“Sovereign Risk and Intangible Investment,” with Minjie Deng
Journal of International Economics, Volume 152, November 2024
Abstract: This paper measures the output and TFP losses from sovereign risk, considering firm-level intangible investment. Using Italian firm-level data, we show that firms reallocated from intangible assets to tangible assets during the 2011–2012 Italian sovereign debt crisis. This asset reallocation is more pronounced among small firms and high-leverage firms. This reallocation affects aggregate output and TFP. To explain the reallocation pattern and quantify the output and TFP losses, we build a sovereign default model incorporating firm intangible investment. In our model, sovereign risk deteriorates bank balance sheets, disrupting banks’ ability to finance firms. Firms with greater external financing needs are more exposed to sovereign risk. Facing tightening financial constraints, firms shift their resources towards tangibles because they can be used as collateral. We find that elevated sovereign risk explains 45% of the observed output losses and 31% of the TFP losses in Italy from 2011 to 2016.
"Trade Barriers and Sovereign Default Risk," with George Alessandria, Yan Bai, Minjie Deng [PDF]
Abstract: Trade barriers are rising worldwide, yet their consequences for sovereign risk remain underexplored. We show that what matters is whether barriers fall on a country's exports or on its imports. Export cost shocks raise sovereign spreads, whereas import cost shocks leave spreads largely unchanged. Under balanced trade, this asymmetry would not arise because the two shocks are equivalent by Lerner symmetry. We prove that unbalanced trade and foreign currency debt break this equivalence in a general equilibrium model of sovereign default with trade. An export cost shock generates a larger depreciation, which raises both the incentive to borrow and the real burden of repayment, so spreads rise by more. We measure export and import wedges in a panel of sixteen emerging economies. Spreads comove strongly with the export wedge but barely with the import wedge. In the calibrated model, an export cost shock that lowers real GDP by one percent raises the spread by four percentage points, while an import cost shock has essentially no effect. The interaction of productivity and export cost shocks accounts for the spread spike of the Great Recession. Local currency debt mutes the debt burden channel, so the asymmetry weakens but persists, in both the model and the data.
"Incomplete Tariff Pass-Through at the Firm-level: Evidence from U.S.-China Trade Dispute,"
with Chengyuan He, Xiaomei Sui, Soo Kyung Woo [PDF]
Abstract: Using confidential U.S. Census data, we show that tariff pass-through to U.S. import prices during the U.S.–China trade dispute was incomplete within continuing trade relationships, even though it was complete in aggregate. We develop an empirical decomposition showing that complete aggregate pass-through reflects import reallocation toward higher-priced new relationships and importers. We then derive a welfare decomposition that applies to a broad class of heterogeneous-importer models. The formula identifies the key statistics needed to estimate the welfare effects of tariffs and shows how importer heterogeneity and sourcing adjustments matter. Quantitatively, ignoring these margins understates the welfare losses from tariffs. Our methods can be used to study other forms of pass-through and heterogeneous responses to common cost shocks.
"Foreign Currency Borrowing and Exporter Dynamics in Emerging Markets" [PDF]
Abstract: This paper studies the interaction between firms' export activities and currency choice of financing, uncovering the underlying driving forces behind this interaction and exploring the associated aggregate implications. Using Indian firm-level data, I find that exporters, particularly those with a large share of export sales, are more likely to borrow in foreign currency, and have more foreign currency borrowing compared to non-exporting firms. To uncover the underlying driving forces of such correlations along both extensive and intensive margins, I develop a heterogeneous firm model with endogenous choices of export and currency of financing. There are three potential channels through which firms' exports correlate with the currency composition of borrowing. Foreign currency revenues from exports can directly repay or serve as collateral for foreign currency borrowing. In addition, exporting firms could face reduced fixed costs of foreign currency borrowing. Disciplined by the observed correlations, the model implies that exporters face 35% lower fixed costs of foreign currency borrowing. Without accounting for these correlations, aggregate output losses due to foreign currency borrowing during depreciation are underestimated by 32%.
"The Slowdown of TFP Declines During the Debt Crisis: Evidence from Tradable and Non-tradable Sectors"
Abstract: The decline in total factor productivity (TFP) has shown a deceleration following the debt crisis. This paper studies the impact of sectoral differences on TFP dynamics, utilizing both Italilan sector-level and firm-level data. The findings reveal that non-tradable sector firms are more prone to exiting the market during the debt crisis. Conversely, high productivity firms in the tradable sector exhibited increased capital resources, maintained higher employment levels, and managed to lower costs of employees. The empirical facts suggest a potential explanation known as the "cleansing effect." By employing a local projection specification, this paper establishes that the cleansing effect in the post-crisis period is primarily influenced by the persistence effects of the debt crisis. To rationalize the empirical findings, a simple trade model with working capital requirement is introduced. The model suggests that domestic firms have difficulties in financing their working capital requirement due to the rising domestic borrowing cost during the debt crisis, thus experience a higher exit rate and a lower labor demand. Exporting firms can additionally borrow from the international market and face a lower cost of labor due to general equilibrium effect, so that they are able to produce more by hiring more labors. The exit of low productivity firms in non-tradable sector as well as a larger share of high productivity firms in tradable sector contribute to the slowdown of TFP declines since the debt crisis. [Draft on request]
"World Financial Cycles and Global Trade," with Yan Bai, Minjie Deng, and Gabriel Mihalache
"Dollar Debt and Monetary Policy Transmission in Emerging Markets," with Minjie Deng, Junhyong Kim, and Annie Soyean Lee
"Firm Financing Over the Life Cycle," with Minjie Deng and Annie Soyean Lee
"Government Finance and Worker Migration across U.S. States," with Minjie Deng, Min Fang, and Zibin Huang