Research

We provide evidence of a new channel of how exchange rates affect trade. Using a novel identification strategy that exploits firms' foreign currency debt maturity structure in Colombia around a large depreciation, we show that firms experiencing a stronger debt revaluation of dominant currency debt due to a home currency depreciation compress imports relatively more while exports are unaffected. Dominant currency financing does not lead to an import compression for firms that export, hold foreign currency assets, or are active in the foreign exchange derivatives markets, as they are all hedged against a revaluation of their debt. These findings can be rationalized through the prism of a model with costly state verification and foreign currency borrowing. Quantitatively, the dominant currency financing channel explains a significant part of the external adjustment process in addition to the expenditure switching channel.

Mixing QE and Interest Rate Policies at the Effective Lower Bound: Micro Evidence from the Euro Area

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with Christian Bittner, Alexander Rodnyanski and Farzad Saidi

We study jointly expansionary rate-based monetary policy and quantitative easing, despite their concurrent implementation around the world, by exploiting the introduction of negative monetary-policy rates in a fragmented euro area, alongside cross-sectional heterogeneity in banks' balance sheets. Banks more exposed to quantitative easing are less likely to increase credit supply when they incur higher funding costs due to a zero lower bound (ZLB) on deposit rates. Using administrative data from Germany, we also uncover that German banks rebalance their interbank lending from safe to risky countries, and that the ZLB on deposit rates compromised the effectiveness of quantitative easing.

Stagflationary Stock Returns and the Role of Market Power

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with Ben Knox

We study the implications of inflation for firms' performance with a focus on the role of market power. Using inflation announcements for identification, we find that inflationary surprises are associated with persistent declines in stock prices. The results hold controlling for discount rate changes, suggesting that stock market investors have a stagflationary view of the world: nominal cash flows are expected to be stagnant during periods of higher inflation. Consistent with this view, we find firms with more market power are shielded from stagflationary stock returns. These firms are better able to hold prices over marginal costs, generating an increase in their nominal cashflows in response to inflation shocks.

Does IT help? Information Technology in Banking and Entrepreneurship

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with Toni Ahnert, Sebastian Doerr and Nicola Pierri

This paper analyzes the importance of information technology (IT) in banking for entrepreneurship. We build a parsimonious model of bank screening that predicts that IT in banking can spur entrepreneurship by making it easier for startups to borrow against collateral. Empirically, we find that job creation by young firms is stronger in US counties that are more exposed to IT-intensive banks, as measured through banks' historical geographical footprint. We also show that entrepreneurship increases by more in IT-exposed counties when house prices rise, and especially so in home equity-intensive sectors.These results suggest that banks' IT facilitates collateralized lending. Further, highlighting IT's role in improving the use of hard information, we establish that small business lending by banks with higher IT adoption is $i)$ more sensitive to changes in local house prices, and $ii)$ less-affected by the distance between the bank headquarters and its borrowers. These findings are robust to controlling for unobservable time-varying county or bank factors.

Monetary Policy under Labor Market Power

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with Anastastia Burya, Rui Mano and Anke Weber

Using the near universe of online vacancy postings in the U.S., we study the interaction between labor market power and monetary policy. We show empirically that labor market power amplifies the labor demand effects of monetary policy, while not disproportionately affecting wage growth. A search and matching model in which firms can attract workers by either offering higher wages or posting more vacancies can rationalize these findings. We also find that vacancy postings that do not require a college degree or technology skills are more responsive to monetary policy, especially when firms have labor market power. Our results help explain the “wageless” recovery after the 2008 financial crisis and the flattening of the wage Phillips curve, especially for the low-skilled, who saw stagnant wages but a robust decline in unemployment.

Pulling and Pushing Risky Firms on a String: The Asymmetric Effects of Monetary Policy

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with Ander Perez-Orive

We show that financial frictions explain why monetary policy tightenings affect firms’ borrowing and investment decisions more than monetary policy easings. We measure the severity of firms’ financial frictions through their distance to default and show that proximity to default increases the responsiveness of firms’ borrowing and investment decisions to contractionary monetary policy surprises but not to expansion- ary surprises. Moreover, a significant response of investment and borrowing to policy changes is only detected for firms with high risk of default and in response to contrac- tionary shocks. These findings suggests that monetary policy acts like a string that can pull firms to curtail their investment but not push them to increase it. In aggregate, the transmission of monetary policy—and, in particular, of policy tightening—to the real economy depends on the severity of financial frictions for nonfinancial firms.

