Working papers
The Impact of Uncertainty Shocks on the Investment of Small and Large Firms: Micro Evidence and Macro Implications (Job Market Paper)
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.
Liability Dollarization and Exchange Rate Pass-Through (with Annie Lee)
Abstract: With Korean firm-level and aggregated industry-level data, we explore a balance sheet channel of corporate foreign currency borrowing through which an exchange rate shock passes through to domestic producer prices. We explore this negative balance sheet effect in the determination of the exchange rate pass-through to domestic prices both empirically and theoretically. Exploiting a large devaluation episode in Korea in 1997, we document that a sector with higher foreign currency debt exposure prior to the crisis experienced a larger price increase. We study the transition path upon an unexpected exchange rate depreciation by building a heterogeneous firm model with working capital and financial constraints. Upon unexpected depreciation, firms with high foreign currency debt exposure face tighter working capital and financial constraints, which reduces investment and liquid savings, increasing the costs of production and prices. The model matches qualitatively and quantitatively the observed marginal effect of the short-term foreign currency debt ratio on the sectoral price changes. The estimated model can explain around 52% of the variation in price changes across industries during the crisis. From firm-level simulations, we decompose the two distinct channels of exchange rate pass-through – the balance sheet channel and the imported input channel – at the firm-level. We show that firms increase their prices and reduce their markups as they have higher foreign currency debt exposure, especially more so when they are financially constrained, consistent with the empirical relationships documented.
Work in progess
Exchange Rate Pass-through to Export Prices:The Role of Foreign Currency Debt (with Annie Lee and Saiah Lee)
Policy works/Articles
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)
The Impact of Uncertainty Shocks on the Investment of Small and Large Firms: Micro Evidence and Macro Implications (Job Market Paper)
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.
Liability Dollarization and Exchange Rate Pass-Through (with Annie Lee)
Abstract: With Korean firm-level and aggregated industry-level data, we explore a balance sheet channel of corporate foreign currency borrowing through which an exchange rate shock passes through to domestic producer prices. We explore this negative balance sheet effect in the determination of the exchange rate pass-through to domestic prices both empirically and theoretically. Exploiting a large devaluation episode in Korea in 1997, we document that a sector with higher foreign currency debt exposure prior to the crisis experienced a larger price increase. We study the transition path upon an unexpected exchange rate depreciation by building a heterogeneous firm model with working capital and financial constraints. Upon unexpected depreciation, firms with high foreign currency debt exposure face tighter working capital and financial constraints, which reduces investment and liquid savings, increasing the costs of production and prices. The model matches qualitatively and quantitatively the observed marginal effect of the short-term foreign currency debt ratio on the sectoral price changes. The estimated model can explain around 52% of the variation in price changes across industries during the crisis. From firm-level simulations, we decompose the two distinct channels of exchange rate pass-through – the balance sheet channel and the imported input channel – at the firm-level. We show that firms increase their prices and reduce their markups as they have higher foreign currency debt exposure, especially more so when they are financially constrained, consistent with the empirical relationships documented.
Work in progess
Exchange Rate Pass-through to Export Prices:The Role of Foreign Currency Debt (with Annie Lee and Saiah Lee)
Policy works/Articles
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)
