Working Papers


The Overhang Hangover, revised July 2007, World Bank Economic Research Working Paper 3673, CEPR Discussion Paper 5210, with Romain Ranciere.


Co-Fluctuations, revised June 2003. CEPR Discussion Paper 2267



Pooling Risk among Countries, Journal of International Economics, forthcoming, with Michael Callen and Paulo Mauro.

Suppose that international sharing risk - worldwide or with large numbers of countries - were costly. How much risk-sharing could be gained in small sets (or “pools”) of countries? To answer this question, we compute the means and variances of poolwide gross domestic product growth, for all possible pools of any size drawn from a sample of 74 countries, and compare them with the means and variances of consumption growth in each country individually. From the difference, we infer potential diversification and welfare gains. As much as two-thirds of the first best, full worldwide welfare gains can be obtained in groupings of as few as seven countries. The largest potential gains arise from pools consisting of countries in different regions and  including countries with weak institutions. We argue international risk-sharing fails to emerge because the largest potential gains are among countries that do not trust each other's willingness and ability to abide by international contractual obligations.

Keywords: Risk Sharing, Diversification.

JEL Classification: E21, E32, E34, F41.


Elasticity Optimism, American Economic Journal: Macroeconomics, forthcoming, with Isabelle Méjean.

On average, estimates of trade elasticities are smaller in aggregate data than at sector level. This is an artefact of aggregation: Estimations performed on aggregate data constrain sector elasticities to homogeneity, which creates a heterogeneity bias. The paper shows such a bias exists in two prominent approaches used to estimate elasticities, which has meaningful consequences for the calibration of the trade elasticity in one-sector, aggregative models. With elasticities calibrated to aggregate data, macroeconomic models can have predictions at odds with the implications of their multi-sector counterparts. They do not when elasticities are calibrated using a weighted average of sector elasticities.

Keywords: Trade Elasticities, Heterogeneity Bias, Elasticity Puzzle.

JEL Codes: F41, F32, F21.


Credit Supply and the Price of Housing, American Economic Review, March 2015, with Giovanni Favara.

An exogenous expansion in mortgage credit has significant effects on house prices. This finding is established using US branching deregulations between 1994 and 2005 as instruments for credit. Credit increases for deregulated banks, but not in placebo samples. Such differential responses rule out demand-based explanations, and identify an exogenous credit supply shock. Because of geographic diversification, treated banks expand credit: Housing demand increases, house prices rise, but to a lesser extent in areas with elastic housing supply, where the housing stock increases instead. In an instrumental variable sense, house prices are well explained by the credit expansion induced by deregulation.

Keywords: Diversification Gains, Deregulation, Credit Supply, House Prices, Bank Branching.

JEL Codes: G21, G10, G12


Sectoral Phillips Curves and the Aggregate Phillips Curve, Journal of Monetary Economics, May 2011, Vol. 58(4), pp. 328-344, with Florian Pelgrin and Eric Jondeau.

Sector-level Phillips curves are estimated in French data. There is considerable heterogeneity across sectors, with vastly different estimates of the backward looking component of inflation and the duration of nominal rigidities. A multi-sector model of inflation dynamics is calibrated on the basis of these sectoral estimates. Aggregate inflation, simulated on the basis of heterogeneous sectors, displays comparable dynamics to actual data. A comparison is drawn between the policy trade-offs implied by a Phillips curve based on macroeconomic estimates, vs. one based on a model with heterogeneous sectors. The difference is sizeable.

Keywords: New Keynesian Phillips Curve, Heterogeneity, Inflation Persistence, Marginal Costs.

