Working Papers

Markups and Inflation in Oligopolistic Markets: Evidence from Wholesale Price Data
with Patrick Alexander, Oleksiy Kryvtsov and Ben Tomlin

We study how the interaction of market power and nominal price rigidity influences inflation dynamics. We formulate a tractable model of oligopolistic competition and sticky prices, and derive closed-form expressions for the pass-through of idiosyncratic and common cost shocks to firms' prices. Using unpublished micro data for Canadian wholesale firms, we estimate that idiosyncratic cost pass-through is incomplete at 70% and independent of the degree of sector price stickiness. Common cost pass-through declines with price stickiness: from nearly complete in flexible-price sectors to below 70% in sectors with the stickiest prices. A higher degree of sector or firm market power lowers the pass-through of both types of cost shocks. These estimates imply a degree of strategic complementarity that lowers the slope of the New Keynesian Phillips Curve by 30% in one-sector model and by 74% in multi-sector model.

The Swift Decline of the British Pound: Evidence from UK Trade-invoicing after the Brexit Vote with Meredith Crowley and Minkyu Son

Using administrative transactions data from the United Kingdom, we document a swift decline in sterling use among British exporters after the 2016 Brexit vote. Through a novel decomposition, we document most of this decline comes from two sources: (i) continuously-operating firms switching from sterling to dollars or local currencies and (ii) reductions in transactions for sterling-loyal firms. In contrast, new entrants into exporting primarily invoice in sterling before and after the Brexit vote. Our findings provide the first evidence on the quantitative relevance of new channels that contribute to changes in aggregate invoicing shares amidst political upheaval.

Dominant Currency Dynamics: Evidence on Dollar-invoicing from UK Exporters
with Meredith Crowley and Minkyu Son [Slides]

How do the choices of individual firms contribute to the dominance of a currency in global trade? Using export transactions data from the UK over 2010-2016, we document strong evidence of two mechanisms that promote the use of a dominant currency: (1) prior experience: the probability that a firm invoices its exports to a new market in a dominant currency is increasing in the number of years the firm has used the dominant currency in its existing markets; (2) strategic complementarity: a firm is more likely to invoice its exports in the currency chosen by the majority of its competitors in a foreign destination market in order to stabilize its residual demand in that market. We show that the introduction of a managerial fixed cost of currency management into a model of invoicing currency choice yields dynamic paths of currency choice that match our empirical findings.

The Mutable Geography of Firms' International Trade: Evidence and Macroeconomic Implications [Slides][Online Appendix I: UK Results] [Online Appendix II: Additional China Results]

Exporters add and drop destination markets in response to a variety of global, national and industry-specific shocks. This paper develops empirical measures of these market changes and documents a set of key stylized facts using the customs databases of China (2000-2006) and the United Kingdom (2010-2016). First, I find within-firm changes in destination markets involve large trade values and 30-40% of all market changes involve simultaneously adding and dropping markets. Second, around 20% of within-firm market changes are driven by fluctuations in bilateral exchange rates and local CPI measures. Third, while adding and dropping markets, firms simultaneously adjust prices and quantities across all other destinations they serve. I build a multi-country general equilibrium model to investigate the channels that can generate the observed data patterns and study the aggregate implications of mutable markets (within-firm market changes) on the distribution of markups, trade volumes, and welfare. Applying the multi-country model to analysis of a bilateral trade war, I find that aggregate productivity for countries directly involved in the trade war drops more (1-2%) and that of countries not involved rises more (8-10%) when firms endogenously vary their markets in response to the new conditions of competition in local markets induced by the bilateral trade war.

Winner of the RoWE Young Economists Prize at the 2019 European Trade Study Group (ETSG) Annual Conference

Markets and Markups: A New Empirical Framework and Evidence on Exporters from China with Giancarlo Corsetti, Meredith Crowley, and Huasheng Song
[Online Appendix][Supplementary Material]

Firms that dominate global trade export to multiple countries and frequently change their foreign destinations. We develop a new empirical framework for analysing markup elasticities to the exchange rate in this environment. The framework embodies a new estimator of these elasticities that controls for endogenous market participation and a new classification of products based on Chinese linguistics to proxy for firms' power in local markets. Applying this framework to Chinese customs data, we document significant pricing-to-market for highly differentiated goods. Measured in the importer's currency, the prices of highly differentiated goods are far more stable than those of less differentiated products.

