Working papers
Corporate Dollar Debt and Global Trades (with Annie Lee and Saiah Lee)
Abstract: This paper investigates the role of dollar debt and firm heterogeneity in shaping the exchange rate pass-through to global trades. With a unique dataset that merges extensive firm-level balance sheet information with transaction-level Korean customs data, we find that firms with greater exposure to foreign currency debt tend to decrease their export quantities and increase their export prices following the devaluation at the end of 1997, particularly pronounced for smaller firms. On the other hand, larger exporters increase their export quantities and lower their export prices as they are more indebted in foreign currency. The heterogeneous price and quantity responses across firm size potentially arise from large firms, indebted in foreign currency, not facing the disruption in their production as much as smaller firms. On top of that, larger firms may increase their exports to generate more cashflows when they are more indebted in foreign currency as their production capacity is not restricted after the devaluation. We also find that exporters, indebted in foreign currency, reduce their sales to domestic markets more than domestic firms, especially when exporters are small facing tighter financial constraints. The panel data analysis from 2001-2020 confirms the relevance of the financial channel of dollar debt in the exchange rate pass-through to export prices and quantities in more recent periods.
Liability Dollarization and Exchange Rate Pass-Through (with Annie Lee)
Abstract: We explore the negative balance sheet effect of foreign currency borrowing on the exchange rate pass-through to domestic prices. Exploiting a large unexpected devaluation episode in Korea in 1997, we show that firms with higher foreign currency debt have indeed experienced balance sheet deterioration and faced lower growth rates of sales and net worths and reduced their price-cost markups. We then empirically document that a sector populated by firms with higher foreign currency debt exposure prior to the crisis experienced a larger price increase. Building a heterogeneous firm model with financial constraints, we quantify the role of foreign currency liabilities in explaining the exchange rate pass-through to prices and find that 20% to 80% of the sectoral price changes during the crisis can be explained by the balance sheet effect of foreign currency debt alone.
The Impact of Uncertainty Shocks on the Investment of Small and Large Firms: Micro Evidence and Macro Implications
Abstract: This paper investigates how cross-sectional micro-uncertainty influences the investment of small and large firms and discusses the aggregate implications of the heterogeneity in their investment decisions. Empirically, we find that large firms show less investment decline in times of heightened uncertainty. We provide empirical evidence for the underlying driver of the observed size effect: the heterogenous responses across firms are in fact the consequence of large firms operating in multiple markets rather than their size per se. To interpret these findings, we build a heterogeneous firm model with single- and multi-unit firms subject to (i) unit-level real frictions—fixed and convex investment adjustment costs and (ii) firm-level financial frictions—costly equity issuance. In the model with unit-level frictions, an increase in uncertainty lowers the investment of both single and multi-unit firms through a ‘wait-and-see’ effect. For a multi-unit firm, on the other hand, firm-level financial frictions generate the interdependence of investment across units within a firm, i.e., a fall in investment in one unit enlarges internal funds and so relaxes the constraint on the amount a firm can invest in the other unit. Therefore, upon uncertainty shocks, multi-unit firms lower their investment by less than single-unit firms. This is because the ‘wait-and-see’ effect is partially offset by the relaxation of financial constraints due to the availability of larger internal funds when investment in one unit decreases. To examine the aggregate implications due to the heterogeneity in firms’ responses, we compare the benchmark economy to a counterfactual economy with only single-unit firms. The result shows that the contribution of multi-unit firms is sizable in alleviating the impact of uncertainty shocks on aggregate investment.
