Tiago Tavares

Abstract:
How much do credit constraints contribute to investment slumps during financial crises? For the Greek crisis that erupted in 2010, we find that tightened credit constraints contributed to about half of the observed collapse in investment rates. The remainder is explained by diminished demand and productivity facing the firms. We use a novel census-type dataset of manufacturing firms and show that standard dynamic investment models abstracting from credit constraints cannot reproduce the observed investment dynamics. Enhanced with borrowing constraints subject to an aggregate shock to eligible collateral, such models can account for the observed collapse in investment rates.

Abstract:
Information is an important policy tool for managing epidemics, but issues with data col- lection may hinder its effectiveness. Focusing on Covid-19 in Mexico, we ask whether delays in reporting deaths affect individuals’ beliefs and behavior. Leveraging an online survey, we randomly provide information to respondents either accounting or not for delays in death re- ports. We find that not accounting for delays leads to a lower perceived risk of contagion and intention to comply with social distancing. An equilibrium model incorporating the endogenous behavioral response documented by our intervention illustrates the effect of reporting delays on the evolution of the epidemic.

Abstract:
Risk of sovereign debt default has frequently affected both emerging market and developed economies. Such financial crises are often followed by severe declines of employment that are hard to justify using standard economic models. This paper documents that labor market distortions deteriorate substantially around debt default episodes. Two different explanations for such dynamics are evaluated by linking these distortions to changes in labor taxes and costs of financing working capital. When added into a dynamic model of equilibrium default, these features are able to replicate the behavior of the observed labor distortion around a period of financial crisis and can also account for substantial declines of employment. In the model, higher interest rates are propagated into larger costs of hiring labor through the presence of working capital. Then, as an economy is hit with a stream of bad productivity shocks, the incentives to default become stronger, thus increasing the cost of debt. This reduces firm demand for labor and generates a labor wedge. A similar effect is obtained with an endogenously generated counter-cyclical income tax rate policy that also rationalizes why austerity is applied during deep recessions. The model is used to shed light on the recent events of the Euro Area debt crisis, in particular, the Greek sovereign debt default.

Abstract:
Emerging market economies often exhibit aggregate consumption that is more volatile than aggregate income, contrary to predictions of standard macro models that are based on consumption smoothing through financial markets under transitory productivity shocks. This paper explores whether heterogeneity in access to financial services can explain this excess consumption volatility. To this end, we extend the standard SOE-RBC model by incorporating both hand-to-mouth and unconstrained households, alongside procyclical firm entry dynamics. Calibrated to capture emerging market features, the model successfully generates greater aggregate consumption volatility compared to aggregate income even when the only source of fluctuations is a transitory productivity shock. Using this framework, we conduct a Bayesian estimation on macroeconomic data for 12 advanced, 19 emerging, and 11 low-income economies. This comprehensive estimation delivers the macro-data consistent fraction of hand-to-mouth households in each country, which aligns closely with the micro-data. Moreover, the results underscore the significance of transitory TFP shocks, even when compared with permanent TFP shocks and interest rate fluctuations.

Abstract:
Managerial occupations represent a significant and expanding segment of the US labor force. At the same time, good managerial practices enhance production efficiency. Competition among firms to hire managers’ services influences their remunerations depending on the technological contribution of a manager to efficiency and on the scarcity of these services in the market. Moreover, since the improvement in the efficiency of production also changes firms’ demand for other factors of production, the general compensation of other types of labor, particularly high-skill workers, also change in a market economy. Given the extensive and expanding body of research on the rise of wage inequality in the US economy1, this paper adds to the literature by analyzing how the increase in managerial compensation can be accommodated with an expansion of their services and how these contribute to the increase in the skill-premium.

Abstract:
A salient feature of emerging economies is that fiscal policy is conducted against the traditional stabilization recipe. Government spending is procyclical (falls in recessions) while tax rates, in particular labor taxes, move countercyclically (increase in recessions). We account for this result as the outcome of a model where the government conducts fiscal policy optimally and is able to commit to future policies. The setup is a small open economy with incomplete markets and a rich labor market structure including an informal sector. Our quantitative results are: (i) the cyclical properties of labor taxes differ according to the nature of the shocks (productivity or foreign interest rates) affecting the economy; and (ii) the presence of an informal sector widens the set of parameters under which distorting labor taxes are negatively correlated with output. The second result is implied by the role of informality in amplifying the fluctuations of the tax base over the business cycle.

Abstract:
Highly indebted developing economies commonly also hold large external reserves. This behavior seems puzzling given that governments in these countries borrow with an interest rate penalty to compensate lenders for default risk. Reducing debt to the same extent as reserves would maintain net liabilities constant while decreasing interest payments. However, holding reserves can have insurance benefits in a financial crisis. To rationalize the levels of international reserves and external debt observed in the data, a standard dynamic model of equilibrium default is extended to include distortionary taxation and debt restructuring. This paper shows that fiscal adjustments induced by sovereign default can generate large demand for reserves if taxation is distortionary. At the same time, a non-negligible position in reserves modifies the debt restructuring negotiations upon default. A calibrated version of the model produces recovery rate schedules that are increasing with reserves, as seen in the data, being also able to replicate large positions of reserves and debt to GDP. Finally, I study how both mechanisms play a key quantitative role to generate such result, in fact, not including them, produces a counterfactual demand for reserves that is close to zero.

Abstract:
Understanding the determinants and implications of delays in reporting COVID-19 deaths is important for managing the epidemic. Contrasting England and Mexico, we document that reporting delays in Mexico are larger on average, exhibit higher geographic heterogeneity, and are more responsive to the total number of occurred deaths in a given location-date. We then estimate simple SIR models for each country to illustrate the implications of not accounting for reporting delays. Our results highlight the fact that low and middle-income countries are likely to face additional challenges during the pandemic due to lower quality of real-time information.

Abstract:
In this paper we study firm-level investment dynamics by incorporating an idiosyncratic investment cost shock in a dynamic investment model of heterogeneous firms with adjustment costs. We interpret this idiosyncratic shock as an investment wedge summarizing firm deviations from model implied efficient behavior. We estimate our dynamic model using data micro-level data of Greek manufacturing firms, allowing for firms to be heterogenous in both profitability and investment cost. Our estimation results show that the level of dispersion of the idiosyncratic investment shock is of the same order of magnitude as the profitability shock which tends to be substantial in most micro-studies. We also find evidence that the investment wedge is correlated with variables not explicitly taken into account by our model such as measures of firm-level leverage and export intensity. This suggests that a financial channel in models of capital accumulation may be crucial in explaining data patterns.

Abstract:
Emerging markets economies are subject to substantial volatility in trend growth motivated by frequent policy reversals. Also, agents in emerging markets face higher uncertainty due to weak institutions and political instability. Motivated by these observations, we build a dynamic stochastic model in which agents cannot perfectly distinguish between the trend and transient component of observed endowments, but can only learn about them by solving a signal-extraction problem. We extend this model to include endogenous default risk and conclude that, for similar endowment and debt levels, higher uncertainty about the trend implies larger default risk. This result is consistent with the documented empirical observation that interest rate spreads are, on average, larger in periods that surround election periods, associated with higher uncertainty, as well with other empirical regularities regarding emerging markets. Furthermore, we use the model to shed light on the recent events that characterized the greek sovereign debt crisis.