Camilo Granados

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Welcome

I am an Assistant Professor of Economics in the School of Economics, Political and Policy Sciences (EPPS) at the University of Texas at Dallas (UTD). I obtained a Ph.D. in Economics at the University of Washington (UW) in 2021. My main areas of research are International Macroeconomics and International Finance. I am also interested in applied econometrics and Macroeconomics.

My current research explores the international dimension of macroprudential regulations and the best policy implementation setups that can be applied in financially integrated economies.

• Click below to download CV.

Curriculum Vitae (PDF)

References: Professor Yu-chin Chen, Professor Ippei Fujiwara, Professor Fabio Ghironi.

• Click title to see abstract.

Working Papers

Strategic Macroprudential Policymaking: When Does Cooperation Pay Off?

Abstract
I study whether emerging economies can navigate the global financial cycle more successfully by resorting to internationally coordinated macroprudential policies. For this, I set an open economy model with banking frictions in a center-periphery environment with multiple emerging economies. Then, I evaluate the performance of several policy arrangements that differ by the degree and type of cooperation. I find that cooperation can generate welfare gains but is not always beneficial relative to nationally-oriented policies. Instead, only regimes where the financial center acts cooperatively generate welfare gains. When present, two mechanisms generate the gains: a cancellation effect of national incentives to manipulate the global interest rate and a motive for steering capital flows to emerging economies. The first mechanism eliminates unnecessary policy fluctuations and the second helps prevent capital retrenchments in the center. These effects can be quantitatively relevant as good cooperation regimes can reduce the welfare losses induced by a financial friction between 60% and 80%.

Abstract

I study whether emerging economies can navigate the global financial cycle more successfully by resorting to internationally coordinated macroprudential policies. For this, I set an open economy model with banking frictions in a center-periphery environment with multiple emerging economies. Then, I evaluate the performance of several policy arrangements that differ by the degree and type of cooperation. I find that cooperation can generate welfare gains but is not always beneficial relative to nationally-oriented policies. Instead, only regimes where the financial center acts cooperatively generate welfare gains. When present, two mechanisms generate the gains: a cancellation effect of national incentives to manipulate the global interest rate and a motive for steering capital flows to emerging economies. The first mechanism eliminates unnecessary policy fluctuations and the second helps prevent capital retrenchments in the center. These effects can be quantitatively relevant as good cooperation regimes can reduce the welfare losses induced by a financial friction between 60% and 80%.

[Paper] / [Slides (30 min)] / [Video (until 21:48)]

Macroprudential Policy Interactions: What has Changed Since the Global Financial Crisis?

Abstract
We study the empirical international policy interactions between macroprudential regulators with the objective of determining whether these adjust their policies with cross-border strategic considerations in mind. For that, we analyze the policy-to-policy interactions for a panel of 65 economies using a local projection approach. Our findings suggest that domestic regulators do react in response to foreign policy changes positively and on average will tighten their domestic tools in response to stricter foreign financial regulations (tightenings). We apply additional specifications to disentangle the average policy effect and obtain that: (i) regulators react mainly to policy changes in advanced economies, (ii) the reaction to foreign policy changes is stronger in advanced economies, (iii) reactions to emerging regulations are less important, but can exist at the regional level (emerging-to-emerging). Additionally, results by type of foreign policy instruments suggest that, other than the typical positive response in our baseline, there can also be occasional loosening adjustments in emerging economies after foreign policy tightenings of some prudential instruments. Our results point to the existence of important policy interactions that can create the scope for coordinated policy frameworks aimed to mitigate inefficiencies in the level of macroprudential interventionism.