Anatomy of Banks' IT Investments: Drivers and Implications

Link, Bank IT Data

with Kosha Modi, Nicola Pierri and María Soledad Martínez Pería

This paper relies on administrative data to study determinants and implications of US banks' Information Technology (IT) investments, which have increased six-fold over two decades. Large and small banks had similar IT expenses a decade ago. Since then, large banks sharply increased their spending, especially those which were more exposed to competition from fintech lenders. Other local-level and bank-level factors, such as county income and bank income sources, also contribute to explain the heterogeneity in IT investments. Analysis of the mortgage market reveals that fintechs' lending behavior is more similar to that of non-bank financial intermediaries rather than IT-savvy banks, suggesting that factors other than technology are responsible for the differences between banks and other lenders. However, both IT-savvy banks and fintech lend to lower income borrowers, pointing towards benefits for financial inclusion from higher IT adoption. Banks' IT investments are also shown to matter for the responsiveness of bank lending to monetary policy.

Intervening against the Fed

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with Alexander Rodnyansky and Naoki Yago

This paper develops a novel event-study methodology for identifying the effect of sterilized foreign exchange (FX) intervention. We use a US monetary policy shock purely identified by high-frequency method and compare the response of exchange rate and stock price to monetary shock in countries that intervene and do not intervene against the Fed. We find that, without intervention, an unexpected Fed funds rate hike depreciates local currencies and decreases the stock price of firms, especially those whose debt is disproportionately denominated in US dollars. However, if central banks counteract by selling the US dollar, the US monetary shock has a limited effect on the exchange rate and stock prices. This suggests that the FX intervention is successful in stabilizing both the exchange rate and stock markets.

The Price of Capital Goods, Investment and Labor: Micro-Evidence from a Trade Liberalization

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with Sergii Meleshchuk
Media: Reuters

In this paper we demonstrate the importance of a reduction in capital goods prices in stimulating investment and employment, by distinguishing capital goods tariffs from other tariffs within a trade reform in Colombia. Using exposure to a quasi-natural experiment induced by a trade reform in Colombia, we find that firms that have been more exposed to a reduction in intermediate and consumption input or output tariffs do not significantly increase their investment rates. However, firms' investment rate increase strongly in response to a reduction in capital goods input tariffs. Firms do not substitute capital with labor, but instead also increase employment, especially for production workers. Reduction in other tariff rates do not increase investment and employment. Our results suggest that a reduction in the relative price of capital goods can significantly boost investment and employment and does not seem to lead to a decline in the labor share.

Exchange Rate Elasticities of International Tourism and the Role of Dominant Currency Pricing

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with Ding Ding

We estimate exchange rate elasticities of international tourism. We show that, in addition to the bilateral exchange rate, the exchange rate between the tourism origin country vis-à-vis the US dollar is an important driver of tourism flows, indicating a strong role of US dollar pricing. The US dollar exchange rate is more important for tourism destination countries with higher US dollar borrowing, pointing toward a complementarity between US dollar pricing and financing. Country-specific dominant currencies (CSDCs) play only a minor role for the average country, but are important for tourism-dependent countries and those with a high concentration of tourists. The importance of the US dollar exchange rate represents a strong piece of evidence of dominant currency pricing (DCP) in the international trade of services, and suggests that the benefits of exchange rate flexibility for tourism-dependent countries may be weaker than previously thought.

Other Publications:

Emerging Markets Corporate Bond Yields and Monetary Policy

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Emerging Markets Review (2018)

The Price of Capital Goods: A Driver of Investment Under Threat?

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IMF Economic Review (2020)
with Weicheng Lian, Natalija Novta, Evgenia Pugacheva and Petia Topalova
Media Coverage: VoxEU, Reuters, IMFBlog, FAZ

The Price of Capital Goods: A Driver of Investment under Threat?

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IMF World Economic Outlook, April 2019, Chapter 3
with Weicheng Lian, Natalija Novta, Evgenia Pugacheva and Petia Topalova

Closer Together of Further Apart? Subnational Regional Disparities and Adjustment in Advanced Economics

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IMF World Economic Outlook, October 2019, Chapter 2
with John Bluedorn, Zsoka Koczan, Weicheng Lian and Natalija Novta

Wie unterschiedlich Corona die Weltwirtschaft trifft

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Capital Magazin Gastbeitrag, July 2020 (in German)
Translation to English here

Dominant Currencies and External Adjustment

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IMF Staff Discussion Note, July 2020
with Gustavo Adler, Camila Casas, Luis Cubeddu, Gita Gopinath, Nan Li, Sergii Meleshchuk, Carolina Osorio Buitron and Damien Puy
Media: Bloomberg, Financial Times, Financial Times (2), The Economist

Monetary Policy, Inflation Outlook, and Recession Probabilities

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FEDS Note
with Andrea Ajello, Luca Benzoni, Makena Schwinn, and Francisco Vazquez-Grande