Working Paper Series

Browse the categories to access the content of academic, scientific and opinion publications of the professors and students of the Department of Economics PUC-Rio.

Risk Sharing Contracts with Private Information and One-Sided Commitment

N 635, 26/03/2015

In a repeated unobserved endowment economy in which agents negotiate long-term contracts with a financial intermediary, we study the risk-sharing implications of the interaction between incentive compatibility constraints (due to private information) and participation constraints (due to one-sided commitment). In particular, we assume that after a default episode, agents consume their endowment and remain in autarky forever. We find that once they are away from autarky today, if the probability of drawing the highest possible endowment shock is sufficiently small, the optimal contract prevents agents from reaching autarky tomorrow and, thus, from being "impoverished". Moreover, an invariant cross-sectional distribution of life-time utilities (or values) exists. A numerical example shows that the mass of agents living in autarky can be zero in the limit.

Revisto em março de 2018

Eduardo Zilberman, Vinicius Nascimento Carrasco, Pedro Hemsley.

The Cross-sectional Distribution of Price Stickiness Implied by Aggregate Data

N 634, 24/03/2015

This paper provides evidence on three mechanisms that can reconcile frequent individual price changes with sluggish aggregate price dynamics. To that end, we estimate a semi-structural model that allows us to extract information about real rigidities and cross-sectional heterogeneity in price stickiness from aggregate data. Hence the model can also speak to the debate about the aggregate implications of sales and other temporary price changes. Our estimates point to the presence of large real rigidities and a significant degree of heterogeneity in price stickiness. Moreover, the cross-sectional distribution of price stickiness implied by aggregate data is in line with an empirical distribution obtained from micro price data that factors out sales and product substitutions. Our results suggest that all three feaures -- i) real rigidities, ii) heterogeneity in price stickiness and iii) exclusion of temporary price changes -- help bridge the gap between micro and macro evidence on nominal price rigidity.

Revisto em Abril de 2018 

Niels A. Dam, Jae Won Lee, Carlos Viana de Carvalho.

Factor Specificity and Real Rigidities

N 633, 23/03/2015

We develop a multisector model in which capital and labor are free to move across firms within each sector, but cannot move across sectors. To isolate the role of sectoral specificity, we compare our model with otherwise identical multisector economies with either economy-wide or firm-specific factor markets. Sectoral factor specificity generates within-sector strategic substitutability and tends to induce across-sector strategic complementarity in price setting. Our model can produce either more or less monetary non-neutrality than those other two models, depending on parameterization and the distribution of price rigidity across sectors. Under the empirical distribution for the U.S., our model behaves similarly to an economy with firm-specific factors in the short-run, and later on approaches the dynamics of the model with economy-wide factor markets. This is consistent with the idea that factor price equalization might take place gradually over time, so that firm-specificity may serve as a reasonable short-run approximation, whereas economy-wide markets are likely a better description of how factors of production are allocated in the longer run

Carlos Viana de Carvalho, Fernanda Feitosa Nechio.

Firms, Informality and Development: Theory and evidence from Brazil

N 632, 09/03/2015

This paper develops and estimates an equilibrium model where heterogeneous firms

can exploit two margins of informality: (i) not register their business, the extensive

margin; and (ii) hire workers "off the books", the intensive margin. The model

encompasses the main competing frameworks for understanding informality and

provides a natural setting to infer their empirical relevance. The counterfactual

analysis shows that once the intensive margin is accounted for, aggregate firm and

labor informality need not move in the same direction as a result of policy changes.

Lower informality can be, but is not necessarily associated to higher GDP, TFP or


Gabriel Ulyssea.