Abstract

We study the empirical international policy interactions between macroprudential regulators with the objective of determining whether these adjust their policies with cross-border strategic considerations in mind. For that, we analyze the policy-to-policy interactions for a panel of 65 economies using a local projection approach. Our findings suggest that domestic regulators do react in response to foreign policy changes positively and on average will tighten their domestic tools in response to stricter foreign financial regulations (tightenings). We apply additional specifications to disentangle the average policy effect and obtain that: (i) regulators react mainly to policy changes in advanced economies, (ii) the reaction to foreign policy changes is stronger in advanced economies, (iii) reactions to emerging regulations are less important, but can exist at the regional level (emerging-to-emerging). Additionally, results by type of foreign policy instruments suggest that, other than the typical positive response in our baseline, there can also be occasional loosening adjustments in emerging economies after foreign policy tightenings of some prudential instruments. Our results point to the existence of important policy interactions that can create the scope for coordinated policy frameworks aimed to mitigate inefficiencies in the level of macroprudential interventionism.

[Paper]

Macroprudential Policy Coordination in Open Economies: A Multicountry Approach.

Abstract
Motivated by the presence of financial spillovers from advanced economies on emerging markets, and the apparent difficulties of the latter to shield their economies from external shocks, I set up a three-country center-periphery model (with two emerging economies and one advanced economy) with banks and financial agency frictions à la Gertler and Karadi (2011). The key defining feature of an emerging economy will be the limited capacity of financial intermediation that leads to a financial dependency relation with the center. Each country will have access to a macroprudential instrument that affects directly its source of inefficiencies and allows to smooth the credit spread distortions. However, such regulation can be costly and interdependent, opening a potential scope for coordination or strategic interactions. The addition of a second emerging country is relevant to enhance the interaction leverage of the peripheric block, as well as to allow for strategic interactions between emerging countries at the regional level. Within this framework, I aim to evaluate the optimal macroprudential instrument and welfare features of a variety of policy arrangements that differ by their degree of cooperation. In particular, I look for gains of coordination, but also for their distribution across economies. Finally, the framework allows to carry experiments with some of the peripheric features and explore whether global or regional incentives for coordination change meaningfully with the addition of new economies to a peripheric economic block.

Abstract

Motivated by the presence of financial spillovers from advanced economies on emerging markets, and the apparent difficulties of the latter to shield their economies from external shocks, I set up a three-country center-periphery model (with two emerging economies and one advanced economy) with banks and financial agency frictions à la Gertler and Karadi (2011). The key defining feature of an emerging economy will be the limited capacity of financial intermediation that leads to a financial dependency relation with the center. Each country will have access to a macroprudential instrument that affects directly its source of inefficiencies and allows to smooth the credit spread distortions. However, such regulation can be costly and interdependent, opening a potential scope for coordination or strategic interactions. The addition of a second emerging country is relevant to enhance the interaction leverage of the peripheric block, as well as to allow for strategic interactions between emerging countries at the regional level. Within this framework, I aim to evaluate the optimal macroprudential instrument and welfare features of a variety of policy arrangements that differ by their degree of cooperation. In particular, I look for gains of coordination, but also for their distribution across economies. Finally, the framework allows to carry experiments with some of the peripheric features and explore whether global or regional incentives for coordination change meaningfully with the addition of new economies to a peripheric economic block.

[Paper]

Exchange Rate Dynamics and the Central Bank’s Balance Sheet (with Guillermo Gallacher and Janelle Mann)

Abstract
In theory, nominal exchange rates are a function of the relative difference in supply and demand of money. In practice, some central banks issue debt. In this study we ask: are nominal exchange rate variations linked to these remunerated central bank liabilities? We use two measures of implied exchange rates using central bank balance sheet data: one measure is a traditional measure that includes the monetary base, while the other also includes remunerated liabilities. We provide a simple theoretical framework to put these measures in context and to shed light on the relationship between exchange rates and the balance sheet of the central bank. We then move on to the formal empirical analysis. Nonlinear cointegration techniques are used to compare these two measures with the actual exchange rate for a set of seven Latin American countries using monthly data for the 2004:1-2019:12 period. The nonlinear cointegration technique allows both the number and location of thresholds to be endogenously determined based on the percentage difference between the exchange rate and the implied exchange rate. We find the exchange and implied exchange rate are cointegrated for most of the set of Latin American countries. For cointegrated series, the implied exchange rate always adjusts to restore the long run relationship while the exchange rate adjusts for only half of the cointegrated series. This empirical finding indicates that the exchange rate is the dominant series and that central bank debt matters for understanding exchange rate dynamics.

