Macroeconomics & International Finance Seminars

Tuesday 1:40–3:00 p.m.
In-Person, E2 499, unless otherwise noted

Spring 2022

March 29
Matteo Maggiori, Stanford University
"Internationalizing Like China"
Host: Galina Hale
We empirically characterize how China is internationalizing the Renminbi by selectively opening up its domestic bond market and propose a dynamic reputation model to understand China’s internationalization strategy. While previously closed to foreign investors, China has recently allowed major increases in foreign investment in its domestic bond market. China carefully controlled the entrance of foreign investors into its market, first allowing in relatively stable long-term investors like central banks before allowing in flightier investors like mutual funds. Foreign investors increasingly treat Renminbi denominated assets as a substitute for safe developed-market government bonds. Our framework explains these patterns as the result of a government strategy to build its reputation as an international currency issuer while minimizing the cost of potential capital flight as it gains credibility. We analyze optimal two-way liberalization: gradually letting more domestic capital flow abroad as foreigners increase their participation in domestic markets. 

April 12
Nuno Coimbra, Bank of France
"Financial Cycles with Heterogeneous Intermediaries"
Host: Grace Gu-Steadmon
We develop a dynamic macroeconomic model with heterogeneous financial intermediaries and endogenous entry. Time-varying endogenous macroeconomic risk arises from the risk-shifting behaviour of the cross-section of financial intermediaries. When interest rates are high, a decrease in interest rates stimulates investment and decreases aggregate risk. In contrast, when they are low, further stimulus can increase financial instability while inducing a fall in the risk premium. In this case, there is a trade-off between stimulating the economy and financial stability. This provides a model of the risk-taking channel of monetary policy.

April 19
Stijn Van Nieuwerburgh, Columbia University
"Financial and Total Wealth Inequality with Declining Interest Rates"
Host: Alonso Villacorta
Financial wealth inequality and long-term real interest rates track each other closely over the post-war period. Faced with unanticipated lower real rates, households which rely more on financial wealth must see large capital gains to afford the consumption that they planned before the decline in rates. Lower rates beget higher financial wealth inequality. Inequality in total wealth, the sum of financial and human wealth and the relevant concept for household welfare, rises much less than financial wealth inequality and even declines at the top of the wealth distribution. A standard incomplete markets model reproduces the observed increase in financial wealth inequality in response to a decline in real interest rates because high financial-wealth households have a financial portfolio with high duration.

April 26
Charles Engel, University of Wisconsin
"Scrambling for Dollars: International Liquidity, Banks and Exchange Rates"
Host: Chenyue Hu
We develop a theory of exchange rate fluctuations arising from financial institutions’ demand for dollar liquid assets. Financial flows are unpredictable and may leave banks “scrambling for dollars.” Because of settlement frictions in interbank markets, a precautionary demand for dollar reserves emerges and gives rise to an endogenous convenience yield on the dollar. We show that an increase in the dollar funding risk leads to a rise in the convenience yield and an appreciation of the dollar, as banks scramble for dollars. We present empirical evidence on the relationship between exchange rate fluctuations for the G10 currencies and the quantity of dollar liquidity, which is consistent with the theory.

May 3
Steve Wu, UC San Diego
"Collateral Advantage: Exchange Rates, the Current Account, and Global Cycles"
Host: Ken Kletzer 
This paper explores the effect of global shocks in a two-country New Keynesian model in which the US government debt has an advantage as a superior collateral asset on the balance sheets of banks. We show that the model can account for the observed response of the US dollar and US bond returns in response to a global downturn.

May 10
Leslie Sheng Shen, Federal Reserve Board
"Risk Sharing and Amplification in the Global Financial Network"
Host: Galina Hale 
We develop a structural model of the global financial network and analyze its evolving role in facilitating risk sharing and propagating shocks across countries and sectors. The model introduces a two-layer network structure, incorporating both the global interbank and bank-firm credit networks, and jointly accounts for bank capital flows and lending prices. Using balance sheet data from 19 countries, we estimate the price elasticities of cross-border loan supply and demand, which reveal significant heterogeneity in the willingness and capacity of global banks to provide intermediary services. We show that this heterogeneity is key to explaining the variation in risk sharing and shock propagation both across countries and over time. In particular, cross-border lending supply has become less elastic since the global financial crisis (GFC), resulting in a weakening of international risk sharing. We provide suggestive evidence that the tightening of macroprudential policy has contributed to the decline in risk sharing.

