Job Market Paper
Foreign Exchange Intervention and Inelastic Financial Market (with Paula Beltran)
updated draft coming soon
Abstract: Are foreign exchange interventions effective at stabilizing exchange rates? In this paper, we empirically assess the effectiveness of foreign exchange rate interventions by leveraging the rebalancings of a local-currency government bonds index for emerging countries as a natural experiment. We show that the rebalancings create large currency demand shocks that move exchange rates and are uncorrelated with the macroeconomic fundamentals. Our results provide empirical support for models of inelastic financial markets where foreign exchange interventions serve as an additional policy tool to effectively stabilize exchange rates. Under inelastic financial markets, a managed exchange rate does not have to fully compromise monetary policy independence even with free capital mobility, relaxing the classical ``Trilemma" constraint. Our results also show that free-floaters are more than five-fold more effective at stabilizing exchange rates than crawling-peggers, as the volatile exchange rates for floaters generate further departure from the ``Trilemma" constraint.
Conference and Seminar Presentations
UChicago MFR Program for Young Scholars, UCLA Economics Proseminar, WashU St. Louis EGSC 2022, UCLA Finance Ph.D Talks, Midwest Macro Meeting Fall 2022, Inter-Finance PhD Seminar, Southwest Finance Association 2023, North America Summer Meeting (NASMES) 2023, Asian Meeting of Econometric Society (AMES) 2023, Society for Economic Dynamics Meeting 2023 (cancelled), St. Louis Fed Dissertation Fellows Workshop, UCLA Anderson Finance Brown Bag (scheduled), UChicago Macro-Finance Society Workshop (scheduled), Southern Economic Association 2023 (scheduled)
updated draft coming soon
Abstract: Are foreign exchange interventions effective at stabilizing exchange rates? In this paper, we empirically assess the effectiveness of foreign exchange rate interventions by leveraging the rebalancings of a local-currency government bonds index for emerging countries as a natural experiment. We show that the rebalancings create large currency demand shocks that move exchange rates and are uncorrelated with the macroeconomic fundamentals. Our results provide empirical support for models of inelastic financial markets where foreign exchange interventions serve as an additional policy tool to effectively stabilize exchange rates. Under inelastic financial markets, a managed exchange rate does not have to fully compromise monetary policy independence even with free capital mobility, relaxing the classical ``Trilemma" constraint. Our results also show that free-floaters are more than five-fold more effective at stabilizing exchange rates than crawling-peggers, as the volatile exchange rates for floaters generate further departure from the ``Trilemma" constraint.
Conference and Seminar Presentations
UChicago MFR Program for Young Scholars, UCLA Economics Proseminar, WashU St. Louis EGSC 2022, UCLA Finance Ph.D Talks, Midwest Macro Meeting Fall 2022, Inter-Finance PhD Seminar, Southwest Finance Association 2023, North America Summer Meeting (NASMES) 2023, Asian Meeting of Econometric Society (AMES) 2023, Society for Economic Dynamics Meeting 2023 (cancelled), St. Louis Fed Dissertation Fellows Workshop, UCLA Anderson Finance Brown Bag (scheduled), UChicago Macro-Finance Society Workshop (scheduled), Southern Economic Association 2023 (scheduled)
Other Working Papers
A Theory of Sovereign Bond Safety: Country Size and Equity Rebalancing (with Xitong Hui) [ssrn] [draft]
Abstract: This paper provides a theoretical framework to understand sovereign bond safety in both normal and in crisis times. Using a continuous-time two-country Lucas tree model with equity constraint, we argue that the country-size effect and the equity-rebalancing effect are the key determinants of sovereign bond safety. The country size effect spills over home production risk to a smaller country through trade and equity rebalancing; equity constraint limits equity rebalancing and creates endogenous UIP deviations in both normal and crisis times. In the period of crisis, the larger country's bond becomes a global safe asset when the country size effect dominates the equity rebalancing effect, as is the case with the United States. Our model mechanisms qualitatively explain the empirical evidence on the country-size and equity-rebalancing effect for both the G10 and emerging market currencies. Our model predictions also reconcile with the empirical facts of flight-to-safety and the covered interest parity (CIP) in both normal and crisis times.
Abstract: This paper provides a theoretical framework to understand sovereign bond safety in both normal and in crisis times. Using a continuous-time two-country Lucas tree model with equity constraint, we argue that the country-size effect and the equity-rebalancing effect are the key determinants of sovereign bond safety. The country size effect spills over home production risk to a smaller country through trade and equity rebalancing; equity constraint limits equity rebalancing and creates endogenous UIP deviations in both normal and crisis times. In the period of crisis, the larger country's bond becomes a global safe asset when the country size effect dominates the equity rebalancing effect, as is the case with the United States. Our model mechanisms qualitatively explain the empirical evidence on the country-size and equity-rebalancing effect for both the G10 and emerging market currencies. Our model predictions also reconcile with the empirical facts of flight-to-safety and the covered interest parity (CIP) in both normal and crisis times.
``Too-Little" Sovereign Debt Restructurings (with Tamon Asonuma and Marcos Chamon)
Updated draft coming soon
Abstract: Sovereign debt restructurings often result in limited debt relief (``too little" problem), followed by repeated restructurings. We find that in 1975–2020, (i) preemptive restructurings are quicker with smaller haircuts but more likely to be ``non-cured," needing a second restructuring within five years; (ii) restructuring strategies and outcomes tend to follow the previous restructuring (are ``sticky"); (iii) ``cured" post-default restructurings have better GDP growth and debt dynamics over the long horizon than non-cured preemptive restructurings. A simple two-period model with two types of restructurings—prior to and after income realization—rationalizes these stylized facts. With possibility of full repayment after income realization, preemptive restructurings result in small haircuts leaving debt unsustainable afterwards.
Conference and Seminar Presentations: UCLA Economics Proseminar, UCLA Macro-Finance Study Group, IMF Sovereign Debt Workshop, Princeton Sovereign Debt Conference (DebtCon 2023)
Updated draft coming soon
Abstract: Sovereign debt restructurings often result in limited debt relief (``too little" problem), followed by repeated restructurings. We find that in 1975–2020, (i) preemptive restructurings are quicker with smaller haircuts but more likely to be ``non-cured," needing a second restructuring within five years; (ii) restructuring strategies and outcomes tend to follow the previous restructuring (are ``sticky"); (iii) ``cured" post-default restructurings have better GDP growth and debt dynamics over the long horizon than non-cured preemptive restructurings. A simple two-period model with two types of restructurings—prior to and after income realization—rationalizes these stylized facts. With possibility of full repayment after income realization, preemptive restructurings result in small haircuts leaving debt unsustainable afterwards.
Conference and Seminar Presentations: UCLA Economics Proseminar, UCLA Macro-Finance Study Group, IMF Sovereign Debt Workshop, Princeton Sovereign Debt Conference (DebtCon 2023)
Pre-doctoral publications:
“Inheritance Taxation: Redistribution and Predistribution.” Research on Economic Inequality, Emerald Publishing, Vol. 26 (2018): pp. 1-13. (with Frank Cowell and Dirk Van de gaer)
“Force profiles for parallel plates partially immersed in a liquid bath.” Journal of Mathematical Fluid Mechanics, 17.1 (2015): 87-102. (with Anna Aspley and John McCuan)
“Force profiles for parallel plates partially immersed in a liquid bath.” Journal of Mathematical Fluid Mechanics, 17.1 (2015): 87-102. (with Anna Aspley and John McCuan)