INTERNATIONAL MACRO & FINANCE

Economies of Scale and International Business Cycles

JOURNAL OF INTERNATIONAL ECONOMICS, Vol. 131, July 2021, No. 103459

journal link | working paper | online appendix | codes

This paper incorporates sloping marginal cost curves and their variations across industries into an open macro model, motivated by the fact that industries' output, imports, and exports are more procyclical when their economies of scale arise from sloping marginal cost curves rather than fixed costs. The model, consistent with the data, delivers endogenous within-firm interdependence across markets and export gains/losses, which reproduce observed industrial business cycle patterns as well as more correlated aggregate business cycles across countries. The findings highlight the importance of marginal cost structures in international business cycle research.

International Economic Sanctions and Third-country Effects

with Fabio Ghironi and G. Kemal Ozhan

IMF ECONOMIC REVIEW, Vol. 72, June 2024, p. 611–652

journal link | working paper

This paper studies international trade and macroeconomic dynamics triggered by economic sanctions, and the associated welfare losses, in a calibrated, asymmetric, three-country model of the world economy. We assume that there are two production sectors in each country, and the sanctioned country has a comparative advantage in production of a commodity (for convenience, gas) needed to produce final, differentiated consumption goods. We consider three types of sanctions: sanctions on trade in final goods, financial sanctions, and gas trade sanctions. We calibrate the model to an aggregate of countries that are currently imposing sanctions on Russia (the European Union, the UK, and the USA), Russia, and an aggregate of third countries (China, India, and Turkey). We show that, instead of reflecting the success of sanctions, exchange rate movements reflect the type of sanctions and the direction of the resulting within-country sectoral reallocations. Our welfare analysis demonstrates that the sanctioned country’s welfare losses are significantly mitigated, and the sanctioning country’s losses are amplified, if the third country does not join the sanctions, but the third country benefits from not joining. These findings highlight the necessity, but also the challenge, of coordinating sanctions internationally.

International Trade and Macroeconomic Dynamics with Sanctions

with Fabio Ghironi and G. Kemal Ozhan

JOURNAL OF MONETARY ECONOMICS, Vol. 154, September 2025, No. 103810

journal link (open access) | NBER working paper

We develop a framework combining dynamic, intertemporal choices of general-equilibrium macro models with microfoundations of modern trade theory to study sanctions. In a two-country, two-sector setup, Home holds a comparative advantage in producing differentiated consumption goods via heterogeneous firms with endogenous entry, while Foreign in homogeneous intermediate goods from a fixed number of firms. Sanctions include trade bans and financial restrictions excluding particular Foreign agents from markets. In our model, sanctions reallocate resources across and within countries, affecting production, exchange rates, and welfare, with larger welfare losses when targeting sectors of comparative disadvantage. Focusing only on long-run outcomes, overlooking initial dynamics, inaccurately assesses welfare impacts. Sanctions weaken international comovement and fragment markets but leave business cycles intact.

Multinational Investment Activity under Policy Uncertainty in Host and Competing Countries

with Sunhyung Lee

Revise & resubmit, JOURNAL OF INTERNATIONAL ECONOMICS

draft

This paper examines how economic policy uncertainty (EPU) in host and competing countries reshapes U.S. multinationals' greenfield foreign direct investment (FDI). Using firm-destination level data from 2003 to 2021, we show that while host-country EPU deters investment, EPU in competing destinations attracts it through a spillover effect. We document a structural shift around 2015: as global EPU rose unevenly, the spillover effect from competitors became the dominant driver of investment decisions, supplanting the direct effect of host-country uncertainty. Our findings indicate that in an era of heightened global risk, FDI allocation is governed by relative, not just absolute, policy stability.

Global Connectedness and Diversification: Firm-level Evidence from the COVID-19 Pandemic

with Jay Hyun and Seung-Ryong Shin

Revise & resubmit, JOURNAL OF MONEY, CREDIT & BANKING

draft | CEPR's Covid Economics, Issue 49

We study how a firm’s global connectedness through supply chains and exports affects its stock market performance during crises, using the COVID-19 pandemic as a natural experiment. While global connectedness can transmit negative foreign shocks, it can also reduce susceptibility to domestic shocks by enabling international diversification. Combining weekly global stock market data with firm-level supply chain, export, and balance sheet information, we document a dual role of global connectedness. While firms global supply chain and export networks expose firms to the negative impact of foreign COVID-19 outbreaks, firms with higher global connectedness are also more resilient to domestic exposures. Consistent with a diversification mechanism, the buffering effect arises only when connected foreign economies faced smaller outbreaks than the domestic economy. We further show that this diversification motive led firms to reorganize their supply chains and export networks, reallocating toward less-affected regions to mitigate the negative impact of pandemic shocks.

