Research

Inflation is widely viewed as a tax on the cash-intensive informal sector, suggesting that inflation discourages informality. I show that the opposite can hold in general equilibrium. Inflation taxes cash holdings, but seigniorage is rebated as lump-sum transfers that do not fully compensate cash-heavy households, who respond by saving less in interest-bearing assets. The resulting contraction in loanable funds raises the cost of capital, which disproportionately hurts capital-intensive formal firms and expands the informal sector through a Stolper-Samuelson mechanism. Cross-country data from 157 countries over 1980-2020 confirm that inflation, financial underdevelopment, and informality form a robust triangle; controlling for credit absorbs 37% of the inflation-informality association. Using the staggered adoption of inflation targeting across 42 countries as quasi-experimental variation, I find that IT reduces informality by 3-4 log points, with inflation falling first, credit expanding over 5-10 years, and informality declining only after 5-15 years. A heterogeneous-agent model with incomplete markets and cash-in-advance constraints delivers an exact sufficient condition for when inflation increases informality, expressed in primitive parameters, and a calibrated version matches the cross-country relationship quantitatively.

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.