Research

Publication

“Sovereign Risk and Intangible Investment,” with M. Deng

Forthcoming, Journal of International Economics, 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" (Job Market Paper) [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 policy implications. Using Indian firmlevel 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. Furthermore, without accounting for these correlations, the cost of capital control policies would be underestimated by 27% of the output losses.

"Trade Barriers and Sovereign Default Risk," with G. Alessandria, Y. Bai, M. 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: This paper studies interactions between trade friction and sovereign default risk. Trade barriers are measured as the gap between observed trade flows and predicted trade flows using relative expenditures and prices. We build a general equilibrium sovereign default model with trade and decompose the trade barriers into one conventional trade wedge term stemming from trade friction and one financial friction component. The trade friction increases the sovereign default risk, which passes through to private sector as driving up their import financing cost. The interaction between trade and financial friction further magnifies the trade barriers. The model generates comovements between trade and financial friction as in the data. We find that financial friction component accounts for 47% of the measured trade barriers. [Draft on request]

"Incomplete Tariff Pass-Through at the Firm-level: Evidence from U.S.-China Trade Dispute," 

with Chengyuan He, Xiaomei Sui, Soo Kyung Woo

Abstract: From aggregate bilateral trade data, recent studies have found that U.S. tariff increases during the U.S.-China trade war were entirely passed on to U.S. importers. Using confidential data from U.S. Census, we show that the pass-through on U.S. importers is incomplete at the disaggregated firm-product-country level. In order to reconcile the discrepancy at different levels of aggregation, we consider the firm and product heterogeneity in various aspects: sourcing countries, number of imported varieties, import intensity from China, inventories, upstreamness, order frequency, etc. [Result disclosures 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]

Working in Progress

"Sovereign Debt Crisis or Financial Crisis: Evidence from Exports," with G. Alessandria, Y. Bai, M. Deng

"Structural Change Following Crises"