Debt covenants are pervasive in debt contracts. In this paper, we embed debt covenants into a workhorse real business cycle model with defaultable debt to study the macroeconomic implications of debt covenants. In our model, creditors penalize firms when debt covenants are violated. We show such a mechanism significantly reduces debt dilution and default over the business cycles. Furthermore, reduced debt dilution due to debt covenants also mitigates the debt overhang problem and thus boosts capital accumulation. Compared to counterfactual economies without covenants, the baseline economy with debt covenants experiences endogenous stabilization of macroeconomic shocks, lower business cycle volatility, and higher capital, output, and consumption levels.

[PDF(Oct. 2023)] 

With more than 1900 anti-dumping duties in force as of 2021, anti-dumping policy has become a major impediment to free trade. In this paper, we embed anti-dumping policy into a general equilibrium trade model with heterogeneous firms and monopolistic competition to study the aggregate implications of anti-dumping policies. In our model, realistic features of the current anti-dumping policy lead exporters to charge higher prices and generate lower price dispersion across exporters. We test the model mechanisms using detailed custom-level data and differences-in-difference method exploiting the 2004 EU enlargement as a quasi-natural experiment. We find that export prices of Chinese products to the new member states align well with the model predictions. Quantitative analysis suggests that the welfare cost of anti-dumping policies in the U.S. is equivalent to a 6 percent tariff that is uniformly applied to all firms.

• Summer Research Fellowship at UW-Madison (2019) 

The 2007-2008 U.S. financial crisis features a deep recession with slow recovery despite rapid and aggressive cuts in interest rates. This paper proposes an inventory fire sales channel that helps explain the weak monetary transmission during the financial crisis. To do so, I develop a dynamic general equilibrium model in which firms face demand uncertainty and financial frictions and, therefore, manage inventory to avoid stock-outs and cash flow shortfalls. When external financing costs are high, firms cut prices to liquidate their inventory as a source of internal financing. This attenuates the stimulative effects of interest rate cuts on inventory investments and, thus, aggregate output. I provide empirical evidence that the drop in inventory-to-sales ratio following expansionary monetary policy shocks is more significant during financial market disruptions, corroborating the model predictions. Calibrating the model to the U.S. economy, I find that the output impact of monetary stimulus is 21% lower when external financing costs are 10% higher than normal times. 

• Trade Reform in Services: Structural Change and Production Networks with Adam Jakubik 

presented at the 9th IMF-WB-WTO Trade Conference  ​[ under IMF internal review ]

• Destinations, Market Penetration, and the Impact of Large Tariff Shocks 

Using a staggered difference-in-differences method and transaction-level export data, we find that the extensive margin---changes in the number of exporters---drives the aggregate “trade deflection’’ effects of large tariff hikes. We develop a dynamic sunk cost model of exporting with destination choices to rationalize the empirical findings and quantify the aggregate impact of tariff hikes.