Essays on International Finance

Abstract

This dissertation consists of three essays in international finance. In the first chapter, Trade Credit, Risk Sharing, and International Spillovers of US Monetary Policy, I study the role of trade credit—supplier financing via costly delayed payments—in determining the investment response of foreign firms to US monetary policy. Using firm-level data from several countries, I find that following a US monetary tightening, trade credit declines by less than bank credit. Firms that rely more on trade credit than on bank credit reduce investment by less. To rationalize these findings, I develop an open economy model with heterogeneous firms, trade and bank credit. In the model, trade credit arises as a risk-sharing mechanism between firms with different risk preferences along the supply chain, for which I provide direct empirical evidence. This mechanism dampens the transmission of US interest rate shocks to trade credit relative to bank credit, which is directly affected by changes in the international funding costs of banks. The presence of trade credit in the model reduces the sensitivity of aggregate investment and output to US monetary policy and increases their average level. In Chapter 2, UIP Deviations, Currency Mismatches and Misallocation, co-authored with Cecilia Dassatti, we study the relationship between capital misallocation and deviations from Uncovered Interest Parity (UIP). Using matched firm–loan administrative data of Uruguay over the period 2012–2019, we show that declines in UIP deviations are associated with significant increases in capital misallocation. A one-standard-deviation decline in UIP deviations leads to a cumulative 11 percentage point increase in capital misallocation over three years and around four percentage points increase contemporaneously—accounting for approximately 40% of the observed slowdown in aggregate productivity during this period. We provide evidence that this effect operates through firms’ currency choice in borrowing in response to changes in relative financing costs implied by UIP. Access to US dollar borrowing is selective and concentrated among large and productive firms. When UIP deviations decline, local-currency borrowing becomes relatively cheaper, enabling smaller and less productive firms—excluded from dollar credit—to access local-currency financing. This reallocation of credit toward lower-productivity firms worsens the efficiency of capital allocation. In Chapter 3, Global Spillovers from FED Hikes and a Strong Dollar: The Risk Channel, co-authored with José Cristi, Şebnem Kalemli-Özcan and Filiz Unsal, we study the international transmission of US monetary policy shocks and a strong US dollar. We focus on the effects of both of these shocks on heterogeneous risk premia in emerging markets (EMs) vs advanced economies (AEs), measured by deviations from UIP. Using a quarterly unbalanced panel with 59 countries from 1990 to 2019, we find that the two shocks yield opposite results on risk premia. Unlike FED hikes, an appreciation of the US dollar does not lead to higher risk premia in EMs, even though their currencies depreciate vis-à-vis the dollar. Our results suggest that US monetary policy shocks are directly linked to global financial conditions, whereas, a strong dollar may be capturing more fundamental, real (instead of financial) global shocks which requires external adjustment in EMs.