Working Papers

Finance-thy-Neighbor. Trade Credit Origins of Aggregate Fluctuations.

[ Online Appendix ],  First Draft: October 2018, This Version: November 2020, New version coming soon.

This paper studies the role of endogenous trade-credit linkages for the propagation of shocks in a multisector model where firms finance production using bank and trade credit. I build a model in which the adjustment in the volume and cost of trade credit introduces interdependent distortions and captures two counteracting mechanisms: (1) Firms smooth shocks by substituting bank and trade credit. (2) An increase in the cost of trade credit amplifies financial shocks by tightening the financing condition of customers. In a quantitative application of the model to the US economy during the 2008-2009 crisis, I simulate the model using financial shocks only and show that: (1) Trade-credit linkages generate large spillovers relative to an economy with bank finance only;  (2) The smoothing mechanism was operative, though small; (3) Sectors extending relatively more trade credit to customers than their volume of bank  loans are systemically important and generate large spillovers.

Work in Progress

Pathways to Persistence (with Vasco Carvalho)

Working Paper Soon

We argue that network connections are an independent source of persistence of economic outcomes. In the context of dynamic equilibrium models where agents’ optimal actions are interlinked and reflect the lagged actions of their network neighbors, as defined by some underlying social or economic graph of connections, we show that these network structures yield: (i) a novel characterization of the conditional expectation of future outcomes – i.e. impulse response functions or conditional forecasts, and (ii) a superior forecasting performance at the macro-level both in theory and in practice.  In the first part of this paper, we offer three theoretical contributions: First, at the micro-level, we develop notions of long- and short-run persistence and show how these vary as a function of standard network objects. Second, at the macro-level, we first show how the corresponding aggregate process can be mapped to a univariate ARMA process whose coefficients depend on the network and, based on this, characterize aggregate persistence in networked environments. Third, we show that knowledge of the network also yields superior forecasts for aggregate outcomes whenever network connections are heterogeneous across agents.  In the second part, as a proof of concept, we provide two applications of this networked perspective in the context of U.S. Industrial Production (IP): We first study how the level and the dynamics of persistence of aggregate IP-growth can be accounted for solely by information on the network structure of sector-to-sector input linkages. Finally, we conduct a forecast race and show that forecasts of aggregate IP growth generated by a calibrated large-dimensional production network model (with zero free parameters) outperform those generated by popular econometric benchmarks.

Financial Frictions and Regional Comovement in the US.

An extensive literature has documented the evolution of comovement of economic activity across countries over time. The importance of bilateral trade as a driver of business cycle synchronization has been highlighted repeatedly. However, the failure of quantitative models to capture the comovement observed in trade data has been dubbed the “trade-comovement puzzle”. Against the back-drop of the quantitative importance of trade credit – the BIS estimates that two thirds of world trade is supported by inter-firm credit – I investigate the ability of an international multisector general equilibrium model with both trade and financial linkages within and across regions to generate comovement patterns and magnitudes as observed in the data.