International Capital Flows, International Prices, and Trade

‘Foreign Ownership of U.S. Safe Assets: Good or Bad?’ Ludvigson, S.C. (with J. Favilukis and S. Van Nieuwerburgh), 2016.

The last 20 years have been marked by a sharp rise in international demand for U.S. reserve assets, or safe stores-of-value. What are the welfare consequences to U.S. households of these trends, or of a reversal? In a lifecycle model with aggregate and idiosyncratic risks, the young and oldest households may benefit substantially from such capital inflows, but middle-aged savers may suffer from greater exposure to systematic risk in equity and housing markets. Under the veil of ignorance, a newborn in the lowest wealth quantile is willing to forego 3% of lifetime consumption to avoid a large capital outflow.

‘Shock restricted structural vector-autoregressions’ Ludvigson, S.C. and S. Ma (with S. Ng) , 2017.

Identifying assumptions need to be imposed on autoregressive models before they can be used to analyze the dynamic e§ects of economically interesting shocks. Often, the assumptions are only rich enough to identify a set of solutions. This paper considers two types of restrictions on the structural shocks that can help reduce the number of plausible solutions. The Örst is imposed on the sign and magnitude of the shocks during unusual episodes in history. The second restricts the correlation between the shocks and components of variables external to the autoregressive model. These non-linear inequality constraints can be used in conjunction with zero and sign restrictions that are already widely used in the literature. The e§ectiveness of our constraints are illustrated using two applications of the oil market and Monte Carlo experiments calibrated to study the role of uncertainty shocks in economic áuctuations.

‘Can heterogeneity in price stickiness account for the persistence and volatility of good-level real exchange rates?,’ Midrigan, V. (with P. Kehoe), 2007.

The classic explanation for the persistence and volatility of real exchange rates is that they are the result of nominal shocks in an economy with sticky goods prices. A key implication of this explanation is that if goods have differing degrees of price stickiness then relatively more sticky goods tend to have relatively more persistent and volatile good-level real exchange rates. Using panel data, we find only modest support for these key implications. The predictions of the theory for persistence have some modest support: in the data, the stickier is the price of a good the more persistent is its real exchange rate, but the theory predicts much more variation in persistence than is in the data. The predictions of the theory for volatility fare less well: in the data, the stickier is the price of a good the smaller is its conditional variance while in the theory the opposite holds. We show that allowing for pricing complementarities leads to a modest improvement in the theory’s predictions for persistence but little improvement in the theory’s predictions for conditional variances.

‘Elasticity Pessimism: Economic Consequences of Black Wednesday,’ Rotemberg, M. (with S. Bustos), 2018.

We document the ramifications of a large devaluation episode: the U.K.’s “Black Wednesday” in 1992. Relative to synthetic counterfactuals, U.K. export and import prices in pounds increased by roughly 20 percent, a similar magnitude to the nominal devaluation. Inflation declined after the devaluation, although the prices of fuels increased. Contrary to the conventional belief that the UK experienced an export led boom after the devaluation, we find no evidence that exports or nominal GDP increased. We also find no evidence of a “J-curve:” imports declined immediately after the devaluation, and stayed persistently below their counterfactual value. We test a wide variety of theories of elasticity pessimism, and find that none do well at explaining patterns in the data.

‘Occupations and Import Competition: Evidence from Denmark,’ Traiberman, S., 2019.

I argue that the winners and losers from trade are decided primarily by occupation. In addition to fixed adjustment costs, workers build up specific human capital over time that is destroyed when they must change occupations. I show that ignoring human capital biases estimates of adjustment costs upward by a factor of 3. Estimating an occupational choice model of the Danish labor market, I show that 57% of the dispersion in worker outcomes is accounted for by occupations, and only 16% by sectors. Finally, the model suggests that rising import competition from 1995-2005 reduced lifetime earnings for 5% of workers.