Working Papers

I study the relative importance of domestic frictions and border price insensitivity for the response of domestic consumer prices (CPI) to exchange rate fluctuations. Using firm and transaction-level data from Chile, I estimate that the presence of domestic frictions --- distribution costs, variable markups and nominal rigidities --- reduce the responsiveness of domestic CPI to exchange rate fluctuations by 60% relatively to an economy that abstract away from it. These frictions are quantitatively more important than the insensitivity of border prices. The presence of domestic frictions also matters for the channels of CPI sensitivity: contrary to prior work, most of the sensitivity arises from the change in the price of imported consumption goods. This channel is more important than the costs arising from imported inputs in the production of domestic goods. The reason is that domestic frictions dampen the price sensitivity of domestically produced goods relatively more. Furthermore, the sensitivity varies across products because of the heterogeneity in domestic frictions, import exposure, and consumption shares. The heterogeneity matters for the overall (in)sensitivity as domestic products with higher import exposure face larger frictions and have lower consumption shares. Ignoring the heterogeneity identifies the wrong products from which most of the sensitivity arises, with implications for monetary policy targeting in open economy and redistribution dynamics.

Decomposition of CPI sensitivity to exchange rate fluctuations.

Lack of detailed data on the characteristics and quality of imported goods poses a challenge for measuring consumption gains from rising imports. To tackle this problem, we propose a methodology to infer unobserved quality change using only data on prices and market shares in a differentiated product market. The method identifies a demand system in which product substitutability varies across products based on quantity and quality. We validate the method using data from the US auto market where information on product characteristics and price instruments are available. Without using these additional sources of information, our strategy estimates price elasticities and quality changes in line with the predictions of the standard estimations of BLP demand. We apply this strategy to the US customs data (1989-2006), and find that quality improvements have lowered the price of US imports relative to the CPI by 17%. For comparison, unit values have fallen by around 11% relative to the CPI and increasing variety has contributed an additional 4%. Using a demand sys- tem that ignores the heterogeneity in product substitutability leads to a substantial overestimation of the extent of quality improvements.

Cumulative change in the US Import Price Index, 1989-2006.

We study how the exchange rate dynamics are influenced by the presence of heterogeneous investors with varying degrees of price impact. Leveraging data from the U.S. Commodity Futures Trading Commission (CFTC) on investors’ currency positions, we show that foreign exchange rate markets display a significant level of concentration, and investors’ price impact is stronger in more concentrated markets. We develop a monetary model of exchange rate determination that incorporates heterogeneous investors with different degrees of price impact. We show that the presence of price impact amplifies the exchange rate’s response to non-fundamental shocks while dampening its response to fundamental shocks. As a result, investors’ price impact contributes to the disconnect of exchange rates from fundamentals and the excess volatility of exchange rates. We provide empirical evidence in line with our theoretical predictions, using data on trading volume concentration from the US CFTC foreign exchange rate market for 10 currencies spanning from 2006 to 2016. Additionally, we extend our framework to account for information heterogeneity among investors, which presents a competing dimension of heterogeneity with qualitatively similar implications for exchange rate dynamics. Both dimensions of heterogeneity are quantitatively relevant, with the heterogeneity in price impact accounting for 62% of the additional volatility and 35% of the additional disconnect attributed to investors’ heterogeneity.

Share of FX transactions intermediated by top dealers, 2005-2019.

Managers face continuous pressure to meet short-term forecasts and targets, which can potentially impact firms’ investments in customer capital and pricing decisions. Using data on U.S. public companies together with IBES analysts’ forecasts, we find that firms that just meet analysts’ profit forecasts have an average markup growth of 0.8% higher than firms that just miss targets, suggesting opportunistic markup manipulation. To assess the aggregate economic implications of short-termism, we develop and estimate a quantitative firm-heterogeneity model that incorporates short-term frictions and endogenous markups resulting from customer accumulation. In the model, short-termism arises optimally to offset manager’s private incentives, resulting in higher markups and lower customer capital stock. We find that, on average, firms increase markups by 8% due to short-termism, generating $38 millions of additional annual profits. At the macro level, the distortion reduces consumers’ welfare by 4% and lowers the annual total market capitalization by $3.1 trillions on average.

Bunching of profits forecast errors, 1990-2018 Compustat-IBES.

This paper studies how large global shocks can undermine the dominance that the US dollar plays in the international monetary system. We show that, following the Great Financial Crisis and the temporary increase in the cost of US dollar financing, the share of total Chilean imports denominated in US Dollar (Chilean Peso) steadily decreased (increased) by almost 10\% (7\%) by the end of 2019, while no changes in the invoicing patterns took place on the exports side. Using the Chilean universe of international transactions from 2007 to 2019, we study the firm-level determinants of these aggregate patterns. We show that: i) the bulk of changes in aggregate invoicing shares is due to firms switching from US dollar to Chilean Peso, as opposed to reallocation between firms or firm entry; ii) the first importers to switch to Chilean Peso invoicing are large firms with wider US Dollar currency mismatches, suggesting that both natural hedging and strategic complementarities are relevant in shaping invoicing choices. We rationalize these findings with a currency choice model of an economy populated by importing firms that choose the currency of denomination of their trade credit for imported inputs, in the presence of natural hedging and strategic complementarities motives. We show how the introduction of sunk cost of currency management generates hysteresis in invoicing choices, yielding permanent changes in the aggregate invoicing share following a temporary shock in the cost of trade credit. Lastly, we test the key theoretical mechanism and study the implications of large changes in invoicing patterns for the whole macroeconomy.

Aggregate Invoicing Share - Chilean Imports