journal articles

The Macroeconomic Impact of NAFTA Termination
2020: Canadian Journal of Economics, 53, 821-865
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U.S. President Trump has threatened to leave the North American Free Trade Agreement. How much would each member country gain or lose if this threat is carried out? Would trade imbalances within the region diminish? What would the transition to new roduction and expenditure patterns look like? I provide quantitative answers to these questions using a dynamic general equilibrium model with a multi-sector input-output production structure, heterogeneous firms that make forward-looking export participation decisions, and adjustment frictions in trade and factor markets. Regional trade flows would fall dramatically, and while the U.S. trade deficit with Canada would decline, the deficit with Mexico would grow. Welfare would fall by 0.04%, 0.12%, and 0.2% in the United States, Canada, and Mexico, respectively, and transition dyynamics would significantly affect welfare in both the short run and the long run.

Comment on “The Economic Effects of Trade Policy Uncertainty” by D. Caldara et al.
2020: Journal of Monetary Economics, 109, 60-64 (Carnegie-Rochester-NYU conference volume)
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The paper by Caldara et al. develops new measures of trade policy uncertainty (TPU) that are associated with reduced economic activity at the micro and macro levels, and uses a DSGE model with sticky prices and sunk exporting costs to illustrate the economic forces driving these results. This discussion provides two forms of additional context for the authors’ findings. First, I shed light on the reasons that firms care about TPU by linking the authors’ dataset to the U.S. input-output accounts. Second, I use a simple model of price-setting under nominal rigidities to explore the sensitivity of the authors’ quantitative results to some of their modeling assumptions.

Brexit and the Macroeconomic Impact of Trade Policy Uncertainty
2019: Journal of International Economics, 117, 175-195
YouTube video of talk at MOVE Round Table on Economic and Political Impact of Brexit
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On June 23, 2016, the United Kingdom voted to leave the European Union. The trade policies that will replace E.U. membership are uncertain, however, and speculation abounds that this uncertainty will cause immediate harm to the U.K. economy. In this paper, I use a dynamic general equilibrium model with heterogeneous firms, endogenous export participation, and stochastic trade costs to quantify the impact of uncertainty about post-Brexit trade policies. I find that the total consumption-equivalent welfare cost of Brexit for U.K. households is between 0.4 and 1.2%, but less than a quarter of a percent of this cost is due to uncertainty.

On the Source of U.S. Trade Deficits: Global Saving Glut or Domestic Saving Drought?
2019: Review of Economic Dynamics, 31, 200-223
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Are U.S. trade deficits caused by high foreign saving—a global saving glut—or low domestic saving—a domestic saving drought? To answer this question, I conduct a wedge accounting analysis of U.S. trade balance dynamics during 1995–2011 using a dynamic general equilibrium model. I find that a global saving glut explains 96 percent of U.S. trade deficits in excess of those that would have occurred naturally as a result of productivity growth and demographic change. Contrary to widespread belief, however, investment distortions, not a global saving glut, account for much of the decline in real interest rates that has accompanied U.S. trade deficits

International Portfolio Diversification and the Structure of Global Production
2018: Review of Economic Dynamics, 29, 195-215
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In recent decades, country portfolio home bias has fallen in advanced economies but not in emerging economies. I use a dynamic general equilibrium model to show that changes in the distribution of global production and absorption explain this pattern. For advanced economies, whose share of world output fell as their trade openness rose, the model predicts an unambiguous drop in home bias. By contrast, emerging economies' growth in both size and trade openness have opposing implications for portfolios. To quantify these forces I calibrate the model to real and counterfactual input–output tables. Jointly, changes in the global production structure account for much of the decline in home bias in advanced economies and lack thereof in emerging economies. Country size and trade openness account for most of this effect. Consistent with theory, the increase in the intermediate share of trade had little impact.

Global Imbalances and Structural Change in the United States
2018: Journal of Political Economy, 126, 761-796 (with Tim Kehoe and Kim Ruhl)
NBER Working Paper #19339
Review in The Region
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Since the early 1990s, as the United States borrowed heavily from the rest of the world, employment in the US goods-producing sector has fallen. We construct a dynamic general equilibrium model with several mechanisms that could generate declining goods-sector employment: foreign borrowing, nonhomothetic preferences, and differential productivity growth across sectors. We find that only 15.1 percent of the decline in goods-sector employment from 1992 to 2012 stems from US trade deficits; most of the decline is due to differential productivity growth. As the United States repays its debt, its trade balance will reverse, but goods-sector employment will continue to fall.

The Next Best Thing to Knowing Someone Who is Usually Right
2006: Journal of Wealth Management, 9, 51-60 (with Gary Smith and Rob Wertheimer)
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Mean-variance analysis is widely used for portfolio allocation decisions. The use of historical data for the inputs may be inferior to using informed estimates that reflect one's beliefs about the current financial environment. In this article we show that portfolios based on expert opinion can outperform portfolios based on historical data, and that even better performance can be achieved by taking into account regression to the mean.

in progress

The Economic Effects of Wealth Taxes and Wealth Tax Evasion
2020: New version with analyses of Warren and Sanders proposals + optimal policy! (with Shahar Rotberg)
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Rising wealth inequality has spurred calls to tax rich households’ wealth, but critics have raised concerns about wealth tax evasion and adverse macroeconomic consequences. We use a calibrated dynamic general equilibrium model to analyze the effects of taxing the wealthy and study how tax evasion shapes these effects. Wealth taxation would reduce inequality but also output, and although welfare could rise, the gains would be unequally distributed and workers could lose. If evasion shifts capital offshore, the macroeconomic consequences would be larger and swifter, and the optimal wealth tax would feature a larger exemption and lower marginal tax rates.

