Research

Wealth inequality deepens the contractions in GDP, domestic absorption, and asset prices that accompany Sudden Stops, which are financial crises marked by excessive capital outflows. European household survey data locate the adjustment behind these contractions on the leveraged side of the wealth distribution: leveraged households cut debt and assets together and stop acquiring assets when the crisis hits, while households that hold the same assets without debt reduce neither their holdings nor their purchases. I build a tractable model with heterogeneous households subject to borrowing constraints, where the borrowing limit depends on the market value of wealth, and characterize analytically how the wealth distribution maps into the size of the contraction. Greater wealth concentration raises the mass of households at the borrowing limit and thins the unconstrained side of the asset market. When the borrowing limit tightens, this intensifies the fire sale pressure on asset prices and amplifies the Fisherian debt deflation that drives the crisis. I embed the mechanism in a quantitative model, with which I conduct an event study of Sudden Stops. The quantitative model produces sharper contractions when wealth is more concentrated, consistent with the cross-country evidence.

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.

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.