Research

This paper studies the drivers of the US real exchange rate (RER), with a particular focus on its comovement with net trade (NT) flows. We consider the entire spectrum of frequencies, as the low-frequency variation accounts for 61 and 64 percent of the unconditional variance of the RER and NT, respectively. We develop a generalization of the standard international business cycle model that successfully rationalizes the joint dynamics of the RER and NT while accounting for the major puzzles of the RER. We find that, while financial shocks are necessary to capture high frequency variation in RER, trade shocks are essential for the lower frequency fluctuations. 

I offer a unified explanation for two puzzles in international economics: (i) the tendency for fiscal expansions to depreciate the exchange rate and increase net trade, and (ii) the exchange rate disconnect — the near-random-walk behavior of exchange rates uncorrelated with macroeconomic fundamentals. I present new evidence showing that debt-financed US fiscal expansions lead to deviations from uncovered interest parity, favoring dollar-denominated assets, and increases in US gross foreign assets, contrary to predictions of standard models. I propose a model where portfolio rebalancing frictions drive the international transmission of debt-financed fiscal expansions and generate exchange rate dynamics consistent with the disconnect.

We study trade-based (quasi-)fiscal devaluations by exploiting changes in China’s system of partial value-added tax rebates on exports (VATRX), which act as time-varying export subsidies. Using highly disaggregated VATRX and customs data, we estimate the dynamic effects of rebate changes on export quantities and prices. Permanent changes in VATRX generate a dynamic quantity response—with trade elasticities rising from 1.2 on impact to 17 in the long run—and complete pass-through to export prices. We embed these micro estimates into a two-country New Keynesian model with delayed substitution in trade flows. Applying the model to the 2008 global financial crisis, we find that China's 1.6 percentage point increase in VATRX boosted exports and GDP by 6.33 and 0.48 percentage points, respectively. Trade policy thus offers an effective fiscal-devaluation instrument.