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Reshaping Global Trade: The Immediate and Long-Term Effects of Bank Failures
Chenzi Xu
Quarterly Journal of Economics, Vol. 137(4): 2107 – 2161, 2022
I show that a disruption to the financial sector can reshape the patterns of global trade for decades. I study the first modern global banking crisis originating in London in 1866 and collect archival loan records that link multinational banks headquartered there to their financing abroad. Countries exposed to bank failures in London immediately exported significantly less and did not recover their lost growth relative to unexposed countries. Their market shares within each destination remained significantly lower for four decades. Decomposing the persistent market-share losses shows that they primarily stem from lack of extensive margin growth, as the financing shock caused importers to source more from new trade partners. Exporters producing more substitutable goods, those with little access to alternative forms of credit, and those trading with more distant partners experienced more persistent losses, consistent with the existence of sunk costs and the importance of finance for intermediating trade.
Real Effects of Supplying Safe Private Money
Chenzi Xu and He Yang
Journal of Financial Economics, Vol. 157, 2024
Privately issued money often bears default risk, which creates transaction frictions when used as a medium of exchange. The late 19th century US provides a unique context to evaluate the real effects of supplying a new type of money that is safe from default. We measure the local change in “monetary” transaction frictions with a market access approach derived from general equilibrium trade theory. Consistent with theories hypothesizing that lowering transaction frictions benefits the traded and inputs-intensive sectors, we find an increase in traded goods production, in the share of manufacturing output and employment, and in innovation.
Misallocation and Capital Market Integration: Evidence from India
Natalie Bau and Adrien Matray (2023) Econometrica, 91: 67-106.
We show that foreign capital liberalization reduces capital misallocation and increases aggregate productivity in India. The staggered liberalization of access to foreign capital across disaggregated industries allows us to identify changes in firms’ input wedges, overcoming major challenges in the measurement of the effects of changing misallocation. For domestic firms with initially high marginal revenue products of capital (MRPK), liberalization increases revenues by 25%, physical capital by 57%, wage bills by 27%, and reduces MRPK by 35% relative to low MRPK firms. There are no effects on low MRPK firms. The effects of liberalization are largest in areas with less developed local banking sectors, indicating that foreign capital partially substitutes for an efficient banking sector. Finally, we develop a novel method to use natural experiments to bound the effect of changes in misallocation on treated industries’ aggregate productivity. Treated industries’ Solow residual increases by 4-17%.
Can Innovation Help U.S. Manufacturing Firms Escape Import Competition from China?
Hombert, Johan and Adrien Matray (2018) Journal of Finance, Vol. 73, Issue 5, October 2018, 2003-2039
We study whether R&D-intensive firms are more resilient to trade shocks. We correct for the endogeneity of R&D using tax-induced changes to R&D cost. While rising imports from China lead to slower sales growth and lower profitability, these effects are significantly smaller for firms with a larger stock of R&D (by about half when moving from the bottom quartile to the top quartile of R&D). We provide evidence that this effect is explained R&D allowing firms to increase product differentiation. As a result, while firms in import-competing industries cut capital expenditures and employment, R&D-intensive firms downsize considerably less.
Latest research
Misallocation and Capital Market Integration: Evidence from India
Natalie Bau and Adrien Matray (2023) Econometrica, 91: 67-106.
We show that foreign capital liberalization reduces capital misallocation and increases aggregate productivity in India. The staggered liberalization of access to foreign capital across disaggregated industries allows us to identify changes in firms’ input wedges, overcoming major challenges in the measurement of the effects of changing misallocation. For domestic firms with initially high marginal revenue products of capital (MRPK), liberalization increases revenues by 25%, physical capital by 57%, wage bills by 27%, and reduces MRPK by 35% relative to low MRPK firms. There are no effects on low MRPK firms. The effects of liberalization are largest in areas with less developed local banking sectors, indicating that foreign capital partially substitutes for an efficient banking sector. Finally, we develop a novel method to use natural experiments to bound the effect of changes in misallocation on treated industries’ aggregate productivity. Treated industries’ Solow residual increases by 4-17%.
Can Innovation Help U.S. Manufacturing Firms Escape Import Competition from China?
Hombert, Johan and Adrien Matray (2018) Journal of Finance, Vol. 73, Issue 5, October 2018, 2003-2039
We study whether R&D-intensive firms are more resilient to trade shocks. We correct for the endogeneity of R&D using tax-induced changes to R&D cost. While rising imports from China lead to slower sales growth and lower profitability, these effects are significantly smaller for firms with a larger stock of R&D (by about half when moving from the bottom quartile to the top quartile of R&D). We provide evidence that this effect is explained R&D allowing firms to increase product differentiation. As a result, while firms in import-competing industries cut capital expenditures and employment, R&D-intensive firms downsize considerably less.
