This paper presents a positive and normative study of a world financial market when sovereign countries can default on their debt. We construct a tractable model that enables us to study sovereign default in general equilibrium. The amount of safe assets is thus endogenous and determined by international risk-sharing. We characterize the equilibrium structure and we show that the market equilibrium

This paper studies the circular relationship between sovereign credit risk, government fiscal and debt policy, and output. I consider a sovereign default model with fiscal policy and private capital accumulation. I show that, when fiscal policy responds to borrowing conditions in the sovereign debt market, multiple equilibria exist where the expectations of lenders are self-fulfilling. In the bad equilibrium

This paper quantifies the size of internal versus external trade barriers and assess the trade and welfare impact. I develop a quantitative two-sector international trade model featuring nonhomothetic preferences in which Indian states trade both domestically and internationally. I discipline the model using rich data on price dispersion together with state-based foreign and domestic trade flows. I

We revisit the relationship between foreign investment and productivity of acquired firms. First, we construct a panel firm-level dataset for eight advanced European countries covering domestic and foreign acquisitions together with detailed balance sheet information for the years 1999–2012. Second, we address the challenge of identifying a causal relation. To that end, we compare foreign to domestic

This paper incorporates sloping marginal cost curves and their variations across industries into an open macro model, motivated by the fact that industries’ output, imports, and exports are more procyclical when their economies of scale arise from sloping marginal cost curves rather than fixed costs. The model, consistent with the data, delivers endogenous within-firm interdependence across markets

We analyze the local effect of exogenous shocks to the value of mineral deposits on a panel of manufacturing plants in Indonesia. We introduce heterogeneity in natural resource extraction methods, which helps to explain the mixed evidence found in the ‘Dutch disease’ literature. In districts where mineral extraction is relatively capital intensive, mining booms cause virtually no upward pressure on

Financial frictions can pose a barrier to export entry by altering a firm's long-term capital structure. The focus on long-term firm financing is motivated by our empirical finding that exporting firms tend to be more leveraged than non-exporting firms in terms of long-term debt, as distinct from short-term working capital. We explain this fact by marrying a corporate finance model of capital structure

We introduce time and risk into the fixed-variable cost tradeoff in heterogeneous firm trade models: Investing in exporting gradually and stochastically lowers the costs of exporting. In the model, aggregate trade dynamics arise from producer-level decisions to invest in lowering their future variable export costs, and tariff reforms generate time-varying trade elasticities. The gains from reducing

We investigate how changes in firm productivity after M&As are affected by differences in profit taxation between the target and the acquirer. We argue that tax differentials distort the efficient allocation of productive factors following an M&A and thus inhibit the realization of productivity improvements. Using firm-level data on inputs and outputs of production as well as on corporate M&As, we

The objective of this paper is to show that the proposal by Froot and Thaler (1990) of delayed portfolio adjustment can account for a broad set of puzzles about the relationship between interest rates and exchange rates. The puzzles include: i) the delayed overshooting puzzle; ii) the forward discount puzzle (or Fama puzzle); iii) the predictability reversal puzzle; iv) the Engel puzzle (high interest

This paper employs a novel multi-country dataset of corporate defaults to develop a model of distress risk specific to emerging markets. The data suggest that global financial variables such as US interest rates and shifts in global liquidity and risk aversion have significant predictive power for forecasting corporate distress risk in emerging markets. We document a positive distress risk premium

Using a new narrative dataset on fiscal consolidation announcements for thirteen EU countries over the period 1978–2013, a panel VAR analysis shows that revenue-based announcements appear more credible, but affect economic activity more adversely than do spending-based announcements. Higher revenue multipliers and, to a lesser extent, larger actual follow-up following a revenue-based announcement help

We examine the relationship between real exchange rate fluctuations and firm-level investment and growth using data for a sample of close to 33,000 firms from 68 advanced and emerging market countries over the 2000–2014 period. We show that real depreciations boost profits, investment, and asset growth of tradable sector firms that have higher labor shares and are relatively more financially constrained

The dominance of English language content on the Internet raises a question of how consumer bilingualism in a given country affects the amount of home language content and the country's welfare. We address this question by studying two-sided market competition between a foreign and a domestic content distribution platform in a small open economy. On the one hand, bilingualism has the benefit of increasing

This paper develops a general equilibrium model of international trade with heterogeneous exporters and heterogeneous importers. This theory is guided by new findings drawn from a matched exporter-importer dataset that characterizes the relationships between exporting and importing firms. I find that most exporters have a single importing partner, that highly productive exporters tend to trade with

We use a new dataset of the universe of Greek corporate tax returns to study a voluntary tax compliance program for small firms. This “self-assessment” program prescribed target taxable profit margins (the ratio of taxable profits to revenues) for different types of activities. Firms that reported profit margins above these targets in a given year were exempt from audits in that year. We find that

