Working Papers
Purchase Obligations and Hedging – joint with Brian Pustilnik
Commodity price shocks have negative consequences for developed economies that rely heavily on imported materials. Consequently, firms employ risk-management instruments to reduce their exposure. In this paper we study how the use of supply contracts by firms can shape the transmission of commodity price shocks to aggregate variables. We focus on purchase obligations, which are supply contracts with fixed prices for the delivery of goods in future periods. We rely on a novel dataset to document two empirical findings. First, we find a large exposure reduction to commodity price risk for firms using these contracts; our estimates suggest a reduction of about 27% compared with non-users. Second, sector output and labor compensation have a smaller negative correlation with commodity prices when firms trade larger contracts. We assess the aggregate quantitative role of these contracts by introducing and calibrating a tractable general equilibrium model. We measure the contribution of purchase obligations to dampening the aggregate transmission of commodity price shocks by constructing a counterfactual in which firms are not allowed to trade these contracts. Our results show that when firms engage in purchase obligations, real consumption has a relative response of 25% less to a 10% commodity price shock.
Manufacturing firms depend on commodity inputs for their production processes, which leads them to engage in hedging strategies to mitigate the impact of commodity price fluctuations. In particular, they regularly employ supply contracts that feature fixed prices, which are also known as purchase obligations in the literature. This paper documents a weak correlation between financial hedging and net worth for publicly traded companies in the manufacturing sector in the United States. These findings remain robust even when accounting for various firm characteristics, including size and commodity exposure. The empirical evidence presented may appear to challenge contemporary corporate hedging theories that highlight collateral as a key determinant of hedging decisions. However, I show that these theories align with the findings of this paper when firms have sufficient collateral, revealing a satiation point in the relationship between net worth and hedging.
This paper investigates the impact of foreign exchange (FX) shocks on income inequality across 31 European countries from 2003 to 2021. Leveraging a unique database of household-level longitudinal data from the European Union Statistics on Income and Living Conditions (EU-SILC) and exchange rate data from the Bank of International Settlements, we investigate how currency devaluations and appreciations influence income distribution. Our findings indicate that a 1% currency devaluation decreases income inequality by 15 basis points within one year, while appreciations have the reverse effect. Contrary to previous studies focused on Latin America, which credit reductions in inequality to both labor mobility and union influence, our analysis identifies labor mobility as the primary factor in Europe. Furthermore, we discover that income changes are predominantly driven by variations in income per hour rather than hours worked.
Work in Progress
Globalization, Markups and the Labor Share
International Equilibrium Portfolios and Capital Flows