Research

Real Exchange Rate and Net Trade Dynamics: Financial and Trade Shocks (with Soo Kyung Woo)

Journal of International Economics, vol. 157, 2025

[WP version]

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. 

Fiscal Policy, Portfolio Frictions, and International Transmission  [Nada es Gratis Blog (spanish)] (submitted)

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.

The Macroeconomic Consequences of Export Value-Added Tax Rebates (with S. Gomez and R. Merga)

We investigate the use of Value-Added Tax Rebates on Exports (VAT-RX), leveraging a novel Chinese industry-level data set. We find that: (1) VAT-RX has been a widely utilized policy tool in China; (2) at the cross-section, changes in VAT-RX were associated with improvements in export performance during the global financial crisis; and (3) changes in the aggregate VAT-RX is typically implemented in a countercyclical manner. We integrate these empirical findings into a two-country DSGE model estimated with Bayesian methods to evaluate the macroeconomic consequences of VAT-RX policy. We estimate that without changes to the VAT-RX policy during the global financial crisis, China’s aggregate exports and GDP would have been 3.7 and 0.3 percentage points lower, respectively.