Central banks unexpectedly tightening policy rates often observe the exchange value of their currency depreciate, rather than appreciate as predicted by standard models. We document this for Fed and ECB policy days using event studies and ask whether an information effect, where the public attributes the policy surprise to an unobserved state of the economy, may explain the abnormality. It turns out

Using price quote data that underpin the official U.K. consumer price index (CPI), we analyze the effects of the unexpected passing of the Brexit referendum on the dynamics of price adjustments. The sizable depreciation of the British pound that immediately followed Brexit works as a quasi-experiment, enabling us to study the transmission of a large common marginal cost shock to inflation as well as

We demonstrate a dramatic change over time in the international transmission of US monetary policy shocks. International spillovers from US interest rate policy have had a different nature since the 1990s than they did in post-Bretton Woods period. Our analysis is based on the a panel of 21 high income and emerging market economies. Prior to the 1990s, the US dollar appreciated, and ex-US industrial

We study the impact of monetary policy on the supply of bank credit when bank lending is denominated in foreign currencies. Accessing a comprehensive supervisory dataset from Hungary, we find that the supply of bank credit in a foreign currency is less sensitive to changes in domestic monetary conditions than the equivalent supply in the domestic currency. Changes in foreign monetary conditions similarly

We study the effects of sovereign debt inflows on domestic firms. To do so, we exploit episodes of large sovereign debt inflows, which follow the announcements of the inclusion of six emerging countries into major sovereign debt indexes. We find that these events reduce government bond yields, appreciate the domestic currency, and have heterogeneous stock-market effects on domestic firms. Firms operating

This paper studies how several macrofinancial factors are associated over time with the evolution of covered interest parity (CIP) deviations in the decade after the Global Financial Crisis. Changes in a number of risk- and policy-related factors have a significant association with the evolution of CIP deviations. Key measures of FX market liquidity and intermediaries' risk-taking capacity are strongly

This paper examines general support for trade at the individual level, measures its sensitivity to pro- and anti-trade framing, and relates these effects to how framing affects specific beliefs about trade. The data come from a randomized experiment we included in the 2018 Latinobarometro survey covering 18 countries. We find that respondents' high support for trade is based primarily on perceived

This paper studies whether innovations underlying skill-biased technical change diffuse internationally and thereby contribute to the increasing skill demand and inequality in other countries. Using a new empirical framework and sectoral data for a panel of 40 emerging and developed countries, 25 industries and the period from 1995 to 2007, the analysis shows that technology diffusion is statistically

This paper provides microfoundations to the Salter-Swan policy framework, a graphical apparatus designed to ascertain the exchange-rate and fiscal stance of a policymaker with internal and external economic targets. The environment is an infinite-horizon small open economy producing tradable and nontradable goods that takes world prices and world interest rates as given and is populated by optimizing

Financial crises originate in debt markets, where beliefs formation about asset values affects the value of collateral, hence the leverage cycles. We introduce novel state-contingent ambiguity attitudes, which endogenously induce pessimism in recessions and optimism in booms, in a model with occasionally binding collateral constraints and exogenous debt supply. Ambiguity is measured in the data through

This paper provides a comprehensive analysis of the dynamic labor market effects of one of the largest forced population movements in history, the mass inflow of eight million German expellees into West Germany after World War II. The expellee inflow was distributed very asymmetrically across two West German regions. We develop a dynamic equilibrium model that closely fits two decades of historical

Nearly 2700 highly potent international investment agreements protect foreign investment against host country policies. This paper analyzes the design and implications of their contentious provisions regarding regulatory expropriations. It derives conditions under which “carve-out” compensation mechanisms, similar to those in actual agreements, solve underinvestment and overregulation problems and

This paper finds that globalization is contributing to the rapid increase in executive compensation. Employing comprehensive data on top executives at major U.S. companies, we show that their compensation is increasing with exports and foreign direct investment, as well as firm size and technology. Exogenous export shocks unrelated to managerial decisions also increase executive compensation, and there

This paper assesses the quantitative importance of including sectoral heterogeneity in computing the gains from trade. Our framework draws from Caliendo and Parro (2015) and has sectoral heterogeneity along five dimensions, including the elasticity of trade to trade costs. We estimate the sectoral trade elasticity with the Simonovska and Waugh (2014) simulated method of moments estimator and micro

For centuries, defaulting governments were immune from legal action by foreign creditors. This paper shows that this is no longer the case. Building a dataset covering four decades, we find that creditor lawsuits have become an increasingly common feature of sovereign debt markets. The legal developments have strengthened the hands of creditors and raised the cost of default for debtors. We show that

The paper presents new empirical evidence on the international effects of surprise and anticipated technology shocks in the US. We employ the proxy-instrumental variable approach to identify structural vector autoregressions in a panel setting and empirically study the transmission of US technology innovations to the G7 countries. Both unanticipated and anticipated exogenous technology improvements