Job Market Paper

Growth in the Shaded Sun: The Role of International Development Finance and Corruption

[Updated Draft (Jan 24)]  [SSRN]

Abstract: Since the 1960s, the Development Assistance Committee (DAC) has been a primary conduit for development finance (DF) from developed to developing countries. In the last two decades, China has emerged as a major DF provider with distinct lending practices. I present the first comprehensive analysis of how developing countries strategically determine the amount, sources, and sectoral allocation of DF. Using project-level DF data and corruption indices from over 110 countries between 2000 and 2021, I find that recipient country corruption is linked to greater reliance on Chinese DF, through more projects and larger project sizes, compared to DAC DF. Higher corruption is also linked to disproportionately larger flows to hard-to-monitor sectors. I explain the findings with a novel growth model that includes active government diversion choices under varying monitoring intensities of DAC and Chinese DF across sectors. Calibrating the model for 108 developing economies and 13 sectors, I explore the impact of Chinese DF on citizen welfare in recipient countries. Results show that similar corruption levels may lead to very different welfare outcomes depending on which sectors are financed by Chinese DF. Compared to the counterfactual steady state without Chinese DF, roughly 15% of the countries experience unambiguous welfare improvements, 29% experience negligible or ambiguous effects, and 55% experience potentially large welfare reductions due to the presence of Chinese DF.

Working Paper

Trade Finance Frictions and International Business Cycles

[Draft]  [SSRN]

Abstract: I study how frictions in exporting firms' trade finance affect the business cycles of a small open economy within a general equilibrium framework. In the model, firms rely on external capital to cover large upfront fixed export costs but face credit constraints that limit borrowing based on the country’s financial development. In quantitative general equilibrium exercises, I show that the effect of trade finance frictions on the aggregate economy is not as significant as on firm-level outcomes due to two mechanisms. First, the decrease in the extensive margin of exports from trade finance frictions is offset by an increase in the average productivity of exporters, limiting its aggregate impact. This extensive margin effect strengthens, while the selection effect weakens, when firm productivity is less dispersed. Second, wage adjustments in general equilibrium reduces the magnitude of these channels, diminishing the role of trade finance frictions at the aggregate level. This wage-adjustment effect is stronger with inelastic labor supply.

Selected Work in Progress

[1] Sovereign Debt and Default Model of Development Finance (with Narek Alexanian)

[2] Firm Dynamics, Trade Invoicing, and Debt Denomination (with Narek Alexanian)

[3] Official Capital Flows as Safeguards Against Geopolitical Risks

Publications

[1] International Bank Lending Channel of Monetary Policy (with Silvia Albrizio, Sangyup Choi and Davide Furceri)

• Working paper version: Banco de España  WP 1938; IMF WP 2019-234; GRU WP 2019-017; Yonsei Univ. WP 2019-145 
• Central Banking, Capital Ebbs and Flows, Banco de España Research Update, ChosunBiz, BOK Global Focus, Cited in Nobel Lecture (Bernanke)

[2] Policy Uncertainty and Foreign Direct Investment (with Sangyup Choi and Davide Furceri)

• Working paper version: GRU WP 2020-007; Yonsei Univ. WP 2019-144
• Top Cited Article in RIE (2021-2022), Cited in 2023 Economic Report of the President (the White House)

[3] International Fiscal-financial Spillovers: The Effect of Fiscal Shocks on Cross-border Bank Lending (with Sangyup Choi and Davide Furceri)

• Working paper version: IMF WP 2019-150; GRU WP 2020-025; Yonsei Univ. WP 2020-179
• BOK Global Focus

[4] Uncertainty, Financial Markets, and Monetary Policy over the Last Century (with Sangyup Choi) 

• Working paper version: GRU WP 2019-020; Yonsei Univ. WP 2019-142