Published Papers
"Sources of Exchange Rate Fluctuations: Are they Real or Nominal?", Journal of International Money and Finance, 30(5), 2011.
Abstract
I analyze the role of real and monetary shocks on the exchange rate behavior using a structural vector autoregressive model of the US vis-à-vis the rest of the world. The shocks are identified using sign restrictions on the responses of the variables to orthogonal disturbances. These restrictions are derived from the predictions of a two-country DSGE model. I find that monetary shocks are unimportant in explaining exchange rate fluctuations. By contrast, demand shocks explain between 21% and 37% of exchange rate variance at 4-quarter and 20-quarter horizons, respectively. The contribution of demand shocks plays an important role but not of the order of magnitude sometimes found in earlier studies. My results, however, support the recent focus of the literature on real shocks to match the empirical properties of real exchange rates.
"Asset Prices, Exchange Rates and the Current Account" (with Marcel Fratzscher and Lucio Sarno), European Economic Review, 54(5), 2010.
Abstract
This paper analyses the role of asset prices in comparison to other factors, in particular exchange rates, as a driver of the US trade balance. It employs a Bayesian structural VAR model that requires imposing only a minimum of economically meaningful sign restrictions. We find that equity market shocks and housing price shocks have been major determinants of the US current account in the past, accounting for up to 30% of the movements of the US trade balance at a horizon of 20 quarters. By contrast, shocks to the real exchange rate have been less relevant, explaining about 9% and exerting a more temporary effect on the US trade balance. Our findings suggest that large exchange rate movements may not necessarily be a key element of an adjustment of today's large current account imbalances, and that in particular relative global asset price changes could be a potent source of adjustment.
"Threshold Adjustment in Deviations from the Law of One Price" (with Mark P. Taylor), Studies in Nonlinear Dynamics and Econometrics 12(3), 2008.
Abstract
Using self-exciting threshold autoregressive models, we explore the validity of the law of one price (LOOP) for sixteen sectors in nine European countries. We find strong evidence of nonlinear mean reversion in deviations from the LOOP and highlight the importance of modelling the real exchange rate in a nonlinear fashion in an attempt to measure speeds of real exchange rate adjustment. Using the US dollar as a reference currency, the half-lives of sectoral real exchange rates shocks, calculated by Monte Carlo integration, imply much faster adjustment than the consensus.half-life estimates of three to five years. The results also imply that transaction costs vary significantly across sectors and countries.
"Las cuentas públicas y la crisis de la convertibilidad en Argentina” (with Mario Damill and Roberto Frenkel), Desarrollo Económico 170, (43), Buenos Aires, 2003.
Working Papers
"Export Market Diversification and Productivity Improvements: Theory and Evidence From Argentinean Firms" (with Paulo Santos Monteiro) [NEW]
Abstract
This paper examines the relationship between trade and investment in technology adoption when firms face demand uncertainty. Our model predicts that, for a given overall market size, exporting to several countries reduces firms' demand uncertainty and, hence, raises incentives to invest in productivity improvements. The effects of diversification are heterogeneous across firms: An additional foreign market matters more for firms exporting to fewer destinations. We test the proposed theory using a large sample of Argentinean manufacturing exporters. The predictions of the model find strong support in the data.
"Speculation in the Oil Market" (with Ivan Petrella)
Abstract
The run-up in oil prices since 2004 coincided with growing investment in commodity markets and increased price comovement among different commodities. We assess whether speculation in the oil market played a key role in driving this salient empirical pattern. We identify oil shocks from a large dataset using a factor-augmented autoregressive (FAVAR) model. This method is motivated by the fact that small scale VARs are not informationally sufficient to identify the shocks. The main results are as follows: (i) While global demand shocks account for the largest share of oil price fluctuations, speculative shocks are the second most important driver. (ii) The comovement between oil prices and the prices of other commodities is explained by global demand and speculative shocks. (iii) The increase in oil prices over the last decade is explained mainly by the strength of global demand. However, speculation played a significant role in the oil price increase between 2004 and 2008 and its subsequent collapse. Our results support the view that the recent oil price increase is mainly driven by the strength of global demand but that the financialization process of commodity markets also played a role.
This paper received media coverage from:
The Washington Post Wonkblog: Was Wall Street to Blame for High Oil Prices?, October 2011.
The Washington Post Wonkblog: Are Speculators to Blame for High Gas Prices?, March 2012.