Abstract

In theory, nominal exchange rates are a function of the relative difference in supply and demand of money. In practice, some central banks issue debt. In this study we ask: are nominal exchange rate variations linked to these remunerated central bank liabilities? We use two measures of implied exchange rates using central bank balance sheet data: one measure is a traditional measure that includes the monetary base, while the other also includes remunerated liabilities. We provide a simple theoretical framework to put these measures in context and to shed light on the relationship between exchange rates and the balance sheet of the central bank. We then move on to the formal empirical analysis. Nonlinear cointegration techniques are used to compare these two measures with the actual exchange rate for a set of seven Latin American countries using monthly data for the 2004:1-2019:12 period. The nonlinear cointegration technique allows both the number and location of thresholds to be endogenously determined based on the percentage difference between the exchange rate and the implied exchange rate. We find the exchange and implied exchange rate are cointegrated for most of the set of Latin American countries. For cointegrated series, the implied exchange rate always adjusts to restore the long run relationship while the exchange rate adjusts for only half of the cointegrated series. This empirical finding indicates that the exchange rate is the dominant series and that central bank debt matters for understanding exchange rate dynamics.

[Paper]

Estimating Potential Output After Covid: How to Address Unpredecented Macroeconomic Variations (with Daniel Parra)

Abstract
This study examines whether and how important it is to adjust output gap frameworks during the COVID-19 pandemic and similar unprecedentedly large-scale episodes. Our proposed modelling framework comprises a Bayesian Structural Vector Autoregressions with an identification setup based on a permanent-transitory decomposition that exploits the long-run relationship of consumption with output and whose residuals are scaled up around the COVID-19 period. Our results indicate that (i) a single structural error is sufficient to explain the permanent component of the gross domestic product (GDP); (ii) the adjusted method allows for the incorporation of the COVID-19 period without assuming sudden changes in the modelling setup after the pandemic; and (iii) the proposed adjustment generates approximation improvements relative to standard filters or similar models with no adjustments or alternative ones, but where the specific rare observations are not known. Importantly, abstracting from any adjustment may lead to over- or underestimating the gap, too-quick gap recoveries after downturns, or too-large volatility around the median potential output estimations.

Abstract

This study examines whether and how important it is to adjust output gap frameworks during the COVID-19 pandemic and similar unprecedentedly large-scale episodes. Our proposed modelling framework comprises a Bayesian Structural Vector Autoregressions with an identification setup based on a permanent-transitory decomposition that exploits the long-run relationship of consumption with output and whose residuals are scaled up around the COVID-19 period. Our results indicate that (i) a single structural error is sufficient to explain the permanent component of the gross domestic product (GDP); (ii) the adjusted method allows for the incorporation of the COVID-19 period without assuming sudden changes in the modelling setup after the pandemic; and (iii) the proposed adjustment generates approximation improvements relative to standard filters or similar models with no adjustments or alternative ones, but where the specific rare observations are not known. Importantly, abstracting from any adjustment may lead to over- or underestimating the gap, too-quick gap recoveries after downturns, or too-large volatility around the median potential output estimations.