May 17
Jesus Fernandez-Villaverde, University of Pennsylvania
"Demographic Transitions Across Time and Space"
Host: Hikaru Saijo
The demographic transition –the move from a high fertility/high mortality regime into a low fertility/low mortality regime– is one of the most fundamental transformations that countries undertake. To study demographic transitions across time and space, we compile a data set of birth and death rates for 186 countries spanning more than 250 years. We document that (i) a demographic transition has been completed or is ongoing in nearly every country; (ii) the speed of transition has increased over time; and (iii) having more neighbors that have started the transition is associated with a higher probability of a country beginning its own transition. To account for these observations, we build a quantitative model in which parents choose child quantity and educational quality. Countries differ in geographic location, and improved production and medical technologies diffuse outward from Great Britain. Our framework replicates well the timing and increasing speed of transitions. It also produces a correlation between the speeds of fertility transition and increases in schooling similar to the one in the data.

May 31
Elena Pastorino, Stanford University
"The Distributional Impact of the Minimum Wage in the Short and Long Run
Host: Brenda Samaniego 
We develop a general equilibrium framework with worker heterogeneity, firm monopsony power, putty-clay capital, and search frictions in order to study the distributional impact of large changes in the minimum wage. We find that in the short run, a high minimum wage has only small negative employment effects, as consistent with a large empirical micro literature, and does increase the welfare of low-income workers. In the long run, though, a high minimum wage has perverse distributional implications in that it reduces the participation, employment, income, and welfare of precisely the low-income workers it is meant to help. However, these long-run consequences take twenty years to fully materialize because firms slowly adjust the labor intensity of their capital stock. We also study the long-run impacts of alternative transfer programs, such as the earned-income tax credit, and find they are much more effective at improving outcomes for workers at the bottom of the wage distribution. In this context, a modest increase in the minimum wage is beneficial because it helps correct monopsony distortions and prevents firms from lowering the pre-transfer wages they pay to workers.  

Winter 2022

January 11
Vivian Yue, Emory University
"Sovereign Risk and Financial Risk"
Host: Chenyue Hu and Grace Gu
In this paper, we study the interplay between sovereign risk and global financial risk. We show that a substantial portion of the comovement among sovereign spreads is accounted for by changes in global financial risk. We construct bond-level sovereign spreads for dollar-denominated bonds issued by over 50 countries from 1995 to 2020 and use various indicators to measure global financial risk. Through panel regressions and local projection analysis, we find that an increase in global financial risk causes a large and persistent widening of sovereign bond spreads. These effects are strongest when measuring global risk using the excess bond premium -- a measure of the risk-bearing capacity of U.S. financial intermediaries. The spillover effects of global financial risk are more pronounced for speculative-grade sovereign bonds.

January 18
Linh To, Boston University
"Wage Differentials and the Price of Workplace Flexibility"
Host: Gueyon Kim
This paper presents a model of compensating differentials in which firms' costs of providing amenities may depend on worker productivity. In equilibrium, workers sort into jobs with and without an amenity depending not only on their willingness to pay for the amenity but also on their productivity. Estimating the model requires measures of workers' willingness to pay for job amenities at the individual level. To measure workers' preferences, we introduce a dynamic preference elicitation method called the Bayesian Adaptive Choice Experiment (BACE). We survey workers about their job characteristics and elicit their willingness to pay for different forms of workplace flexibility. We estimate the model to understand how workers trade-off workplace flexibility and match key patterns in the data. We use the estimates to explore the welfare consequences of workers facing different amenity prices.

January 25
Simon Gilchrist, New York University
"The Fed Takes on Corporate Credit Risk: An Analysis of the Efficacy of the SMCCF"
Host: Alonso Villacorta
We evaluate the efficacy of the Secondary Market Corporate Credit Facility (SMCCF), a program designed to stabilize the U.S. corporate bond market during the Covid-19 pandemic. The Fed announced the SMCCF on March 23, 2020, and expanded the program on April 9. Our results show that the two announcements significantly lowered credit and bid-ask spreads, the former almost entirely through a reduction in credit risk premia. The announcements had a differential effect on the program-eligible bonds relative to their ineligible counterparts, but this difference is not due to program eligibility per se, according to our results. Rather, the announcements restored the “normal” upward-sloping profile of the term structure of credit spreads by substantially reducing spreads at the short end of the maturity spectrum relative to spreads at the long end. Using an IV approach, we also document important announcement-induced spillovers across all bonds outstanding for issuers whose bonds were likely to be purchased by the facility. Finally, we show that the Fed’s actual purchases had negligible effects on credit and bid ask spreads. Our results highlight the extraordinary power of modern central banks: when markets have trust in the central bank’s ability to deliver on its promise, as exemplified by the iconic “whatever it takes” remark by Mario Draghi, the central bank needs to do less (if anything) to deliver on its promise.

