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 study the role of US government purchases in driving lower frequency international business cycles. At such frequencies, US government purchases are strongly and positively correlated with US net trade flows and a depreciated real exchange rate (RER). I build a theory where shocks to government purchases, financed with debt issued in imperfect financial markets that break Ricardian equivalence, trigger a strong crowding-out of private investment. This induces the economy into a cycle of positive net trade flows, accumulation of gross foreign assets and a depreciated RER. I show that these predictions are supported by identified impulse responses to shocks to US government purchases in a SVAR. Finally, using the estimated model, which also includes a rich set of shocks and frictions, I quantify the importance of innovations to US government purchases in driving international business cycles.