Export Market Penetration Dynamics
2020: Draft coming soon!
Information, Contract Enforcement and Misallocation
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Misallocation of resources can cause large reductions in total factor productivity (TFP). The literature emphasizes financial frictions driven by limited contract enforcement that restrict productive firms’ access to credit. Evidence suggests that information frictions also reduce access to credit, particularly in countries with weak contract enforcement. I study how the interaction between information frictions and limited enforcement affects resource allocation and TFP. I build a model in which lenders have imperfect information about borrowers’ default risk and enforcing repayment is costly. I use the model to illustrate i) how imperfect information of this type causes misallocation, and ii) how limited enforcement exacerbates this effect. I calibrate the model and find that imperfect information causes TFP to fall by up to 23% when I take contract enforcement parameter values from U.S. data, and by up to 32% when I set them to values common in low-income countries.

Real Exchange Rate Undervaluation, Financial Development and Economic Growth
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This paper studies the hypothesis that real exchange rate undervaluation can alleviate the economic symptoms of financial underdevelopment, acting as a temporary substitute for institutional reform. This hypothesis is motivated by recent empirical studies that document a link between real exchange rate undervaluation and increased growth in GDP per capita in developing countries. As further motivation I present new evidence that this effect is driven by an interaction between undervaluation and financial frictions. Using panel data on value added in manufacturing sectors at the 3-digit ISIC level for 103 countries, I find that for countries with low levels of financial development, real exchange rate undervaluation is associated with stronger growth in sectors that depend more heavily on external financing. To establish a causal relationship between undervaluation, financial development and growth and evaluate its quantitative implications I build a multi-sector semi-small open economy model with limited enforcement of financial contracts. Qualitative partial equilibrium results indicate that a government policy of subsidizing the purchase of tradeable goods undervalues the real exchange rate and loosens enforcement constraints, leading to temporary increased growth on the transition to a new steady state with higher output. The magnitude of this effect is increasing in the severity of the enforcement problem. For economies with severe enforcement problems this policy increases consumption although the quantitative effect is quite small.

other publications

What Will Happen When Foreigners Stop Lending to the United States?
2013: Federal Reserve Bank of Minneapolis, Economic Policy Papers, 13-4 (with Tim Kehoe and Kim Ruhl)
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Since the early 1990s, the United States has borrowed heavily from its trading partners. This paper presents an analysis of the impact of an end to this borrowing, an end that could occur suddenly or gradually.

Modeling U.S. borrowing as the result of what Bernanke (2005) calls a global saving glut—where foreigners sell goods and services to the United States but prefer purchasing U.S. assets to purchasing U.S. goods and services—we capture four key features of the United States and its position in the world economy over 1992–2012. In the model, as in the data: (1) the U.S. trade deficit first increases, then decreases; (2) the U.S. real exchange rate first appreciates, then depreciates; (3) the U.S. trade deficit is driven by a deficit in goods trade, with a steady U.S. surplus in service trade; and (4) the fraction of U.S labor dedicated to producing goods—agriculture, mining and manufacturing—falls throughout the period.

Using this model, we analyze two possible ends to the saving glut: an orderly, gradual rebalancing and a disorderly, sudden stop in foreign lending as occurred in Mexico in 1995–96. We find that a sudden stop would be very disruptive for the U.S. economy in the short term, particularly for the construction industry. In the long term, however, a sudden stop would have a surprisingly small impact. As the U.S. trade deficit becomes a surplus, gradually or suddenly, employment in goods production will not return to its level in the early 1990s because much of this surplus will be trade in services and because much of the decline in employment in goods production has been, and will be, due to faster productivity growth in goods than in services.

Inequality and Redistribution During the Great Recession
2012: Federal Reserve Bank of Minneapolis, Economic Policy Papers, 12-1 (with Fabrizio Perri)
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In this paper, we explore the impact of the Great Recession on economic inequality and redistribution in the United States. We analyze many sorts of inequality (in earnings, disposable income, consumption expenditures and wealth) for different sections of the economic distribution. Here we highlight three central findings.
• In 2010, the bottom 20 percent of the U.S. earnings distribution was doing much worse, relative to the median, than in the entire postwar period. This is because their earnings (including wages, salaries, and business and farm income) fell by about 30 percent relative to the median over the course of the recession. This lowest quintile also did poorly in terms of wealth, which declined about 40 percent.
• Redistribution through taxes and transfer programs reached historically high levels in 2010. As a result, spending power, captured by disposable income and consumption expenditures on nondurables, of this same lowest 20 percent did not significantly change relative to other economic groups during the recession.
• Although government redistribution protected households from fully bearing the impact of an earnings decline, households that experienced such a decrease nonetheless endured sizable drops in disposable income and drops in consumption expenditures.


The Economic Effects of Trade Policy Uncertainty
by A. Caldara, M. Iaoviello, P. Molligo, A. Prestipino, and A. Raffo
Protectionism and the Business Cycle
by A. Barattieri, M. Cacciatore, and F. Ghironi
Trade Adjustment Dynamics and the Welfare Gains from Trade
by G. Alessandria, H. Choi, and K. Ruhl
Trade Integration and the Trade Balance in China
by G. Alessandria, H. Choi, and D. Lu