I study the role of foreign currency risk in affecting export behavior. The dominant role of the United States Dollar in the international payments system exposes many emerging market firms to exchange rate risk in international trade due to unexpected movements in prices paid in local currency. In 2008, Brazil and Argentina agreed to a "Local Currency Payments" (SML) system, which allowed exporters and importers to operate in their own local currencies. This system was responsible for nearly 10% of exports from Brazil to Argentina by 2012. I estimate the effect of eliminating foreign currency risk via the SML system by leveraging plausibly exogenous municipal variation in access to authorized financial institutions. Using a triple difference design, I find that municipalities with high access to the SML system exported 22% more to Argentina relative to other South American export destinations compared to municipalities with low access. Applying estimates of the trade elasticity from the literature, this effect is equivalent to reducing trade barriers by approximately 10%. I complement this finding with a firm-level analysis using confidential customs data. Export transactions through the SML system were on average 44% larger than otherwise similar transactions. In a stylized model of export behavior, I rationalize these results in an environment of risk-averse importers and costly invoicing decisions.
Financial Failures and Depositor Quality: Evidence from Building and Loan Associations in California (link) |
Abstract
I study the role of flightiness in causing financial distress. Flightiness refers to exante, unobserved differences across depositors that imply higher liquidity needs during a negative shock. I leverage institutional differences across Building and Loan Associations in California during the Great Depression. Permanent plans were regular, forced savings plans more likely to penalize withdrawals. Dayton plans were more similar to commercial banks and has no such forced savings or withdrawal penalties. I find that Dayton plans in California were more likely to fail during the Great Depression. This result has potentially important implications for responding to financial crises.
Bank Networks, Credit Frictions, and Economic Growth: Evidence from U.S. Cross-State Banking Deregulation with Peter McCrory.
(link) |
Abstract
In the 1980s and 1990s, U.S. states deregulated restrictions on cross-state banking operations. These policies were oftentimes implemented on a pairwise basis: A state would allow another state to expand banking operations within its borders only if its banks had the option to expand in a reciprocal manner. In this paper, we leverage the timing and pairwise structure of these policy innovations to assess how bank deregulation affected geographic financial integration, banking operations, and economic growth. We have three main findings. First, bank holding companies (BHCs) quickly responded to effective deregulation events by increasing the number of interstate relationships by a large and significant amount. Second, the balance sheet of acquired banks expanded on average by ten percent. Third, we present state-level evidence that the real economic effects of deregulation occurred only to the extent that BHCs actually established interstate banking networks. Once connected to an interstate banking network, relative stat-level real personal income growth rose by an annual rate of 1.2 percentage points, and relative auto sales growth rose by an annual rate of 1.9 percentage points.
The Economics of Sovereign Debt, Bailouts and the Eurozone Crisis with Pierre-Olivier Gourinchas and Philippe Martin.
(link) |
Abstract
Despite a formal ‘no-bailout clause’, we estimate significant net present value transfers from the European Union to Cyprus, Greece, Ireland, Portugal and Spain, ranging from roughly 0.5% (Ireland) to 43% (Greece) of 2011 output during the recent Eurozone crisis. We propose a model to analyze and understand bailouts in a monetary union, and the large observed differences across countries. We characterize bailout size and likelihood as a function of the economic fundamentals (economic activity, debt-to-gdp ratio, default costs). Our model embeds a ‘Southern view’ of the crisis (transfers did not help) and a ‘Northern view’ (transfers weaken fiscal discipline). While a stronger no-bailout commitment reduces risk-shifting, it may not be optimal from the perspective of the creditor country, even ex-ante, if it increases the risk of immediate insolvency for high debt countries. Hence, the model provides a potential justification for the often decried policy of ‘kicking the can down the road’.
Publications
Unemployment Effects of Stay-at-Home Orders: Evidence from High Frequency Claims Data
with Chaewon Baek, Peter McCrory, and Preston Mui.
