USC Marshall

We show that a change in organizational structure from partnerships to public companies---which weakens contractual commitment---can lead to higher investment in high return-and-risk activities, higher productivity (value added per employee) and greater income dispersion (inequality). These predictions are consistent with the observed evolution of the financial sector where the switch from partnerships to public companies has been especially important in the decades that preceded the 21st Century financial crisis.

Following the low interest rate policies adopted by industrialized countries after the 2008 financial crisis, there has been a reduction of capital outflows from emerging countries to industrialized countries. The lower outflows of capital, however, did not appear to have helped emerging economies since the economic performance of these countries has deteriorated more than in industrial countries. I propose a model that captures the observed dynamics in capital flows and macroeconomic performance. Contrary to the more conventional view, lower interest rates in industrialized countries could have negative macroeconomic consequences for emerging countries even though the latter experience an increased inflows of capital.

We study how cross-country macroeconomic spillovers caused by sovereign default affect equilibrium bailouts. Because of portfolio diversification, the default of one country causes a macroeconomic contraction also in other countries. This creates a vested-interest for other countries to bailout the defaulting country. A novel insight of the paper is that bailouts could be efficient not only ex-post (after the debt has been issued) but also ex-ante (before the issuance of the debt). Although anticipated bailouts create the typical moral hazard problem leading to higher levels of borrowing, this may correct for the under issuance of debt that results from the lack of cross-country policy coordination.

Using Chinese manufacturing data, we show that the 2005-2011 credit expansion was associated with higher credit received by upstream manufacturing industries. However, this did not generate a similar increase in `trade lending' from upstream industries to downstream industries, limiting the transmission of the credit expansion to the whole manufacturing sector. We develop a model that formalizes some of the key features of the production and financial structure of the Chinese economy to illustrate why a credit expansion that reaches the upstream sector may not fully cascade through trade credit to the whole economy.

This is a discussion of the article ``Trading Down and the Business Cycle'' by Nir Jaimovich, Sergio Rebelo and Arlene Wong, presented at the Carnegie-Rochester-NYU conference.