Capital Controls and Implications for Surveillance and Coordination: Brazil and Latin America

N 631, 27/02/2015

Brazil has been one of the most active country in intervening in FX markets though several forms: sterilized interventions and foreign reserves accumulation, controls on capital inflows and FX interventions through domestic derivatives markets. During the golden phase of the commodity super-boom generated by China, the goal of the FX interventions was to deter real exchange rate appreciation. With the Brazilian experience in mind, we extract lessons for surveillance and coordination. We argue that capital controls were not a very useful tool to deter real exchange rate appreciation. Comparing Brazil with Chile, the poster child of capital controls in the nineties that decided not to use them again during the commodity super-boom of this century, we conclude that an adequate fiscal policy stance could provide much better results than the use of capital controls. Furthermore, we claim that the use of capital controls in Brazil helped to avoid necessary changes in the fiscal policy stance. Analyzing the recent experiences of Colombia and Peru also do not bring much support to capital controls. Therefore, when analyzing the implications for surveillance and coordination, international institutions, as the IMF, should take into consideration that, no matter how many caveats are listed before its guidelines, capital controls may serve mainly to bypass needed changes in macroeconomic policy, thereby jeopardizing better economic performance.

Márcio Garcia.

FX interventions in Brazil: a synthetic control approach

N 630, 19/02/2015

The taper tantrum of May 2013 generated sharp fall in risky assets prices,

including the depreciation of several emerging market currencies. To fight

excess volatility and exchange rate overshooting, the Central Bank of Brazil

announced a major program of interventions in foreign exchange markets. We

use a synthetic control approach to determine whether or not the

intervention program was successful. Our results suggest that the first FX

intervention program mitigated the depreciation of the real against the

dollar. A second announcement made later in the year that the program

was going to continue on a smaller basis had a smaller effect, which was not

significant. This result is corroborated by a standard event study

methodology. We also document that both program did not have an impact on the volatility of the exchange rate

Marcos Chamon, Márcio Garcia, Laura Candido de Souza.

Macroeconomic Effects of Credit Deepening in Latin America

N 629, 02/10/2014

We augment a standard dynamic general equilibrium model with financial frictions, in order to quantify the macroeconomic effects of the credit deepening process observed in Latin America in the last decade - most notably in Brazil. In the model, a stylized banking sector intermediates credit from patient households to impatient households and entrepreneurs. Motivated by the Brazilian experience, we allow the credit constraint faced by households to depend on labor income. Our model is designed to isolate the effects of credit deepening through demand-side channels, and abstracts from potential effects of credit supply on total factor productivity. In the calibrated model, credit deepening generates only modest above-trend growth in consumption, investment, and GDP. Since Brazil has experienced one of the most intense credit deepening processes in Latin America, we argue that the quantitative effects that hinge on the channels captured by the model are unlikely to be sizable elsewhere

(revisto em Junho de 2017)

Carlos Viana de Carvalho, Nilda Mercedes Cabrera Pasca, Laura Candido de Souza, Eduardo Zilberman.

Monetary Policy and Real Exchange Rate Dynamics in Sticky-Price Models

N 628, 12/08/2014

We study how real exchange rate dynamics are a¤ected by monetary policy in dynamic, sto-

chastic, general equilibrium, sticky-price models. Our analytical and quantitative results show

that the source of interest rate persistence –policy inertia or persistent policy shocks –is key.

When the monetary policy rule has a strong interest rate smoothing component, these models fail

to generate high real exchange rate persistence in response to monetary shocks, as policy iner-

tia hampers their ability to generate a hump-shaped response to such shocks. Moreover, in the

presence of persistent monetary shocks, increasing policy inertia may decrease real exchange rate


Carlos Viana de Carvalho, Fernanda Feitosa Nechio.

Selection and Monetary Non-Neutrality in Time-Dependent Pricing Models

N 627, 30/07/2014

Revisto em agosto de 2015

For a given frequency of price changes, the real e ects of a monetary shock are smaller if

adjusting rms are disproportionately likely to have last set their prices before the shock. This

type of selection for the age of prices provides a complete characterization of the nature of

pricing frictions in time-dependent sticky-price models. In particular: 1) The Taylor (1979)

model exhibits maximal selection for older prices, whereas the Calvo (1983) model exhibits

no selection, so that real e ects are smaller in the former than in the latter; 2) Selection is

weaker and real e ects of monetary shocks are larger if the hazard function of price adjustment

is less strongly increasing; 3) Selection is weaker and real e ects are larger if there is sectoral

heterogeneity in price stickiness; 4) Selection is weaker and real e ects are larger if the durations

of price spells are more variable

Carlos Viana de Carvalho, Felipe Schwartzman.

