“Sovereign Risk and Intangible Investment,” with Minjie Deng
Journal of International Economics, Volume 152, November 2024
Abstract: This paper measures the output and TFP losses from sovereign risk, considering firm-level intangible investment. Using Italian firm-level data, we show that firms reallocated from intangible assets to tangible assets during the 2011–2012 Italian sovereign debt crisis. This asset reallocation is more pronounced among small firms and high-leverage firms. This reallocation affects aggregate output and TFP. To explain the reallocation pattern and quantify the output and TFP losses, we build a sovereign default model incorporating firm intangible investment. In our model, sovereign risk deteriorates bank balance sheets, disrupting banks’ ability to finance firms. Firms with greater external financing needs are more exposed to sovereign risk. Facing tightening financial constraints, firms shift their resources towards tangibles because they can be used as collateral. We find that elevated sovereign risk explains 45% of the observed output losses and 31% of the TFP losses in Italy from 2011 to 2016.
"Foreign Currency Borrowing and Exporter Dynamics in Emerging Markets" [PDF]
Tapan Mitra Prizes (best fifth-year theoretical paper), University of Rochester
Abstract: This paper studies the interaction between firms' export activities and currency choice of financing, uncovering the underlying driving forces behind this interaction and exploring the associated aggregate implications. Using Indian firm-level data, I find that exporters, particularly those with a large share of export sales, are more likely to borrow in foreign currency, and have more foreign currency borrowing compared to non-exporting firms. To uncover the underlying driving forces of such correlations along both extensive and intensive margins, I develop a heterogeneous firm model with endogenous choices of export and currency of financing. There are three potential channels through which firms' exports correlate with the currency composition of borrowing. Foreign currency revenues from exports can directly repay or serve as collateral for foreign currency borrowing. In addition, exporting firms could face reduced fixed costs of foreign currency borrowing. Disciplined by the observed correlations, the model implies that exporters face 35% lower fixed costs of foreign currency borrowing. Without accounting for these correlations, aggregate output losses due to foreign currency borrowing during depreciation are underestimated by 32%.
"Incomplete Tariff Pass-Through at the Firm-level: Evidence from U.S.-China Trade Dispute,"
with Chengyuan He, Xiaomei Sui, Soo Kyung Woo [PDF]
Abstract: Recent studies of the U.S.–China trade dispute suggest that U.S. importers fully absorbed the tariff increases. We develop a decomposition framework and use confidential U.S. Census data to show that pass-through is incomplete among firms that continue to import the same products from the same countries. Prior findings of complete pass-through reflect a reallocation of imports toward firms with higher pass-through and costlier new supplier relationships within product-country markets. We then derive general formulas for the first-order welfare effects of tariffs, applicable to a broad class of heterogeneous-importer models with diverse microfoundations, and identify the key data moments required for welfare estimation. Finally, we develop a quantitative model to estimate the welfare effects of the tariffs and to uncover the mechanisms underlying the observed empirical patterns.
"Trade Barriers and Sovereign Default Risk," with George Alessandria, Yan Bai, Minjie Deng
Abstract: We develop a quantitative general equilibrium model of sovereign default with trade and financial frictions to study how trade barriers shape sovereign risk and how sovereign risk, in turn, distorts trade. The model features imported intermediate inputs subject to import costs and working-capital requirements, exports subject to export costs, and a government that issues defaultable debt. An increase in trade cost shock elevates default risk, leading to higher borrowing costs and a further decrease in total trade, so there is an endogenous feedback between trade friction and financial friction. The model successfully replicates the observed comovement between trade and sovereign default risk. Quantitatively, the model delivers a pronounced asymmetry across trade shocks: export cost shocks account for most of the model-implied variation in default risk and sovereign spreads, whereas import cost shocks have comparatively small effects on spreads. Guided by the model, we construct empirical measures of import, export, and total trade wedges in a cross-country panel and document strong comovement between trade wedges and sovereign spreads, with the tightest relationship for the export wedge. [draft coming soon!]
"The Slowdown of TFP Declines During the Debt Crisis: Evidence from Tradable and Non-tradable Sectors"
Conibear Memorial Prize for the Best Third Year Paper, University of Rochester
Abstract: The decline in total factor productivity (TFP) has shown a deceleration following the debt crisis. This paper studies the impact of sectoral differences on TFP dynamics, utilizing both Italilan sector-level and firm-level data. The findings reveal that non-tradable sector firms are more prone to exiting the market during the debt crisis. Conversely, high productivity firms in the tradable sector exhibited increased capital resources, maintained higher employment levels, and managed to lower costs of employees. The empirical facts suggest a potential explanation known as the "cleansing effect." By employing a local projection specification, this paper establishes that the cleansing effect in the post-crisis period is primarily influenced by the persistence effects of the debt crisis. To rationalize the empirical findings, a simple trade model with working capital requirement is introduced. The model suggests that domestic firms have difficulties in financing their working capital requirement due to the rising domestic borrowing cost during the debt crisis, thus experience a higher exit rate and a lower labor demand. Exporting firms can additionally borrow from the international market and face a lower cost of labor due to general equilibrium effect, so that they are able to produce more by hiring more labors. The exit of low productivity firms in non-tradable sector as well as a larger share of high productivity firms in tradable sector contribute to the slowdown of TFP declines since the debt crisis. [Draft on request]
"World Financial Cycles and Global Trade," with Yan Bai, Minjie Deng, Gabriel Mihalache
"Government Finance and Worker Migration across U.S. States," with Minjie Deng, Min Fang, Zibin Huang
"Sovereign Debt Crisis or Financial Crisis: Evidence from Exports," with George Alessandria, Yan Bai, Minjie Deng