Publications
"The Composition of Capital Inflows When Emerging Market Firms Face Financing Constraints” with Katherine A. Smith.2008. Journal of Development Economics 89(2), July 2009, pp. 223—234. (PDF Slides: Short, Long)
http://dx.doi.org/10.1016/j.jdeveco.2008.05.003
http://dx.doi.org/10.1016/j.jedc.2006.09.012
“Implications of Intellectual Property Rights for Dynamic Gains from Trade” with Michelle P. Connolly. American Economic Review Papers and Proceedings 95(2), May 2005, pp. 318—322.
http://dx.doi.org/10.1257/000282805774670022
“Currency Boards, Dollarized Liabilities, and Monetary Policy Credibility” with Mark Spiegel. Journal of International Money and Finance 22(7), December 2003, pp. 1065—1087.
http://dx.doi.org/10.1016/j.jimonfin.2003.09.010
Work in Progress
“Why Do Emerging Economies Import Direct Investment and Export Savings? A Story of Financial Underdevelopment” with Katherine A. Smith
(PDF Slides: Short) Preliminary
The net foreign asset positions (NFAP) of developing countries and emerging markets tend to be short equity and either short or long debt, while most industrial nations are long equity and short debt. This paper proposes that financial system inefficiencies associated with underdeveloped financial markets can explain this difference in the NFAPs. Financial system imperfections typically found in emerging markets and developing countries raise the cost of debt financing for domestic firms. This in turn leads to three distinct effects; a greater need for firms to precautionary save, increased vulnerability to foreign multinationals buy-outs, and a drastic limitation on the purchase of foreign firms. We extend a small open economy framework to study the financing decisions of firms operating under financial frictions. In equilibrium, we can obtain a large negative net equity position and a smaller negative net debt position as a result of incremental financing decisions of the firms, rationalizing the observed NFAP in most non-industrial economies.
(zipped fortran files) (zipped LaTeX files)
“Unleashing the Bond Market: Implications of Firm Financing Decisions for Aggregate Welfare” with Katheryn Russ
Since 1998, policymakers worldwide have pushed for the development of local bond markets to finance investment as an alternative to the bank-dependent financing prevalent in East Asia and Latin America. However, few studies have quantified the impact that the development of a local bond market would have on investment and employment decisions by domestic firms. Our paper fills this gap. It presents a new framework where firms' productivity, investment decisions, and capital structure are jointly determined. In our small open economy model with an endogenous capital stock and heterogeneous firms, each firm chooses to finance investment either by borrowing from banks or by paying a fixed issuance fee to borrow through a domestic debt market. If they can pay the issuance fee, firms borrowing through the public debt market enjoy lower interest rates than firms borrowing from banks due to extra intermediation and monitoring costs involved in bank financing. Thus, firms with higher productivity finance their investment with publicly issued debt and exploit their cheaper credit by using more capital-intensive techniques, while less productive firms use bank loans and more labor-intensive production techniques. As domestic debt markets evolve, the average capital intensity of the economy increases, impacting consumption, wages, welfare, and trade patterns. We use counterfactuals calibrated with data from several different emerging markets to quantify our results.
“The impact of Financial Frictions on a Small Open Economy: When Current Account Borrowing Hits a Limit”
(PDF) (FRBSF Working Paper) (PDF Slides)
The evidence of the last 20 years of recurring output busts and rapid reversals of the current account in emerging markets indicates that domestic agents may not be able to borrow in international capital markets to fully insure themselves against internal and external shocks. This paper models this phenomenon as a form of excess volatility by introducing a financial friction into a stochastic model of a small open economy. The financial friction limits the current account deficit to a fixed fraction of gross domestic product. The paper shows that conditional volatility and asymmetry are significant statistical characteristics of the GDP and current account that reflect the excess volatility and the current account reversals. Using a simulated method of moments approach, we show that the model can explain the conditional volatility and asymmetry of Mexican GDP and the current account.
