Research

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 more during sudden stops. Using a tractable model with heterogeneous households subject to borrowing constraints, I analytically characterize a mechanism that links the cross-country and household-level evidence. 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. Wealth taxation, when optimally combined with capital control on external debt, limits the increase in constrained households during sudden stops by reducing households’ borrowing needs through transfers, whereas the increase remains substantial under optimal capital control alone.

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 the effects of domestic non-deliverable forwards (DNDF) on the level and volatility of the USD/MXN nominal exchange rate. We focus on the introduction of the DNDF policy by the Bank of Mexico in 2017 and find that the first announcement of the policy was successful in mitigating both depreciation pressure and volatility of the USD/MXN exchange rate. Our estimates show an appreciation of the Mexican Peso by 32.91 cents after the announcement of the policy and a reduction in the option-implied exchange rate volatility of different maturities by 40 cents on average. We rationalize our findings using a model of a small open economy with collateral constraints and show that the DNDF policy can be used to mitigate severity of a self-fulfilling currency crisis, thereby counteracting the downward pressure on the domestic currency.

Countries with high expropriation risk receive less FDI and lose more profit to shifting, yet their statutory corporate tax rates are no lower than those of safe countries. I explain this with a model in which the government may renege on the rate it announces, and firms can shift profits abroad once the rate is set. The central force is that profit-shifting disciplines a government that cannot commit. It bounds how much the government can extract after investment is sunk, since taking too much drives the tax base abroad, so the burden firms bear stays close to the announced rate, and closer the worse the government's reputation, as in the data. Profit-shifting also makes credibility a reason to tax less: when firms place more weight on the announcement, investment responds more strongly to it, so a government with a good reputation competes for capital by announcing a low rate, while one with a poor reputation gains little from cutting and announces a high rate. This inverts the usual hold-up logic, in which only trusted governments attract capital and therefore tax it most---the benchmark my model nests without profit-shifting, and one whose predicted pattern the data do not display. A two-period version endogenizes reputation, with profit-shifting lowering the revenue a government sacrifices to stay credible; and investment treaties, modeled as a penalty on reneging, raise investment and lower statutory rates where credibility is scarce.

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.