@emilio-zaratiegui.bsky.social
PhD Candidate at Columbia University | Macroeconomics and International Finance https://www.emiliozaratiegui.com
Link to paper β¬οΈ
emiliozaratiegui.github.io/Personal-Web...
ππ You can also see the rest of my research agenda at
www.emiliozaratiegui.com/home
Plot shows optimal capital controls as a function of the elasticity of tfp with respect to capital.
Compute optimal capital control (Y-axis) as function of productivity elasticity wrt investment (x-axis)
Trade-off is relevant -> Adding investment and misallocation turns tax (dashed black) into subsidy (solid blue)
Result driven mostly by effects on productivity
Plot shows estimates of the elasticity of TFP with respect to capital for a sample of 18 european countries. Estimates range between 0.14 and 0.3
I leverage Orbis data to obtain estimates for 18 countries
Using firm-level balance sheet data, estimate misallocation (dispersion in marginal returns to capital)
Use as input to obtain elasticity of TFP with respect to investment
I derive a sufficient static formula β‘οΈ Clear mapping to data
Key object: Productivity losses from capital controls
I obtain a closed form expression that depends on cross-sectional misallocation across firms
How can this be measured?
Governments can't always control allocation of credit β‘οΈ Trade-off!
Capital controls prevent and mitigate crises but affect productivity
Is this quantitatively relevant?
What is the optimal level of capital controls, defined as a tax on foreign borrowing?
As benchmark, first allow policymaker to control allocation of credit between consumption and investment.
Capital control on borrowing and investment subsidy β‘οΈ No trade-off
Financial crises: Income depends on prices, which depends on aggregate choices β‘οΈ Not internalized by HHs
Capital controls can reduce foreign borrowing β‘οΈ Prevents and mitigates crises
This is the standard motivation in the literature and underpins the IMF view
Key elements
1) Financial crises: Households (HH) face a borrowing constraint that depends on income β‘οΈ when it binds, reduced borrowing reduces income leading to vicious cycle
2) Misallocation: Firms differ in their ability to access capital β‘οΈ reduced productivity
I build a model that combines two literatures: Small open economy literature on optimal capital controls, and extensive literature on capital misallocation.
28.11.2024 01:43 β π 0 π 0 π¬ 1 π 0Some context:
Capital controls have become a key policy tool and are now part of the IMF toolkit
Traditional view: Capital controls can contribute to financial stability
Overlooked: Effects on productivity through misallocation that have been empirically documented
Macroprudential Policy with Firm Heterogeneity, Emilio Zaratiegui, Columbia University, I study optimal macroprudential policy when its effects on investment and productivity are taken into account. To do so, I introduce a tractable way of modeling misallocation that generates a link between investment and productivity and can be easily taken to the data. Because macroprudential policies affect investment, they lead to productivity losses. I show that, when the policymaker is constrained in their available instruments, this generates a policy trade-off between financial stability and productivity growth. I derive a sufficient statistic formula for the second-best policy composed of measurable objects, including its productivity costs. I leverage the tractability of my model to get a range of estimates for the latter using rich firm-level microdata for several European countries. The trade-off is quantitatively relevant: For baseline crisis probabilities, productivity losses switch optimal policy from a capital control to a foreign borrowing subsidy.
I am on the Job Market!
In my #EconJMP, I study optimal capital controls considering previously overlooked effects on investment and productivity using a sufficient statistic approach
Estimating productivity losses using micro-data, I find that capital flows should be incentivized.
πππ§΅