Winner of the Emerald Best Paper Award at the 2018 China Finance Review International Conference

Renegotiation of Trade Agreements and Firm Exporting Decisions: Evidence from the Impact of Brexit on UK Exports with Meredith Crowley and Oliver Exton; R&R European Economic Review

The renegotiation of a trade agreement introduces uncertainty into the economic environment. We exploit the natural experiment of the Brexit referendum to estimate the impact of uncertainty associated with trade agreement renegotiation. Empirically, we develop measures of the trade policy uncertainty facing firms exporting from the UK to the EU after June 2016. Using the universe of UK export transactions at the firm and product level, we estimate entry (exit) in 2016 would have been 5.0% higher (6.1% lower) if firms exporting from the UK to the EU had not faced increased trade policy uncertainty after June 2016.

Media Coverage: VoxEU; The Economist (2018, 2019); The Financial Times; The Telegraph

The Pro-competitive Effects of Trade Agreements
with Meredith Crowley and Thomas Prayer; R&R Journal of International Economics [Slides]

How does trade policy affect competition? Using the universe of product exports by firms from eleven low and middle-income countries, we document that tariff reductions under trade agreements have strong procompetitive effects - they encourage entry and reduce the (tariff exclusive) price-cost markups of exporters. This finding, that markups fall with tariff cuts, contradicts a core prediction of standard oligopolistic competition models of trade. We extend a workhorse international pricing model of oligopolistic competition to include multiple countries and a rich preference structure. Our preference structure allows for fierce competition among firms from the same country and less intense competition among firms from different countries. We show a firm’s optimal markup after a tariff cut can rise or fall depending on the parameters of the preference structure and tariff-induced reallocation of market share among firms and across countries.

Publications

Invoicing and the Dynamics of Pricing-to-Market: Evidence from UK Export Prices around the Brexit Referendum with Giancarlo Corsetti and Meredith Crowley [VoxEU] [Slides] [Replication Code]
Journal of International Economics, March 2022

The Looming Threat of Tariff Hikes: Entry into Exporting under Trade Agreement Renegotiation with Meredith Crowley and Oliver Exton
AEA: Papers and Proceedings, May 2020


Work in Progress

Firm-level Pass Through: A Machine Learning Approach [Slides]

Understanding how exporters react to exchange rate shocks is important for evaluating international shock transmissions and setting the optimal international monetary policy. Empirical studies have documented huge heterogeneity in the degree to which different firms and products respond to exchange rate shocks. In addition, estimates of exchange rate pass through (ERPT) are time varying and depend on observed and unobserved variables in a nonlinear way. This paper proposes a machine learning algorithm that systematically detects determinants of ERPT and estimates ERPT at the firm-level in a large-scale custom dataset. The accuracy of the algorithm is tested on simulated data from a multi-country version of Atkeson and Burstein (2008). Applying the algorithm to China’s custom data from 2000-2006, this paper estimates the ERPT of China’s exporters and documents new evidence on the nonlinear relationships among market structures, unit value volatility and ERPT.

Global Implications of Multilateral Competition and Pricing-to-Market
with Giancarlo Corsetti and Meredith Crowley

Policy Articles

The Price Impacts of Trade Agreements, 23 June 2022, The Economics of Brexit: What Have We Learned?, VoxEU-CEPR eBook, with Meredith Crowley and Thomas Prayer

How is Brexit Affecting the Role of Sterling in UK Trade?, 19 July 2021, Economics Observatory, with Meredith Crowley

Pro-competitive Provisions in Deep Trade Agreements, 23 June 2021, The Economics of Deep Trade Agreements, CEPR-World Bank eBook, with Meredith Crowley and Thomas Prayer

Will ‘Level Playing Field’ Issues Derail the UK-EU Negotiations?, 26 May 2020, The UK in a Changing Europe, with Meredith Crowley

The Sterling Depreciation and UK Price Competitiveness, 26 August 2019, VoxEU, with Giancarlo Corsetti and Meredith Crowley

The Impact of Brexit Uncertainty on UK Exports, 21 January 2019, VoxEU, with Meredith Crowley and Oliver Exton

A Granular Analysis of the Exposure of UK Exports to EU Tariffs, Quotas and Antidumping under ‘No Deal’, 13 December 2017, VoxEU, with Giancarlo Corsetti, Meredith Crowley and Oliver Exton