Ms Laura  Castillo-Martínez

Ms Laura Castillo-Martínez

PhD Candidate in Economics

Department of Economics

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About me

Research interests
Macroeconomics (primary)
International Macroeconomics, Monetary Economics (secondary)

Job market paper
Sudden stops, productivity and the exchange rate

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Following a sudden stop, real exchange rates can realign through a nominal exchange rate depreciation, lower domestic prices, or a combination of both. This paper makes four contributions to understand how the type of adjustment shapes the response of macroeconomic variables, in particular, productivity, to such an episode. First, it documents that TFP systematically collapses after a sudden stop under a flexible exchange rate arrangement while it moderately improves if taking place within a currency union. Second, using firm-level data for two sudden stops in Spain, it highlights that the difference in the productivity response is largely driven by entry and exit firm dynamics.  Third, it proposes a small open economy DSGE framework with firm selection into production and endogenous mark-ups that is consistent with the empirical findings. The model nests three mechanisms through which a shock affects productivity: a pro-competitive, a cost, and a demand channel. While only the former operates when the nominal exchange rate adjusts, all three are active under a currency union. The model delivers general conditions under which the demand channel dominates in the latter scenario. Fourth, it uses a quantitative version of the model to revisit the optimality of exchange rate policy after a sudden stop.

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Publications and additional papers

Internal devaluation and the extensive margin of trade: the case of Spain
Working Paper, Oct 2018.

Abstract: An economy can improve its performance  in  the  exporting  market in two ways:  with a  nominal  exchange  rate  devaluation or a fall in relative prices.  Both alternatives induce a real exchange rate depreciation which boosts international sales through enhanced price competitiveness. Wage moderation policies traditionally attempt to reduce the prices of exports by lowering the costs of production and are often associated with the latter. This paper revisits the mechanisms through which an internal devaluation may contribute to an export boom, not as a price but a cost competitiveness strategy.  In a small open economy setting, a reduction in costs does not fully pass on to export prices and, thus, the traditional channel no longer applies. I suggest that lower costs and fixed prices expand the extensive margin of trade by allowing more firms to substitute away from a weaker domestic demand into the exporting sector. This results in a simultaneous decrease in the number of firms, an increase in the share of exporters and improved aggregate labor productivity. The model’s predictions are in line with Spanish aggregate data following the wage moderation policies implemented during the recent financial crisis.

Paying Bankers: Rents, Risk, and Performance (with Sophia Chen and Deniz Igan)
Work in Progress

Dual mandates and excessive hawkishness: a principal-agent approach to monetary policy design 
Work in Progress


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Professor Mark Schankerman 

Professor Silvana Tenreyro

Professor Ricardo Reis 

Professor Silvana Tenreyro
Professor Ricardo Reis 
Professor Gianmarco Ottaviano
Dr Gianluca Benigno

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Department of Economics,
London School of Economics and Political Science,
Houghton Street, London WC2A 2AE