Essays on Macroeconomics
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carrasco-alexcm-phd-econ-2026-thesis.pdf
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Author(s)
Carrasco Martinez, Alex Avelino
Advisor(s)
Werning, Iván
Beraja, Martin
Date Issued
May 2026
Publisher
Massachusetts Institute of Technology
Abstract
This thesis contains three essays in macroeconomics. Together, they study how endogenous longevity, central bank reputation, and financial intermediary balance sheets shape aggregate outcomes and policy design. Each essay is presented as a separate chapter.
In Chapter 1, I study how an endogenous longevity channel, the partial control of life expectancy through preventive health investment, shapes macroeconomic outcomes and policy design. I first study how health investments affect individual saving decisions in a two-period model where survival probabilities depend on prevention. Endogenous longevity creates a non-linear asset-income relationship: health spending depresses saving and yields concavity at low incomes, while longer expected lifespans raise the value of saving and generate convexity at higher incomes. Embedding this mechanism into a neoclassical OLG model, I then examine its implications for macroeconomic policy design. When annuity markets are incomplete, individuals who extend their lifespans fail to internalize the social costs associated with longer survival. When policy instruments are sufficiently rich, efficiency requires a positive tax on health investment. In more realistic second-best settings, however, health subsidies can become optimal as they partially compensate for annuity imperfections and reduce longevity inequality and income inequality. I then build a quantitative model disciplined by U.S. data to assess two applications: (i) how the endogenous longevity channel alters the contribution of demographic and inequality trends to the rise in aggregate saving and decline in real interest rates over the past five decades, and (ii) the welfare effects of alternative policy reforms to preventive health investment subsidies.
In Chapter 2, joint with Pedro Martínez-Bruera and Tomás E. Caravello, we study the implications of uncertainty about a central bank’s preference for inflation stability for monetary policy design. A hawkish reputation, defined as a reputation for placing large weight to inflation stabilization, reduces stabilization costs by dampening the pass-through of shocks to short-run inflation expectations. Because the private sector learns from the bank’s policy actions, the optimal response to cost-push shocks is more aggressive than that of a myopic policymaker: the bank internalizes the value of its reputation. Furthermore, the bank treats reputation as an asset: it invests in it when perceived as dovish, and spends it when perceived as hawkish. Using cross-sectional variation in U.S. private forecasts, we find evidence consistent with these mechanisms. Quantitatively, welfare gains from the optimal policy are larger during the Great Moderation than during the Great Inflation, and delegating policy to a conservative but myopic central banker, as in Rogoff (1985), closely approximates the optimal policy.
In Chapter 3, joint with Cesar Alejandro Vasquez Chacon, we study how global financial shocks affect deviations from uncovered interest parity in emerging market economies. These economies are especially exposed to such shocks because they rely more heavily on foreign currency borrowing and operate with shallower financial markets. Using local projections in a panel of advanced and emerging economies, we show that UIP deviations rise persistently after a U.S. monetary tightening in emerging markets but respond little in advanced economies. This differential response is stronger in countries whose banking sectors hold larger short foreign currency positions. We develop a dynamic small open economy model
with financial frictions and market segmentation to interpret these
facts. Banks borrow in foreign currency and lend domestically, subject
to balance sheet constraints and forward looking portfolio decisions.
Exchange rate movements revalue intermediary net worth, alter intermediation capacity, and generate endogenous UIP premia. The model matches the asymmetric response of UIP deviations to foreign monetary shocks and highlights intermediary balance sheets as a key determinant of international monetary transmission.
MIT Department
Massachusetts Institute of Technology. Department of Economics
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