Hillary Stein

Abstract: I examine the effect of exogenous terms of trade shocks on an exchange rate by turning to New Zealand’s dairy auctions. Dairy is New Zealand's largest export category, making up almost 20 percent of exports. Specifically, whole milk powder accounts for 6 to 11 percent of total exports, and its price is determined in twice-monthly auctions. I use event studies to quantify the impact of surprise auction results on the New Zealand dollar on a high-frequency basis. I find that a 1 percent surprise increase in whole milk powder prices has a modest, but nevertheless significant, effect on the nominal exchange rate. The methodology developed here can potentially be applied to other commodity exporters.

Abstract: We develop a new methodology for tracing out how border price increases may pass through into US consumer prices. This methodology builds upon a static open economy model with a network structure, markups, and domestic retailers, from which we carefully map each model object to publicly-available US data, including input-output tables and information on industry and retailer margins. We calculate import price sensitivities by expenditure category, which lends itself to a few applications. First, we build a consumption-weighted import price index that improves consumer prices prediction. Second, we predict the partial-equilibrium effects of various tariff scenarios. An additional 10 percent tariff on the rest of the world would prompt a 0.78 to 1.34 percentage point increase in inflation, with significant heterogeneity by country. Finally, we show full pass-through to consumer prices of the 2018 tariffs.

Abstract: This paper shows that global inflation dynamics have a sizable regional component. Using a balanced panel of 61 countries starting in 1970, we document that while the global factor, defined as the dominant principal component, explains a large portion of inflation variation in advanced economies, the model with just one principal component is less successful for developing countries. By contrast, a hierarchical dynamic factor model, which includes a global (unconstrained) factor and regional (restricted) factors, performs substantially better for emerging market and developing economies. The regional factors are linked to commodity prices and help improve inflation forecasts at the country level. Employing an unsupervised machine learning technique, we show that the estimated clusters of countries based on the similarity of inflation dynamics exhibit a strong regional pattern. Our findings suggest that policymakers in developing countries should pay close attention to inflation dynamics in the neighboring countries.

Abstract: Using confidential microdata, we show that shocks to primary dealers' risk-bearing constraints have significant effects on the US Treasury securities market. In response to tighter constraints, dealers reduce their Treasury positions, triggering a reduction in aggregate turnover and an increase in bid-ask spreads. These effects are more pronounced in securities that contribute more to the utilization of risk constraints. The impaired intermediation also affects Treasury yields, amplifying the yield response to net demand shifts. Moreover, tighter dealer constraints weaken Treasury auction outcomes: Bid-to-cover ratios decline, driven by dealers' less aggressive bidding, and the highest yield accepted by participants rises, thereby increasing the government's cost of issuing debt. Using our estimates, we back out key elasticities to show that the shadow cost of dealer constraints is as high as one-third of dealers' intermediation margin.

Abstract: We leverage supervisory microdata to uncover the role of global banks' risk limits in driving exchange rate dynamics. Consistent with a model of currency intermediation under risk constraints, shocks to dealers' risk limits lead to price and quantity adjustments in the foreign exchange market. We show that dealers adjust their net position and increase the bid-ask spread in response to granularly identified limit shocks, leading to lower turnover and an adjustment in currency returns. These shocks exacerbate the effects of net currency demand on exchange rate movements, as predicted by theory, and trigger deviations from covered interest parity.

Abstract: Even though financial risk management can generate value, the use of financial derivatives among nonfinancial corporations remains limited. We identify a channel that contributes to this limited use:  the decoupling of derivatives losses and operational gains. We explore this phenomenon using a unique dataset built from the universe of US dollar-Mexican peso currency derivatives transactions in Mexico along with customs data. Using a regression kink design, we find that when losses from previous transactions increase 1 percentage point, firms become 4.24 percentage points less likely to take out a new derivatives position within 90 days.