Investment Giants in Emerging Markets

with Jee Won Park and Inhwan Sodraft

A small group of large institutional investors (investment giants) takes the lion’s share of cross-border equity flows into emerging markets. This paper examines their behavior and market impact through a theoretical framework in which investors consider both market fundamentals and aggregate behavior. In equilibrium, a single investment giant moves first, setting market direction and providing information to a continuum of typical investors. Compared to a simultaneous-move strategy, this directional leadership increases the giant’s ex-ante payoff while establishing the predictability and outsized influence of its decisions. Empirically, we introduce contrarian investment (excess investment growth relative to peers or the market) to isolate the giants’ idiosyncratic influence from the shared macroeconomic fundamentals. Using fund-level data, we find that investor flows, aggregate flows, stock returns, and exchange rates persistently increase following giants’ contrarian flows, demonstrating their predictive power. These findings suggest monitoring giants as early indicators of financial market movements in emerging economies.

Works in Progress

Local Factors and Return Chasing: A New Phase in Emerging Equity Markets

with Jongrim Ha and Inhwan Sodraft available upon request

Monetary Policy, Trade, and Commodity Price Fluctuations

with Fabio Ghironi, G. Kemal Ozhan, and Larry Schembri

Testing and Identification of Common Trends and Factors in Commodity Prices

with Barry Goodwin and Junyeob Kim

INTERNATIONAL TRADE & GEOGRAPHICAL ECONOMICS

Skilled Immigration, Offshoring, and Trade

with Mishita Mehra

JOURNAL OF ECONOMIC DYNAMCIS & CONTROL, Vol. 146, January 2023, No. 104579

journal link (open access)

We develop a dynamic general equilibrium model with skilled immigration, offshore labor hiring, and intermediate input trade to study the impact of skilled immigration policy changes in the US. Consistent with the data, the model accounts for a small subset of large firms that adjust offshore labor hiring in response to skilled immigration policy changes. Our calibrated model that matches the US economy shows that if we ignore the offshoring channel, we would overstate welfare gains to skilled domestic wage earners by approximately 20 percent following a 10 percent immigration cap reduction. The paper highlights the importance of considering the interactions between immigration, offshoring, and trade when studying the impacts of skilled immigration policy on domestic labor markets and trade.

Home Market Effects and Increasing Returns with Non-constant Marginal Costs

with Nahyeon Bak and Mishita Mehra

JOURNAL OF ECONOMIC GEOGRAPHY, Vol. 24(6), November 2024, p. 871–885

journal link | working paper

We reexamine the role of increasing returns in production, central to trade and economic geography theories, focusing on the home market effect. We extend the conventional multi-industry new trade model to introduce (1) nonconstant marginal costs and (2) nonhomothetic production in factors. If factors that are more (less) intensively used in fixed costs than variable costs also have higher relative prices in large countries compared to small countries, then large countries exhibit larger (smaller) firm sizes and specialize in industries with decreasing (increasing) marginal costs. Notably, different levels of fixed costs have a limited impact on these patterns.

Public Information on Overseas Buyers for Export Promotion

with Chan Kim (U of Maryland)draft

Governments widely operate trade promotion organizations (TPOs) to overcome non-tariff barriers in trade, yet their specific mechanisms often remain opaque. This paper evaluates one key intervention: the public dissemination of foreign buyer information. Guided by a search-and-matching model, we use a unique historical archive of buyer contacts from South Korea's KOTRA magazine to exploit plausibly exogenous variation in information provision. We find that this policy leads to a significant and persistent increase in exports to targeted destination-industries. As predicted by the model, the effect is substantially larger in less concentrated industries, demonstrating that public information is particularly effective at alleviating search frictions that disproportionately hinder smaller firms.

Industry Characteristics and the Home Market Effect: Evidence from Manufacturing Trade

with Nahyeon Bak and Mishita Mehradraft

This paper examines how supply-side industry characteristics—particularly returns to scale from non-constant marginal costs—shape home market effects. Using data on narrowly defined industries, we find that industries with stronger returns to scale are more concentrated in larger countries only when non-production activities rely more on non-tradable inputs (labor) than production activities. In such cases, higher labor costs in larger countries deter firm entry, resulting in larger average firm sizes that better exploit scale economies. Consistent with prior research, we also find that industries with higher markups and trade costs tend to concentrate in larger countries.

Works in Progress

Understanding the Challenges and Opportunities of Immigrant Entrepreneurs in the U.S.

with Alejandro Gutierrez-Li

Learning from Consumer Travel Distance: Firm Expansion, Contraction, and Exit

with Yoonsoo Lee and Jeongwon Jang

MACROECONOMICS

Central Bank Policy and the Concentration of Risk: Empirical Estimates

with Nuno Coimbra and Hélène Rey

JOURNAL OF MONETARY ECONOMICS, Vol. 125, January 2022, p. 182–198

journal link (open access) | NBER working paper | appendix | codes

Before the 2008 crisis, the cross-sectional skewness of banks’ leverage went up and macro risk concentrated in the balance sheets of large banks. Using a model of profit-maximizing banks with heterogeneous Value-at-Risk constraints, we extract the distribution of banks’ risk-taking parameters from balance sheet data. The time series of these estimates allow us to understand systemic risk and its concentration in the banking sector over time. Counterfactual exercises show that (1) monetary policymakers confront the trade-off between stimulating the economy and financial stability, and (2) macroprudential policies can be effective tools to increase financial stability.

