Hyun Song Shin, Bank for International Settlements
Abstract: We highlight the role of duration and exchange rate risks on portfolio flows by using a unique and comprehensive database of US investor flows into emerging market government bonds denominated in local currency. Borrowing long-term mitigates roll-over risk but amplifies valuation changes that further interact with currency movements. Our analysis highlights the double-edged nature of long-term borrowing and draws attention to market stress dynamics due to strategic complementarities among mutual fund investors.
Discussant: Jaewon Choi, University of Illinois-Urbana-Champaign
Abstract: This paper combines administrative tax data and a model of global investment behavior to evaluate the investment and firm valuation effects of the Tax Cuts and Jobs Act (TCJA) of 2017, the largest corporate tax reduction in the history of the United States. We extend the canonical model of Hall and Jorgenson (1967) to a multinational setting in which a firm produces in domestic and international locations. We use the model to characterize and measure four determinants of domestic investment: domestic and foreign marginal tax rates and cost-of-capital subsidies. We estimate elasticities of domestic investment with respect to each and use them to identify the structural parameters of our model, to quantify which parts of the reform mattered most to investment, and to conduct policy counterfactuals. We have five main findings. First, the TCJA caused domestic investment of firms with the mean tax change to increase by roughly 20% relative to firms experiencing no tax change. Second, the TCJA created large incentives for some U.S. multinationals to increase foreign capital, which rose substantially following the law change. Third, domestic investment also increases in response to foreign incentives, indicating complementarity between domestic and foreign capital in production. Fourth, the general equilibrium long-run effects of the TCJA on the domestic and total capital of U.S. firms are around 6% and 9%, respectively. Finally, in our model, the dynamic labor and corporate tax revenue feedback in the first 10 years is less than 2% of baseline corporate revenue, as investment growth causes both higher labor tax revenues from wage growth and offsetting corporate revenue declines from more depreciation deductions. Consequently, the fall in total corporate tax revenue from the tax cut is close to the static effect.
Discussant: Terry Moon, University of British Columbia
Abstract: In the context of international trade, firms are exposed to foreign exchange risk due to both import and export channels. This study employs firm-level data to examine how US firms manage foreign exchange risk through financial hedging, as well as the distribution of such risk management strategies across the production network. Our empirical analysis reveals that large firms, more centralized firms, as well as those situated at extreme upstream and downstream positions in the production network, are more likely to utilize financial hedging. Moreover, we find that firms’ natural hedg- ing and hedging decisions are influenced by their production network positions and their attention to other firms’ hedging activities. To better understand the potential positive externalities of hedging in the production network, we develop a model that considers the impact of various hedging allocations. Our investigation demonstrates that suboptimal distributions of hedging activities across the production network can result in inefficiencies.