A Década Perdida: 2003 – 2012

N 626, 29/07/2014

O economia brasileira avançou na década seguinte à chegada ao poder do ex-presidente Lula. Ainda mais importante foi o avanço nos temas sociais. Não obstante, o desempenho brasileiro, quando medidoem relação ao melhor grupo de comparação entre emergentes, foi, em geral, muito aquém do que poderia ter sido. Tendo recebido um choque de renda externa mais generoso, o Brasil, em relação ao melhor grupo de comparação:1) cresceu, investiu e poupou menos; 2) recebeu menos investimento estrangeiro direto e adicionou menos valor na indústria; 3) teve mais inflação; 4) perdeu competitividade e produtividade, avançou menos em Pesquisa e Desenvolvimento e piorou a qualidade regulatória; 5) foi pior ou igual em quase todos os setores importantes; 6) a distribuição de renda, a fração de pobres, e a subnutrição caíram em linha ou um pouco menos; 7) a escolaridade avançou menos, a despeito de maiores gastos; 8) a saúde andou em linha.Fomos melhor no mercado de trabalho, onde avançamos na margem mais fácil: colocar as pessoas para trabalhar. Em suma, o Brasil avançou, mas poderia ter avançado muito mais. Neste sentido a década foi perdida.

Vinicius Nascimento Carrasco, João Manoel Pinho de Mello, Isabela Ferreira Duarte.

Rotatividade do trabalho e incentivos da legislação trabalhista

N 625, 28/07/2014

Gustavo Gonzaga, Rafael de Carvalho Cayres Pinto.

Economic gains of realized volatility in the Brazilian stock market

N 624, 30/06/2014

A model of realized variance-covariance is proposed using a portfolio with the most liquid stock

assets of Ibovespa. The purpose is to evaluate the economic gains associated with following a

volatility timing strategy based on the model’s conditional forecasts. Comparing with traditional

volatility methods, we find that economic gains associated with realized measures perform well

when estimation risk is controlled and increase proportionally to the target return. When

expected returns are bootstrapped, however, performance fees are not significant, which is an

indication that economic gains of realized volatility are offset by estimation risk.

Márcio Garcia, Marcelo Medeiros, Francisco Eduardo de Luna e Almeida Santos.

The impact of macroeconomic announcements in the Brazilian futures markets

N 623, 26/06/2014

The estimation of the impact of macroeconomic announcements in the Brazilian futures

markets is used to uncover the relationship between macroeconomic fundamentals and

asset prices. Using intraday data from October 2008 to January 2011, we find that

external macroeconomic announcements dominate price changes in the Foreign

Exchange and Ibovespa futures markets, while the impact of the domestic ones is

mainly restricted to Interest Rate futures contracts. We additionally propose an

investment strategy based on the conditional price reaction of each market that showed

promising results in an out-of-sample study, where we are able to correctly identify

returns’ signals, conditional on the surprise’s signal, in approximately 70% of the cases.

Finally, we provide evidence that price reactions are conditional on the state of the

economy and document the impact on volume and bid-ask spreads

Márcio Garcia, Marcelo Medeiros, Francisco Eduardo de Luna e Almeida Santos.

Price Discovery in Brazilian FX Markets

N 622, 23/05/2014

Brazilian Foreign Exchange (FX) markets have a unique structure: most trades are conducted in the derivatives (futures) market. We study price discovery in the FX markets in Brazil and indicate which market (spot or futures) adjusts more quickly to the arrival of new information. We find that futures market dominates price discovery since it responds for 66.2% of the variation in the fundamental price shock and for 97.4% of the fundamental price composition. In a dynamic perspective, the futures market is also more efficient since, when markets are subjected to a shock in the fundamental price, it is faster to recover to equilibrium. By computing price discovery according to calendar semesters, we find evidence of the correlation between price discovery metrics and market factors, such as spot market supply-demand disequilibrium, central bank interventions and institutional investors’ pressure

Márcio Garcia, Marcelo Medeiros, Francisco Eduardo de Luna e Almeida Santos.

DNDFs:a more efficient way to intervene in FX markets?