February 8
Peter Maxted, Berkeley Haas
"A Macro-Finance Model with Sentiment" 
Host: Hikaru Saijo
This paper integrates diagnostic expectations into a general equilibrium macroeconomic model with a financial intermediary sector. Diagnostic expectations are a forward-looking model of extrapolative expectations that overreact to recent news. Frictions in financial intermediation produce nonlinear spikes in risk premia and slumps in investment during periods of financial distress. The interaction of sentiment with financial frictions generates a short-run amplification effect followed by a long-run reversal effect, termed the feedback from behavioral frictions to financial frictions. The model features sentiment-driven financial crises characterized by low pre-crisis risk premia and neglected risk. The conflicting short-run and long-run effect of sentiment produces boom-bust investment cycles. The model also identifies a stabilizing role for diagnostic expectations. Under the baseline calibration, financial crises are less likely to occur when expectations are diagnostic than when they are rational.

February 15
Louphou Coulibabli, University of Wisconsin
"Liquid Traps, Prudential Policies, and International Spillovers"
Host: Galina Hale
We present a simple open economy framework to study the transmission channels of monetary and macroprudential policies and evaluate the implications for international spillovers and global welfare. Using an analytical decomposition, we first identify three transmission channels: intertemporal substitution, expenditure switching, and aggregate income. Quantitatively, expenditure switching plays a prominent role for monetary policy, while macroprudential policy operates almost entirely through intertemporal substitution. Turning to the normative analysis, we show that the risk of a liquidity trap generates a monetary policy tradeoff between stabilizing output today and reducing capital flows to lower the likelihood of a future recession. However, leaning against the wind is not necessarily optimal, even in the absence of capital controls. Finally, we argue that contrary to emerging policy concerns, capital controls are not beggar-thy-neighbor and can enhance global macroeconomic stability.

February 22
Linda Goldberg, New York Fed
Seminar:  The Federal Reserve's International Liquidity Facilities
1.  "The Fed's International Dollar Liquidity Facilities: New Evidence on Effects"
In March 2020, the Federal Reserve eased the terms on its standing swap lines in collaboration with other central banks, reactivated temporary swap agreements, and then introduced the new Foreign and International Monetary Authorities (FIMA) Repo Facility. We provide new evidence on how the central bank swap lines and FIMA Repo Facility can reduce strains in global dollar funding markets and U.S. Treasury markets during extreme stress events. These facilities are found to reduce strains in dollar funding markets as measured by foreign exchange swap basis spreads or covered interest parity deviations, as well as the sensitivity of these strains to risk sentiment deterioration. Cross-border flows through banks for excess liquidity support purposes are reduced in the near term and the risk sensitivity of equity and bond fund flows declines. However, access to these facilities leaves longer-term patterns of cross-border liquidity and capital flows broadly unchanged. While official sector liquidity hoarding and “dash for cash” activity are expected to be lower with access to these facilities, initial evidence does not show differential changes in foreign exchange reserve holdings by central banks in relation to liquidity access.

2. "COVID Response: The Fed's Central Bank Swap Lines and FIMA Repo Facility"
Building on the facility design and application experience from the period of the global financial crisis, in March 2020 the Federal Reserve eased the terms on its standing swap lines in collaboration with other central banks, reactivated temporary swap agreements, and then introduced the new Foreign and International Monetary Authorities (FIMA) repo facility. While these facilities share similarities, they are different in their operations, breadth of counterparties and potential span of effects. This article provides key details on these facilities and evidence that the central bank swap lines and FIMA repo facility can reduce strains in global dollar funding markets and U.S. Treasury markets during extreme stress events.
Host: Grace Gu

March 1
Enrico Moretti, UC Berkeley
"Where is Standard of Living the Highest? Local Prices and the Geography of Consumption
Host: Brenda Samaniego
Income differences across US cities are well documented, but little is known about the level of standard of living in each city—defined as the amount of market-based consumption that residents are able to afford. In this paper we provide estimates of the standard of living by commuting zone for households in a given income or education group, and we study how they relate to local cost of living. Using a novel dataset, we observe debit and credit card transactions, check and ACH payments, and cash withdrawals of 5% of US households in 2014 and use it to measure mean consumption expenditures by commuting zone and income group. To measure local prices, we build income-specific consumer price indices by commuting zone. We uncover vast geographical differences in material standard of living for a given income level. Low-income residents in the most affordable commuting zone enjoy a level of consumption that is 74% higher than that of low-income residents in the most expensive commuting zone.

