Recent Working Papers

This paper builds a two-country model of gross capital flows in which agents share tradable output risk using two bonds, subject to stochastic collateral constraints.  Calibrated to the US, equilibrium portfolios are short in domestic bonds and long in foreign bonds because the endogenous movements of the real exchange rate provide a hedge against domestic output shocks. Under negative domestic shocks, these external positions transfer wealth from home to abroad. In an application to the Great Recession, the model shows that such wealth transfer from the US mitigated the consumption drop abroad. Quantitatively, financial frictions can account for about half of the collapse in gross flows of the US in 2008. 

This paper studies the nature of financial frictions that firms face in an increasingly intangible economy. Using new microdata from South Korea, we document that intangible-intensive firms disproportionately borrow from non-bank lenders. This heterogeneity in the mode of financing is magnified and leads to differential outcomes in response to an exogenous tightening of bank credit supply. We find that intangible-intensive firms are mostly unaffected, while traditional firms struggle to finance their growth. To explain these findings, we build a model of heterogeneous firms and two sources of financing: shadow and regulated bank, with collateral constraints for the latter. Higher collateral requirement drives intangible-intensive firms away from bank borrowing and results in the rise of shadow credit. A counterfactual experiment using the model shows that suppressing the rise of shadow financing comes at significant costs.

Published Papers

This paper studies the effects of higher bank capital requirements. Using new firm-lender matched credit data from South Korea, we document that Basel III coincided with a 25% decline in credit from regulated banks, and an increase of similar magnitude from non-bank (shadow) lenders. We use our data to estimate the effect of capital requirements on bank credit, and the spillover effect of the reform on non-bank lending. We then build a general equilibrium model with heterogeneous banks and firms that replicates these micro estimates. We find that Basel III can account for most of the observed decrease in regulated bank lending, and about three quarters of the increase in shadow lending. The latter is driven exclusively by general equilibrium effects of the reform.

Overreaction and the Value of Information in a Pandemic, with Keyvan Eslami (European Economic Review 161 (2024) 104624)

This paper studies optimal mitigation and testing during a pandemic in the presence of partial information. We develop a stylized dynamic epidemiological model where the true number of infected individuals can only be partially inferred from two noisy signals: hospitalization and positivity rate. An egalitarian planner chooses the level of mitigation and testing, which respectively affect the infection rate and signal noise, at a certain economic cost. We first show that the planner is willing to pay a significant "information premium" to eliminate the uncertainty by extensive testing. However, if testing is prohibitively costly, then a stringent mitigation becomes optimal, as it partially substitutes for testing as an information acquisition device. Such policies were often criticized as excessive at the onset of the COVID-19 pandemic. We argue that this "optimal overreaction" is a result of the extreme costs of policy mistakes---such as high future casualties---and not due to an aversion to risk.