N 621, 16/05/2014

We analyze the unique intervention strategy of the BCB using DNDFs (Domestic-Non-Deliverable Forwards): currency forwards that settle in domestic currency. We show the mechanisms through which DNDFs provide efficient hedging instruments for economic agents in times of reduced capital inflows and FX volatility, and how the use of DNDFs provide incentives for commercial banks to bring dollar to Brazil and so help finance the current account deficit. We discuss the limits to this strategy, which will work insofar as economic agents believe they can go from DNDFs to spot USD, i.e., that convertibility risk is negligible. We also have described how the strategy creates increasing positions within the commercial banking system (basis and roll over risks,0), generating possible threats to financial stability. The gain of not having to sell down hard currency reserves in the present strategy should be weighed against these risks. We conclude that the BCB’s strategy does provide an alternative intervention strategy, which is made possible only due to specific features of the Brazilian financial markets and its legislation. It is not clear that other emerging markets would profit from adopting such intervention strategy in FX markets.

Tony Volpon, Márcio Garcia.

Conhecimento ou Práticas Pedagógicas? Medindo os Efeitos da Qualidade dos Professores no Desempenho dos Alunos

N 620, 08/05/2014

Mauricio Fernandes, Claudio Ferraz.

Wage Differentials: Trade Openness and Wage Bargaining

N 619, 24/04/2014

We build a theoretical model that incorporates unionization in the
labor market into a Heckscher-Ohlin-Samuelson (HOS) framework to in-
vestigate the impact of unionization on the Stolper-Samuelson Theorem.
To capture the American economy case, we assume that unskilled labor in
the manufactured goods sector is unionized, and that sector is intensive
in skilled labor, and that trade liberalization increases the relative price
of manufactured goods. In the HOS model, trade liberalization induces
a reallocation of production towards the sector that uses intensively the
country's most abundant factor. The resulting change in relative labor de-
mand impacts wage bargaining in the unionized sector, which, in turn, has
a dampening e ect on the Stolper-Samuelson e ect. Moreover, wages of
unionized workers are even less responsive to trade liberalization. Through
traditional mandated-wages regressions, we show that skilled-wage di er-
entials changes were less pronounced among more unionized sectors in the
U.S. economy for the 1979-1990 period.

Gustavo Gonzaga, Beatriz Cristina Muriel Hernández, Cristina Terra.

Do People Understand Monetary Policy?

N 618, 10/10/2013

We combine questions from the Michigan Survey about future inflation, unemployment, and
interest rates to investigate whether households are aware of the basic features of U.S. monetary
policy. Our findings provide evidence that some households form their expectations in a way
that is consistent with a Taylor (1993)-type rule. We also document a large degree of variation in
the pattern of responses over the business cycle. In particular, the negative relationship between
unemployment and interest rates that is apparent in the data only shows up in households´
answers during periods of labor market weakness.

Carlos Viana de Carvalho, Fernanda Feitosa Nechio.

Just Words? A Quantitative Analysis of the Communication of the Central Bank of Brazil

N 617, 07/10/2013

We quantify the informational content of statements issued by the interest-rate setting com-

mittee of the Central Bank of Brazil (COPOM,0), building on the methodology developed by Lucca

and Trebbi (2011). Using Google search queries, we measure the extent to which each COPOM

statement is perceived to be associated with more “hawkish”or “dovish”language. This allows us

to construct a time-series of the informational content of COPOM statements, which we then use

in regressions to explain changes in the term-structure of interest rates around COPOM meetings

–together with a market-based measure of interest-rate surprises. We …nd that, during Governor

Tombini’s tenure, interest-rate surprises started to be “passed through”one-to-one (or more) even

at long maturities, as markets seem to have bought into the idea that the interest-rate cuts that

began in mid-2011 would lead to lower yields in Brazil into the foreseeable future. Most impor-

tantly, changes in the informational content of COPOM statements seem to have meaningful e¤ects

on yields at short-to-medium maturities. However, this result only holds for the period prior to

Tombini’s tenure.

Carlos Viana de Carvalho, Fernando Cordeiro, Juliana Vargas.

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