Research
"Globalization and Financial Development: A Model of the Dot-Com and the Housing Bubbles" (under revision)
Abstract: In the last decade the United States experienced a large sudden drop in both the stock market and house prices. These two episodes have been referred to as the burst of the Dot-Com and the Housing Bubbles. In this paper I develop a model to study the relationship between international trade and the emergence of rational bubbles and analyze how the effect of globalization on house prices depends on the type of bubble. The model is a three-period OLG economy in which young agents borrow to purchase a house and middle-aged agents save to consume when they are old. Agents can only borrow a fraction of the value of the house. The quality of financial institutions determines this fraction. Bubbles cannot arise in a financially developed country in autarky. In contrast, pure asset price and/or housing bubbles can appear when a financially developed country opens up to trade with a financially underdeveloped country. As globalization progresses, the possibility of having a bubble in the financially developed country increases. I also show that an increase in globalization raises house prices when there is a housing bubble but it has no effect on house prices if the bubble is not attached to houses. This prediction is consistent with empirical evidence on house prices for U.S. metropolitan areas. An increase in U.S. current account defi cit (over GDP) has a signi ficant effect on real house price appreciation during the Housing Bubble. This effect is larger, the lower the housing supply elasticity is. However, an increase in U.S. current account de ficit does not have a significant effect on house price appreciation during the Dot-Com Bubble.
"Heterogeneous Trade Costs and Wage Inequality: A Model of Two Globalizations" (with MartĂ Mestieri)
(Revise and Resubmit Journal of International Economics)
Abstract: We develop a model to analyze the distributional effects of two waves of globalization and their interdependencies. Guided by our empirical evidence, we distinguish between (i) a First Globalization, characterized by trade liberalizations which mainly affected trade in low skill intensive goods, (ii) a Second Globalization, characterized by a reduction in communication costs, which has affected trade in more skill intensive goods. We consider a North-South trade economy, in which North is skill abundant. A freely traded final good is produced in the North using high skill services and a bundle of inputs. Inputs differ on the skill intensity required to be produced and are subject to heterogeneous trade costs. We find that wage inequality increases in the North and the South during the First Globalization. In the Second Globalization, there is wage polarization in the North and increasing wage inequality in the South. We find a complementarity between the two globalizations. Wage polarization is delayed by the extent of trade in the First. Finally, we show how asymmetries in participation in the Second Globalization of two southern countries can generate a discontinuous pattern of specialization. The southern country participating in the Second Globalization specializes in the least and most skill intensive traded inputs and wage inequality rises in this country.
(Older version with additional results)
"Financial Development and the Product Cycle" (under revision) (Download)
Abstract: I develop a model to study how financial institution differences across countries affect the decision of Northern firms to offshore production and whether a product cycle arises when the only comparative advantage of Northern suppliers is their access to better financial institutions. A Northern final-good producer needs to buy an intermediate input from a supplier to complete production. She can find this supplier either in the low-wage but financially underdeveloped South or in the high-wage and financially developed North. I show that financial institution differences affect the optimal contract offered to the supplier and are enough to generate a product cycle. The final-good producer faces a trade-off between low wages and contracting distortions. When the good is new, she finds it optimal to keep production in the North at the cost of a higher wage but with the benefit of a less distorted contract. However, as the good becomes more standardized, the importance of the supplier increases and the cost of not shifting production to the South and take advantage of the lower wage offsets the contractual distortions that the underdeveloped Southern financial institutions create. The most salient empirical prediction is that the more R&D-intensive an industry is, the larger is the effect of financial development on offshoring. These results also hold when wages are endogenized. In the empirical section, the prediction is tested and confirmed using disaggregated trade data.