- Bank Regulations, Credit Crunch, and Exports, joint work with Hyunju Lee and Sunyoung Lee
We estimate the effect of financial regulation on exporters through the bank lending channel, using a new data set of matched Korean banks and firms. Amiti and Weinstein (2011) have shown that the health of financial institutions is an important factor in explaining the firm-level exports during the Japanese financial crises 1990-2010. However, their analysis does not cover the period where extensive bank regulations (Basel III) have been imposed. In our analysis, we build a model of search and matching in loan markets and show the impact of financial regulations on the credit availability of exporters.
- The Ultralong Sovereign Default Risk (draft coming soon!)
Between 2010 and 2015, Mexico issued a part of its sovereign debt in the form of century bonds. These issuances coincide with the historically low level of world interest rates, but also improving growth prospects for many emerging markets. Using a sovereign default model with endogenous maturity choice and volatile risk-free rate, I propose a theory of the ultralong debt issuance and quantify the relative importance of the factors that promote it. I identify the model parameters using evidence from a cross-section of long-horizon economic projections. I find that improved expectations about future growth are crucial in generating realistic levels of the ultralong debt.
- Pay What Your Dad Paid: Commitment and Price Rigidity in the Market for Life Insurance, [NEW DRAFT] joint work with Pei Cheng Yu
Life insurance premiums display significant rigidity in the data, on average adjusting once every 3 years by more than 10%. This contrasts with the underlying marginal cost which exhibits considerable volatility due to the movements in interest and mortality rates. We build a model where policyholders are held-up by long-term insurance contracts which presents a time inconsistency problem for the firms. The optimal contract takes the form of a simple cutoff rule: premiums are rigid for cost realizations smaller than the threshold, while adjustments must be large and are only possible when cost realizations exceed it. We use a calibrated version of the model to show that it matches the data and captures several aspects of premium rigidity in the cross-section and over time.
- Learning about Debt Crises
The European debt crisis presents a challenge to our understanding of the relationship between government bond yields and economic fundamentals. I argue that information frictions are an important missing element, and support that claim with empirical evidence on the evolution of GDP forecast errors in years 2008-2014. I build a quantitative model of sovereign default where output features rare disaster risk and agents learn about its realizations. Debt crises coincide with economic depressions and develop gradually, while markets update their expectations about future income. Calibrated to Portuguese economy, the model replicates the comovement of bond spreads and output before and after 2008.