UC Berkeley

This dissertation consists of two chapters which study questions at the intersection of macroeconomics, trade, and finance. The first chapter investigates the role of trade for the geographic spread of the 2007-09 recession within the U.S.. The second chapter, co-authored with Mauricio Larrain, studies the role of financial market reforms for changes in aggregate productivity, using the example of Eastern European countries in the late 1990s and early 2000s.

In the first chapter, I use the large spatial variation in consumer demand shocks at the onset of the Great Recession to study the mechanisms behind the ensuing geographic spread of the crisis. While the initial increase in unemployment was concentrated in areas with housing busts, subsequently unemployment slowly spread across space. By 2009, it was above pre-crisis levels in almost all U.S. counties. I show that trade was an important driver of this geographic spread of the crisis. To identify the trade channel empirically, I make use of heterogeneity in the direction of trade flows across industries in the same state: Industries that sold relatively more to states with housing boom-bust cycles grew by more before the crisis and declined faster from 2007-09. These results cannot be explained by a collapse in credit supply. I then link the reduced form empirical evidence to a formal model of contagion through trade. In a quantitative exercise, the model delivers a cross-sectional effect of similar magnitude as the one found empirically and reveals that the trade channel can explain roughly a third of the overall spread.

The second chapter analyzes the microeconomic channels by which financial sector reforms affect aggregate productivity. We use a large firm-level dataset to study the episode of financial market liberalization in 10 Eastern European countries starting in the late 1990s. We exploit cross-sectoral differences in external financial dependence and find that financial reform increases productivity disproportionately in industries heavily dependent on external finance. We show that this productivity increase is driven entirely by improvements in the within-industry allocation of resources across firms, as opposed to within-firm productivity improvements. According to our results, reform allows financially-constrained firms to take on new debt, increase market share, and produce closer to optimal level. A back-of-the-envelope calculation suggests that financial reform increases aggregate manufacturing productivity by 17%. Our results highlight financial markets' key role in improving the within-industry allocation of capital.