JEL Codes: E31, E52, E60

Supplementary materials, Technical Appendix, Matlab Codes


What Happened to the East Asian Business Cycle?, Chapter 11, pp.284-310, in Devereux, M., P. Lane, C.Y. Park, and S.J. Wei. (Eds.). The Dynamics of Asian Financial Integration, Routledge Studies in the Modern World Economy (2011)

I examine the dynamics of business cycle correlations within emerging East Asia, and draw comparisons with alternative regional samples. There is overwhelming evidence bilateral cycle correlations have significantly shifted upwards since the 1980's. In emerging East Asia, the shift corresponds to the late 1990's Asian crisis - but not elsewhere. A spike in business cycles synchronization is evident from 2008Q3. However, it is substantially more pronounced amongst developed countries than in emerging East Asia, or indeed Latin America. The ongoing crisis appears to affect East Asian economies in more differentiated ways than the rest of the developed world. The paper proposes a decomposition of the dynamics in cycle synchronization into changes in goods trade and in financial linkages. Interestingly, while the change in cycles synchronization corresponds to a fall in bilateral trade for emerging East Asia, it is associated with a fall in financial trade in the rest of

the world.

Keywords: International Business Cycle, Asian Crisis, Sub-Prime Crisis, Trade Linkages, Financial Linkages.

JEL Codes: E32, F15, F36, F41.



The Efficiency of Capital Allocation: Do Bank Regulations Matter?, Review of Finance, January 2011, Vol. 15(1), pp. 135-172, with Viral Acharya and Jason Sturgess

We document that the deregulation of bank branching restrictions in the United States triggered a reallocation across sectors, with end effects on state-level volatility. The change cannot be explained simply by shifts in sector-level returns and volatility. A reallocation effect is at play, which we study in the context of mean-variance portfolio theory applied to sectoral returns. We find the reallocation is particularly strong in sectors characterized by young, small and external finance dependent firms, and for states that have a larger share of such sectors. The findings suggest that improving bank access to branching affects the sectoral specialization of output, in a manner that depends on the variance-covariance properties of sectoral returns, rather than on their average only.

Keywords: Financial development, Growth, Volatility, Diversification, Deregulation, Liberalization, Mean-variance efficiency.

JEL Codes: E44, F02, F36, G11, G21, G28, O16

Companion paper



The First Global Recession in Decades, IMF Economic Review, December 2010, Vol. 58(2), pp.327-354.

This paper uses monthly data on industrial production to estimate the distribution of international business cycle correlations since the 1980s, with a focus on the current turmoil. The degree of international correlation in national business cycles since the end of 2008 is unprecedented in three decades. Since December 2008, there has been a sizable and significant upward shift in the cross-sectional distribution of cycles synchronization, especially between advanced economies. The magnitude of the shift is unprecedented in recent history, even relative to what happened following 1973 after alternative shocks with worldwide consequences. The shift does not arise because volatilities changed with the crisis. Both goods and assets trade have contributed to this synchronization. The (large and significant) synchronization among OECD economies is associated with financial openness. The (weaker) diffusion among developing economies tends to happen between trade partners.

Keywords: International Business Cycle, Sub-Prime Crisis, Trade Linkages, Financial Linkages.

JEL Codes: E32; F15; F36; F41



One TV, One Price?, Scandinavian Journal of Economics, December 2010, Vol.112(4), pp.753-781,with Haroon Mumtaz, Morten Ravn and Hélène Rey.

We study television prices across European countries and regions. Quality as measured by observable characteristics of televisions accounts for a large share of the international dispersion in prices. Rich economies tend to consume higher-quality goods, but sizeable international price differentials exist even for identical televisions. The valuation of brands differs significantly across borders. EMU countries display lower price dispersion but not necessarily because of the single currency. Absolute price differentials and relative price volatility increase with exchange rate volatility, but not with transport costs. Exchange rate pass-through is low in the short run but high in the long run.

Keywords: International and regional price differences; border effect; brand perception.

