Job Market Paper

Borrowing Constraints in Emerging Markets

Borrowing constraints are a key component of modern macroeconomic models. The analysis of Emerging Markets (EM) economies generally assumes that firms' access to debt is constrained by the value of their collateral. Using credit-registry data and exploiting banking regulations from Argentina for the period 1998-2020 we show that less than 10% of firms' debt is based on asset values, with the remaining 90% based on firms' cash-flows. Exploiting Central Bank regulations over banks’ capital requirements and credit policies we argue that the most prevalent borrowing constraints is defined in terms of the ratio of their interest payments to a measure of their present and past cash flows, akin to the "interest coverage" borrowing constraint studied by the corporate finance literature. We argue that Argentina exhibits a greater share of interest sensitive borrowing constraints than the US and other Advanced Economies. We claim that this result can be extrapolated to other EMs by showing that firms' interest payments are strongly and positively correlated with their cash flows for a panel of firms from 13 EMs, a novel stylized fact to the literature. We show that in an otherwise standard small open economy DSGE model, an "interest coverage" borrowing constraints leads significantly stronger amplification of foreign interest rate shocks compared to the standard collateral constraints. This greater amplification provides a solution to the Spillover Puzzle of US monetary policy rates by which EMs experience greater negative effects than Advanced Economies after a US interest rate hike. In terms of policy implications, this greater amplification demonstrates how a managed exchange rate policy is more costly in the presence of an interest coverage constraint, given their greater interest rate sensitivity, compared to the standard collateral borrowing constraint.

Here's the link! 

Working Papers

The International Monetary Transmission Mechanism

joint work with Lawrence Christiano and Husnu Dalgic

Link to Paper

 Link to 39th NBER Macro Annual Presentation 

Time series analysis shows that a US monetary tightening leads to economic contractions in non-US countries. We develop small open economy (SOE) models that include standard frictions like balance sheet effects, UIP frictions, sticky-in-dollar export prices, etc. that capture these spillover effects quantitatively. We also include the VAR-estimated import decline that accompanies US monetary tightenings. Using counterfactual experiments, we identify the decline in US imports as the most important mechanism by which a US monetary contraction affects other economies. We also document that Emerging Market Economies (EME) exhibit more pronounced contractions compared with Advanced Economies (AE). Additional counterfactual experiments attribute the limited contraction in AEs primarily to relatively high home bias in AE production. Finally, our findings suggest that FX interventions are relatively ineffective in mitigating the effects of a US monetary contraction that is accompanied by reductions in US imports and inflation. FX interventions are relatively more effective in the face of pure ‘noise’ shocks in financial markets and in the scenario in which a US monetary policy contraction is not associated with a decline in US imports and inflation. 

Exploiting the high-frequency movements of US Treasuries and the Stock Market to identify pure monetary policy shocks from information disclosure shocks

Spillovers of US Interest Rates: 

Monetary Policy & Information Effects            Link to paper 

Revise & Resubmit at Journal of International Economics

This paper quantifies the spillovers of US monetary policy in Emerging Market economies. By imposing sign restrictions on the high-frequency surprises of the Fed Fund Futures and the S\&P 500 I am able to identify two distinct FOMC shocks: a pure US monetary policy and an information disclosure shock. On the one hand, a US tightening caused by a pure US monetary policy shock produces a recession, an exchange rate depreciation and tighter financial conditions. On the other hand, a tightening of US monetary policy caused by the FOMC disclosing positive information about the state of the US economy produces an economic expansion, an exchange rate appreciation and laxer financial conditions. These results help explain atypical dynamics found by recent literature. Augmenting the benchmark model with additional variables I argue that the financial channel is the main propagation mechanism of US interest rates into Emerging Markets. Furthermore, the quantitative impact of these FOMC shocks appear to depend on the Emerging Market's exchange rate regime and its dependency on commodity good exports.

In several Emerging Market economies, commodity goods explain a large fraction of both export bundles and consumption bundles. 

TANK meets Diaz Alejandro:  

Monetary policy with commodity consumption and household heterogeneity Link to Paper 

This paper studies the role of two dimensions of household heterogeneity in the transmission of foreign shocks in a small open economy: (i) limited access to financial markets, (ii) consumption exposure to commodity-based goods. First, I use survey data from Uruguay to show that low-income households have limited access to savings technologies and spend a significant share of their income on commodity-based goods while high-income households are more likely to save and spend a significantly lower share of their income on commodity-based goods. Second, I construct a Two-Agent New Keynesian model with two features inspired by Diaz Alejandro 1963's paper: (i) Ricardian and Hand-to-mouth households, and (ii) non-homothetic preferences over commodity goods. I show these features amplify foreign shocks and provide a rationale for Central Banks' fear-of-floating through a redistribution channel of monetary policy. I study the design of optimal policy regimes and find that households have opposing preferences over monetary and fiscal rules.

Does an increase in the cost of imported inputs hurt exports?

Evidence from firms' network of foreign supplier    Link to paper 

This paper examines the relationship between changes in the cost of imported inputs and export performance using a novel dataset from Argentina which identifies domestic firms' network of foreign suppliers. I construct a heterogeneous firm model to guide my empirical strategy and test its predictions by constructing firm-specific shocks using a shift-share analysis. This identification strategy exploits firms' lagged exposure to foreign suppliers and finely defined import price shifts. Evidence suggests the presence of significant adjustment cost in firms' foreign supplier linkages and strong complementarities between imported inputs and export performance, particularly for high-quality products. 