Published in The Review of Economics and Statistics (Recently Accepted) . (link)
| Abstract
Without effective mitigation strategies, epidemiological models project that upwards of 2 million Americans are at risk of death from the coronavirus pandemic, with many more subject to uncertain health complications. Heeding the warning, in mid-March 2020, state and local officials in the United States began issuing Stay-at-Home (SAH) orders, instructing people to remain at home except to do essential tasks or to do work deemed essential. By April 4th, 2020, nearly 95% of the U.S. population was under such directives. Over the same three week period, initial claims for unemployment spiked to unprecedented levels. In this paper, we use the high-frequency, decentralized implementation of SAH policies, along with high-frequency unemployment insurance (UI) claims, to disentangle the local effect of SAH policies from the general economic disruption wrought by the pandemic that affected all regions similarly. We find that, all else equal, each employment-weighted week of Stay-at-Home exposure increased a state’s weekly initial UI claims by 1.9% of its employment level. Ignoring cross-regional spillovers, this finding implies that, of the 16 million UI claims made between March 14, 2020 and April 4, 2020, only 4 million are attributable to the Stay-at-Home directives. This evidence suggests that the direct effect of SAH orders accounted for a significant, but minority share of the overall rise in unemployment claims, and that the majority of the rise in unemployment during this period would have occurred in the absence of these orders. This suggests that any economic recovery that arises from undoing SAH orders will be limited if the underlying pandemic is not resolved.
Firm Entry and Macroeconomic Dynamics: A State-Level Analysis
with Francois Gourio and Michael Siemer.
Published May 2016 in American Economic ReviewPapers and Proceedings 106 (5), pp. 214-218. (link)
| Abstract
Using an annual panel of US states over the period 1982-2014, we estimate the response of macroeconomic variables to a shock to the number of new firms (startups). We find that these shocks have significant effects that persist for many years on real GDP, productivity, and population. This is consistent with simple models of firm dynamics where a "missing generation" of firms affects productivity persistently.
Fiscal Consequences of Paying Interest on Reserves
with Marco Bassetto.
Published December 2013 in Fiscal Studies 34 (4), pp. 413-436. (link)
| Abstract
We review the role of the central bank's balance sheet in a textbook monetary model and explore what changes if the central bank is allowed to pay interest on its liabilities. When the central bank (CB) cannot pay interest, away from the zero lower bound its (real) balance sheet is limited by the demand for money. Furthermore, if securities are not marked to market and the central bank holds its bonds to maturity, it is impossible for the CB to make losses, and it always obtains profits from being a monopoly provider of money. When the option of paying interest on liabilities is allowed, the limit on the CB's balance sheet is lifted. In this case, the CB is free to take on interest‐rate risk – for example, by buying long‐term securities and financing those purchases with short‐term debt that pays the market interest rate. This is a risky enterprise that can lead to additional profits but also to losses. To the extent that losses exceed the profits of the monopoly operations, the CB faces two options - either it is recapitalised by Treasury or it increases its monopoly profits by raising the inflation tax.
Forecasting inflation and the Great Recession
with Marco Bassetto and Christine Ostrowski.
Published September 2013 in Economic Perspectives 37 (Q3), pp. 79-106. (link)
| Abstract
This article shows how the recovery of inflation in 2009-10 occurred precisely at the only time (since 1985) the models would predict disinflation, i.e., inflation went up when the models said it should go down.
DISCLAIMER: The views expressed in all work on this website are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of any other person associated with the Federal Reserve System.
Department of Economics
University of California, Berkeley
530 Evans Hall #3880
Berkeley, CA 94720-3880
Other
In the early months of the Coronavirus pandemic and ensuing economic downturn, Peter McCrory and I put together a site documenting the various economic policy responses taken by the U.S. government. We stopped updating the site towards the end of May to focus our attention on our academic research and on finishing our PhDs. We are leaving it up as a reference.