Publications & Work in Progress

 What If (Kristin Vestgard)

1. "COVID-19 Credit Policies around the World: Size, Scope, Costs and Consequences" with Deborah Lucas, Brookings Papers on Economic Activity, Spring 2023

Abstract.  Governments deployed credit policies on a historically unprecedented scale in response to the COVID-19 pandemic. We estimate the effective size of credit policies for seven large advanced economies in terms of the incremental resources provided to firms and households--a measure that allows aggregation across credit support, forbearance and traditional fiscal policies, but that does not appear in traditional government statistics. These estimates are used to reassess the absolute and relative size of different governments’ policy interventions, and to evaluate whether taking credit policies into account can help explain the cross-section of macroeconomic outcomes. Incremental resources increase from an average 14.5% of 2020 GDP when only fiscal policies are considered to 22% of 2020 GDP when credit policies are also taken into account. Incorporating credit policies also reduces the cross-country variation in the total size of policy interventions. With regard to fiscal cost, fair value estimates for these credit support programs, taken from Hong and Lucas (2023), average 37% of principal, with wide variation depending on program features. We also discuss several related measurement issues; the financial regulatory changes that accommodated these programs; the pros and cons of the different types of credit policies; and how in principle budgetary costs should be calculated versus how governments account for credit policies in practice.

 2. "The  Real Effects of Monetary Shocks: Evidence from Micro Pricing Moments" with Matt Klepacz, Ernesto Pasten, and Raphael Schoenle ,  Accepted at the Journal of Monetary Economics

Abstract.  Empirically, what pricing moments are informative about monetary non-neutrality? The frequency of price changes is robustly informative  among a set of pricing moments and across specifications: A lower frequency is statistically significantly associated with higher monetary non-neutrality, in line with models of price rigidities. Other moments that describe the price change distribution are not consistently or significantly related to monetary non-neutrality. While the frequency explains the largest share of variation in non-neutrality, no pricing moments individually or jointly explain a majority of the variation in a linear empirical setting.  Non-pricing moments explain additional variation, however are not consistently associated with monetary non-neutrality. A multi-sector menu cost model featuring different price adjustment technologies across sectors can rationalize our main findings.

3. "What Do Deviations from Covered Interest Parity and Higher FX Hedging Costs Mean for Asia?" with Kenneth Kang, Anne Oeking, Changyong Rhee, Open Economies Review

Abstract. Asian countries have high demand for US dollars and are sensitive to US dollar funding costs. An important, but often overlooked, component of these costs is the basis spread in the cross-currency swap market that emerges when there are deviations from covered interest parity (CIP). CIP deviations mean that investors need to pay a premium to borrow US dollars or other currencies on a hedged basis via the cross-currency swap markets. These deviations can be explained by regulatory changes since the GFC, which have limited arbitrage opportunities and country-specific factors that contribute to a mismatch in the demand and supply of US dollars. We find that an increase in the basis spread tightens financial conditions in net debtor countries, while eases financial conditions in net creditor countries. The main reason is that net debtor countries are, in general, unable to substitute smoothly to other domestic funding channels. Policies that promote reliable alternative funding sources, such as long-term corporate bond market, or stable long-term investors, including a “hedging counterpart of last resort,” can help stabilize financial intermediation when US dollar funding markets come under stress.

4.  "Pushed Past the Limit? How Japanese Banks Reacted to Negative Rates?" with John Kandrac, Journal of Money, Credit and Banking, (Accepted for publication)

Abstract. In this paper, we investigate how negative interest rate policy (NIRP) introduced by the Bank of Japan (BoJ) affected Japanese banks’ lending and risk taking behavior. The BoJ’s announcement was unequivocally seen as an accommodative surprise in financial markets, but equity prices of Japanese financial firms experienced sharp drops. We exploit the cross-sectional variation in the change of share prices on the day of the announcement to measure banks’ differential exposure to negative rate policy. We first document the unique characteristics of Japan’s banking system and why investors perceived the announcement of NIRP as negative news for Japanese banks. We then show that, after the adoption of NIRP, banks that were more exposed to NIRP insulated their profits from the adverse effects of negative policy rates by boosting risk taking behavior and increasing credit supply relative to less exposed banks. 

5. "Portfolio Inflows Eclipsing Banking Inflows: Alternative Facts?" with Eugenio Cerutti, Journal of International Money and Finance,  April 2021 (forthcoming, online version available), 

Abstract.  Superficial examination of aggregate gross cross-border capital inflow data suggests that there was no substitution between portfolio inflows and bank loans in recent years. However, our novel analysis of disaggregate inflows (both by types of instrument and borrower) shows interesting heterogeneity. There has been substitution of bank loans for portfolio debt securities not only in the case of corporate and sovereign borrowers in advanced countries, but also sovereign borrowers in emerging countries. In the case of corporate borrowers in emerging markets, the relationship corresponds to complementarity across types of gross capital inflows, especially during periods of positive capital gross inflows after the global financial crisis. A large part of these patterns does not seem to be driven by a common phenomenon across countries, but rather by country-specific factors. 

