Rui Castro Professor McGill University

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Research

Published and Forthcoming Papers:

1. Labor Force Transitions, with Fabian Lange  and Markus Poschke, forthcoming in the Handbook of Labor Economics, November 2024.  PDF (working paper).
   
   Abstract
   
   Labor Force States and flows between are useful tools to model individual dynamics in the labor market. This chapter reviews recent literature uncovering substantial heterogeneity in transitions across Labor Force States. We review methods and results by replicating leading studies using Canadian data and relate our findings to important literatures on recall non-employment, duration dependence, and job ladders.
   
   
   
2. Occupational Choice, Human Capital, and Financial Constraints, with Pavel Sevcík.
   Canadian Journal of Economics, Symposium Issue on “Misallocation and Structural Transformation,” August 2024.
   PDF (journal)   PDF (working paper).
   
   Abstract
   
   We study the aggregate productivity effects of firm-level financial frictions. Credit constraints affect not only production decisions, but also household-level schooling decisions. In turn, entrepreneurial schooling decisions impact firm-level productivities, whose cross-sectional distribution becomes endogenous. In anticipation of future constraints, entrepreneurs under-invest in schooling early in life. Frictions lower aggregate productivity because talent is misallocated across occupations, and capital misallocated across firms. Firm-level productivities are also lower due to schooling distortions. These effects combined account for between 36% and 68% of the U.S.-India aggregate productivity difference. Schooling distortions are the major source of aggregate productivity differences.
   
   
   
3. Explaining the Evolution of Educational Attainment in the U.S., with Daniele Coen-Pirani.
   American Economic Journal: Macroeconomics, July 2016.  PDF (journal)   PDF (working paper)
   
   Abstract
   
   We study the evolution of educational attainment of the 1932-1972 cohorts using a calibrated model of investment in human capital with heterogeneous learning ability. The inter-cohort variation in schooling is driven by changes in skill prices, tuition, and education quality over time, and average learning ability across cohorts. A version of the model with static expectations is successful in accounting for the main patterns in the data. Rising skill prices for college explain the rapid increase in college graduation till the 1948 cohort. The measured decline in average learning ability contributes to explain the stagnation in college graduation between the 1948 and 1972 cohorts.
   
   
   
4. Cross-Sectoral Variation in Firm-Level Idiosyncratic Risk, with Gian Luca Clementi and Yoonsoo Lee.
   Journal of Industrial Economics, March 2015.  PDF (journal)   PDF (working paper)
   
   Abstract
   
   We estimate the volatility of plant-level idiosyncratic shocks in the U.S. manufacturing sector. Our measure of volatility is the variation in Revenue Total Factor Productivity which is not explained by either industry or economy-wide factors, or by establishments' characteristics. Consistent with previous studies, we find that idiosyncratic shocks are much larger than aggregate random disturbances, accounting for about 80% of the overall uncertainty faced by plants. The extent of cross-sectoral variation in the volatility of shocks is remarkable. Plants in the most volatile sector are subject to about six times as much idiosyncratic uncertainty as plants in the least volatile. We provide evidence suggesting that idiosyncratic risk is higher in industries where the extent of creative destruction is likely to be greater.
   
   
   
   
5. On the Individual Optimality of Economic Integration, with Nelnan Koumtingué.
   Journal of Monetary Economics, November 2014.  PDF (journal)   PDF (working paper)
   
   Abstract
   
   Which countries find it individually optimal to form an economic union? We emphasize the risk-sharing benefits of economic integration. We consider an endowment world economy model, where international financial markets are incomplete and contracts not enforceable. A union is an arrangement that solves both the market incompleteness and the lack of enforcement problems among member countries. The union as a whole still faces these frictions when trading in the world economy. We uncover conditions on the initial income and net foreign assets of potential union members such that forming a union is welfare-improving over standing alone in the world economy. Our model predicts that economic unions (i) occur relatively infrequently, and (ii) are more likely to emerge among homogeneous countries, and (iii) among rich countries.
   
   
   
   
   
6. Asset Pricing in a Production Economy with Chew-Dekel Risk Preferences, with Claudio Campanale and Gian Luca Clementi.
   Review of Economic Dynamics, April 2010.  PDF (journal)   PDF (working paper)
   
   Abstract
   
   In this paper we provide a thorough characterization of the asset returns implied by a simple general equilibrium production economy with Chew-Dekel risk preferences and convex capital adjustment costs. When households display levels of disappointment aversion consistent with the experimental evidence, a version of the model parameterized to match the volatility of output and consumption growth generates unconditional expected asset returns and price of risk in line with the historical data. For the model with Epstein-Zin preferences to generate similar statistics, the relative risk aversion coefficient needs to be at least 50, two orders of magnitude higher than the estimates available so far. We argue that this is not surprising, given the limited risk imposed on agents by a reasonably calibrated stochastic growth model. 
   
   
   
7. The Economic Effects of Improving Investor Rights in Portugal, with Gian Luca Clementi.
   Portuguese Economic Journal, August 2009.  PDF (journal)   PDF (working paper)
   
   Abstract
   
   The Portuguese economy has performed remarkably well since joining the EU in 1986. Output per worker grew at an annual rate of 2.25%. The relative price of investment has declined. Real investment has increased compared to output, in part fueled by an increase in capital inflows. At the same time, resource allocation seems to have improved as well: firm-level data shows a significant decline in the dispersion of labor productivity and size across firms. This paper argues that improvements in outside investor rights that have taken place since Portugal joined the EU is a prime candidate to explain this set of facts.
   
