WPs & Work in Progress

Trade Credit and Relationships (with Felipe Benguria and Alvaro Garcia-Marin)

CESifo Working Paper, May 2023
Latest version, October 2023, download

(Partly based on the previously circulated paper “Trade credit, Markups, and Relationships”, IFDP 1303, 2020)

Abstract: Exploiting transaction-level international trade data, this paper documents new facts about trade credit. Trade credit use increases with firm-to-firm relationship length, an effect that varies with countries’ rule of law, and is stronger for trade in more complex products and trade between unrelated parties. A model featuring diversion risk, learning, and a financing cost advantage of trade credit can rationalize these patterns. Initially, payment risk is a key factor limiting trade credit use. Through learning, this risk declines and firms switch to trade credit. Long-term trade relationships give rise to a financial benefit: saving financing costs through trade credit.

Diversion Risk, Markups and the Financing Cost Advantage of Trade Credit (with Alvaro Garcia-Marin and Santiago Justel)

R&R American Economic Journal: Macro

December 2022 (first version September 2018), download. 

(previously circulated under the title "Trade Credit and Markups")

Abstract: Trade credit is the most important form of short-term finance in both emerging and developed economies. This paper develops a model where trade credit reduces borrowing from banks.  This gives rise to a financing cost advantage of trade credit that increases in the product of markups and borrowing costs.  In line with this prediction, Chilean export data show that a one-standard-deviation rise in upstream markups increases trade credit by 13 days.  The extensive and intensive margins contribute about equally to this effect, which strengthens with the destination country’s borrowing costs.  These findings are robust to instrumenting markups with estimated physical productivity.

The Financial Channel of the Exchange Rate and Global Trade (with Sai Ma) 

R&R Review of Financial Studies

September 2023, download

Abstract: This paper provides evidence that the U.S. dollar affects trade through a financial channel of the exchange rate. Using global data over three decades on trade between countries whose currency is not the U.S. dollar, it shows that a dollar appreciation increases import prices and decreases import quantities. In line with a financial channel, these effects are stronger when the exporting country borrows more in U.S. dollars abroad. The financial channel was active before the global financial crisis but has strengthened since. Instrumenting the dollar is key to uncovering the full effect of the financial channel.

The Dollar and Corporate Borrowing Costs (with Ralf Meisenzahl and Friederike Niepmann)

November 2022, download.

Abstract: We show that exchange rate movements in the dollar affect syndicated loan spreads. We identify the effect of dollar movements by focusing on spread adjustments during the syndication process. Using this high-frequency, within loan variation, we find that a one standard deviation increase in the dollar index increases spreads by about 5 basis points. The same increase in the dollar index leads to a reduction in loan amounts by 0.5 percent, and syndicate participants experience a reduction in underpricing by 3 basis points. The effects are considerably larger for dollar appreciations. The results suggest that the dollar is a strong indicator for the global demand for risky assets and that global shocks through the dollar affect corporate borrowing costs

The Effect of the Dollar on Trade Prices (with Sai Ma and Shaojun Zhang) download. 

Abstract: This paper provides evidence on the effect of the dollar exchange rate on international trade prices, employing a new instrument for the U.S. dollar based on U.S. domestic housing activity (Ma and Zhang (2019)). In line with the dominant currency paradigm (Gopinath et al. (2020)), when instrumenting the dollar, we find evidence for a perfect pass-through of the dollar exchange rate to import prices that are invoiced in dollars.

Elusive Safety:  The New Geography of Capital Flows and Risk (with Laura Alfaro, Ester Faia and Ruth Judson)

Abstract: Using a unique confidential data set with industry-level disaggregation of U.S. cross-border securities claims and liabilities, we find that the growing U.S. securities are also increasingly intermediated by tax haven financial centers (THFC) and by less regulated funds. These securities are risky and respond to tax rates and regulation, suggesting tax avoidance and regulatory arbitrage. Issuers are mostly intangible-intensive multinationals, and investors require a high Sharpe ratio, suggesting search for yield. In contrast, safe Treasuries are mainly held by the foreign official sector and increased with quantitative easing policies. Facts on private securities are rationalized through a model where multinationals with heterogeneous default probabilities endogenously choose to shift profits and are funded by global intermediaries with endogenous monitoring intensity. A fall in the costs of global funds, by increasing firms' profits, shifts the distribution of entrants toward riskier ones and also reduces intermediaries' incentives to monitor both the extensive (fraction of monitored firms) and intensive margin, hence raising ex post risk. Firms appear elusively safe.