My doctoral research contributes to the fields of macroeconomics and international

finance. Within macroeconomics, I have explored the role of financial frictions

in shaping macroeconomic outcomes following a recession. I have studied the dissonance

between the rapid improvement in financial conditions and the sluggish

recovery in investment observed in the aftermath of the Great Recession. In related

research I also analyze the fast improvement in financial conditions and analyze the

existence of a positive feedback between asset prices and leverage through the lens

of liquidity shocks. Within international finance, I have an empirical and theoretical

interest in the analysis of capital flows. My research in this area has focused

on the role of domestic investors in preventing economies from experiencing the

largely-documented pervasive effects of net sudden stops in capital flows, and its

determinants.

Chapter 1. The rapid improvement in financial conditions and the sluggish recovery

of physical investment in the aftermath of the Great Recession are difficult to

reconcile with the predictions of existing models that link impaired access to credit and investment. I propose a tractable model that solves this puzzle by exploiting

the role of customer markets in shaping the persistent effects of financial shocks

on investment decisions. In my model, firms react to a negative financial shock by

reducing expenditures in sales-related activities and increasing prices to restore internal

liquidity, at the expense of customer accumulation. Once financial conditions

start reverting to normal levels, the firm postpones investment due to a shortage

of customers relative to its existing production capacity and the need to first rebuild

its customer base. This mechanism can capture two important features of the

data: First, the slow recovery of investment despite improving financial conditions,

and second, the positive correlation between financial conditions and investment

observed during downturns and the weakening of this correlation observed during

upturns.

Chapter 2. I assess how the inclusion of complementary sources of liquidity can

have sizeable reinforcing effects during a crisis and in its aftermath. In this paper,

I allow for the possibility to finance investment projects either by selling existing

capital units or by borrowing using the units not sold as collateral. The main

characteristic of this model is that capital is heterogeneous and composed by units of

different quality, which are only observed by the owner. The asymmetric information

on capital quality makes both, the asset prices at which investors can sell their

assets and the loan-to-value (i.e. leverage) ratio at which they can borrow to be

endogenously determined. The simultaneity in the determination of asset prices and

leverage lead to the existence of liquidity spirals. For instance, a negative exogenous

shock that reduces leverage creates a fall in the funds available to finance capital purchases (i.e. a decline in demand). It also increases the supply for assets in the

market, since entrepreneurs require selling more units to finance the same amount

of investment. These two effects create unambiguously a fall in prices. The fall

in prices reinforces the initial fall in loan-to-values since lenders expect the quality

of units used as collateral to be lower. This mechanism explains why alternative

sources of liquidity fall rapidly during downturns, and why liquidity can recover

faster during upturns.

Chapter 3. This paper, which is joint work with Eduardo Cavallo and Alejandro

Izquierdo, explores the determinants behind the decision of domestic investor to

adjust their asset position in response to a variation in gross capital inflows and avoid

episodes of net sudden stops. We present evidence that while sudden stops in gross

inflows are associated with global conditions, domestic factors such as the degree

of domestic liability dollarization, economic growth and institutional background

are important to prevent these episodes in becoming net sudden stops. We also

extend the concept of “Prevented Sudden Stops” and differentiate “Delayed” from

“Purely Prevented” episodes. A purely prevented episode is one in which there is

not a sudden stop in any of the quarters for which there was a sudden stop in gross

inflows. A delayed episode is one in which there is at least one quarter in which

there was both a sudden stop in gross inflows and a net sudden stop. We want

to analyze how this classification can affect the extent to which economic growth

and domestic liability dollarization can still account for the offsetting behavior of

domestic investors.