JEL Codes: F15; F23; F41



Finance, Institutions and Risk Sharing in International Portfolios, Journal of Financial Economics, December 2009, Vol. 94(3), pp.428-447, with Marcel Fratzscher

We develop a standard model to show how transaction costs in international investment affect conventional tests of consumption risk sharing, both in a multilateral and a bilateral setting. We implement the tests in a novel international data set on bilateral holdings of equity, bonds, foreign direct investment (FDI) and bank loans. In our data, high foreign capital holdings are associated with international consumption risk sharing as implied by our theory. This is especially true of investment in equity or bonds, but not of foreign direct investment or bank loans. In our model, the implication is that transaction costs are higher for FDI and international loans. The discrepancy could reflect technological differences, but also the prospect of expropriation, perhaps most stringent for FDI or loans. We argue that expropriation risk is endogenous to both the borrower's institutions and its openness to international markets. The detrimental impact of poor institutions is muted in open economies, where the possibility of subsequent exclusion from world markets deters expropriation of foreign capital. We show the implied effects of institutions prevail in both the cross-section of consumption risk sharing and in observed international investment patterns.

Keywords: Risk sharing; Diversification; Portfolio choice; Financial integration; Cross-border investment

JEL Codes: F21; F30; G15



The Dynamics of Trade and Competition, Journal of International Economics, February 2009, Vol. 77(1), pp.50-62, with Natalie Chen and Andrew Scott.

We present, extend and estimate a model of international trade with firm heterogeneity in the tradition of Melitz (2003) and Melitz and Ottaviano (2005). The model is constructed to yield testable implications for

the dynamics of international prices, productivity levels and markups as functions of openness to trade at a sectoral level. The theory lends itself naturally to a difference in differences estimation, with

international differences in trade openness at the sector level reflecting international differences in the competitive structure of markets. Predictions are derived for the effects of both domestic and foreign openness

on each economy. Using disaggregated data for EU manufacturing over the period 1989-1999 we find evidence that trade openness exerts a competitive effect, with prices and markups falling and productivity

rising. Consistent with theory however, these effects diminish and may even revert in the longer term as less competitive economies become attractive havens from which to export from. We provide evidence

that this entry into less open economies induces pro-competitive effects overseas in response to domestic trade liberalization.

JEL-code : E31, F12, F15, L16.

Keywords: Competition, Globalization, Markups, Openness, Prices, Productivity, Trade.

Results available upon request


Growth and Volatility, Journal of Monetary Economics, October 2007, Vol. 54(7), pp.1848-1862.

Growth and volatility correlate negatively across countries, but positively across sectors. Analytically, whether or not sectoral growth and volatility are correlated positively is irrelevant in the aggregate.

Cross-country estimates identify the detrimental effects of macroeconomic volatility on growth, but they cannot be used to dismiss theories implying a positive growth–volatility coefficient, which appear

to hold in sectoral data. In particular, volatile sectors command high investment rates, as they would in a mean–variance framework.

Keywords: Sectors; Growth; Volatility

JEL Codes: E32; O40



The Real Effects of Financial Integration, Journal of International Economics, March 2006, Vol. 68(2), pp.296-324.

This paper shows correlations in GDP fluctuations rise with financial integration. Finance serves to increase international correlations in both consumption and GDP fluctuations, which explains the persistent gap between the two in the data, a quantity puzzle. The positive association between financial integration and GDP correlation constitutes a puzzle, as theory suggests a negative relation if anything. Nevertheless, it prevails in the data even after the effects of finance on trade and specialization are accounted for.

Keywords: Financial Integration, International Business Cycles, Risk Sharing, Quantity Puzzle

JEL Codes: F30, F41, E44



PPP Strikes Back: Aggregation and the Real Exchange Rate, Quarterly Journal of Economics, vol. 120(1): pp1-43, January 2005. Lead article, with Haroon Mumtaz, Morten Ravn and Hélène Rey.

