"A Theory of Rollover Risk, Sudden Stops, and Foreign Reserves", joint 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.*"
accepted for publication in the Journal of International Economics
This version - April 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 - September 2018.
We study how the co-movement of inflation and economic activity affects real interest rates and the likelihood of debt crises. First, we show that for advanced economies, periods with procyclical inflation are associated with lower real interest rates. Procyclical inflation implies that nominal bonds pay out more in bad times, making them a good hedge against aggregate risk. However, such procyclicality also increases sovereign default risk when the economy deteriorates, since the government needs to make larger (real) payments. In order to evaluate both effects, we develop a model of sovereign default on domestic nominal debt with exogenous inflation risk and domestic risk-averse lenders. Countercyclical inflation is a substitute with default, while procyclical inflation is a complement with it, by increasing default incentives. In good times, when default is unlikely, procyclical inflation yields lower real rates. In bad times, as default becomes more material, procyclical inflation can magnify default risk and trigger an increase in real rates.
"Political Distortions and Infrastructure Networks in China: A Quantitative Spatial Equilibrium Analysis", joint with Simon Alder
This version - July 2018.
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 design and implementation are more likely to be closer to the actual network compared to an approximation of the optimal network arising from a quantitative spatial general equilibrium model. We then use the model to quantify the aggregate effects of distortions in the highway network. Altogether, aggregate income is 1.4 percent higher with the approximation of the optimal highway network compared to the actual highway network. Counterfactual networks with political distortions modeled using standard iceberg transportation costs are shown to account for part of these welfare losses.
Work in progress
"Trade liberalization, Income Risk, and Optimal Taxation"
"On the Margins of Growth", joint US Census project with Logan Lewis and Andrea Stella