Firm Revenue Elasticity and Business Cycle Sensitivity

with Anthony Savagar

JOURNAL OF ECONOMIC DYNAMCIS & CONTROL, Vol. 154, September 2023, No. 104722

journal link (open access) | codes

We show that it is not necessary to have price and quantity data separately in order to study firm responses to business cycle shocks. We explain that revenue elasticities, which measure the response of firm revenue to input changes and combine price and quantity data, are sufficient to understand business cycle amplification. We present theory to show that higher revenue elasticity firms generate greater business cycle amplification. We use US data to measure revenue elasticities at the firm level, and we show that higher revenue elasticity firms respond more to business cycle shocks, consistent with our theory. We conclude that trends towards lower revenue elasticity firms implies weaker business cycle amplification over time.

Aggregate Fluctuations from Firm Comovement

with Nahyeon Bak

Revise & resubmit, JOURNAL OF MONETARY ECONOMICS

draft

This paper shows that correlated idiosyncratic fluctuations within industries are an important source of macroeconomic volatility. Standard methods, such as cross-sectional demeaning, obscure this channel by mechanically driving average pairwise correlations toward zero asymptotically. We develop a non-parametric bounds approach that quantifies the contribution of such clustered comovement directly from firm-level data. Applied to U.S. firms, we find that within-industry comovement explains 10–15% of GDP volatility in normal times, 15–30% in downturns, and up to 45% during the Great Recession, helping account for the Great Moderation. These findings highlight the importance of cross-firm interdependencies in business cycle fluctuations.

Parental Leave Policies, Fertility, and Labor Supply

with Minchul Yumdraft

South Korea faces persistently low fertility rates and large gender gaps in labor supply. Under traditional gender roles, more generous parental leave makes it difficult to narrow gender gaps while increasing fertility. To examine how recent reforms operate beyond these static channels, we develop a dynamic, heterogeneous-household life-cycle model in which couples jointly choose careers, labor supply, savings, childcare, and fertility. The model is calibrated to recent Korean cohorts and incorporates Korea’s segmented labor market, where career-oriented jobs are inflexible and involve high entry costs. Our quantitative results show that gen- erous parental leave benefits can raise fertility and reduce gender gaps in labor supply and wages over the life cycle. These dynamic effects arise because parental leave job protection allows more women to remain in career-oriented jobs during childrearing years, enabling long-term career progression. Without job protection or segmented markets, this career-retention channel weakens and policy effects diminish or reverse.

A Model of Entry, Exit, and Endogenous Productivity Dispersion

with Yoonsoo Leedraft

We explore the variability and dynamics of firm behavior over the business cycle, focusing on both the first and second-moment properties of firm heterogeneity. Our static model reveals that when entry costs increase less than fixed operating costs during economic booms, procyclical entry and intensified factor market competition lead to a procyclical productivity cutoff. This effect forces less productive firms out of the market, thereby contributing to the observed countercyclical dispersion of firm productivity. However, this model’s prediction—that low- productivity firms exit during booms and enter during recessions—is contradicted by US data. To resolve this discrepancy, our dynamic model incorporates firm uncertainty and productivity learning mechanisms. This enhancement enables the model to replicate observed empirical patterns across both the first and second-moments: countercyclical firm dispersion, more procyclical entry rates than exit rates, and a countercyclical pattern in the relative productivity of entering versus exiting firms. Our calibrated model successfully explains approximately 19% of the observed countercylical dispersion in firm productivity endogenously, without relying on external shocks to second moments.

OTHER TOPRICS

Consumer Learning and Package Size in Dynamic Brand Choice

with Nahyeon Bak (Amazon) and Chanheung Cho (NCSU)draft

Why consumers repeatedly purchase the same brand is a central question in consumer choice research. We develop and test a novel identification strategy that uses purchase size dynamics to disentangle consumer learning from other drivers of state depen- dence, such as switching costs, in brand choice. Our dynamic model predicts that as consumers learn about a brand’s quality, reduced uncertainty and self-selection generate larger purchase sizes within a spell, whereas switching to an untried brand renews uncertainty and results in smaller trial sizes. By contrast, switching cost models predict no systematic or reversed relationships between experience, switching, and size. Using Nielsen scanner data on the U.S. cough drop market—where infrequent, need-based purchase patterns facilitate clean observation of new learning spells—we empirically demonstrate that within-spell experience positively correlates with purchase size, while brand switching negatively correlates. These findings identify consumer learning as a key mechanism underlying state dependence in consumer choice.

Works in Progress

Uncertainty or Bad News? Contamination, Bias, and Correction in News-Based Uncertainty Measures

with Nahyeon Bak and Hanbat Jeong

Motivated Reasoning, Overconfidence, and Asset Market Bubble: An Experimental Study

with Jeongbin Kim

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