Policy works/Articles
Recent Fluctuations in Current Account: Factors and Implications, KDI Economic Outlook, 2023, 40(2)(In Korean, In English)
Impacts of Currency Fluctuations on Exports and Imports, and the Trade Balance, KDI Economic Outlook, 2022, 39(2)(In Korean, In English)
External Uncertainty: Impacts on Korea's Real Economy, KDI Economic Outlook, 2022, 39(1)(In Korean, In English)
Corporate Dollar Debt and Global Trades (with Annie Lee and Saiah Lee)
Abstract: This paper investigates the role of dollar debt and firm heterogeneity in shaping the exchange rate pass-through to global trades. With a unique dataset that merges extensive firm-level balance sheet information with transaction-level Korean customs data, we find that firms with greater exposure to foreign currency debt tend to decrease their export quantities and increase their export prices following the devaluation at the end of 1997, particularly pronounced for smaller firms. On the other hand, larger exporters increase their export quantities and lower their export prices as they are more indebted in foreign currency. The heterogeneous price and quantity responses across firm size potentially arise from large firms, indebted in foreign currency, not facing the disruption in their production as much as smaller firms. On top of that, larger firms may increase their exports to generate more cashflows when they are more indebted in foreign currency as their production capacity is not restricted after the devaluation. We also find that exporters, indebted in foreign currency, reduce their sales to domestic markets more than domestic firms, especially when exporters are small facing tighter financial constraints. The panel data analysis from 2001-2020 confirms the relevance of the financial channel of dollar debt in the exchange rate pass-through to export prices and quantities in more recent periods.
Liability Dollarization and Exchange Rate Pass-Through (with Annie Lee)
Abstract: We explore the negative balance sheet effect of foreign currency borrowing on the exchange rate pass-through to domestic prices. Exploiting a large unexpected devaluation episode in Korea in 1997, we show that firms with higher foreign currency debt have indeed experienced balance sheet deterioration and faced lower growth rates of sales and net worths and reduced their price-cost markups. We then empirically document that a sector populated by firms with higher foreign currency debt exposure prior to the crisis experienced a larger price increase. Building a heterogeneous firm model with financial constraints, we quantify the role of foreign currency liabilities in explaining the exchange rate pass-through to prices and find that 20% to 80% of the sectoral price changes during the crisis can be explained by the balance sheet effect of foreign currency debt alone.
The Impact of Uncertainty Shocks on the Investment of Small and Large Firms: Micro Evidence and Macro Implications
Abstract: This paper investigates how cross-sectional micro-uncertainty influences the investment of small and large firms and discusses the aggregate implications of the heterogeneity in their investment decisions. Empirically, we find that large firms show less investment decline in times of heightened uncertainty. We provide empirical evidence for the underlying driver of the observed size effect: the heterogenous responses across firms are in fact the consequence of large firms operating in multiple markets rather than their size per se. To interpret these findings, we build a heterogeneous firm model with single- and multi-unit firms subject to (i) unit-level real frictions—fixed and convex investment adjustment costs and (ii) firm-level financial frictions—costly equity issuance. In the model with unit-level frictions, an increase in uncertainty lowers the investment of both single and multi-unit firms through a ‘wait-and-see’ effect. For a multi-unit firm, on the other hand, firm-level financial frictions generate the interdependence of investment across units within a firm, i.e., a fall in investment in one unit enlarges internal funds and so relaxes the constraint on the amount a firm can invest in the other unit. Therefore, upon uncertainty shocks, multi-unit firms lower their investment by less than single-unit firms. This is because the ‘wait-and-see’ effect is partially offset by the relaxation of financial constraints due to the availability of larger internal funds when investment in one unit decreases. To examine the aggregate implications due to the heterogeneity in firms’ responses, we compare the benchmark economy to a counterfactual economy with only single-unit firms. The result shows that the contribution of multi-unit firms is sizable in alleviating the impact of uncertainty shocks on aggregate investment.
Policy works/Articles
Recent Fluctuations in Current Account: Factors and Implications, KDI Economic Outlook, 2023, 40(2)(In Korean, In English)
Impacts of Currency Fluctuations on Exports and Imports, and the Trade Balance, KDI Economic Outlook, 2022, 39(2)(In Korean, In English)
External Uncertainty: Impacts on Korea's Real Economy, KDI Economic Outlook, 2022, 39(1)(In Korean, In English)