6. "Financial Frictions and the Great Productivity Slowdown" with Romain Duval, Yannick Timmer, Review of Financial Studies, Editor's Choice, February 2020, 33 (2), 475-503 (in Wall Street Journal, Bloomberg)

Abstract. We study the role of financial frictions for productivity. Using a rich cross-country firm-level data, we exploit variation in pre-existing exposure to the 2008 global financial crisis to study the post-crisis productivity slowdown. Firms with weaker pre-crisis balance sheets experienced a highly persistent decline in post-crisis total factor productivity growth relative to their less vulnerable counterparts, accounting for about a third of the within-firm productivity slowdown. This decline was larger for firms that faced a more severe tightening of credit conditions. Financially fragile firms cut back on innovation activities, one channel through which financial frictions weakened post-crisis productivity growth.

7. "The Cyclicality of Sales, Regular and Effective Prices: Business Cycle and Policy Implications: Reply" with Olivier Coibion, Yuriy Gorodnichenko, American Economic Review January 2019, 109 (1),  314-324. 

Abstract. We address how using different censoring thresholds and imputation procedures affects the baseline results of Coibion, Gorodnichenko, and Hong (2015). Higher censoring thresholds introduce measurement error and outliers that generate wide variability in results across weighting schemes, but methods that explicitly control for outliers confirm the results of Coibion, Gorodnichenko, and Hong (2015) for all censoring thresholds. We also illustrate how the BLS’s approach to imputing missing prices can introduce a cyclical bias into measures of posted price inflation when store-switching is present in the data.

8. "Market Structure and Cost Pass-Through in Retail" with Nicholas Li, Review of Economics and Statistics, March 2017, 99 (1), 151-166, Bank of Canada Working Paper

Abstract. We examine the extent to which vertical and horizontal market structure can together explain incomplete retail pass-through. To answer this question, we use scanner data from a large U.S. retailer to estimate product level pass-through for three vertical structures: national brands, private label goods not manufactured by the retailer, and private label goods manufactured by the retailer. Our approach circumvents issues associated with internal firm prices and demonstrates that accounting for horizontal market structure is important for measuring the effects of vertical integration and reduced double marginalization on pass-through.

9. "The Cyclicality of Sales, Regular and Effective Prices: Business Cycle and Policy Implications" with Olivier Coibion, Yuriy Gorodnichenko, American Economic Review March 2015, 105(3),  993-1029. NBER Working Paper, IMF Working Paper, Bank of Canada Working Paper

Abstract. We study the cyclical properties of sales, regular price changes and average prices paid by consumers ("effective" prices) in a dataset containing prices and quantities sold for numerous retailers across a variety of U.S. metropolitan areas. Both the frequency and size of sales fall when local unemployment rates rise and yet the inflation rate for effective prices paid by consumers declines significantly with higher unemployment. This discrepancy can be reconciled by consumers reallocating their expenditures across retailers, a feature of the data which we document and quantify. We propose a simple model with household shopping effort and store-switching consistent with these stylized facts and document its implications for business cycles and policymakers.

10. "Rethinking the Exchange Rate Impact on Trade in a World with Global Value Chains" with Kevin Cheng, Dulani Seneviratne, Rachel van Elkan,  International Economic Journal 

Abstract. Global value chains (GVCs) are a prominent feature of global production and trading systems. Using the OECD-WTO database on trade in value added, this paper examines the exchange rate elasticities of GVC-related exports and imports and compares them with elasticities for trade in traditonal goods. We find that a real depreciation raises both the foreign and domestic value-added content of GVC-related exports. The size of these elasticities is found to be smaller when the import content of GVC exports is larger. Among the key policy implications of these results is that exchange rate changes by small contributors of value added have little effect on their own production or the production of their supply chain partners. On the other hand, large contributors to the value-added of the final product create spillovers to their smaller supply chain partners, obviating traditional beggar-thy-neighbor concerns.

11. "China and Asia in Global Trade Slowdown" with Jaewoo Lee, Wei Liao and Dulani Seneviratne, Journal of International Commerce, Economics and Policy, March 2017, Vol 8 (1).

Abstract. Asia and China made disproportionate contributions to the slowdown of global trade growth in 2015. China’s import growth slowed starkly, driven by both external and domestic factors, including a rebalancing of demand. Econometric results point to weak investment and rebalancing as the main causes of the import slowdown. Spillover effects from China’s rebalancing are estimated for some 60 countries using value-added trade data, and are found to be more negative on Asia and commodity exporters than others.

12. "Food for thought: Menu Labeling as Obesity Prevention Public Health Policy" with Claudia Chaufan, Patrick Fox, Critical Public Health, 2011, Vol. 21 (3), pp.353-358.

Abstract. This article discusses the evidence for menu labeling as obesity prevention public health policy. While sympathetic to providing nutritional information, whether food is consumed at restaurants or purchased for home consumption, the authors raise a word of caution against the assumption that menu labeling will significantly lead to healthier food choices, lower obesity rates, and decreased obesity disparities. The authors find little empirical evidence that this will be the case, critique the theoretical model that informs menu labeling as obesity prevention public health policy, and instead encourage policies that draw on a fundamental social causes approach to obesity prevention and health promotion generally.

13. "Taxing Sin-Foods: Soda Taxes and Obesity Prevention Public Health Policy" with Claudia Chaufan, Patrick Fox, New England Journal of Medicine, 2009, Nov. 25. PMID: 19940.

14. "Sin-Food Taxes and Sugar-Sweetened Beverages - the Right Policy for the Wrong Reason?" with Claudia Chaufan, Patrick Fox, American Journal of Health Promotions, 2010, Vol. 25(2), pp.87-90.