Essays on International Finance and Political Economy

Abstract

The following three essays involve understanding both currency determination and the currency vulnerabilities of firms, as well as the political determinants of default. They are primarily empirical in nature, utilizing large datasets and methods from causal inference. My first essay provides causal evidence on the extent to which export prices impact exchange rates using a well-identified natural experiment. In doing so, the essay sheds light on the exchange rate disconnect puzzle, the name for the fact that the literature struggles to tie exchange rate movements to economic fundamentals. I isolate the effect of foreign demand shocks for dairy on the New Zealand Dollar, finding that the nominal exchange rate appreciates a modest, but nevertheless significant, amount. My second essay, coauthored with Gabriel Levin-Konigsberg, Vicente García Averell, and Calixto López Castañon, explores how non-financial companies may expose themselves to such exchange rate fluctuations via limited risk management. Using a unique dataset involving all derivative transactions with banks regulated by the Banco de México, the essay shows that firms that experience derivative losses are less likely to continue using derivatives in their risk management program. This is consistent with a behavioral bias called narrow framing. My final essay provides a political economic framework for predicting the relative seniority of bond holders and pensioners in US cities and counties by considering special-interest politics amid electoral pressures. It first uses an institutional framework to evaluate the degree to which policymakers are susceptible to political pressures; it then considers the relative political influence of bond holders and pensioners. I provide evidence for my theory by examining municipal bond yields.