Job Market Paper

Propagation of Financial Shocks in an Input-Output Economy with Trade and Financial Linkages of Firms



Abstract: Firms are connected through the production network. At the same time, the production linkages coincide with financial linkages because of delays to input payments. This paper investigates how these interconnected production and financial linkages lead to the propagation of financial shocks both upstream and downstream. First, I show that financial shocks can propagate upstream if there are financial linkages of firms and financial frictions in trade. Second, I find, based on the input-output matrix and the bond yield data in the U.S., upstream propagation of financial shocks is stronger than downstream propagation. Third, I elaborate a DSGE model that can capture this pattern of shocks and generate quantitative predictions. Fourth, I demonstrate that credit policies would have a stronger impact if liquidity were transferred to downstream sectors after aggregate liquidity shocks.

Publication

Exchange Rates, Risk Premia, and Inflation Indexed Bond Yields,
with Richard Clarida, The Role of Currency in Institutional Portfolios, ed. Rick Levich, Risk Books and Journals, London.

Working Paper

The Skewness of Price Change Distributions: A New Touchstone of Sticky Price Models, with Daniel Villar.

Discretion Versus Commitment with Information Acquisition,

Work In Progress

Experimental Analysis of Coordination Games with Flexible Information Acquisition, with Sergey Kolbin

The State-dependent Price Adjustment Hazard Function: Evidence from High Inflation Environments, with Daniel Villar

Risk and Return in the Foreign Exchange Market: Measurement without VARs