Journal Publications

Why Are Exchange Rates So Smooth? A Household Finance Explanation, with YiLi Chien and Hanno Lustig,

Journal of Monetary Economics, 2020, Vol. 112, 129-144.

Empirical moments of asset prices and exchange rates imply that pricing kernels are almost perfectly correlated across countries. Otherwise, observed real exchange rates would be too smooth for high Sharpe ratios. However, the cross-country correlation among macro fundamentals is weak. We reconcile these facts in a two-country stochastic growth model with heterogeneous households and a home bias in consumption. In our model, only a small fraction of households trade domestic and foreign equities. We show that this mechanism can quantitatively account for the smoothness of exchange rates in the presence of volatile pricing kernels and weakly correlated macro fundamentals.

Real Exchange Rate Fluctuations, Wage Stickiness and Tradability

Canadian Journal of Economics, 2017, Vol. 50 (1), 94-110.

When we classify factors of production by their tradability, the relative wage of nontraded labour influences the real exchange rate through the relative cost of distribution services. We confirm this prediction using monthly data on the sector‐level US–Canada real exchange rate and the relative wage of service‐producing labour. The relative wage accounts for 40% of the variability of the real exchange rate at a one‐month horizon. Furthermore, when we use the effective nontraded labour content to classify goods into nontraded and traded ones, the variability of the price of the nontraded‐goods basket accounts for more than half of the variability of the real exchange rate.

ASEAN Economic Integration through Trade and Foreign Direct Investment: Long-Term Challenges, with Masahiro Kawai,

Singapore Economic Review, 2017, Vol. 62 (3), 643-680.

This paper explores the long-term challenges for economic integration of the Association of Southeast Asian Nations (ASEAN) through trade and foreign direct investment (FDI). The region has emerged as an important production base for global multinational corporations by joining East Asia’s supply chains. While proceeding to establish the ASEAN Economic Community (AEC) by the end of 2015, ASEAN has also forged five major free trade agreements (FTAs) with its dialogue partners (China, India, Japan, Republic of Korea, and Australia–New Zealand) and is currently negotiating the Regional Comprehensive Economic Partnership. In addition, four ASEAN member states have completed Trans-Pacific Partnership negotiations. Econometric evidence suggests that (i) trade flows and inward FDI mutually reinforce each other, i.e., an increase in trade flows stimulates inward FDI and vice versa; (ii) a larger market tends to attract more inward FDI; (iii) FTAs tend to help stimulate inward FDI; and (iv) strong institutions, good physical infrastructure, and low costs of doing business are critical in boosting inward FDI. The paper suggests that in the long run it is ASEAN’s interest to further integrate itself with the rest of Asia and the world (through a Free Trade Area of the Asia-Pacific and an Asia–Europe FTA), while substantially deepening its internal integration (by moving from the AEC to a customs and economic union) and thereby maintaining ASEAN centrality.

The Risk Premium and Long-Run Global Imbalances, with YiLi Chien,

Journal of Monetary Economics, 2015, Vol. 76, 299-315.

This study proposes that heterogeneous household portfolio choices within a country and across countries offer an explanation for global imbalances. We construct a stochastic growth multi-country model in which heterogeneous agents face the following restrictions on asset trade. First, the degree of US equity market participation is higher than that of the rest of the world. Second, a fraction of households in each country maintains a fixed share of equity in its portfolios. In our calibrated model, which matches the US net foreign asset position and the equity premium, the average US household loads up more aggregate risk than the average foreign household by investing in risky assets abroad and issuing risk-free assets. As a result, the US is compensated by a high risk premium and runs trade deficits even as a debtor country. The long-run average trade deficit in our model accounts for 50% of the observed US trade deficit.

Exchange Rate Volatility and Fluctuations of the Extensive Margin of Trade

Journal of Economic Dynamics and Control, 2015, Vol. 52, 322-339.

The existing evidence for exporters׳ entry and exit in response to exchange rate movements is based on either low frequency data or a sample with large devaluations. Using quarterly data of US bilateral trade with 99 countries, this study provides new evidence that the extensive margin of trade fluctuates over the business cycle. First, I show that the extensive margin of exports to the US and the extensive margin of imports from the US are more volatile than the output of almost all trading partners. Next, I find that fixing exchange rates with the US dollar, having a free trade agreement with the US, and an increase in country size is significantly associated with the stability of the pattern of trade with the US.

The Marginal Product of Capital, Capital Flows and Convergence, with Sirsha Chatterjee,

American Economic Review: Papers and Proceedings, 2010, Vol. 100 (2), 73-77.

We employ annual data of 47 countries from 1970 to 2013 to construct annual series of country returns. We find that the adjustment of price of investment doubles the standard deviation of annual returns. This volatility enables us to estimate the correlation between changes in returns and net capital inflows. We find weak evidence that banking inflows are positively correlated with the domestic returns and negatively correlated with the world returns, as predicted by an open-economy growth model. The estimated correlation implies that capital inflows increased output less than 3 percentage points over the entire period.

Real Exchange Rate Fluctuations, Endogenous Tradability and Exchange Rate Regimes

Journal of Monetary Economics, 2008, Vol. 55 (3), 645-663.

The real exchange rate is driven by fluctuations of the relative price of traded goods and the relative price of nontraded to traded goods. This study explains the variance decomposition of the real exchange rate using a stochastic dynamic general equilibrium model of comparative advantage with money. Given interest rate shocks, exchange rate stability reduces the covariance between the two relative prices and raises the contribution of the relative price of nontraded to traded goods. Productivity shocks do not alter the covariance across exchange rate regimes and let the relative price of traded goods drive the real exchange rate.

Other Publications

The Economic Role of the Thai Military: A Commercial Logic to Coups?

Praetorians, Profiteers or Professionals? Studies on the Militaries of Myanmar and Thailand, 2020, Prajak Kongkirati and Michael Montesano (Ed.): ISEAS – Yusof Ishak Institute

Competition, Labor Intensity and Specialization: Structural Changes in Post-Crisis Asia, with Yothin Jinjarak,

Trade and Employment in Asia, 2013, Niny Khor and Devashish Mitra (Ed.): Routledge

Does the Exchange Rate Belong in Monetary Policy Rules? New Answers from a DSGE Model with Endogenous Tradability and Trade Frictions, with Michael Kumhof and Douglas Laxton,

Macroeconomic Performance in a Globalising Economy, 2010, Anderton, Robert and Geoff Kenny (Ed.), 120-154: Cambridge University Press

Exchange Rate Regimes, International Linkages, and the Macroeconomic Performance of the New Member States, with Tamim Bayoumi, Michael Kumhof and Douglas Laxton,

The New EU Member States: Convergence and Stability, 2005, Detken, Carsten, Vitor Gaspar and Gilles Noblet (Ed.), 75-104: European Central Bank

Working Papers

Foreign Direct Investment Commitments in East Asia, with Abigail S. Hornstein, Resubmitted

Exchange Rates, Invoicing Currencies, and the Margins of Exports, with Kwan Yong Lee, Resubmitted

Asset Price Spillovers from US Monetary Policy Uncertainty, with Birendra Budha

Real Exchange Rate Misalignments and Non-Homothetic Preferences, with Michael Lorenzo

Exchange Rate Pass-through and Market Structure in a Multi-Country World

Tariffs and the Expansion of the American Pig Iron Industry, 1870-1940

The Thai Military As a Business Group, 1940-2016

Work in Progress

Capital Flows and Investment in Emerging Market Economies, with Laura Alfaro

Trade in Capital Goods and Business Cycles