"International Trade and Macroeconomic Dynamics with Sanctions" (with Fabio Ghironi and Daisoon Kim)
Journal of Monetary Economics, accepted
Blogpost: VoxEU
Coverage: Kommersant
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.
"Interest Rate Uncertainty as a Policy Tool?" (with Fabio Ghironi)
Journal of International Economics, conditionally accepted
[paper] [online appendix] [CEPR DP] [NBER WP]
Coverage: Bank of Canada Governor's Speech
We study an unconventional policy tool–interest rate uncertainty–that may be used to discourage inefficient capital inflows and to adjust the composition of external accounts between short-term securities and foreign direct investment (FDI). Identified interest rate volatility shocks in several emerging markets cause a decline in GDP growth, increase in inflation, an improvement in the current account, and a depreciation in real exchange rate. Using a calibrated open-economy New Keynesian model, we introduce an interest rate uncertainty policy rule that adjusts the volatility of emerging market economy interest rate shocks in response to drivers of capital flows. The uncertainty policy discourages short-term inflows through portfolio risk and consumption smoothing channels. A markup channel combined with exchange rate depreciation generates FDI inflows. The transmission of uncertainty via markups is influenced by the extent of exchange rate pass-through. The uncertainty policy may be welfare improving if designed against uncertainty shocks that drive capital flows. However, it may be welfare reducing against level shocks that drive capital inflows. We further investigate new channels under different scenarios, including various assumptions about currency of export invoicing, varying degrees of risk aversion, interaction with different types of Taylor rules, and effective-lower-bound in the rest of the world.
"International Economic Sanctions and Third-Country Effects" (with Fabio Ghironi and Daisoon Kim)
IMF Economic Review 72 (January 2024): 611-652.
Coverage: Berliner Zeitung.
We develop a quantitative, asymmetric, three-region, international trade and macroeconomic model in which the sanctioned economy has a comparative advantage in the energy production sector (e.g., gas) whereas the sanctioning economy(ies) has a comparative advantage in consumption goods production. We study two types of sanctions: (i) trade sanctions and (ii) financial sanctions. We calibrate our model to resemble the economic sizes and export patterns of three blocs: the EU-UK- US, China-India-Turkey, and Russia. Sanctions are effective at making the targeted economy less efficient and suffer from welfare losses–even if they are introduced unilaterally. Both the sanctioning and sanctioned regions are subject to inefficient resource allocation in response to sanctions. Exchange rate movements reflect the producer composition in the sanctioned economy. Multilateral sanctions amplify the impact of sanctions on the sanctioned economy, while they come at a cost for the third-region that joins the sanctions. Our results highlight the importance of multilateral sanctions for greater impact.
"News-Driven International Credit Cycles"
Journal of Macroeconomics 70 (December 2021): 103372
[paper] [online appendix] [Bank of Canada SWP]
How does news about future economic fundamentals affect within-country and cross-country credit allocation? How effective is unconventional policy when financial crises are driven by unfulfilled favorable news? I study these questions by employing a two-sector, two-country macroeconomic model with a financial sector in which financial crises are associated with occasionally binding leverage constraints. In response to positive news on the valuation of non-traded sector capital which turns out to be incorrect at a later date, the model captures the changes in the sectoral allocation of bank credit and patterns in cross-country borrowing in Spain between 2000-2010. When there are unconventional policies by a common authority in response to unfulfilled favorable news, liquidity injections perform better in ameliorating the downturn than direct assets purchases from the non-traded sector.
"Financial Intermediation, Resource Allocation, and Macroeconomic Interdependence"
Journal of Monetary Economics 115 (November 2020): 265-278.
[paper] [online appendix] [ESRB WP]
Awards: European Economic Association Young Economist Award, European Systemic Risk Board Ieke van den Burg Award (shortlist), 48th Money, Macro and Finance Conference Best Paper Award.
Coverage: Liberty Street Economics, e-axes -- 360 Econ view.
During the first decade of the euro, southern countries experienced a boom-bust cycle in bank lending, non-tradable sector growth, and capital inflows. I develop a quantitative, open economy model of banking that is consistent with the banks' behavior in credit allocation and foreign borrowing observed in Spanish data. I illustrate how movements in the frictions of cross-border deposits generate an endogenous asymmetric allocation of bank credit toward non-traded sectors, while producing a persistent and climbing current account deficit. A common central bank's unconventional policies in response to sudden stops are successful at ameliorating the downturn.