“Financial Frictions, Distribution Costs, and Current Account Crises” with Sylvain Leduc (PDF Slides)
Current account crises in emerging markets are characterized by large increases in interest rates, big drops in output, and large real currency depreciations. Current models of crisis with financial frictions do not generate very large movements in these variables. Recent work has shown that the introduction of distribution costs, in otherwise standard open-economy models, can work to amplify the movements in real exchange rate. In this paper, we model a distribution sector that combines tradables and nontradables to produce a consumer good and also faces a financing constraint. In our model, a large increase in interest rates raises the cost of distributing goods and therefore brings about a fall in the supply of distribution services. In turn, the increase in the cost of distribution triggers a fall in tradable output, via a fall in the demand for traded goods. We find that the introduction of distribution services amplifies the responses of output, imports, and the real exchange rate in episodes of current account crises.
“North-South Technological Diffusion:A New Case for Dynamic Gains from Trade” with Michelle P. Connolly.
(tech.pdf)(FRBSF Working Paper) (PDF Slides)
This paper studies the transitional dynamics in a quality ladder model of endogenous growth in which North-South trade leads to technological diffusion through reverse engineering of intermediate goods. The concept of learning-to-learn is incorporated into both imitative and innovative processes, which in turn drive domestic technological progress. International trade with imitation leads to feedback effects between Southern imitators and Northern innovators who compete for the world market. Consequently, both regions face transition paths dependent on their relative technologies. We solve the model numerically to illustrate the transition paths and welfare effects of Southern trade liberalization. While particular welfare results depend on parameter choices, we demonstrate that focusing solely on steady-state results leads to incorrect welfare interpretations.
“Intellectual Property Rights Design and Dynamic Gains from Trade” with Michelle P. Connolly.
A simple intellectual property rights (IPRs) framework is introduced into a dynamic quality ladder model of technological diffusion between innovating firms in one country and imitating firms in another country. The presence of technological spillovers and feedback effects between firms in the two countries demonstrates that, even when steady state growth increases, transition costs sometimes dominate steady state welfare gains. Most existing models of international IPRs find that high intellectual property enforcement in the imitating country leads to welfare gains in the innovating country at the expense of the imitating country. In contrast, we find IPR regimes that, even after accounting for transition costs, positively affect welfare in both countries. Preferred IPR regimes maintain competition from imitative activity but enforce some remuneration to innovators for the spillovers they generate. Well-designed IPR regimes imposed at the time of trade liberalization will be welfare enhancing for both regions relative to trade liberalization without IPR enforcement.
Discussions
Discussion of "Patterns, Paradoxes, and Puzzles of International Capital Flows" by Laura Alfaro, Sebnem Kalemli-Ozcan and Vadym Volosovych, 2008 UC Davis CEGE (PDF)
Discussion of "Default and the Term Structure in Sovereign Bonds'" by Cristina Arellano and Ananth Ramanarayanan, 2007 SCIEA Fall (PDF)
Discussion of "Currency Crisis and Foreign Credit in Emerging Markets: Credit Crunch or Demand Effect'" by Galina Hale and Carlos Arteta, 2006 SITE (PDF)Discussion of "Dual Labor Markets and Business Cycles'" by David
Cook and Hiromi Nosaka, 2006 CPBS Conference (PDF)
Discussion of "Financial Integration and the Wealth Effect of Exchange Rate Fluctuations" by Cedric Tille, SCIEA, Spring 2005 (PDF)
Discussion of "Defaultable Debt, Interest Rates and the Current Account" by Mark Aguiar and Gita Gopinath, FRBSSF UMD "Emerging Markets and Macroeconomic Volatility Conference", 2004 (PDF)
Discussion of "Trade, Interdependence and Exchange Rates" by Doireann Fitzgerald, 2004 UCSC Trade Workshop (PDF)
Discussion of "Dollarization and Financial Integration" by Cristina Arellano and Jonathan Heathcote, ITAM Summer Conference, August 2003 (PDF)
Discussion of "Long-Run Supply Effects and the Elasticities Approach to Trade" by Joe Gagnon, SCIEA, Spring 2003 (PDF)
Discussion of "Stock Market Cycles, Instability and Financial Liberalization" by Sebastian Edwards, Javier Gomez Biscarri and Fernando Perez de Gracia, UCSC 2003 "Regional and International Implications o the Financial Instability in Latin America" conference, (PDF)