We study the international transmission of US monetary policy shocks and a strong US dollar. We show that monetary tightening is linked to a higher risk premium, only in emerging markets, measured by deviations from uncovered interest parity. An appreciation of the US dollar, on the other hand, does not lead to higher risk premia anywhere, even though countries' currencies depreciate vis-à-vis the dollar. Our interpretation is that monetary policy shocks are a better proxy for global financial conditions than the exchange rate movements that may be capturing more fundamental shocks.

I study the role of trade credit—supplier financing via costly delayed payments—in determining the investment response of foreign firms to US monetary policy. Using firm-level data from several countries, I find that trade credit declines by less than bank credit following a US monetary tightening. Firms that rely more on trade credit than on bank credit reduce investment by less. To rationalize these findings, I develop a two-sector open economy model with heterogeneous firms, trade and bank credit. Trade credit arises as a risk-sharing mechanism between firms with different risk preferences along the supply chain, for which I provide direct empirical evidence. This mechanism dampens the transmission of US interest rate shocks to trade credit relative to bank credit, which is directly affected by changes in banks’ international funding costs. The presence of trade credit in the model reduces the sensitivity of aggregate investment and output to US monetary policy and increases their average level.

This paper studies the relationship between capital misallocation and deviations from the Uncovered Interest Parity (UIP). In a theoretical framework where firms borrow in different currencies, we show that UIP deviations generate heterogeneous borrowing costs. When firms are equally productive, these cost differentials distort the allocation of capital. Using firm-loan matched administrative data from Uruguay spanning 2012-2019, we find that declines in UIP deviations are associated with significant increases in capital misallocation. A one-standard deviation decline in UIP deviations leads to a cumulative increase in capital misallocation of 11 percentage points over three years, and around four percentage points contemporaneously—accounting for a significant portion of the observed rise in misallocation during this period. We provide evidence that this effect is driven by firms switching their borrowing currency in response to relative costs implied by the UIP. Access to dollar borrowing is selective, limited to larger and more productive firms. As UIP deviations decrease, peso borrowing becomes relatively cheaper, enabling smaller, less productive firms—excluded from dollar credit—to access peso financing. This reallocation of credit contributes to a worsening in the efficiency of capital allocation.