[Paper]

Work in Progress

Capital Flow Management and Monetary Policy Shocks (with Kyongjun Kwak)

Abstract
We study the effectiveness of capital flow management measures (CFMs) in curbing the capital flows’ fluctuations in Emerging Market Economies (EMEs) caused by monetary policy shocks. In particular, we examine i) the extent to which CFMs mitigate the impact of US monetary shocks, and ii) whether the mitigating effect differs between net capital flows and gross capital flows. Our results, based on local projection panel estimations for the period 2000-2018, indicate that CFMs effectively reduce the fluctuations of both gross capital inflows and outflows when there are monetary policy shocks from the US. Our findings also show that the effect in gross flows is greater than in net flows. In contrast to the effects in gross flows, the mitigating effects on net flows are ambiguous in most specifications.

Abstract

We study the effectiveness of capital flow management measures (CFMs) in curbing the capital flows’ fluctuations in Emerging Market Economies (EMEs) caused by monetary policy shocks. In particular, we examine i) the extent to which CFMs mitigate the impact of US monetary shocks, and ii) whether the mitigating effect differs between net capital flows and gross capital flows. Our results, based on local projection panel estimations for the period 2000-2018, indicate that CFMs effectively reduce the fluctuations of both gross capital inflows and outflows when there are monetary policy shocks from the US. Our findings also show that the effect in gross flows is greater than in net flows. In contrast to the effects in gross flows, the mitigating effects on net flows are ambiguous in most specifications.

[Paper]

Prices Stability and Macroeconomic Volatility Spillovers in Latin America

Abstract
In order to determine the presence of volatility spillovers among macroeconomic variables a Vector Autorregresive (VAR) model with multivariate heteroskedasticity effects is carried out for five countries in Latin America. The variables considered are real activity, price level, interest rate, and exchange rate. The results indicate that there are few within country volatility spillovers. Those that are significant are usually sizable and point to the relevance of international shocks in spreading volatility to other countries rather than local effects. Finally, we obtain that the volatility of inflation is not generally affected by the uncertainty shocks in the exchange rate, this result is noticeable as the price instability effects of the exchange rate fluctuations is usually the justification behind exchange rate intervention programs in these economies.

Abstract

In order to determine the presence of volatility spillovers among macroeconomic variables a Vector Autorregresive (VAR) model with multivariate heteroskedasticity effects is carried out for five countries in Latin America. The variables considered are real activity, price level, interest rate, and exchange rate. The results indicate that there are few within country volatility spillovers. Those that are significant are usually sizable and point to the relevance of international shocks in spreading volatility to other countries rather than local effects. Finally, we obtain that the volatility of inflation is not generally affected by the uncertainty shocks in the exchange rate, this result is noticeable as the price instability effects of the exchange rate fluctuations is usually the justification behind exchange rate intervention programs in these economies.

[Paper]

Enhancing Economic Resiliency Through Prudential Cooperation

Abstract
I analyze the short-run resilience and financial stability properties of an array of cooperative policy regimes relative to nationally-oriented regulations. I show that countries that rely on internationally coordinated policies are more insulated to the negative effects of international financial downturns like the global financial crisis. Additionally, cooperative policies allow countries to increase the countercyclicality of the prudential policies, to lower the required level of interventionism to deal with crises, and to mitigate the deleveraging processes after a financial crisis. All of these properties imply that smoother and less volatile policy responses can be compatible with improved economic performance after external shocks which makes a case for the implementation of coordinated policy schemes that go beyond the potential welfare gains involved in these initiatives.

Abstract

I analyze the short-run resilience and financial stability properties of an array of cooperative policy regimes relative to nationally-oriented regulations. I show that countries that rely on internationally coordinated policies are more insulated to the negative effects of international financial downturns like the global financial crisis. Additionally, cooperative policies allow countries to increase the countercyclicality of the prudential policies, to lower the required level of interventionism to deal with crises, and to mitigate the deleveraging processes after a financial crisis. All of these properties imply that smoother and less volatile policy responses can be compatible with improved economic performance after external shocks which makes a case for the implementation of coordinated policy schemes that go beyond the potential welfare gains involved in these initiatives.

[Paper]

Financial Regulation and Income Inequality (with Jasmine Jiang)