Working Papers

Cavallo, Alberto, Gita Gopinath, Brent Neiman, and Jenny Tang. Working Paper. “Tariff Passthrough at the Border and at the Store: Evidence from US Trade Policy”. Abstract
We use data collected at the border and at retailers to characterize the impact of recent changes in US trade policy on importers, consumers, and exporters. We start by studying the tariffs on imports of steel and Chinese goods that were imposed during 2018. We find little difference in the "at-the-dock" ex-tariff price levels and stickiness for otherwise equivalent goods that were affected and not affected. This nearly complete passthrough of tariffs to the total price paid by importers suggests the tariffs incidence has fallen largely on the US. We simultaneously estimate exchange rate passthrough and find the response to be far more muted. Next, in-progress analyses of retail prices preliminarily show more heterogeneity, with the higher cost of imports passed through to consumers for some goods, such as washing machines, but absorbed by lower retailer profit margins for others, such as many from China. Finally, in contrast to imports, US exports subjected to retaliatory tariffs exhibited declines in their ex-tariff prices relative to equivalent but non-targeted goods.
Gopinath, Gita, Emine Boz, Camila Casas, Federico Diez, Pierre-Olivier Gourinchas, and Mikkel Plagborg-Moller. 2019. “Dominant Currency Paradigm”. Abstract
Most trade is invoiced in very few currencies. Yet, standard models assume prices are set in either the producer’s or destination’s currency. We present instead a ‘dominant currency paradigm’ with three key features: pricing in a dominant currency, pricing complementarities, and imported input use in production. We test this paradigm using both a newly constructed data set of bilateral price and volume indices for more than 2,500 country pairs that covers 91% of world trade, and very granular €firm-product-country data for Colombian exports and imports. In strong support of the paradigm we €find that: (1) Non-commodities terms of trade are essentially uncorrelated with exchange rates. (2) ‘The dollar exchange rate quantitatively dominates the bilateral exchange rate in price pass-through and trade elasticity regressions, and this e‚ffect is increasing in the share of imports invoiced in dollars. (3) U.S. import volumes are signi€cantly less sensitive to bilateral exchange rates, compared to other countries’ imports. (4) A 1% U.S. dollar appreciation against all other currencies predicts a 0.6% decline within a year in the volume of total trade between countries in the rest of the world, controlling for the global business cycle.
Under revision for the American Economic Review
Aguiar, Mark, Manual Amador, Emmanuel Farhi, and Gita Gopinath. 2013. “Crisis and Commitment: Inflation Credibility and the Vulnerability to Sovereign Debt Crises”. Abstract

We explore the role of inflation credibility in self-fulfilling debt crises. In particular, we propose a continuous time model of nominal debt with the potential for self-fulfilling debt crises as in Calvo (1988) and Cole and Kehoe (2000). We characterize crisis equilibria conditional on the level of commitment to low inflation. With strong commitment, which can be interpreted as joining a monetary union or issuing foreign currency debt, the environment is a version of the one studied by Cole and Kehoe. The paper contrasts this framework with one in which sovereign debt is nominal and is vulnerable to ex post devaluation. Inflation is costly, but reduces the real value of outstanding debt without the full punishment of default. In a debt crisis, a government may opt to inflate away a fraction of the real debt burden rather than explicitly de-fault. This flexibility potentially reduces the country's exposure to self-fulfilling crises. On the other hand, the government lacks commitment not to inflate in the absence of crisis. This latter channel raises the cost of debt in tranquil periods and makes default more attractive in the event of a crisis, increasing the country's vulnerability. We characterize the interaction of these two forces. We show that there is an intermediate level of commitment that minimizes the country's exposure to rollover risk. On the other hand, low inflation credibility brings the worst of both worlds high inflation in tranquil periods and increased vulnerability to a crisis. Weak inflationary commitment also reduces the country's equilibrium borrowing limit. These latter results shed light on the notions of original sin and debt intolerance highlighted in the empirical literature; that is, the fact that developing economies issue debt exclusive in foreign currency to international investors as well as encounter solvency issues at relatively low ratios of debt-to-GDP.

Preliminary October 2012.

Aguiar, Mark, Manuel Amador, and Gita Gopinath. 2006. “Efficient Expropriation: Sustainable Fiscal Policy in a Small Open Economy”. Abstract

We study a small open economy characterized by two empirically important frictions – incomplete financial markets and an inability of the government to commit to policy. We characterize the best sustainable fiscal policy and show that it can amplify and prolong shocks to output. In particular, even when the government is completely benevolent, the government’s credibility not to expropriate capital endogenously varies with the state of the economy and may be “scarcest” during recessions. This increased threat of expropriation depresses investment, prolonging downturns. It is the incompleteness of financial markets and lack of commitment that generate investment cycles even in an environment where first best capital stock is constant.