   
   
   
8. Legal Institutions, Sectoral Heterogeneity, and Economic Development, with G. L. Clementi and G. MacDonald.  Review of Economic Studies, April 2009.   PDF (journal)    PDF (working paper)
   
   Abstract
   
   Poor countries have lower PPP-adjusted investment rates and face higher 8relative prices of investment goods. It has been suggested that this happens either because these countries have a relatively lower TFP in industries producing capital goods, or because they are subject to greater investment distortions. This paper provides a micro-foundation for the cross-country dispersion in investment distortions. We first document that firms producing capital goods face a higher level of idiosyncratic risk than their counterparts producing consumption goods. In a model of capital accumulation where the protection of investors' rights is incomplete, this difference in risk induces a wedge between the returns on investment in the two sectors. The wedge is bigger, the poorer the investor protection. In turn, this implies that countries endowed with weaker institutions face higher relative prices of investment goods, invest a lower fraction of their income, and end up being poorer. We find that our mechanism may be quantitatively important.
   
   
   
9. Why Have Aggregate Skilled Hours Become So Cyclical since the Mid-1980s? with Daniele Coen-Pirani.
   International Economic Review, February 2008.   PDF (journal)    PDF (working paper)
   
   Abstract
   
   We document and discuss a dramatic change in the cyclical behavior of aggregate skilled hours since the mid-1980's. Using CPS data for 1979:1-2003:4, we find that the volatility of skilled hours relative to the volatility of GDP has nearly tripled since 1984. In contrast, the cyclical properties of unskilled hours have remained essentially unchanged. We evaluate whether a simple supply/demand model for skilled and unskilled labor with capital-skill complementarity in production can help explain this stylized fact. Our model accounts for about sixty percent of the observed increase in the relative volatility of skilled labor.
   
   
   
   
10. Economic Development under Alternative Trade Regimes.
    International Economic Review, May 2006.    PDF (journal)    PDF (working paper)
    
    Abstract
    
    How does openness affect economic development? This question is answered in the context of a dynamic general equilibrium model of the world economy, where countries have technological differences that are both sector-neutral and specific to the investment goods sector. Relative to a benchmark case of trade in credit markets only, consider (i) a complete restriction of trade, and (ii) a full liberalization of trade. The first change decreases the cross-sectional dispersion of incomes only slightly, and produces a relatively small welfare loss. The second change, instead, decreases dispersion by a significant amount, and produces a very large welfare gain.
    
    
    
    
11. Economic Development and Growth in the World Economy.
    Review of Economic Dynamics, January 2005.   PDF  (journal)    PDF (working paper)
    
    Abstract
    
    This paper investigates whether technological shocks, constructed to be consistent with the observed cross-country income dispersion, are also capable of accounting for development regularities related to capital accumulation. This question is approached via a quantitative theoretical analysis of a model of an integrated world economy. An open economy framework constrains country heterogeneity to be consistent with international capital flows. Moreover, it enables the study of distinctively open economy development facts. The model produces time-invariant long-run cross-sectional distributions for the relevant development variables, whose properties are quantitatively compared with the Penn World Table data set. The model generates too little dispersion in capital-output ratios and investment rates. However, it is consistent with the relative importance of investment, saving, and international capital flows for economic development.
    
    
    
    
12. Investor Protection, Optimal Incentives, and Economic Growth, with Gian Luca Clementi and Glenn MacDonald.
    Quarterly Journal of Economics, August 2004.   PDF (journal)    PDF (working paper)
    
    Abstract
    
    Does investor protection foster economic growth? To assess the widely-held affirmative view, we introduce investor protection in a standard overlapping generations model of capital accumulation. Better investor protection implies better risk-sharing. Because of entrepreneurs' risk-aversion, this results in a larger demand for capital. This is the demand effect. A second effect (the supply effect) follows from general equilibrium restrictions. Better protection (i.e. higher demand) increases the interest rate and lowers the income of entrepreneurs, decreasing current savings and next period's supply of capital. The supply effect is stronger the tighter are the restrictions on capital flows. Our model thus predicts that the (positive) effect of investor protection on growth is stronger for countries with lower restrictions. Cross-country data provides support for this prediction, as does the detailed examination of the growth experiences of South Korea and India.
    
    
    
13. Compensations as Signaling Devices in the Political Economy of Reforms, with Daniele Coen-Pirani.
    International Economic Review, August 2003.    PDF (journal)    PDF (working paper)
    
    Abstract
    
    We propose an explanation for why efficient reforms are not carried out when losers can block their implementation and compensations are feasible. In our model, a government tries to sequentially implement two efficient reforms by bargaining with interest groups. The organization of interest groups is endogenous. Compensations are distortionary and different governments care differently about distortions. Governments use low compensations to discourage losers who just want to receive transfers from organizing. This comes at the cost of reforms being blocked by interest groups with relatively high losses, resulting in a bias against payment of compensations and the implementation of reforms.
    
    

1. Trajectoires possibles pour le marché du travail au Québec suite à la crise de la Covid-19, with Fabian Lange  and Markus Poschke, prepared for the Québec Ministry of Finance, September 2020 (in French).   PDF.
   
   
   
2. Education and Tuiton Fees, with Michel Poitevin.
   Actualité Économique, September 2014.   PDF (journal, in French)   PDF (CIRANO Burgundy Report 2013RB-01, in French)
   
   
   
3. Growth in Open Economies, Neoclassical Models.
   The Princeton Encyclopedia of the World Economy, Eds. K. Reinert and R. Rajan, Princeton University Press, 2009.
   Google Books  (partial link).

1. Tuition Subsidies as a Tool for Economic Development, with Pavel Sevcík.
   
   
2. Stimulative Effects of Temporary Corporate Tax Cuts, with William Gbohoui.
   

Activities related to Macroeconomics

Seminar schedule at McGill

Canadian Macroeconomics Study Group (CMSG)