UC Berkeley

This dissertation consists of three essays that aim to provide a deeper understanding of the consequences of financial globalization and macroeconomic fluctuations—for banks, firms, and households—by analyzing both micro-foundations and macroeconomic implications.

The first chapter studies how globalization of banking systems has affected credit allocation and the macroeconomy. I provide a new theory of credit allocation in financial systems with both global and local banks, and tests it using cross-country loan-level data. I first point out that the traditional theory in banking and corporate finance of firm-bank sorting based on hard versus soft information does not explain the sorting patterns between firms and global versus local banks. In light of this puzzle, I propose a new perspective: global banks have a comparative advantage in extracting global information, and local banks have a comparative advantage in extracting local information. I formalize this view in a model in which firms have returns dependent on global and local risk factors, and each bank type can observe only one component of the firms’ returns. This double information asymmetry creates a segmented credit market with a double adverse selection problem: in equilibrium, each bank lends to the worst type of firms in terms of the unobserved risk factors. Moreover, I show that the adverse selection problem has important macroeconomic implications. When one of the bank types faces a funding shock, the adverse selection affects credit allocation at both the extensive and intensive margins, generating spillover and amplification effects through adverse interest rates. I formally test the model using detailed firm-bank micro data and empirical strategies that tightly map to the model set-up. I find firm-bank sorting patterns, and effects of US and Euro area monetary policy shocks on credit allocation, that support the model predictions. This evidence reveals a novel adverse selection channel of international monetary policy transmission.

The second essay studies the long-run implications of financial crises and macroeconomic shocks on consumption behavior. We show that personal lifetime experiences can “scar” consumption. Consumers who have lived through times of high unemployment have persistent pessimistic beliefs about their future financial situation, though their actual future income is uncorrelated with past experiences. Nevertheless worse lifetime experiences predict significantly reduced consumption spending, controlling for income, wealth, demographics, and time effects. As a result of their experience-induced frugality, scarred consumers also build up more wealth. The results are robust to a battery of variations in the liquid- and illiquid wealth and income controls in the PSID, and replication in the Nielsen Homescan Panel and the CEX. Scarred consumers use more coupons and purchase more sale items and lower-end products. We use the stochastic life-cycle model of Low et al. (2010) to show that the estimated negative relationship between experiences and consumption cannot be generated by financial constraints, income scarring, or unemployment scarring, but is consistent with experience-based learning. As predicted by experience-based learning, the estimated effects of a macro shock are stronger for younger cohorts. The results suggest a novel micro-foundation of fluctuations in aggregate demand, and imply long-run effects of macroeconomic shocks.

The third chapter studies the impact of capital inflows on the real economy in the context of a “China shock” in the US real estate market. We document an unprecedented surge in housing purchases by foreign Chinese in the US over the past decade and estimates its effect on US local economies. Using transaction-level data on housing purchases, we find that the share of purchases by foreign Chinese in the California real estate market increased almost twentyfold during the period of 2007-2013. In particular, these purchases have been concentrated in zip codes that are historically populated by ethnic Chinese, making up for more than 10% of the total real estate transactions in these neighborhoods in 2013. We exploit the cross-sectional variation in the concen- tration of Chinese population settlement across zip codes during the pre-sample period to instrument for housing transactions by foreign Chinese. The results show that the surge in capital inflow from China into the US real estate market significantly increases local housing prices and local employment. We present evidence showing that this effect is primarily driven by a housing net worth channel. The evidence highlights the role of foreign capital inflow on the local real economy, especially in times of economic downturns.