Research
Working Papers
Exchange Rate Pass-through and Expenditure-Switching Revisited (Job Market Paper) under Census Bureau Project #2874.
Conventional wisdom is that low pass-through of exchange rate movements into trade prices dampens the response of trade quantities to exchange rates. If true, exchange rates lose their expenditure-switching power and allocative role. In this paper, I demonstrate and explain the opposite result. Using confidential US micro-data and a macroeconometric technique applied to panel data, I show that quantity-exchange rate elasticities are similar across high and low pass-through environments. In essence, the low pass-through environment displays a higher import demand (quantity-price) elasticity than the high pass-through environment. I then propose and validate an extension of a standard small open economy New Keynesian model in which both exporting and importing firms are subject to price rigidities. The "import buyer rigidity" causes the importing firm to adjust import demand more for more persistent pass-through. Increasing the exporter's trade price rigidity lowers exchange rate pass-through but also increases pass-through persistence; as a result, low pass-through is associated with a higher import demand elasticity as estimated. I conclude by exploring the implications of this framework for monetary and exchange rate policy, actually finding a stronger expenditure-switching channel under low pass-through.
Media: Marginal Revolution
Why is there complete long-run pass-through of both tariffs and exchange rates in US exports, despite evidence of flexible markups? To answer this question, I develop a methodology to leverage tariffs and exchange rates to uncover the structural drivers of pass-through, the markup elasticity and the marginal cost scale elasticity. I derive and quantify the scale channel of pass-through, which can be decomposed into a bilateral scale and the novel "shock span" scale effect. The shock span channel arises because different correlation patterns across customers enters prices via the scale channel. Because exchange rates are correlated across trading partners, compared to tariffs they have greater capacity for shock-span effects of scale economies. Quantifying the bilateral and shock span components of the scale channel, the paper demonstrates that scale economies can rationalize the discrepancy between markup flexibility and observed pass-through.
This paper exploits the temporary US export drop during the 1997 Asian Crisis to demonstrate that short- run foreign crises can have local labor spillovers via the export channel, and to trace out the accompanying dynamics. Empirically, traded employment fell associated with the drop in exports to Crisis-4 countries, there was sluggish post-Crisis adjustment (4 years), and nontraded employment in lower-education areas also fell. To compute the total effect, I embed a Roy model into a specific-factors setting, linking export fluctuations to local labor markets. Computational estimates find the shock lowered 1998 US traded employment by 135,000- 150,000 workers, and measurement of the Frechet degree of worker heterogeneity finds that heterogeneity is higher in the short-run than the long-run.
Research In Progress
Broken Links: The Disruptive Impact of Import Competition on Local Supply Chains and Employment (with Daron Acemoglu, David Autor, David Dorn, and Gordon Hanson) under Census Bureau Project #1684.
Although the substantial job loss that followed from the surge of imports from China is well documented, why import flows created such large adverse effects on local labor markets is poorly understood. This paper documents the overlooked role of supply chain disruptions. We build empirical measures of local and national supply linkages by exploiting commodity-level input-output tables and the gravity-like structure of supply relationships. Consistent with standard input-output models, we find that establishments whose customers are adversely affected by Chinese import shocks see a drop in their own output and employment. The standard model further suggests that establishments whose suppliers are exposed to rising import competition stand to benefit from the availability of less expensive Chinese imports. Contrary to this prediction, we document that establishments whose suppliers compete with cheaper imported substitutes actually experience falling sales and employment effects. These “downstream” impacts appear to reflect costly disruptions to US supply chains, whose operation depends on local long-term relationships. Supporting this interpretation, we show that it is local, rather than national, downstream effects that are most consequential, and that these downstream impacts are driven by customer-supplier linkages involving significant relationship specificities rather than arms-length transactions. We conclude that domestic firms are challenged in exploiting potential gains from cheaper imported inputs when long-term supply chain relationships are threatened.
The International Elasticity Puzzle: Identifying Codetermining Frictions under Census Bureau Project #2874.
The International Elasticity Puzzle focuses on a discrepancy in the import demand elasticity in international trade versus macroeconomic models, but it relates to both the horizon and the underlying shock (tariff or exchange rate). I present two facts consistent with the puzzle's duality: the elasticity is increasing over time, and is dependent on the underlying shock. I then apply the general framework from Gertler (2024a) to rationalize the puzzle. First, I demonstrate that both within exchange rates and across to tariffs, more persistent shocks generate larger demand effects. Second, I show that import buyer rigidities attenuate the elasticity and cause it to be increasing in shock persistence and over time. Third, I leverage the model structure and the estimates to measure the demand rigidity and the underlying static elasticity: the paper quantitatively explains the puzzle. Finally, I employ the framework and estimates to analyze the rate-of-convergence for exchange rates versus tariffs: in the short-run the persistence effect dominates so that the exchange rate converges to the static elasticity more slowly than the tariff.
The Macrofinancial Link Between Tariffs, Exchange Rates, and Trade (with Victor Orestes)
We examine how macrofinancial factors, particularly the interest rate, shape exchange rate and trade responses to tariff shocks. First, we find that US import tariffs substantially influence the exchange rate, and in contrast little effect from tariffs imposed on the US. Second, we find that countries with which maintain higher interest rates than the US experience larger depreciations than lower-interest-rate countries. Third, we present evidence that high-interest-rate countries’ trade are subject to higher demand elasticities, which is driven by supply- or demand-side factors depending on exchange rate regime. Our findings are consistent with a model of centrality in which financial and real factors co-amplify and can offset each other on aggregate but not necessarily in terms of incidence.