Publications

Trade credit is the most important form of short-term finance in both emerging and developed economies. This paper develops a model where trade credit reduces borrowing from banks.  This gives rise to a financing cost advantage of trade credit that increases in the product of markups and borrowing costs.  In line with this prediction, Chilean export data show that a one-standard-deviation rise in upstream markups increases trade credit by 13 days.  The extensive and intensive margins contribute about equally to this effect, which strengthens with the destination country’s borrowing costs.  These findings are robust to instrumenting markups with estimated physical productivity.

This paper provides evidence that the U.S. dollar affects trade through a financial channel of the exchange rate. Using global data over three decades on trade between countries whose currency is not the U.S. dollar, it shows that a dollar appreciation increases import prices and decreases import quantities. In line with a financial channel, these effects are stronger when the exporting country borrows more in U.S. dollars abroad. The financial channel was active before the global financial crisis but has strengthened since. Instrumenting the dollar is key to uncovering the full effect of the financial channel.

80 percent of U.S. imports occur in preexisting firm-to-firm relationships, so disruptions to them can have large and long-lasting effects.  Using U.S. Census data, this paper shows that as importers and their suppliers transact repeatedly, traded quantities and survival probabilities rise.  We develop a general equilibrium trade model with relationship dynamics that is consistent with these facts.  The quantification implies that long-term relationships are substantially more valuable than new relationships, with wide variation across source countries. The model shows that losing relationship capital is costly for an economy, with disruptions to relationships causing sizable drops in welfare and substantially lower levels of consumption and trade in the short- to medium term.

A strong dollar has been shown to reduce capital flows and lending at the global level. This paper documents significant adverse effects on credit also in the U.S. economy: a one-point appreciation in the U.S. broad dollar index reduces U.S. banks’ corporate loan originations by 4 percent. These effects have emerged with the shift of traditional financial intermediation from banks to less regulated entities, especially CLOs and mutual funds, which are more sensitive to global developments and active in the secondary market. When the dollar strengthens, demand for loans on the secondary market falls, with prices declining and liquidity worsening.

When firms borrow in foreign currency and are not perfectly hedged, exchange rate changes can affect their ability to repay the debt. U.S. loan-level data show that a 10 percent depreciation of the local currency quarter-to-quarter increases the probability that a firm becomes past due on its loans by 42 basis points for firms with foreign currency debt relative to those with local currency debt. This increase is economically significant, given a baseline probability of 20 basis points, and indicates that exchange rate risk of borrowers can translate into credit risk for banks. Firms are more likely to borrow in foreign currency if they belong to industries that generate more income abroad and if a UIP deviation makes foreign currency loans cheaper. The paper establishes additional facts on large U.S. banks’ international corporate loan portfolios, offering a perspective complementary to that provided by syndicated loan data.

This paper employs unique data on export transactions and corporate tax returns of UK multinational firms and finds that firms manipulate their transfer prices to shift profits to lower-taxed destinations. It shows that the 2009 tax reform in the United Kingdom, which changed the taxation of corporate profits from a worldwide to a territorial system, led to a substantial increase in transfer mispricing. It also provides evidence for a trade creation effect of transfer mispricing and estimates substantial transfer mispricing in non-tax-haven countries with low- to medium-level corporate tax rates, and in R&D intensive firms.

Employing new data on U.S. banks' trade-finance claims by country, this paper estimates the effect of letter-of-credit supply shocks on U.S. exports. We show that a one-standard deviation negative shock to a country's letter-of-credit supply reduces U.S. exports to that country by 1.5 percentage points. This effect is driven by countries that are small and where few banks are active. It more than doubles during the 2007-09 crisis. The provision of letters of credit is highly concentrated and banks are geographically specialized. Therefore, shocks to individual banks can have sizable effects in the aggregate and affect trade patterns.

International trade exposes exporters and importers to substantial risks. To mitigate these risks, firms can buy special trade finance products from banks. Based on unique data with global coverage, this paper explores under which conditions and to what extent firms use these products. 15% or $2.5 trillion of world exports are settled with letters of credit and documentary collections. Letters of credit are employed the most for exports to countries with intermediate contract enforcement, and they are used for riskier destinations than documentary collections. The 2007/2008 financial crisis affected firms' payment choices, pushing them to use more letters of credit. These patterns follow naturally from a model of payment contracts in international trade.

Shipping goods internationally is risky and takes time. To allocate risk and to finance the time gap between production and sale, a range of payment contracts is utilized. I study the optimal choice between these payment contracts and their implications for trade. The equilibrium contract is determined by financial market characteristics and contracting environments in both the source and the destination country. Trade increases in enforcement probabilities and decreases in financing costs proportional to the time needed for trade. Empirical results from gravity regressions are in line with the model, highly significant and economically relevant. They suggest that importer finance is as important for trade as exporter finance.

Financial institutions are increasingly linked internationally. As a result, financial crises and government intervention have stronger effects beyond borders. We provide a model of international contagion allowing for bank bailouts. While a social planner trades off tax distortions, liquidation losses, and intra- and intercountry income inequality, in the noncooperative game between governments there are inefficiencies due to externalities, a lack of burden sharing, and free riding. We show that, in absence of cooperation, stronger interbank linkages make government interests diverge, whereas cross-border asset holdings tend to align them. We analyze different forms of cooperation and their effects on global and national welfare.

Larger firms are more likely to use tax haven operations to exploit international tax differences. We study tax competition between a large country and a tax haven. In the large country, heterogeneous firms operate under monopolistic competition and can choose to shift profits abroad. We show that a higher degree of firm heterogeneity (a mean-preserving spread of the cost distribution) increases the degree of tax competition, i.e. it decreases the equilibrium tax rate of the large country, leads to higher outflows of its tax base and thus decreases its equilibrium tax revenues. Similar effects hold for a higher substitutability across varieties.