Research

This paper documents that countries with greater wealth inequality experience deeper recessions during sudden stops. Household-level data show that more unequal countries have a higher share of indebted households, whose debt and assets decrease during sudden stops. In a model with heterogeneous households subject to borrowing constraints, I analytically characterize that greater inequality increases the fraction of constrained households, amplifying declines in asset prices and consumption following an adverse aggregate shock. Quantitatively, a 0.01 increase in the wealth Gini amplifies the declines in GDP and consumption by 0.07 and 0.11 percentage points, respectively, per percentage point of capital outflow during a sudden stop. Under an optimal macroprudential tax on debt alone, the increase in constrained households during sudden stops remains substantial. When optimally combined with the macroprudential tax, taxation of capital holdings limits this increase through transfers that reduce households’ borrowing needs.

We analyze the international spillover effects of US monetary policy uncertainty shocks on countries with fixed versus flexible exchange rate regimes. Our findings show that such shocks lead to a larger contraction in countries with flexible exchange rates than in those with fixed exchange rates, contradicting the conventional view that flexible exchange rates serve as a buffer against external shocks. We also document that US monetary policy uncertainty shocks raise economic uncertainty more strongly in countries with flexible exchange rate regimes. On the theoretical side, we demonstrate that a standard small open economy New Keynesian DSGE model cannot replicate this empirical result, but an augmented model that incorporates the direct international spillover of policy uncertainty is able to reproduce the findings.

The U.S.–China trade war in 2018-19 was bilateral in nature, but its effects extended to countries linked to both economies through global supply chains. This paper studies how the trade war affected Korea, a bystander country deeply integrated with China and the United States. While existing evidence on bystander countries emphasizes rerouting and trade diversion, Korea imported less from China after the trade war. We develop a simple analytical model of a global supply chain linking China, Korea, and the United States. The model shows that U.S. tariffs can reduce Korean imports from China when Chinese production exhibits increasing returns to scale: lower Chinese sales to the U.S. contract production scale, raise Chinese marginal costs, and increase the prices Korean firms pay for Chinese goods. The model also allows Chinese producers to reroute goods through Korea, generating heterogeneous effects across sectors depending on rerouting costs. Using transaction-level Korean customs data, we find that a 10 percentage-point increase in U.S. tariffs on Chinese products reduced Korean import quantities from China by about 24 percent and raised Korean import prices by about 2.5 percent. The decline is concentrated in industries exhibiting increasing returns to scale. However, in industries with high pre-shock U.S.-export exposure, Korean imports from China and exports to the U.S. both rise, consistent with rerouting through Korea. These results show that bilateral tariffs can generate both decoupling from China and indirect China-U.S. trade through third countries.

We study how central banks can use foreign exchange forwards to stabilize exchange rates and support financial stability, using the Bank of Mexico’s introduction of domestic non-deliverable forwards (DNDFs) in 2017. Across announcements of the policy intervention, option implied volatility fell by 0.38 percentage points, with larger effects at shorter maturities. Announcements also reduced the risk-neutral probability of large depreciations, while the implementation of the policy via auctions had no significant effects. We rationalize these findings in a small open economy with collateral constraints and self-fulfilling currency crises. The central bank's provision of insurance against future depreciation through DNDFs dampens the feedback between depreciation and deleveraging in self-fulfilling crises by sustaining external debt and supporting collateral values. Anticipation of DNDF interventions appreciates the currency and reduces exchange rate risk before the contracts are issued. Quantitatively, DNDFs generate larger welfare gains than macroprudential taxes on external debt in states with high debt.

I document that countries with higher investment risk have higher statutory corporate tax rates and that foreign direct investment inflows decline as investment risk rises. I rationalize these patterns in a static model in which multinational firms invest before knowing whether a revenue-maximizing government will implement its announced tax rate. Government reputation is the probability firms assign to a commitment type that must implement the announced rate. Firms can protect returns after a tax increase by shifting reported profits abroad once the implemented rate is known, while physical capital remains in place. Higher government reputation then makes the tax base more sensitive to the announced rate, inducing a lower tax. Without profit shifting, the optimal announced tax instead rises with government reputation. Extending the model to multiple periods, I show that future revenue losses can deter tax revisions, but the government may still announce a high tax that discourages investment. Profit shifting keeps investment positive at low government reputation because firms retain some profits after a tax increase. Higher government reputation increases the future revenue lost after a tax revision and can therefore support a lower announced tax and greater investment.

We investigate how dual holders that simultaneously hold loans and equity shares of a firm respond to stock mispricing of the firm. Using the fire-sales shock driven by mutual fund outflows as a measure of stock mispricing, we find that dual holders provide lower loan spreads in times of fire-sales shocks. The result is driven by dual holders' incentive to support the firm as long-term investors. We find that the loan spread discount is more pronounced when dual holders are lead arrangers of the loan and when they hold larger equity shares of the firm. Dual holders offer lower spreads to help firms maintain investments, as the effect is greater when firms exhibit better growth prospects or face financial constraints due to higher equity financing costs. We establish causality by exploiting mergers between banks. In a firm-level analysis, we find that dual holders' loan provisions offset the negative effects of the fire-sales shock on firms' capital investments.