We then endogenize income and estimate the standard of living that low-skill and high-skill households can expect in each US commuting zone, accounting for geographical variation in both costs of living and expected income. We find that for college graduates, there is essentially no relationship between consumption and cost of living, suggesting that college graduates living in cities with high costs of living—including the most expensive coastal cities—enjoy a standard of living on average similar to college graduates with the same observable characteristics living in cities with low cost of living—including the least expensive Rust Belt cities. By contrast, we find a significant negative relationship between consumption and cost of living for high school graduates and high school drop-outs, indicating that expensive cities offer a lower standard of living than more affordable cities. The differences are quantitatively large: High school drop-outs moving from the most to the least affordable commuting zone would experience a 26.9% decline in consumption.

March 8
Chenzi Xu, Stanford GSB
"Reshaping Global Trade: The Immediate and Long-Run Effects of Bank Failures"
Host: Alan Spearot
I show that a disruption to the financial sector can reshape the patterns of global trade for decades. I study the first modern global banking crisis originating in London in 1866 and collect archival loan records that link multinational banks headquartered there to their lending abroad. Countries exposed to bank failures in London immediately exported significantly less and did not recover their lost growth relative to unexposed places. Their market shares within each destination also remained significantly lower for four decades. Decomposing the persistent market-share losses shows that they primarily stem from lack of extensive margin growth, as the financing shock caused importers to source more from new trade partnerships. Exporters producing more substitutable goods, those with little access to alternative forms of credit, and those trading with more distant partners experienced more persistent losses, consistent with the existence of sunk costs and the importance of finance for intermediating trade.

Fall 2021

October 12
Tom Schmitz, Bocconi University, Milan (visiting UCSC)
"The Aggregate Effects of Acquisitions on Innovation and Economic Growth"
Host: Hikaru Saijo
Large incumbent firms routinely acquire startups. This may stimulate aggregate growth, as acquisitions provide an incentive for startup creation and could transfer ideas to more efficient users. However, large firms do not always implement the ideas of their acquisition targets. Moreover, frequent acquisitions lower competition, which has an ambiguous effect on the innovation incentives of incumbents. To assess the net effect of these forces, we build a new endogenous growth model with heterogeneous firms and acquisitions. We discipline the model by matching aggregate moments and evidence from a rich micro dataset on acquisitions and patenting. Our findings indicate that stricter antitrust policy would trigger somewhat higher growth.

October 19
Anusha Chari, University of North Carolina at Chapel Hill
"Capital Flows in Risky Times: Risk-on/Risk-off and Emerging Market Tail Risk"
Host: Galina Hale
This paper characterizes the implications of risk-on/risk-off shocks for emerging market capital flows and returns. We document that these shocks have important implications not only for the median of emerging markets flows and returns but also for the tails of the distribution. Further, while there are some differences in the effects across bond vs. equity markets and flows vs. asset returns, the effects associated with the worst realizations are generally larger than that on the median realization. We apply our methodology to the COVID-19 shock to examine the pattern of flow and return realizations: the sizable risk-off nature of this shock engenders reactions that reside deep in the left tail of most relevant emerging market quantities.

October 26
Michael Devereux, University of British Columbia
"Foreign Reserves Management and Original Sin"
Host: Chenyue Hu
This paper studies the interaction between foreign exchange reserves and the currency composition of sovereign debt in emerging countries. Focusing on inflation targeting countries, we find that large holdings of foreign reserves are associated with higher local currency sovereign debt portfolios, an exchange rate which is less sensitive to global shocks, and a lower exchange rate risk premium in local currency sovereign spreads. We rationalize these findings within a financially constrained model of a small open economy. The Sovereign values local currency debt as a hedge against endowment risk, but since the exchange rate tends to depreciate in times of global downturns, risk averse international investors charge an additional currency risk premium on this debt. But when a country uses foreign reserves to lean against the wind in response to global shocks, this dampens the response of the exchange rate, providing insurance for the global investor. By reducing the investor ex-ante risk premium on local currency debt, foreign exchange reserves therefore facilitate a higher share of local currency debt in the sovereign portfolio. The key feature of the analysis highlights the role of reserves in stabilizing the component of exchange rate changes that respond to global shocks, and not the response to local shocks.

