Research

Across countries, high-inflation economies have larger informal sectors and shallower credit markets. The standard view predicts the opposite: inflation taxes cash, and informal transactions are cash-intensive, so inflation should shrink the informal sector. I show that a credit channel reverses this relationship and reconciles the standard view with the cross-country evidence. Households commit to cash before they spend it, so the inflation tax falls on balances they cannot adjust, and its lump-sum rebate returns less to savers than it takes from them. Deposits contract and the cost of capital rises, which burdens the capital-intensive formal sector, where firms borrow to pay wages, and shifts demand toward informal goods. A cross-country panel and an event study around inflation-targeting adoption show informality moving as the credit channel predicts. In a calibrated economy with heterogeneous households, raising annual inflation from 0% to 30% raises the informal share of output from 29% to 35%. Taxing the informal sector through inflation is self-defeating, because it expands the sector it targets. Disinflation raises welfare, with gains to the poorest households and losses to the richest, because it raises the real wage and lowers the return to capital. 

This paper focuses on a Central Bank that seeks to profit from trading against irrational noisy traders but cannot directly observe their positions as they blend in with rational traders that are going against the noise themselves. The optimal strategy for the Central Bank is to trade against the remaining noise partially, but this results in an inefficiently small position size. With complete information, targeting the actual noise is optimal for higher expected profits. If the Central Bank had a prior on the net open position limit of the rational traders, it would target more than the remaining observable noise. I prove that the Central Bank can learn to differentiate actual noise from rational traders by fixing the prior for many periods, computing the sample variance of the observable noise, and comparing it with the actual noise variance. Finally, if rational traders have better information than the Central Bank about the future real exchange rate, intervening in the market may result in negative expected profits, so total inaction may be recommendable.

I document that the increase in prices and not in quantities are driving the rise in the value of exports of goods in Argentina in this century. I also show the country’s poor performance in capital formation, the low value of its market capitalization, and the tendency of consumers to save and firms to borrow in foreign currency. These three forces could help explain why Argentina is not exporting more. To understand the mechanisms, I build a model in which financial constraints and external debt will keep the economy closer relative to the same economy unconstrained. Moreover, this constrained economy allows for multiple equilibria, which could open room for optimal policy intervention. The critical channel driving the results is the low capital creation  arising from high real exchange rates and the balance-sheet effect, affecting future consumers’ wages through a decrease in the installed capital and its price, which forces the economy to appreciate in the future to compensate for that drop in income and keep the balance of payments in equilibrium. An economy “trapped” in a bad pace will initially export more due to high real exchange rates. Still, it will eventually be forced out of the international markets due to insufficient capital stock.