Recent Working Papers

This paper studies the nature of financial frictions faced by firms in an increasingly intangible economy. Using matched firm-lender corporate credit data from South Korea, we document that intangible-intensive firms disproportionately borrow from non-bank lenders. This heterogeneity in the mode of financing is amplified in response to a change in bank regulation which acts as exogenous tightening of bank credit supply. To explain these findings, we develop a simple model of heterogeneous firms with two types of capital and two sources of financing: shadow and regulated banks. Bank capital requirements directly affect the pricing of corporate credit, and raising them leads the most productive firms to both increase borrowing from non-banks and invest more in intangible assets.

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.

This paper builds a two-country model of gross capital flows where agents share tradable output risk using two bonds, subject to stochastic collateral constraints. 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. During the Great Recession, the model shows that such wealth transfer from the US mitigated the consumption drop abroad. Quantitatively, financial frictions account for about half of the collapse in US gross flows in 2008.