Domestic firms exhibit granular linkages with foreign suppliers, with the median and average firms only purchasing from 2 and 6 foreign firms

Granular Linkages, Supplier Cost Shocks & Export Performance

Link to paper 

This paper presents evidence on the granular nature of firms' network of foreign suppliers and studies its implications for the impact of supplier shocks on domestic firms' performance. To demonstrate this, I use customs level information on transactions between Argentinean firms and foreign firms. I highlight two novel stylized facts: (i) the distribution of domestic firms' number of foreign suppliers is highly skewed with the median firm reporting linkages with only two, (ii) firms focus imported value on one top-supplier, even when controlling for firm size. Motivated by these facts I construct a theoretical framework of heterogeneous firms subject to search frictions in the market for foreign suppliers. Through a calibration exercise I study the framework’s predictions and test them in the data using a shift-share identification strategy. Results present evidence of significant frictions in the market for foreign suppliers and strong import-export complementarities.

It’s not always about money, sometimes it’s about sending a message 

Evidence of Informational Content in Monetary Policy Announcements 

Joint work with Yong Cai and Nicholas Capel       Link to Paper 

This paper introduces a transparent framework to identify the informational content of FOMC announcements. We do so by modelling the expectations of the FOMC and private sector agents using state of the art computational linguistic tools on both FOMC statements and New York Times articles. We identify the informational content of FOMC announcements as the projection of high frequency movements in financial assets onto differences in expectations. Our recovered series is intuitively reasonable and shows that information disclosure has a significant impact on the yields of short-term government bonds. 

The Transmission of US Monetary Policy Shocks 

The Role of Investment & Financial Heterogeneity

joint work with Sebastian Ramirez Venegas (CMF)  Link to Paper 

This paper studies the transmission of US monetary policy shocks into Emerging Markets emphasizing the role of investment and financial heterogeneity. First, we use a panel SVAR model to show that a US interest tightening leads to a persistent recession in Emerging Markets driven by a sharp reduction in aggregate investment. Second, we study the role of firms' financial heterogeneity in the transmission of US interest rate shocks by exploiting detailed balance sheet dataset from Chile. We find that more indebted firms experience greater drops in investment in response to a US tightening shock than less indebted firms. This result is at odds with recent evidence from US firms, even when using the same identification strategy and econometric methods. Third, we rationalize this finding using a stylized model of heterogeneous firms subject to a tightening leverage constraint. Finally, we present evidence in support of this hypothesis as well as robustness checks to our main results. Overall, our results suggests that the transmission channel of US monetary policy shocks within and outside the US differ, a result novel to the literature. 

International Spillovers of ECB Interest Rates

Monetary Policy & Information Effects   Link to Paper 

This paper shows that disregarding the information effects around the European Central Bank monetary policy decision announcements biases its international spillovers. Using data from 23 economies, both Emerging and Advanced, I show that following an identification strategy that disentangles pure monetary policy shocks from information effects lead to international spillovers on industrial production, exchange rates and equity indexes which are between 2 to 3 times larger in magnitude than those arising from following the standard high frequency identification strategy. This bias is driven by pure monetary policy and information effects having intuitively opposite international spillovers. Results are present for a battery of robustness checks: for a sub-sample of ``close'' and ``further away'' countries, for both Emerging and Advanced economies, using local projection techniques and for alternative methods that control for ``information effects''. I argue that these biases may have led a previous literature to disregard or find little international spillovers of ECB rates.

Published Papers

Don't Put All Your Eggs in Foreign Baskets:

Revista Economica de la Plata, Vol. LXVI, Nro. 1, 2020. 

Earlier version of this paper was Awarded the Julio H. G. Olivera Prize

Don't Put All Your Eggs in Foreign Baskets.pdf

I analyze the sluggish response of exports during and after financial crises using firm level data for two countries-episodes: Argentina 2001 and Peru 1998 crises. I find that both incumbent exporting firms do not expand and that there’s no significant entry of new exporting firms. Furthermore, I present evidence that suggests that the export elasticity to the real exchange rate is asymmetric, smaller for depreciations than for appreciations. I build and estimate a DSGE model for a small open economy where exporting entrepreneurs are subject to financial frictions and balance sheet effects in order to try and explain these stylized facts. Although these frictions decrease the response of exports to movements in the exchange rate, I use computational exercises to show that they are not enough to explain the empirical results. 

Financial Crises, Exporting and Dollar Credit Supply:

An Application for the COVID-19 Pandemic

Revista Integración & Comercio 25 (47), 133-157. INTAL-IADB

We study the role of financial frictions in explaining firm level export performance during episodes of financial crisis. In particular, we use the Great Recession and the Argentina 2018 Sudden Stop crisis to analyze how the COVID-19 pandemic will impact export behavior in Latin American economies. Using firm level data for a panel of countries, we find that firms that export goods more intensive in financial needs suffer a greater impact during the Great Recession and had a higher probability of exiting foreign markets and not re-entering during the aftermath. Next, we estimate the elasticity of exports to credit in dollars using matched customs and firm-level bank credit data from Argentina. We control for firms' exposure to foreign currency debt and find that firms with higher exposure experienced a lower export growth after large exchange rate fluctuations. We construct an heterogeneous firm model in which entrepreneurs face both a working capital and borrowing constraint. We parametrize our analytical framework using our empirical results and do numerical simulations of export performance during the recovery of the COVID-19 pandemic.

Published Version in Spanish:

English Version: 

Financial Crises Exporting and Dollar Credit Supply - English.pdf