Work in progress
Intra- and inter-industry misallocation and comparative advantage (Job Market Paper)
What are the implications of allocative inefficiency in an open economy? This paper shows how firm-level resource misallocation can affect the relative unit cost of producing a good across sectors, distorting the “natural” comparative advantage of a country. First, sectors with a larger extent of within-industry factor misallocation face larger productivity losses, which reduce their relative export capability. Second, misallocation of factors across industries can alter sectors’ sizes and distort their average productivity through firms’ selection effects, affecting their comparative advantage too. After presenting evidence on how metrics of intra- and inter-industry factor misallocation are related to the observed patterns of comparative advantage, this paper explores the general equilibrium effects of both types of misallocation in an open economy and their role in shaping industry export capabilities. For this, I use a model of international trade with endogenous selection of heterogeneous firms, in which the allocation of factors within and across industries is inefficient. I compute a counterfactual equilibrium in which misallocation in capital, skilled labor and unskilled labor is removed in Colombia, a country whose firm-level data allows me to obtain precise measures of factor misallocation. The reallocation of factors allows Colombia to specialize in industries with “natural” comparative advantage and generates a substantial change in its industrial composition, which leads to a rise in the ratio of exports to GDP by 18 p.p. This industrial composition effect is absent in the workhorse models of factor misallocation under closed economies.
Barriers to mobility or sorting? Sources and aggregate implications of income gaps across sectors and locations in Indonesia (with Tomasz Święcki)
Existence of large income gaps between agricultural and non-agricultural workers in developing countries is well known, but the exact source of the gaps is debated. The two main hypotheses, barriers to labor mobility and sorting of workers based on unobserved comparative advantage, have distinct predictions for aggregate efficiency but are difficult to distinguish using only cross- sectional data typically available for developing countries. We use panel data from Indonesia Family Life Survey to document that workers who move out of agriculture see an income gain of around 20% while those who move into agriculture see a similar income loss, even if they stay in the same location. These premia are difficult to reconcile with efficient sorting of workers and suggest a presence of substantial costs of switching across industries. Without controlling for individual heterogeneity the income premia are even larger, suggesting that some sorting is taking place as well. To evaluate the contribution of switching costs and sorting to the observed income gaps more clearly, we develop a structural model of sectoral decisions. We find significant switching costs that misallocate workers across sectors, which imply income losses of around 15% for misallocated workers. Although reallocating workers generates a sizable change in the sectoral choice distribution, it has a moderate impact (1.4%) on the aggregate income.
Market substitution under short-run production restrictions: Evidence from a trade shock
Using a quasi-natural experiment, this paper quantifies the importance of short-run production restrictions for exporters. I study the consequences of the imposition of large trade restrictions from the Venezuela’s government to Colombian exporters during a diplomatic crisis at the end of the last decade. These restrictions were particularly sudden and unexpected, and hence they constitute a perfect exogenous shock. I document that Colombian exporters diversified their exporting destinations once the trade shock occurred. This fact raises the question of why exporters did not explore new markets earlier. A structural model of international trade where heterogeneous firms face short-run production restrictions in the form of capacity constrains rationalizes exporters behaviour.
Alfonso, V., Arango, L., Arias, F. Cangrejo, L. and Pulido, J. (2013) “Business cycles in Colombia: 1975-2011″. Lecturas de Economía, No. 78, pp. 115-149, Universidad de Antioquia.
We propose a chronology for the business cycles in Colombia following the NBER classic notion; that is, dates of peaks and troughs of economic activity are estimated without decomposing the series used in their transitory and permanent components. The estimated chronology suggests that the four complete cycles that occurred between 1975 and 2011 are asymmetric and have an approximate duration of 6.8 years. Expansions lasted, on average, 5.4 years while contractions took about 1.3 years. These results are derived from the application of a cumulative diffusion index to 41 series of economic activity.
Kamil, H., Pulido, J. and Torres, J. (2010) “IMACO”: a monthly leading indicator of economic activity in Colombia. Monetaria, Vol. XXXIII, No. 4, pp. 495-598, CEMLA – Center for Latin American Monetary Studies.
This paper describes the construction of a new monthly leading indicator of eco- nomic activity in Colombia (IMACO). The procedure is based on a heuristic search algorithm that selects an optimal group of seven leading variables so that the com- posite indicator anticipates GDP movements Öve months in advance and with a 93 % correlation. Also, the IMACO has others desirables predictive properties: it anticipates the break points in the Colombian business cycle without giving any wrong signals, and minimizes the forecast errors on GDP growth. Due to its simplicity and low computational cost, the IMACO indicator offers a tool for the continuous monitoring of the economic activity and economic policy design, and can be replicated for oth- er macroeconomic aggregates in Colombia and also applied in other Latin-American countries.
Cristiano, D., Hernandez, D. and Pulido J. “Nowcasting Colombian economic activity”. Borradores de Economía, No. 724, Banco de la República.
Policy makers usually require estimates of the performance of economic activity in real time. However, the information used is only available at the level of hard indicators and opinion polls, which usually have different frequencies and publication lags, in addition to idiosyncratic shocks. In this paper, we adapt Camacho and Perez-Quiros (2009-2010)’s forecasting schemes that produce estimates of GDP growth in real time for the Colombian economy. The adapted dynamic factors model involves economic series of different frequency, availability and origin, used with the information available at the time of each publication. The forecast evaluation suggests that the model presents a better performance against other reference schemes, and that the accuracy of the forecasts increases when we include the flow of information in real time of the activity indicators.
Alonso, G., Hernandez, N., Pulido, J. and Villa, M. (2009) “Alternative measures of real exchange rate for Colombia”. Borradores de Economía, No. 514, Banco de la República.
To be added.