Recent Working Papers
Gross Capital Flows and International Diversification
Gross capital flows in the US have increased from 2% of GDP in 1970 to 26% by 2007, and then fully collapsed in a single year. This paper builds a two-country model of gross flows in which agents share non-tradable consumption risk. Equilibrium portfolios are long in domestic bonds and short in foreign bonds because the endogenous movements in real exchange rate provide a hedge against non-tradable shocks. In a counterfactual exercise, I find that the consumption decline during the Great Recession would have been 60% larger in the absence of the risk sharing channel provided by gross capital flows.
Network Cities, with Alessandra Fogli
We analyze the geographic dimension of innovation. Innovation is the critical component of long term prosperity and it is unevenly distributed across US. Using data on 1.8 million US patents and their citation properties, we map the innovation network of all major US cities over the last three decades. We find that the innovation gap among cities, which was shrinking until 1980, has recently started growing, generating divergence. We develop a network model of cities that captures knowledge spillovers within and across industries as well as within and across cities, and calibrate it using information on the patterns of patents citations. We show that the IT revolution, by reducing the cost of information exchange across cities, induced an endogenous response of the network structure of cities. This change in network structure can explain a large part of the recent divergence in innovation patterns, and is consistent with a number of stylized facts about the evolution of US cities over the past thirty years.
Sovereign Uncertainty: Fiscal Policy under the Debt Crisis
How should the fiscal policy be adjusted when the volatility of government bond yield is time varying? In this paper, I first quantify the stochastic volatility of real government bond yields for Germany, Italy, Spain and Portugal. I show that among peripheral countries, volatility shock was the highest for Portugal during the debt crisis, followed by Italy and Spain. Then, I propose a small open economy model that examines the dynamics of government revenue and other macroeconomic variables when fiscal policy is adjusted on the impact of real interest rate volatility shock. I find that under high volatility, consumption tax will result in the highest revenue but at the cost of biggest welfare loss compared to the benchmark low volatility. Capital and labor income taxes show similar result but to the lesser amount. Calibrating to Portuguese data, I show that 1 percentage point increase in consumption tax will yield 1.5% less total government revenue and 1.6% more welfare loss in present value terms under the high volatility than the low volatility.
Bank Regulations, Credit Crunch, and Exports, with Radek Paluszynski and Sunyoung Lee
We estimate the effect of financial regulation on exporters through the bank lending channel, using a new data set of matched Korean banks and firms. Amiti and Weinstein (2011) have shown that the health of financial institutions is an important factor in explaining the firm-level exports during the Japanese financial crises 1990-2010. However, their analysis does not cover the period where extensive bank regulations (Basel III) have been imposed. In our analysis, we build a model of search and matching in loan markets and show the impact of financial regulations on the credit availability of exporters.
In Retreat: Global Banks and International Trade, with Parisa Kamali
In the wake of the Great Recession, both international banking activity and international trade flows have retreated from their all-time highs. We ask whether the financial friction channel can explain the double downturns of exports and international financial markets. Using firm-level data, we provide evidence that exporters borrow more and have higher leverage ratios compared to non-exporters. To evaluate the importance of financial frictions for international trade dynamics, we construct a model of heterogeneous firms and financial intermediaries (banks) in which firms face financial constraints and banks are subject to collateral constraints. Exporters borrow working capital from banks who, in turn, hold equity in the borrowing firms as collateral. When banks are subjected to a financial shock that tightens collateral constraints, exporters’ production rapidly declines because of reduced financing from the banking sector. Fisher's debt-deflation mechanism further amplifies the downturn of firms and banks. As firms’ production drops, their net worth decreases, which further tightens the collateral constraints of the banks. We show that a significant amount of the fall in global exports can be explained by the presence of financial frictions in a standard model