I build an homogenized database covering the country of exposure through revenue, cost, equity, debt, and subsidiary linkages of large global companies. These exposure channels determine large return and cash flow comovements, but comovent is lower when multiple channels of exposure are active.
Abstract: How does exposure to international markets affect returns and cash flow comovements? Foreign bond owners, lenders, affiliates, investors, customers, and suppliers all transmit country shocks to companies. Most multinationals have many of these exposures simultaneously within the same foreign market. Returns and cash flows of two companies comove when exposed to the same country through the same channel. Within-country exposure through different channels is generally associated with lower comovement, in line with an operational hedging strategy. This evidence can help reconcile how, on average, increased market integration does not lead to increased comovement.
Coming Soon. With Falk Brauning, Gustavo Joaquim, and Hillary Stein
Granular-identified desk risk limit shocks of global FX dealers lead to turnover and exposure reduction, increased currency returns and spread increase. The evidence is in line with a model of dealers market segmentation.
Abstract: We leverage supervisory micro data to uncover the role of global banks' risk limits in drivign exchange rate dynamics. Consistent with a model of currency intermediation under risk constraints, shocks to dealers' risk limits lead to price and quantity adjustments in the foreign exchange market. We show that dealers adjust their net exposure and increase spread in response to granular-identified limit shocks, leading to lower turnover and an adjustment in currency returns. The exchange rate adjustment is stronger when interacted with shifts in net dollar demadn, as predicted by theory, and triggers deviations from coverred and uncovered interest parity.
Job Market Paper
Selling and buying goods with prices specified in dollars generates currency mismatch on French firms' balance sheets. Exporters can deal with it. Investments and employment of small domestic-oriented firms remain highly exposed to merchandise valuations.
Abstract: This paper estimates the cash flow effects of currency mismatches generated by foreign-priced operations of French manufacturers. The value of transactions invoiced in foreign currencies is twice as sensitive to exchange rates as the value of transactions invoiced in the domestic currency. I aggregate foreign-priced operations to the firm level to build a shift-share measure of invoice currency mismatch. This measure outperforms any trade-weighted effective exchange rate index at explaining cash flows of trading firms. Large firms absorb valuation shocks in their balance sheet and small exporters partially hedge their dollar-priced exports with dollar-priced imports. Investment and payroll of small domestic-oriented firms are sensitive to invoice currency valuations. These results show how trade value sensitivities to currency fluctuations can coexist with the evidence of disconnect between exchange rates and real macroeconomic fundamentals.
with Gita Gopinath, Emmanuel Farhi, Oleg Itskhoki
2018 NBER Macro Annual
Economic theory predicts that the same tax deducted from exports and levied on imports makes no real economic impact. We argue that the conditions for this to happen are unlikely to hold in practice. We simulate the impact of a border-adjusted corporate tax and a VAT introduction in the US.
Abstract: We analyze the dynamic macroeconomic effects of border adjustment taxes (BAT), both when they are a feature of corporate tax reform (C-BAT) and for the case of value-added tax (VAT). Our analysis arrives at the following main conclusions. First, C-BAT is unlikely to be neutral at the macroeconomic level, as the conditions required for neutrality are unrealistic. The basis for neutrality of VAT is even weaker. Second, in response to the introduction of an unanticipated permanent C-BAT of 20% in the United States, the dollar appreciates strongly, by almost the size of the tax adjustment, and US exports and imports decline significantly, while the overall effect on output is small. Third, an equivalent change in VAT, in contrast to the C-BAT effect, generates only a weak appreciation of the dollar and a small decline in imports and exports, but has a large negative effect on output. Last, border taxes increase government revenues in periods of trade deficit; however, given the net foreign asset position of the United States, they result in a long-run loss of government revenues and an immediate net transfer to the rest of the world.
with Alberto Alesina, Carlo Favero, Francesco Giavazzi, Matteo Paradisi
We extend a narrative dataset of fiscal consolidations, with details on over 3500 measures for 16 OECD countries. Government spending cuts and cuts in transfers are less harmful than tax hikes. Standard New Keynesian models match our results when fiscal shocks are persistent.
Abstract: We investigate the macroeconomic effects of fiscal consolidations based upon government spending cuts, transfers cuts and tax hikes. We extend a narrative dataset of fiscal consolidations, with details on over 3500 measures for 16 OECD countries. We show that government spending cuts and cuts in transfers are much less harmful than tax hikes, despite the fact that nondistortionary transfers are not classified as spending. Standard New Keynesian models robustly match our results when fiscal shocks are persistent. Wealth effects on aggregate demand mitigate the impact of a persistent spending cut. Static distortions caused by persistent tax hikes cause larger shifts in aggregate supply under sticky prices.
with Alberto Alesina, Carlo Favero, Francesco Giavazzi, Matteo Paradisi
2015 Economic Policy
The 2009-13 fiscal adjustments based upon cuts in spending were less recessionary than those based upon tax increases. Once taking this fact into account, we don't find sufficient evidence to claim that the 2009-13 austerity measures have been more costly than in the past.
Abstract: The conventional wisdom is (i) that fiscal austerity was the main culprit for the recessions experienced by many countries, especially in Europe, since 2010 and (ii) that this round of fiscal consolidation was much more costly than past ones. The contribution of this paper is a clarification of the first point and, if not a clear rejection, at least it raises doubts on the second. In order to obtain these results we construct a new detailed "narrative" data set which documents the actual size and composition of the fiscal plans implemented by several countries in the period 2009-2013. Out of sample simulations, that project output growth conditional only upon the fiscal plans implemented since 2009 do reasonably well in predicting the total output fluctuations of the countries in our sample over the years 2010-13 and are also capable of explaining some of the cross-country heterogeneity in this variable. Fiscal adjustments based upon cuts in spending appear to have been much less costly, in terms of output losses, than those based upon tax increases. The difference between the two types of adjustment is very large. Our results, however, are mute on the question whether the countries we have studied did the right thing implementing fiscal austerity at the time they did, that is 2009-13. Finally we examine whether this round of fiscal adjustments, which occurred after a financial and banking crisis, has had different effects on the economy compared to earlier fiscal consolidations carried out in "normal" times. When we test this hypothesis we do not reject the null, although in some cases failure to reject is marginal. In other words, we don't find sufficient evidence to claim that the recent rounds of fiscal adjustment, when compared with those occurred before the crisis, have been especially costly for the economy.