WORKING PAPERS

Trade Credit and Exchange Rate Risk Pass Through (with Bryan Hardy and Felipe Saffie), NBER Working Paper No. 31078, March 2023

We show that trade credit mitigates exchange rate risk pass through along supply chains. We develop a theory of trade credit provision along supply chains that involve large intermediate-good suppliers and small final-good producers, both of which face bank borrowing constraints. Motivated by empirical findings, we assume that large suppliers borrow in foreign currency, while small final-good producers borrow in domestic currency at higher rates. Trade credit loosens borrowing constraints and allows for higher production scale. Additionally, the model predicts that unconstrained suppliers fully absorb increasing costs of borrowing in foreign currency when domestic currency depreciates: specifically, suppliers settle for lower profits but maintain unchanged trade credit lines with their trade partners. We verify the model's predictions using firm-level data for over 11,000 large firms in 19 emerging markets over the 2004-2020 period.

Economic Stabilizers in Emerging Markets: The Case for Trade Credit (with Bryan Hardy and Felipe Saffie), April 2022

We document that small and medium-sized enterprises (SMEs) trade off bank for trade credit, while large firms extend trade credit, especially during financial crises. We develop a model of heterogeneous firms that extend state-contingent credit to each other along supply chains for the purpose of providing insurance in the case of adverse economic shocks. The model predicts that firms obtain more (state-contingent) trade credit the more debt-constrained they are relative to their trading partner. We validate the model's predictions using detailed firm-level data from emerging economies. We find that the model with state-contingent trade credit generates lower GDP volatility and more sharply increasing share of trade credit in liabilities during crises than counterfactual economies without (state-contingent) trade credit. We conclude that the insurance channel of trade credit earns it a role of a macroeconomic stabilizer in emerging markets.

The Risky Capital of Emerging Markets (with Felix Gerding and Espen Henriksen), revise and resubmit at Journal of Finance, new draft coming soon

We use macroeconomic data and stock market data to build a panel of international capital returns over a long horizon across both developed and developing countries. We document: (1) higher returns to capital in poorer over richer countries, (2) a systematic relationship between returns to capital and unlevered returns to equity, and (3) higher returns to equity and higher sensitivity of dividend growth rates to global growth conditions for emerging relative to developed markets. We quantitatively explore whether consumption-based long-run risk faced by a U.S. investor can reconcile these patterns. The model predicts a mean equity risk premium of 10.31% compared to 10.87% observed among 50 countries. Predicted risk premia for a set of emerging markets, developed countries, and the U.S., respectively, amount to 12.30%, 9.40%, and 6.52% , which compare favorably to the observed levels of 13.09%, 8.41%, and 6.40% during the 1970-2022 period. A tenth of the magnitude of risk premia outside of the U.S. are due to real exchange rate risk. Differences in countries' sensitivity of equity dividends to global shocks explain nearly half of observed cross-sectional variation in equity risk premia around the world.

Trade Models, Trade Elasticities, and the Gains from Trade (with Michael Waugh), NBER Working Paper No. 20495, September 2014, revise and resubmit at Journal of Political Economy

We argue that the welfare gains from trade in new models with micro-level margins exceed those in frameworks without these margins. Theoretically, we show that for fixed trade elasticity, different models predict identical trade flows, but different patterns of micro-level price variation. Thus, given data on trade flows and micro-level prices, different models have different implied trade elasticities and welfare gains. Empirically, models with extensive or variable mark-up margins yield significantly larger welfare gains. The results are robust to incorporating into the estimation moment conditions that use trade-flow and tariff data, which imply a common trade elasticity across models.

PUBLISHED PAPERS

Exporter Heterogeneity and Price Discrimination: A Quantitative View (with Jae-Wook Jung and Ariel Weinberger), 2019, Journal of International Economics, 116, 103-124
​BibTex     Web Appendix     Data and Code

We quantify a general equilibrium model of international trade and pricing-to-market that features firm-level heterogeneity and consumers with non-homothetic preferences---generalized CES (GCES). We demonstrate theoretically that, relative to existing frameworks, the GCES model exhibits features of the data that are essential to conduct quantitative analysis. The framework can reconcile the documented price dispersion across firms and markets, while maintaining consistency with cross-sectional observations on firm productivity, markups, and sales. We estimate the model's parameters to match bilateral trade flows across 66 countries as well as moments from the markup and sales distributions of Chilean firms. The model reconciles both micro and macro facts quantitatively, and yields trade elasticity estimates that are in line with the existing literature. Hence, we conclude that the GCES model constitutes a plausible and parsimonious quantitative workhorse framework that can be used to analyze gains from trade.

International Trade with Indirect Additivity (with Paolo Bertoletti and Federico Etro), 2018, American Economic Journal - Microeconomics, 10(2), 1-59​
BibTex  ​  Data and Code

We develop a general equilibrium model of trade that features indirectly additive preferences and heterogeneous firms. Monopolistic competition generates markups that are increasing in firm productivity and in destination country per-capita income, but independent from destination population, as documented empirically. The gains from trade liberalization are lower than in models based on CES preferences, and the difference is governed by the average pass-through. When we calibrate the model so as to match observed
pricing-to-market in micro-data, it generates welfare gains that are substantially lower than those predicted by commonly-employed frameworks.

