Abstract: We argue that inflationary shocks affect allocative efficiency by changing the rate and the characteristics of workers' job-to-job transitions. First, using monetary policy shocks and survey data on search effort, we empirically show that a one percentage point rise in inflation increases job-to-job transitions by up to 4.5%, and workers with higher inflation expectations are more likely to search and do so more effectively. Second, we build a general equilibrium model of directed on-the-job search to quantify the aggregate implications of labor market reactions. Higher-than-expected inflation reduces real wages, prompting workers to search more actively and aim lower. This increases job-to-job transitions but lowers the efficiency gains per transition. Therefore, the effect on output is ambiguous. Last, we calibrate the model to the U.S. economy. Inflationary shocks increase reallocation rates, yet allocative efficiency and output decline. Small deflationary shocks (e.g., 2%) increase output in the short run, while others decrease it.

Abstract: Stock markets play a dual role: they provide information about firms’ fundamentals, which improves resource allocations, and they provide liquidity. We propose a setting in which these two roles interact: if stocks are used more intensively for liquidity, then prices reveal less information about fundamentals. We structurally estimate stock price informativeness for several countries and show that it declines when alternative liquidity sources, such as banks, are in distress. To study the real effects of this mechanism, we devise a strategy to integrate our stock-trading module into a dynamic general equilibrium model with heterogeneous firms. We calibrate the model to the United States and simulate recessions with and without banking distress. In a standalone recession, prices become more informative, and allocation improves, mitigating output losses by 4.4%. If the recession coincides with banking distress, agents rely more on stock markets to obtain liquidity, prices become less informative, and allocation deteriorates, magnifying output losses by 22%.

Labor outsourcing provides flexibility to producers but also exposes sensitive information to outsiders, which may deter outsourcing if the legal system does not provide adequate protection. I use this simple trade-off to evaluate policies that capacitate higher levels of labor outsourcing. I build an industry dynamics model where outsourcing provides flexibility to producers but might be underutilized due to a legal friction. I estimate the model using data from the U.S. states and decompose the cross-state heterogeneity in labor outsourcing into differences in firing cost, industry composition, demand volatility, and a state-level wedge. The wedge estimates correlate with trade secret protection measures across states. I find that reducing the friction for all states to match the least distorted state would increase outsourced employment by 33% and aggregate output by 0.8%. Then, using event studies around the staggered adoption of the Uniform Trade Secrets Act, I show that it led to increased outsourcing of high-skill jobs. 

Abstract: Negative advertising provides information about the weaknesses of a competitor's product. We study negative advertising with a focus on how its regulation impacts product positioning for profit-maximizing firms. We build a model of informative advertising competition, where product positioning is endogenous and consumers have rational expectations. We show that despite the informational benefits of negative advertising, permitting it (as the Federal Trade Commission in the United States does) may lead to reduced product differentiation and lower consumer welfare, even in markets where firms do not utilize negative advertising in equilibrium. We then extend our model to political competition, where a candidate's objective is to obtain a larger share of votes than the competitor. We show that political competition supports higher positional differentiation, along with more negative advertising than product competition, in line with the observed high use of negative advertising in political races and their rarer use in product competition.  

This paper estimates the global network structure of sovereign credit risk by applying the Diebold-Yilmaz connectedness methodology on sovereign credit default swaps (SCDSs). The level of credit risk connectedness among sovereigns, which is quite high, is comparable to the connectedness among stock markets and foreign exchange markets. In the aftermath of the recent financial crises that originated in developed countries, emerging market countries have played a crucial role in the transmission of sovereign credit risk, while developed countries and debt-ridden developing countries played marginal roles. Secondary regressions show that both trade and capital flows are important determinants of pairwise connectedness across countries. The capital flows became increasingly important after 2013, while the effect of trade flows decreased during the crisis and did not recover afterwards.

Presented at: Financial Globalization and Its Spillovers Workshop at TH Koln and Maastricht University (2017), the Third Economic Networks and Finance Conference at the London School of Economics (2015) and the Second Vienna Workshop on High Dimensional Time Series in Macroeconomics and Finance (2015)