By setting interest rates, monetary policy affects the cost of carrying inventories. We build a model to capture the resulting “cost-of-carry channel” of monetary policy, finding it to yield interesting non-linearities. We begin with a static model showing that higher inventory costs drive firms, especially those with larger inventories, to reduce prices. Extending this to a dynamic model where firms face distinct demand shocks, we first show in a tractable model with only high and low demand shocks that firms with inventories reduce prices as carrying costs rise, while others may increase them. In aggregate, higher inventory levels make prices more responsive to tighter monetary policy. Finally, a quantitative model with firm heterogeneity and idiosyncratic demand shocks reveals that prices should be more sensitive to the stance of monetary policy when inventory levels are higher (effectively leaving sellers with less market power). By drawing on data from the U.S. goods market, as well as from the housing and oil markets, we are able to test this hypothesis—finding strong support for the cost-of-carry channel. Central banks may therefore wish to pay close attention to inventory levels, as they could matter for the strength of monetary policy transmission to inflation.

Assessing the fundamental value of a wide range of asset-backed securities is costly. As a result, these assets can become information insensitive, which allows them to be used as collateral in credit transactions. In this paper, we show that while it is true that information-insensitive assets can play a liquidity role, the fact that they play this role reinforces their information-insensitivity. This implies that the availability of alternative ways of financing can harm the liquidity role of assets, even if these alternatives are costly and not used in equilibrium. The reason is that such options raise the asset's sensitivity to information by increasing the relative importance of their fundamental value vis-a-vis their role as collateral.

We present an aggregation theory for the Social Welfare Function (SWF) that enables its empirical estimation. Agents have heterogeneous perceptions of how the planner should value the welfare of other agents, which results in so-called Individual Welfare Functions (IWFs), shaped by their life experiences. The SWF is constructed as an aggregation of IWFs, weighted by the political weights of each group of agents. We then develop an estimation strategy to identify the SWF and IWFs based on the observed levels of capital tax, consumption tax, labor tax, and public debt. This strategy extends the inverse optimal approach to a general equilibrium heterogeneous-agent model. The application of our methodology to France and the United States shows that France’s SWF is more Egalitarian and places greater emphasis on low-income individuals, contrasting with the United States’ SWF, which is more Libertarian and assigns greater weight to high-income individuals. Finally, we simulate the fiscal system of the United States under the assumption of adopting the French SWF. Our findings indicate that the SWF significantly shapes the observed fiscal system and equilibrium inequality.

This paper examines the relationship between terms-of-trade shocks and sovereign debt defaults in import-dependent developing economies. While existing literature highlights a negative relationship between terms-of-trade shocks and defaults for commodity exporters, we find the opposite for commodity importers, where rising import prices can worsen debt distress and increase default risks. We incorporate trade into a sovereign default model to explore this interaction, finding that countries with a high import share are at risk of default when facing rising import prices and deteriorating terms of trade. Additionally, heavily indebted nations risk default even with modest price increases. Our empirical analysis focuses on food as a key terms-of-trade shock, given its limited substitutability with domestic production. Using unexpected harvest shocks as an instrument to isolate food price fluctuations, we focus on Ghana, which defaulted on its external debt in 2022. We find that unexpected food price increases drive up import costs, inflation, trade imbalances, and debt. These results underscore the importance of consumption composition in assessing trade shock impacts.

The economic landscape post-COVID-19 and the energy crisis has underscored the critical role of government intervention in cushioning against shocks and aiding economic recovery. Focusing on the United Kingdom, we analyze optimal fiscal and monetary policies in scenarios marked by differing debt-to-GDP ratios, notably comparing the low ratio of 2007 to the high ratio of 2021. By exploring dynamic responses to shocks and the utilization of policy tools like taxation, public debt, and inflation, we offer insights into effective strategies for navigating economic uncertainties. Specifically, we highlight how higher debt-to-GDP ratios necessitate nuanced approaches to managing public debt in response to shocks. Additionally, we find that in the absence of fiscal tools, inflation can serve as an effective adjustment mechanism, suggesting that accepting moderate inflation may be optimal in certain scenarios. We use an extended Lagrangian approach for analytical results and a truncated representation of incomplete markets model for quantitative findings, offering a manageable framework for studying policy dynamics in response to economic shocks.

We estimate a production function model of aggregate economic growth by including two important dimensions of human capital - education and health. Our main intention was to study the importance of health in explaining economic growth in different countries and in different regions. In order to achieve this ambition we divided the countries into four regions: Africa Sub Saharan; Latin America and Caribbean; South Asia, Middle East, North Africa, East Asia and Pacific; and Europe, Central Asia and North America. Our findings suggest that health has a positive and statistically significant effect on economic growth. For the whole world, it suggests that an increase in one-year life expectancy leads to a growth of output per capita in the countries of around 1.36% when we control for the worldwide technological frontier and about 2.10% when we do not control for this fixed effect in time. The results we found suggest that the omission of health produces a misspecification bias of the coefficients of the production function. In most part of the empirical exercises we did, we found that the effect of schooling was also positive and statistically significant, even when we controlled for health capital. By analyzing the importance of these two dimensions of human capital in the different regions, we found that education is more important in Latin America and African Sub-Saharan countries than in countries from the region Europe, Central Asia, and North America, whereas life expectancy is more important in explaining the growth in this last region. Our results indicate that the role of different forms of capital in the growth process change as income rise.