"A Theory of Rollover Risk, Sudden Stops, and Foreign Reserves", with Sewon Hur.
Journal of International Economics, November 2016.
Emerging economies have accumulated very large foreign reserve holdings since the turn of the century. We argue that this policy is an optimal response to an increase in foreign debt rollover risk. In our model, reserves play a key role in endogenously reducing debt rollover crises (“sudden stops”) by allowing governments to be solvent in more states of the world. Using a dynamic multi-country environment with learning, we find that a relatively small unanticipated increase in rollover risk jointly accounts for (i) the outburst of sudden stops in the late 1990s, (ii) the subsequent increase in foreign reserves holdings, and (iii) the salient resilience of emerging economies to sudden stops ever since. We also show that a policy of pooling reserves may substantially reduce reserves because mutual insurance across countries dampens rollover risk.
"Trade-Induced Displacements and Local Labor Market Adjustments in the U.S.*"
Journal of International Economics, September 2018.
Administrative data from the U.S. Trade Adjustment Assistance (TAA) program reveal that, across locations, one extra TAA trade-displaced worker is associated with the overall employment falling by about two workers amidst muted geographic mobility. This correlation is robust to local import penetration proxies and is corroborated using differences in the exposure of commuting zones to the plausibly exogenous normalization of U.S. trade relations with China in 2000. A Ricardian trade model with endogenous variable markups arising from head-to-head foreign competition can rationalize such a correlation. Following a trade liberalization shock, employment and earnings collapse in the less productive locations since they endogenously exhibit both higher trade-induced job losses and lower job creation, as in the data. When migration is muted in response to the trade shock, inequality increases across locations and induces transitional transfers towards decaying locations, even as employment and welfare rise in the aggregate.
*This paper supersedes the manuscript previously titled "Trade Reforms, Foreign Competition, and Labor Market Adjustments in the U.S."
This version - June 2019.
Heavy tails play an important role in modern macroeconomics. We revisit the empirical evidence on the nature of firm and establishment size distributions in the United States using the Longitudinal Business Database, a confidential Census Bureau panel of all non-farm private firms and establishments with at least one employee. We show that the lognormal distribution provides a better statistical fit than the more popular Pareto distribution, even far in the truncated upper tail of firm or establishment size. We argue that a convolution of lognormal and Pareto distributions not only fits both size distributions well, but also provides a substantially better fit for the employment share distribution. We also contrast estimates of these best-fitting distributions over time, in manufacturing and services sectors, and for plant-level total factor productivity, a common theoretical primitive for size.
This version - August 2019.
This paper argues that the comovement between inflation and economic activity is an important determinant of real interest rates over time and across countries. First, we show that for advanced economies, periods with more procyclical inflation are associated with lower real rates, but only when there is no risk of default on government debt. Second, we present a model of nominal sovereign debt with domestic risk-averse lenders. With procyclical inflation, nominal bonds pay out more in bad times, making them a good hedge against aggregate risk. In the absence of default risk, procyclical inflation yields lower real rates. However, procyclicality implies that the government needs to make larger (real) payments when the economy deteriorates, which could increase default risk and trigger an increase in real rates. The patterns of real rates predicted by the model are quantitatively consistent with those documented in the data.
*An earlier version of this paper was circulated under the title "Inflation, Debt and Default''.
"Political Distortions and Infrastructure Networks in China: A Quantitative Spatial Equilibrium Analysis", joint with Simon Alder
This version - January 2020.
Using the timing of China's highway network construction and political leadership cycles, we document systematic political distortions in the road infrastructure network: the birthplaces of the top officials who were in power during the network's implementation are closer to the actual network, compared to the counterfactual optimal network in a quantitative spatial general equilibrium model. We then use the model to quantify the aggregate costs of distortions in the highway network. Overall, compared to the actual highway network, aggregate real income net of road construction costs is 1.76 percent higher with the heuristic optimal network. Political distortions due to favoring birthplaces account for approximately 0.2 percentage points of this welfare difference.
Work in progress
"The Establishment Margin of Firm Growth", with Logan Lewis and Andrea Stella
"Trade liberalization, Income Risk, and Optimal Taxation"
"On the Margins of Growth", joint US Census project with Logan Lewis and Andrea Stella