"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.

Paper| Online appendix | Slides | Data appendix | Programs | Published version

"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.

Paper | Published version

*This paper supersedes the manuscript previously titled "Trade Reforms, Foreign Competition, and Labor Market Adjustments in the U.S."

"Infrastructure Investment and Labor Monopsony Power", with Wyatt Brooks, Joe Kaboski, Amber Li, and Wei Qian.

IMF Economic Review, August 2021

In this paper, we study whether or not transportation infrastructure disrupts local monopsony power in labor markets in the context of an expansion of the national highway system in India. Using panel data on manufacturing firms, we find that monopsony power in labor markets is reduced among firms near newly constructed highways relative to firms that remain far from highways. We estimate that the highways lower labor markdowns significantly. We use changes in the composition of inputs to identify these effects separately from the reduction of output markups that occurs simultaneously. The impacts of highway construction are therefore pro-competitive in both output and input markets, and act to increase the share of income that labor receives by 1.8--2.3 percentage points.

Paper | Published version | NBER WP 28977

"Heavy Tailed, but not Zipf: Firm and Establishment Size in the United States.", with Logan Lewis and Andrea Stella

Journal of Applied Econometrics, 2023

Heavy tails play an important role in modern macroeconomics and international economics. Previous work often assumes a Pareto distribution for firm size, typically with a shape parameter approaching Zipf’s law. This convenient approximation has dramatic consequences for the importance of large firms in the economy. But we show that a lognormal distribution, or better yet, a convolution of a lognormal and a non-Zipf Pareto distribution, provides a better description of the U.S. economy, using confidential Census Bureau data. These findings hold even far in the upper tail and suggest heterogeneous firm models should more systematically explore deviations from Zipf’s law.

Paper (October 2022 version) | Replication readme +  zip (104 MB) | Published version

*An earlier version of this paper was circulated under the title "On the U.S. Firm and Establishment Size Distributions''.


"Real Interest Rates, Inflation, and Default*", with Sewon Hur and Fabrizio Perri

This version - December 2023.

We present a simple theory of the link between inflation cyclicality and real interest rates, with and without sovereign default risk. When inflation is procyclical, nominal bonds pay out more in bad times, making them a good hedge against aggregate risk. This implies that, in the absence of default risk, procyclical inflation lowers real rates. However, procyclical inflation implies that the government needs to make larger (real) payments when the economy deteriorates, which can push up real interest rates in the presence of default risk. Data from a panel of advanced economies support these predicted patterns of real rates, inflation cyclicality, and default risk.  Finally, we turn to a calibrated model to quantify the welfare consequences of inflation cyclicality and to investigate how real rates respond when inflation risk and default risk increase.

Paper | Data (zip file)| Code (zip file)

*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.


"Borrowing in the Shadow of China", joint with Astghik Mkhitaryan and César Sosa-Padilla

Very preliminary early version - June 2021.

Emerging economies’ debt to China is large, non-marketable, and opaque. We study the impact that such borrowing from China–which is almost completely official debt–has on the equilibrium quantities and prices for marketable sovereign debt. We use a standard sovereign debt model with long-term debt and find that following a positive inflow from China our model economy chooses to re-balance its debt portfolio by delevering from market debt. In the process it pays lower spreads and faces less volatile consumption. On the other hand, when facing a capital outflow vis-à-vis China, the economy taps international debt markets, levers up on defaultable debt, and ends up paying higher and more volatile spreads in equilibrium. We contrast the model dynamics with panel-data evidence from emerging and low-income economies, and discuss its welfare implications.


"Trade Liberalization and Labor Monopsony: Evidence from Chinese Firms", joint with Amber Li and Wei Qian.

April 2022, revision requested at the Journal of International Economics

Using firm-level data and variations in tariff reductions across industries in China, we find that input trade liberalization is associated with lower labor markdowns. Furthermore, these pro-competitive labor market effects are more pronounced for skill-intensive firms. We then derive in a simple model how firm size and firm entry interact with  aggregate labor supply to determine equilibrium labor markdowns following input tariff reductions. Consistent with the model, we find evidence that labor markdowns fall more in labor markets in which the aggregate labor supply undergoes greater expansion, especially for skill-intensive firms operating in regions with large contemporaneous college expansion reforms. Overall, our results suggest that labor market power may be an important margin of adjustment to trade liberalization.


Work in progress

"The Industrial Diversification of Cities and the Impact of Trade Shocks in France," with François de Soyres and Simon Fuchs

"The Establishment Margin of Firm Growth", with Logan Lewis and Andrea Stella

"Road Network Centralization and Political Institutions,"  with Simon Alder and Leonard Wantchekon

"On the Margins of Growth", joint US Census project with Logan Lewis and Andrea Stella

"Trade liberalization, Income Risk, and Optimal Taxation"