November 2
Laura Alfaro, Harvard
"Currency Hedging: Managing Cash Flow Exposure"
Host: Grace Gu
Foreign currency derivative markets are among the largest in the world, yet their role in emerging markets is relatively understudied. We study firms' currency risk exposure and their hedging choices by employing a unique dataset covering the universe of FX derivatives transactions in Chile since 2005, together with firm-level information on sales, international trade, trade credits and foreign currency debt. We uncover four novel facts: (i) natural hedging of currency risk is limited, (ii) financial hedging is more likely to be used by larger firms and for larger amounts, (iii) firms in international trade are more likely to use FX derivatives to hedge their gross -not net- cash currency risk, and (iv) firms pay different premiums, in particular, for longer maturity contracts. We then show that financial in- termediaries can affect the forward exchange rate market through a liquidity channel, by leveraging a regulatory negative supply shock that reduced firms' use of FX derivatives and increased the forward premiums.

November 9
Enghin Atalay, Federal Reserve Board, Philadelphia
"Micro- and Macroeconomic Impacts of Place-Based Industrial Policy"
Host: Gueyon Kim
We investigate the impact of a set of place-based subsidies introduced in Turkey. These policies were introduced in 2012 with the aim of spurring investment and reducing regional income inequality, and involve a mix of VAT reductions, investment tax credits, and reduced mandated social security contributions. Using firm-level data on revenues, employment, and productivity along with buyer-supplier data on the domestic production network, we first assess the direct and indirect impact of the 2012 subsidy reforms. We find an increase in economic activity in industry-province pairs that were the focus of the subsidy program, and positive spillovers to the suppliers of subsidized firms. With the aid of a dynamic multi-region multi-industry general equilibrium model, we then assess the aggregate impacts of the 2012 subsidy reforms. We find that the subsidy reforms reduced regional real wage inequality, but only modestly. These modest effects are due to the ability of households to migrate in response to the subsidy reforms and input-output linkages that traverse subsidy regions within Turkey.

November 16
William Diamond, Wharton School, University of Pennsylvania
"Risk-Free Rates and Convenience Yields Around the World
Host: Alonso Villacorta
This paper constructs risk-free interest rates implicit in index option prices for 9 of the major G10 currencies. We compare these rates to the yields of government bonds to provide international estimates of the convenience yield earned by safe assets. Average convenience yields across countries are highly correlated with the average interest rate in each country, ranging from -15 basis points in low-rate Japan to 60 basis points in high-rate Australia, with the moderate-rate U.S. providing a middling 35 basis points. For each country, a covered interest parity (CIP) deviation constructed from its option-implied rates and those of the U.S. is negative, with these negative CIP deviations growing sharply in periods of financial distress, including the 2020 covid crisis when convenience yields themselves remained moderate. We conclude that risk-free discount rates in the U.S. are especially low due to its central position in the global financial system, particularly during financial crises, but that U.S. safe assets do not earn an unusually large convenience yield in addition.

November 23
Ioana Marinescu, University of Pennsylvania, School of Social Policy & Practice
"Minimum Wage Employment Effects and Labor Market Concentration"
Host: Brenda Samaneigo
Why is the employment effect of the minimum wage frequently found to be close to zero? Theory tells us that when wages are below marginal productivity, as with monopsony, employers are able to increase wages without laying off workers, but systematic evidence directly supporting this explanation is lacking. In this paper, we provide empirical support for the monopsony explanation by studying a key low-wage retail sector and using data on labor market concentration that covers the entirety of the United States with fine spatial variation at the occupation-level. We find that more concentrated labor markets - where wages are more likely to be below marginal productivity - experience significantly more positive employment effects from the minimum wage. While increases in the minimum wage are found  to significantly decrease employment of workers in low concentration markets, minimum wage-induced employment changes become less negative as labor concentration increases, and are even estimated to be positive in the most highly concentrated markets. Our findings provide direct empirical evidence supporting the monopsony model as an explanation for the near-zero minimum wage employment effect documented in prior work. They suggest the aggregate minimum wage employment effects estimated thus far in the literature may mask heterogeneity across different levels of labor market concentration.