We show the importance of a dynamic aggregation bias in accounting for the PPP puzzle. We prove that the aggregate real exchange rate is persistent because its components have heterogeneous dynamics. Established time series and panel methods fail to control for this. Using Eurostat data, we find that when heterogeneity is taken into account, the estimated persistence of real exchange rates falls dramatically. Its half-life, for instance, may fall to as low as eleven months, significantly below the “consensus view” of three to five years.

Keywords: Real Exchange Rate Persistence, Purchasing Power Parity, Parameter Heterogeneity.

JEL Codes: F36, F41, C43

Reply to Chen-Engel

Aggregation DOES explain the PPP puzzle


Trade, Finance, Specialization and Synchronization, Review of Economics and Statistics, August 2004, 86(3), pp.723-734.

I investigate the determinants of business cycle synchronization across regions. The linkages between trade in goods, financial openness, specialization, and business cycle synchronization are evaluated in the context of a system of simultaneous equations. The main results are as follows. (i) Specialization patterns have a sizable effect on business cycles. Most of this effect is independent of trade or financial policy, but directly reflects differences in GDP per capita. (ii) A variety of measures of financial integration suggest that economic regions with strong financial links are significantly more synchronized, even though they also tend to be more specialized. (iii) The estimated role of trade is closer to that implied by existing models once intra-industry trade is held constant. The results obtain in a variety of data sets, measurement strategies, and specifications. They relate to a recent strand of international business cycle models with incomplete markets and transport costs and, on the empirical side, point to an important omission in the list of criteria defining an optimal currency area, namely, specialization patterns.

Keywords: Trade, Specialization, Financial Openness, International Business Cycle, Optimal Currency Area.

JEL Codes: F41, E32.

Results available upon request


Non-Linearities and Real Exchange Rate Dynamics, Journal of the European Economic Association, April-May 2003, 1 (2-3), , pp.639-649, with Haroon Mumta, Morten Ravn and Hélène Rey.

We confirm the presence of substantial nonlinearities in real exchange rate dynamics at the sectoral level. There exists zones where arbitrage is not profitable because of transaction costs, and thus mean reversion is inexistent. We compute the speed of mean reversion of sector specific real exchange rates, conditional on the existence of arbitrage as implied by our nonlinear estimations, and relate them to plausible economic determinants such as tradability and exchange rate volatility.

Keywords: Non-Linearities, Exchange Rates, Transport costs

JEL Codes: F36, F41, C43



Stages of Diversification, American Economic Review, March 2003, 93, 1, pp.63-86, with Romain Wacziarg

This paper studies the evolution of sectoral labor concentration in relation to the level of per capita income. We show that various measures of sectoral concentration follow a U-shaped pattern across a wide variety of data sources: countries first diversify, in the sense that labor is spread more equally across sectors, but there exists, relatively late in the development process, a point at which they start to specialize again. We introduce a model with endogenous costs of trading internationally that provides an explanation for this new empirical fact. The model highlights a trade-off between the benefits of diversification in the context of high trading costs, and the benefits of specialization in a Ricardian sense.

Keywords: Specialization, International Macroeconomics, International Trade, Comparative Advantage.

JEL Codes: F43, F15, O40



Technology, Growth and the Business Cycle, Journal of Monetary Economics, 44(1), pp.65-80, August 1999.

Using a partial equilibrium model that allows for factor hoarding, I construct series on input utilization rates for ten OECD countries. These series are used in growth accounting computations of total factor productivity which filter out cyclical variations in input utilization rates. The main findings are as follows: (i) adjusted Solow residuals grow consistently faster than standard measures; (ii) the variability of the adjusted Solow residual is in some cases smaller than the standard residual's; (iii) adjusted Solow residuals are less procyclical than standard residuals, and fare better at usual exogeneity tests; (iv) supply shocks are no more synchronized between European countries than elsewhere; and (v) observed increased output synchronization in Europe is due to demand factors.

Keywords: Solow residuals; Factor hoarding; International business cycle

JEL Codes: O47; F41; E32  





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