Working Papers

Corporate Tax Reforms and The Investment Channel of Monetary Policy. (with Ezgi Kurt) 

This paper presents the first empirical evidence on how corporate tax policy affects the effectiveness of monetary policy on investment. By examining exogenous marginal tax reforms in the US, and accounting for the dynamic nature of taxable income and the forward-looking behavior of investment, we find that monetary policy is more effective at stimulating investment when firms face tax increases, compared to when their taxes are stable. Conversely, monetary policy is least effective on investment when firms experience marginal tax cuts.

Presented at: Midwest Economics Association 2024, UNH Macro Brownbag. 

Financial Frictions Over the Early Life Cycle of Firms: A Cross-Country Perspective. (with Ina Simonovska) 

We study young firms' short- and long-term leverage dynamics across rich and poor countries to infer the severity of firm-level financial constraints. Using data from private European firms, we document two novel facts: short-term leverage increases while long-term leverage decreases over the early life cycle of firms, and this pattern persists longer in less developed economies. We build a model of endogenous borrowing constraints consistent with international corporate finance facts and leverage dynamics over the early life cycle of firms. The model implies that short-term funding gaps are biased measures of the severity of firm-level financial constraints, and cross-country data can be used to recover the bias. Guided by the model, we estimate that the bias accounts for 17.2% 10.6% in low (high) contract-enforcement economies,  suggesting the importance of cross-country data when measuring the severity of financial frictions.

Presented at: Bentley Applied Macroeconomics Workshop  2024, UNH seminar series.

Cross Country Patterns of Relative Misallocation in Services and Manufacturing: Theory and Evidence. (with Ina Simonovska) 

While we have some evidence that misallocation is higher in services than in manufacturing, these findings have been produced in the context of intra-country comparison. Is misallocation consistently higher in the service sector? Is there a pattern of the severity of misallocation in the service sector? We answer the later question by presenting a novel fact: misallocation in the service sector is relatively more severe at lower levels of development. To rationalize the previous fact, we present a model of industry dynamics, endogenous borrowing constraints, and financial structure. We use the model to quantify the TFP losses implied by the patterns of premature deindustrialization.

Ex-Post Efficient Risk Sharing with Private Information and Limited Commitment. (with Nicolas Caramp) 

Sovereigns might find that state-contingent bonds have attractive risk-sharing properties, however the fact that the national authorities are reporting the states limits the implementable risk-sharing arrangements. For example, Argentina issued state-contingent bonds (bonds whose payments were tied to GDP or inflation) and then misreported inflation. In this sense, the natural environment to study the design of state-contingent bonds is an economy with private information and limited commitment. The literature has characterized the optimal contract in this setting. A common feature of the resulting contract is that it is ex-post inefficient (i.e., there exists another contract that generates an ex-post Pareto improvement). In this paper we propose a notion of limited commitment involving renegotiation proofness. To capture the idea that mutually beneficial trades should occur between parties constantly interacting in markets, we solve the optimal contract under asymmetric information, limited commitment of the agent, and limited commitment of the principal. Specifically, we assume that the principal cannot commit not to renegotiate. While this breaks the traditional revelation principle, we show how to implement the general version of the revelation principle under limited commitment in our setting. We propose a decentralization a la Alvarez Jerman (2000) and study the role of constraints coming from limited enforcement and adverse selection.

Work in Progress

Rank Reversals of Financial Constraints, Revisiting Financial Dependence Measures.