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''.

conference volumes

Borrowing from China and Sovereign Credit Risk, joint with Astghik Mkhitaryan and César Sosa-Padilla

American Economic Review Paper and Proceedings, forthcoming.

Using data on external marketable debt and prices combined with Chinese lending data, we find that a “Chinese funding event” is associated with a relative decline in both marketable debt, new bond issuance, and sovereign bond yields. On the other hand, we document a significant “Chinese debt restructuring event” premium: Countries face markedly larger spreads after a Chinese debt restructuring episode. We then discuss these findings through the lens of standard

sovereign debt models.


Granular Income Inequality and Mobility using IDDA: Exploring Patterns across Race and Ethnicity and Establishment Size in the United States, with Kevin Rinz, Natalie Gubbay, Brandon Hawkins, John Voorheis, and Abbie Wozniak

NBER CRIW - Spring 2024 Conference on Race, Ethnicity, and Economic Statistics for the 21st Century

We explore the evolution of income inequality and mobility in the U.S. for a large number of subnational groups defined by race and ethnicity, using granular statistics describing income distributions, income mobility, and conditional income growth derived from the universe of tax filers and W-2 recipients that we observe over a two-decade period (1998–2019). We find that income inequality and income growth patterns identified from administrative tax records differ in important ways from those that one might identify in public survey sources. The full set of statistics that we construct is available publicly alongside this paper as the Income Distributions and Dynamics in America, or IDDA, dataset. Using two applications, we illustrate IDDA’s relevance for understanding income inequality trends. First, we extend Bayer and Charles (2018) beyond earnings gaps between Black and White men and document that, unlike those for other groups, earnings for both Black men and Black women fell behind earnings for White men following the Great Recession. This trend lasted through 2019, the end of the data period. Second, we document a significant reversal in the convergence of earnings for Native earners in Native areas.

Paper (NBER WP version) | Linked CPS "Appendix B" | Documentation | Mpls Fed IDDA page


"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''.

"Outsourcing Policy and Worker Outcomes: Causal Evidence from a Mexican Ban", with Alejandro Estefan, Roberto Gerhard, Joe Kaboski and Wei Qian

This version - January 2024.

A weakening of labor protection policies is often invoked as one cause of observed monopsony power and the decline in labor's share of income, but little evidence exists on the causal impact of labor policies on wage markdowns.  Using confidential Mexican economic census data from 1994 to 2019, we document a rising trend over this period in on-site outsourcing. Then, leveraging data from a manufacturing panel survey from 2013 to 2023 and a natural experiment featuring a ban on domestic outsourcing in 2021, we show that the ban drastically reduced outsourcing, increased wages, and reduced measured markdowns without lowering output or employment. Consistent with the presence of monopsony power, we observe large markdowns for the largest firms, with the decline in markdowns in response to the ban concentrated among high-markdown firms. However, we also find that the reform reduced capital investment and increased the probability of market exit.

Paper | NBER WP No. 32024 | Minneapolis Fed IWP No. 84

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

This version - February 2024, minor revision requested, Journal of International Economics

We document that larger input tariff reductions were associated with lower labor markdowns in China, especially for skill-intensive firms. Guided by a stylized model of equilibrium labor market power, we leverage differences in the aggregate labor supply dynamics across labor markets -- such as regional variations in China's contemporaneous college expansion reforms -- to that show trade-induced labor markdown decreased more in labor markets with more labor supply growth. Our estimates suggest that lower labor markdowns due to input trade liberalization offset China's aggregate labor share decline by almost one-half percentage point in the early 2000s.


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

stay tuned -- new draft coming soon.

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 deleveraging 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.

Paper (older draft)

"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 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"