Research

[1] The impact of the COVID-19 pandemic and policy support on productivity 

ECB Occasional Paper Series

with ECB and NCB co-authors

This paper studies the short-term and long-term consequences of the COVID-19 pandemic for productivity in Europe. Aggregate and sectoral evidence is complemented by firm-level data-based findings obtained from a large microdistributed exercise. Productivity trends during the COVID-19 pandemic differed from past trends. Labour productivity per hour worked temporarily increased, while productivity per employee declined across sectors given the widespread use of job retention schemes. The extensive margin of productivity growth was muted to some degree by the policy support granted to firms. Firm entries declined while firm exits increased much less than during previous crises. The pandemic had a significant impact on the intensive margin of productivity growth and led to a temporary drop in within-firm productivity per employee and increased reallocation. Job reallocation was productivity-enhancing but subdued compared to the Great Recession. As confirmed by a granular data analysis of the distribution of employment subsidies and loan guarantees and moratoria, job reallocation and also debt distribution and “zombie firm” prevalence were not significantly affected by the COVID-19 policy support. The pandemic and related lockdowns accelerated changes in consumer preferences and working habits with potential long-term effects. Generous government support muted the surge in unemployment and reduced permanent scarring effects. 

[1] Geopolitical Risk and Foreign Portfolio Investment: A Tale of Advanced and Emerging Markets

R&R at Journal of International Money and Finance

with Sangyup Choi, Yonsei University

We study the influence of local geopolitical risk on U.S. cross-border portfolio investment, covering the period from 1994 to 2021. We uncover significant heterogeneity between advanced and emerging market destinations, revealing that local geopolitical risk exerts a dampening effect on U.S. purchases of bonds and equities solely within emerging markets, while having no discernible impact on advanced markets. We identify poor institutional quality as the primary driver behind the heightened sensitivity of portfolio investment to geopolitical risk in emerging markets, thereby signaling potential implications for financial stability. Moreover, our analysis reveals a noteworthy phenomenon where U.S. investment in emerging market bonds experiences a considerable decline in response to the geopolitical risk within other emerging markets in close geographical proximity, displaying a robust contagion effect. However, such contagions do not manifest in cross-border equity investment. Notably, these contagion effects are observed exclusively among emerging markets, providing valuable insights into investors’ portfolio adjustments in the face of elevated geopolitical risk.

[1] Foreign Banks and Capital Flows

with Kyu Bong Cho, Handong University

We analyze the effect of foreign bank entries into 33 emerging market economies on cross-border bank inflows. Using a unique dataset of 5498 banks, we find that inflow of cross-border loans and debt securities significantly increases in the year following a foreign bank entry. Our results are robust in both the bilateral case of bank entry and bank inflows, as well as in the unilateral case of all foreign bank entries and total bank inflows.