​Correlated Beliefs, Returns, and Stock Market Volatility (with Joel M. David), 2016, Journal of International Economics, 99, S58-S77.
BibTex     VoxEU: Investor beliefs and stock market outcomes for emerging markets

Firm-level stock returns exhibit comovement above that in fundamentals, and the gap tends to be higher in developing countries. We investigate whether correlated beliefs among sophisticated, but imperfectly informed traders can account for the patterns of return correlations across countries. We take a unique approach by turning to direct data on market participants' information - namely, real-time firm-level earnings forecasts made by equity market analysts. The correlations of firm-level forecasts exceed those of fundamentals and are strongly related to return correlations across countries. A calibrated information-based model demonstrates that the correlation of beliefs implied by analyst forecasts leads to return correlations broadly in line with the data, both in levels and across countries - the correlation between predicted and actual is 0.63. Our findings have implications for market-wide volatility - the model-implied correlations alone can explain 44% of the cross-section of aggregate volatility. The results are robust to controlling for a number of alternative factors put forth by the existing literature.

Income Differences and Prices of Tradables: Insights from an Online Retailer, 2015, Review of Economic Studies, 82 (4), 1612-1656.
BibTex     Web Appendix     Data and Code

I study the positive relationship between prices of tradable goods and per-capita income. I develop a highly tractable general equilibrium model of international trade with heterogeneous firms and non-homothetic consumer preferences that positively links prices of tradables to consumer income. Guided by the model's testable prediction, I estimate the elasticity of price with respect to per-capita income from a unique dataset that I construct, which features prices of 245 identical goods sold in 29 European, Asian, and North American markets via the Internet by Spain's second largest apparel manufacturer - Mango. I find that doubling a destination's per-capita income results in an 18% increase in the price of identical items sold there. Per-capita income differences account for a third, while shipping cost differences can explain up to a third of the cross-country price variations of identical items purchased via the Internet by consumers who do not take advantage of quantity discounts. The price elasticity estimates compare favorably to estimates that I obtain from a standard dataset that features prices across retail locations around the world, suggesting that variable mark-ups play a key role in accounting for observed cross-country differences in prices of tradables.

Business Cycle Accounting For Chile (with Ludvig Söderling), 2015, Macroeconomic Dynamics, 19(5), 990-1022.
BibTex

We investigate sources of economic fluctuations in Chile during 1998-2007 within the framework of a standard neoclassical growth model with time-varying frictions (wedges). We analyze the relative importance of efficiency, labor, investment, and government/trade wedges for business cycles in Chile. The purpose of this exercise is twofold: (i) focus the policy discussion on the most important wedges in the economy; and (ii) identify which broad class of models would present fruitful avenues for further research. We find that different wedges have played different roles during our studied period, but that the efficiency, labor, and investment wedges have had the greatest impact. We also compare our results with existing studies on emerging and developed economies.

The Balassa-Samuelson Effect and Pricing-to-Market: The Role of Strategic Complementarity (with Eddy Bekkers), 2015, Economics Letters, 126, 156-158.
BibTex          Web Appendix

We propose a novel determinant of prices of tradable goods: the interaction of the Balassa-Samuelson (BS) effect with strategic complementarities between prices of tradables and non-tradables. A larger difference in productivity and in capital intensity between tradables and non-tradables yields a BS effect and therefore an increase in the price of non-tradables. With strategic complementarities, producers of traded goods set higher prices as well. If a small open economy, populated by consumers with linear quadratic demand and firms that enjoy market power, becomes richer, and therefore displays stronger BS effects, it also enjoys a higher price of tradable goods.

Asset Liquidity and International Portfolio Choice (with Athanasios Geromichalos), 2014, Journal of Economic Theory, 151, 342-380. 
BibTex          Web Appendix

We study optimal portfolio choice in a two-country model where assets represent claims on future consumption and facilitate trade in markets with imperfect credit. Assuming that foreign assets trade at a cost, agents hold relatively more domestic assets. Consequently, agents have larger claims to domestic over foreign consumption. Moreover, foreign assets turn over faster than domestic assets because the former have desirable liquidity properties, but represent inferior saving tools. Our mechanism offers an answer to a long-standing puzzle in international finance: a positive relationship between consumption and asset home bias coupled with higher turnover rates of foreign over domestic assets.

The Elasticity of Trade: Estimates and Evidence (with Michael Waugh), 2014, Journal of International Economics, 92(1), 34-50. 
Winner of Bhagwati Award for best paper in 2013-2014 in the Journal of International Economics
BibTex        Web Appendix        Data and Code

Quantitative results from a large class of structural gravity models of international trade depend critically on the elasticity of trade with respect to trade frictions. We develop a new simulated method of moments estimator to estimate this elasticity from disaggregate price and trade-flow data and we use it within Eaton and Kortum’s (2002) Ricardian model. We apply our estimator to new disaggregate price and trade-flow data for 123 countries in the year 2004. Our method yields a trade elasticity of roughly four, nearly fifty percent lower than Eaton and Kortum’s (2002) approach. Moreover, robustness exercises result in trade elasticity estimates that are both lower and fall within a narrower range relative to the existing literature. This difference doubles the welfare gains from international trade.