ABC News: Gas Prices Spiked by Speculators, Congressmen Claim, March 2012.
SFGATE: Wall Street Speculation Blamed for Gas Price Spike, March 2012.
LATimes: Obama Proposes Steps to Curb Oil Market Manipulation, April 2012.
Our paper was commented by Lutz Kilian on Econbrowser. Click here for our response to Kilian.
"Trade and Synchronization in a Multi-Country Economy" (with Paulo Santos Monteiro)
Abstract
Substantial evidence suggests that countries with stronger trade linkages have more synchronized business cycles. The standard international business cycle framework cannot replicate this nding, uncovering the trade-comovement puzzle. In this paper we investigate the extent to which more sophisticated trade models can sort out this puzzle. We show that under certain macro-level conditions but irrespective of the micro-level assumptions concerning trade (within a large class of trade models) synchronization is explained by three factors: (i) the correlation between each country's productivity shocks, (ii) the correlation between each country's share of expenditure on domestic goods, and (iii) the correlation between each country's productivity and the partner's share of expenditure on domestic goods. An empirical investigation of the link between trade and each of the three factors shows that the trade-comovement relation is explained by the first and second factors.
"Financial Integration, Globalization, and Real Activity" (with Gianni De Nicolò)
Abstract
Using data for a large number of advanced and emerging market economies during the last two decades and novel measures of financial integration and globalization, this paper obtains the following results: (a) financial integration has progressed significantly worldwide and has been fastest in emerging markets; (b) advances in financial integration predict improvements in countries’ risk-adjusted growth opportunities at a global and regional level as well; (c) advances in financial integration and globalization predict higher risk-adjusted growth and a lower probability of systemic risk realizations, with this predictive power stronger for emerging market economies; and (d) advances in financial integration and globalization are mutually reinforcing, while financial integration Granger-causes financial development and improvements in the liquidity of equity markets. Overall, financial integration appears to yield direct and indirect benefits in the form of improved countries’ risk-adjusted growth, growth opportunities and lower systemic risk.
Work in Progress
"Quality and Exchange Rate Pass-Through: Firm Level Evidence for Argentinean Wine" (with Natalie Chen)
"Sources of Exchange Rate Fluctuations: Are they Real or Nominal?", Journal of International Money and Finance, 30(5), 2011.
Abstract
I analyze the role of real and monetary shocks on the exchange rate behavior using a structural vector autoregressive model of the US vis-à-vis the rest of the world. The shocks are identified using sign restrictions on the responses of the variables to orthogonal disturbances. These restrictions are derived from the predictions of a two-country DSGE model. I find that monetary shocks are unimportant in explaining exchange rate fluctuations. By contrast, demand shocks explain between 21% and 37% of exchange rate variance at 4-quarter and 20-quarter horizons, respectively. The contribution of demand shocks plays an important role but not of the order of magnitude sometimes found in earlier studies. My results, however, support the recent focus of the literature on real shocks to match the empirical properties of real exchange rates.
"Asset Prices, Exchange Rates and the Current Account" (with Marcel Fratzscher and Lucio Sarno), European Economic Review, 54(5), 2010.
Abstract
This paper analyses the role of asset prices in comparison to other factors, in particular exchange rates, as a driver of the US trade balance. It employs a Bayesian structural VAR model that requires imposing only a minimum of economically meaningful sign restrictions. We find that equity market shocks and housing price shocks have been major determinants of the US current account in the past, accounting for up to 30% of the movements of the US trade balance at a horizon of 20 quarters. By contrast, shocks to the real exchange rate have been less relevant, explaining about 9% and exerting a more temporary effect on the US trade balance. Our findings suggest that large exchange rate movements may not necessarily be a key element of an adjustment of today's large current account imbalances, and that in particular relative global asset price changes could be a potent source of adjustment.
"Threshold Adjustment in Deviations from the Law of One Price" (with Mark P. Taylor), Studies in Nonlinear Dynamics and Econometrics 12(3), 2008.
Abstract
Using self-exciting threshold autoregressive models, we explore the validity of the law of one price (LOOP) for sixteen sectors in nine European countries. We find strong evidence of nonlinear mean reversion in deviations from the LOOP and highlight the importance of modelling the real exchange rate in a nonlinear fashion in an attempt to measure speeds of real exchange rate adjustment. Using the US dollar as a reference currency, the half-lives of sectoral real exchange rates shocks, calculated by Monte Carlo integration, imply much faster adjustment than the consensus.half-life estimates of three to five years. The results also imply that transaction costs vary significantly across sectors and countries.
