Working papers

International Portfolio Investments with Trade Networks (*New draft: March 2022)
Abstract: What determines the composition of international portfolio investments remains an open question in international finance. In this paper, I propose a theory of international portfolio choice where trade networks play a key role. I solve in closed form for the optimal equity and bond portfolio investments in a multi-country model with arbitrary global input – output linkages and taste differences. I show that a measure of international demand exposure, called the “International Domar Weights” (IDWs), is key in determining international equity portfolios. The IDWs extend the closed-economy “Domar weights” to the international setting and capture countries’ interdependence through both direct and indirect trade linkages. Using data from the World Input – Output Database (WIOD) and Coordinated Portfolio Investment Survey (CPIS), I apply the framework to a network of 43 major developed and emerging economies and obtain four main results. First, the theoretical network portfolio is a significant predictor and explains almost half of the variation in international bilateral portfolio investments. The significance of the network portfolio is robust to controlling for gravity factors (market capitalization, distance, EU membership, etc.). Second, including the network-based portfolio in a gravity model for assets resolves the puzzle of why distance matters for asset trade at all. Third, indirect trade linkages matter for portfolio determination, highlighting the need to explicitly account for trade in intermediate inputs. Finally, the model predicts both the levels and the changes in equity home bias that have occurred since 2000.

Behavioral-Attention Phillips Curve: Theory and Evidences from Inflation Surveys (2020)
Abstract: I derive a new “Behavioral-Attention Phillips Curve” based on a theory of endogenous uncertainty and behavioral attention choice that jointly accounts for two recent phenomena: (i) the flattening of the Phillips Curve and (ii) “well-anchored” inflation. In particular, the new Phillips Curve features both output gap and inflation expectation slopes that decline when there is less uncertainty about the inflation rate. I construct measures of inflation uncertainty from surveys of inflation expectation and show that the new Phillips Curve fits better in-sample and makes better out-of-sample prediction compared to a traditional Phillips Curve with fixed slopes. The model also implies that multiple equilibria arise in periods with medium volatility due to the complementarity between attention choice and pricing decisions, and that the Central Bank faces a novel policy paradox that makes it hard to raise inflation in a quiet, low-volatility period.

Zipf’s Law for International Currencies (2022)
Joint with Ken Rogoff and Ethan Ilzetzki. Slides available upon request.
Abstract: Using detailed transaction data from SWIFT, the world’s largest financial messaging service, we document a power law distribution of currency denomination. Zipf’s law, an inverse relationship between (log) rank and size, with a roughly unitary slope, has been documenting in a multitude of setting in social and natural sciences, and random growth theories have been proposed to explain this empirical regularity. We show that currency usage shows an even more skewed distribution than suggested by Zipf’s law that we name “Hyper-Zipf”. The US dollar and Euro are both used even more than would be predicted by this skewed distribution, suggesting strong “winner-takes-all” dynamics. Looking at transactions at country by currency-pair level, we show that the US is unique in that nearly all in- and out-bound transactions with the US are in US dollars. We then show that dollar usage percolates through US trading partners into the international monetary system. We provide an augmented random-growth network theory to rationalize these findings. 

Supply Chain Disruptions and Inflation (2022)
Joint with John Spray and Taehoon Kim. Slides available upon request.
Abstract: In this paper, we explain the cross-country inflation dynamics during the COVID-19 pandemic and explore the role of the global production network in propagating idiosyncratic country shocks and global shocks. Using the OECD world input-output table for 63 countries and 45 sectors, we measure differential exposures of countries and production sectors to major pandemic-induced shocks — lockdown, transportation cost, government fiscal support, oil price — and employ a Bartik shift-share design to identify how each shock affects inflation measures via supply and demand-based channels. Our findings have implications for the conduct of monetary policy as economies recover from the pandemic.

Optimal Adaptation and Mitigation Policies for Small Open Economies (2022)
Joint with Filiz D. Unsal and Michael Cai.