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.

Foreign exchange rate markets exhibit a significant level of concentration. 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 foreign exchange rate market for 18 currencies spanning from 2005 to 2019. 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. We show that 80% of the disconnect and 66% of the excess volatility due to investors’ heterogeneity can be attributed to heterogeneity in price impact.

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.

Work in Progress

Importer's Dynamics and Exchange Rate Pass-through - Draft Coming Soon

This paper examines the role of importers' dynamics on the transmission of exchange rate fluctuations to international prices. Using import transaction data from Chile, I document novel empirical facts on importers' dynamics and exchange rate pass-through: as the importer grows older, i) market share and imported quantity (price) increases (decreases) and ii) the exchange rate pass-through into import prices decreases. I rationalize these findings proposing a model of international oligopsony: as importers grow older and larger, they gain experience in foreign markets which allows to exert stronger market power on foreign suppliers. Older importers have stronger market power and pay a markdown price, which allow to keep prices stable and lower the exchange rate pass-through. My estimates imply that the presence of experienced importers insulated domestic prices during the sharp depreciation of the Chilean peso following the 2019 Estallido Social. Moreover, the rise in the average importers' experience from 2009 to 2019 accounts for 40% of the negative trend in CPI sensitivity to exchange rate fluctuations.

Trade Credit and Exchange Rate Pass-Through: Evidence from Chile

Stochastic Trends in Interest Rates: Implications for UIP (with Luigi Pollio)