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Rui Castro
Professor
McGill University
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Personal Information
Research
Activities related to Macroeconomics
Personal Information
CV: PDF
Research
IDEAS (with
links to the papers below)
Google Scholar
Working Papers:
- The
Dynamics of Firm-level Pay: Theory and Evidence from
Portugal, with
Gian Luca
Clementi.
December 2023. PDF (working paper)
Abstract
Recent empirical work
has emphasized the role played by firms in shaping
earnings inequality. In this paper, we build a tractable
model of firm-pay heterogeneity, by introducing
labor market's monopsonistic power in a Hopenhayn-style
firm dynamics framework. The model naturally generates
wage-size premia. We use our theory to help understand the
dynamics of earnings inequality in Portugal. Like in other
developed economies, earnings inequality in Portugal has
increased sharply from the mid-1980s until the mid-1990s.
However, it has been steeply decreasing ever since. We
trace this unique dynamics to firm-level changes. The sole
factor pushing inequality downwards has been a larger
compression in firm pay, mostly driven by a decline in the
pass-through from firm-level productivity to wages. Our
model suggests that a decrease in firms' labor market
power may have been a chief determinant of such decline.
Published and Forthcoming
Papers:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
Other Publications:
- 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.
- Education
and Tuiton Fees, with Michel
Poitevin.
Actualité
Économique, September 2014.
PDF
(journal, in French) PDF
(CIRANO Burgundy Report
2013RB-01, in French)
- 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).
Work in Progress:
- Tuition Subsidies as a Tool for
Economic Development,
with Pavel
Sevcík.
- Stimulative
Effects of Temporary Corporate Tax Cuts, with William
Gbohoui.
Activities related to
Macroeconomics
Seminar
schedule at McGill
Canadian Macroeconomics
Study Group (CMSG)
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