"Las cuentas públicas y la crisis de la convertibilidad en Argentina” (with Mario Damill and Roberto Frenkel), Desarrollo Económico 170, (43), Buenos Aires, 2003.
Working Papers
"Export Market Diversification and Productivity Improvements: Theory and Evidence From Argentinean Firms" (with Paulo Santos Monteiro) [NEW]
Abstract
This paper examines the relationship between trade and investment in technology adoption when firms face demand uncertainty. Our model predicts that, for a given overall market size, exporting to several countries reduces firms' demand uncertainty and, hence, raises incentives to invest in productivity improvements. The effects of diversification are heterogeneous across firms: An additional foreign market matters more for firms exporting to fewer destinations. We test the proposed theory using a large sample of Argentinean manufacturing exporters. The predictions of the model find strong support in the data.
"Speculation in the Oil Market" (with Ivan Petrella)
Abstract
The run-up in oil prices since 2004 coincided with growing investment in commodity markets and increased price comovement among different commodities. We assess whether speculation in the oil market played a key role in driving this salient empirical pattern. We identify oil shocks from a large dataset using a factor-augmented autoregressive (FAVAR) model. This method is motivated by the fact that small scale VARs are not informationally sufficient to identify the shocks. The main results are as follows: (i) While global demand shocks account for the largest share of oil price fluctuations, speculative shocks are the second most important driver. (ii) The comovement between oil prices and the prices of other commodities is explained by global demand and speculative shocks. (iii) The increase in oil prices over the last decade is explained mainly by the strength of global demand. However, speculation played a significant role in the oil price increase between 2004 and 2008 and its subsequent collapse. Our results support the view that the recent oil price increase is mainly driven by the strength of global demand but that the financialization process of commodity markets also played a role.
This paper received media coverage from:
The Washington Post Wonkblog: Was Wall Street to Blame for High Oil Prices?, October 2011.
The Washington Post Wonkblog: Are Speculators to Blame for High Gas Prices?, March 2012.
ABC News: Gas Prices Spiked by Speculators, Congressmen Claim, March 2012.
SFGATE: Wall Street Speculation Blamed for Gas Price Spike, March 2012.
LATimes: Obama Proposes Steps to Curb Oil Market Manipulation, April 2012.
Our paper was commented by Lutz Kilian on Econbrowser. Click here for our response to Kilian.
"Trade and Synchronization in a Multi-Country Economy" (with Paulo Santos Monteiro)
Abstract
Substantial evidence suggests that countries with stronger trade linkages have more synchronized business cycles. The standard international business cycle framework cannot replicate this nding, uncovering the trade-comovement puzzle. In this paper we investigate the extent to which more sophisticated trade models can sort out this puzzle. We show that under certain macro-level conditions but irrespective of the micro-level assumptions concerning trade (within a large class of trade models) synchronization is explained by three factors: (i) the correlation between each country's productivity shocks, (ii) the correlation between each country's share of expenditure on domestic goods, and (iii) the correlation between each country's productivity and the partner's share of expenditure on domestic goods. An empirical investigation of the link between trade and each of the three factors shows that the trade-comovement relation is explained by the first and second factors.
"Financial Integration, Globalization, and Real Activity" (with Gianni De Nicolò)
Abstract
Using data for a large number of advanced and emerging market economies during the last two decades and novel measures of financial integration and globalization, this paper obtains the following results: (a) financial integration has progressed significantly worldwide and has been fastest in emerging markets; (b) advances in financial integration predict improvements in countries’ risk-adjusted growth opportunities at a global and regional level as well; (c) advances in financial integration and globalization predict higher risk-adjusted growth and a lower probability of systemic risk realizations, with this predictive power stronger for emerging market economies; and (d) advances in financial integration and globalization are mutually reinforcing, while financial integration Granger-causes financial development and improvements in the liquidity of equity markets. Overall, financial integration appears to yield direct and indirect benefits in the form of improved countries’ risk-adjusted growth, growth opportunities and lower systemic risk.
Work in Progress
"Quality and Exchange Rate Pass-Through: Firm Level Evidence for Argentinean Wine" (with Natalie Chen)