Research

Publication

“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.

Working Papers

"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

Abstract: Recent studies on the U.S.-China trade dispute suggest that the increases in U.S. import tariffs were fully borne by U.S. importers. However, using firm-level data from the U.S. Census, our analysis finds that tariff pass-through is incomplete for firms that continue importing the same product from the same country. Large importers experience higher pass-through and account for a larger import share. On the other hand, firms importing new products or sourcing from different countries pay higher prices compared to those maintaining existing relationships. These findings suggest that the observed complete pass-through in recent studies arises from import reallocation toward firms with greater pass-through or higher prices in new relationships. We introduce a firm-specific import price with two-sided market power into a standard importer model to understand the potential mechanisms behind these findings. Our results show that fixed import costs, an elastic foreign export supply, and greater bargaining power among large U.S. importers can account for the empirical observations.  [revising, draft available upon request]

"Trade Barriers and Sovereign Default Risk," with George Alessandria, Yan Bai, Minjie Deng

Accepted for presentation at the Midwest Macro Meetings 2023, Research Symposium on Finance and Economics 2023, North America Summer Meeting of Econometric Society 2023, Society for Economic Dynamics (SED) Annual Meeting 2023, and The China International Conference in Finance (CICF) 2023

Abstract: We develop a general equilibrium sovereign default model with both trade and financial frictions to study the interaction between sovereign default risk and trade. In this model, an increase in trade cost shock elevates default risk, leading to higher borrowing costs and a further decrease in total trade. The model endogenously generates elevated default risk arising from trade frictions and can captures the trade costs of defaults. It successfully replicates the observed comovements between trade and sovereign default risk, and quantitatively, the amplification of trade costs due to increased default risk accounts for nearly half of the variation in total trade costs. [revising, draft available upon request]

"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]

Working in Progress

"World Financial Cycles and Global Trade," with Yan Bai, Minjie Deng, Gabriel Mihalache

"Sovereign Debt Crisis or Financial Crisis: Evidence from Exports," with George Alessandria, Yan Bai, Minjie Deng

"Government Finance and Worker Migration across U.S. States," with Minjie Deng, Min Fang, Zibin Huang

"Structural Change Following Crises"