Michael Devereux

Professor

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Graduate Student Supervision

Doctoral Student Supervision (Jan 2008 - May 2019)
Essays on international economics (2015)

This dissertation consists of three chapters. The first chapter examines how the export intensity of Chinese firms is related to their productivity, and finds a negative correlation within exporting firms. This pattern remains robust even when controlling for ownership, trade mode, factor intensity, and export subsidies. Firms have to pay marketing costs in order to reach customers. If the elasticity of these costs, with respect to the number of consumers in the domestic market, is higher than in foreign markets, then more productive firms sell relatively more in the domestic market compared with low-productivity firms. Using the marketing cost framework, this chapter further estimates the elasticity of marketing costs in each market and then uses local market competition to explain the heterogeneity in elasticity across markets. When competition is tougher in a market, elasticity is higher there. The second chapter investigates the exchange rate pass-through differences in import prices between two trade modes and finds some robust empirical patterns. First, Chinese-owned assembly firms bear higher exchange rate pass-through than multinational firms. However, joint-owned and foreign-owned assembly firms bear less. Second, the exchange rate pass-through is greater when firms import materials from developed countries. Third, assembly firms can bear higher exchange rate pass-through if they have higher market shares or import less inputs. Finally, high financial development is helpful for assembly firms to bear higher exchange rate pass-through. The last chapter discusses the impact of China's rare earth policy on downstream industries. When China implemented the tough restriction on rare earth exporting in 2010, it caused a significant price gap between the domestic market and foreign markets. Therefore, downstream industries in China enjoy cost advantages relative to foreign competitors. First, this policy has led a rapid increase in exports of Chinese rare earth downstream firms relative to other Chinese firms. The increase of exports is mainly due to the price rather than quantity. Second, this chapter focuses on a typical downstream product -- magnets, and finds that the exports of Chinese metal permanent magnet also increase faster than exports of other countries.

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Essays on corporate leasing (2013)

Leasing is one of the most important sources of external finance to corporate firms. Better understanding of the determinants of corporate leasing behavior is critical for us to study the capital structure and investment of firms. However, it has been overlooked in the theoretical and empirical literature on investment. This thesis studies the determinants of corporate leasing. Each chapter presents a separate essay.The first chapter studies the role of uncertainty and financial constraint in understanding firms' leasing decisions. Although leasing costs more than owning capital in the long run, it provides operational flexibility for firms. In addition, leases are easier to finance than purchases. The benefits of leasing are particularly attractive to firms with high uncertainty and more financial constraints. This chapter develops a dynamic model and predicts that firms with high uncertainty and firms that are more financially constrained lease more of their capital than firms with low uncertainty and firms that are less financially constrained. Using data on publicly-traded firms in the U.S., this chapter provides evidence consistent with the prediction of the model.The second chapter documents that leasing is countercyclical over business cycles. Firms lease more during economic downturns, and are more willing to buy capital during up cycles. One key benefit of leasing is that leases are easier to finance than purchases. This benefit is particularly important to firms with financial constraints. Firms face tighter financing conditions during recessions. Therefore, leasing is more attractive during recessions. This chapter develops a model to explain the observed countercyclical pattern of leasing.The third chapter utilizes data from 81 countries to examine how legal environments affect firms' leasing behavior. The results suggest that leasing is less used in countries with weak legal environments. Firms in countries with weak legal environments tend to avoid the use of leasing contracts because the contracts are costly to enforce. I also find that leasing has a measurable impact on both firm growth and GDP growth. Leasing can help increase capital availability and improve operational efficiency, and thus may contribute to growth. The results provide a policy implication that possible adjustments in legal systems can facilitate the availability of leasing and thus may generate real economics gains.

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Essays in international portfolio choice and monetary policy (2012)

Empirical evidence shows that equity home bias is a prevailing fact for most countries, but standard international monetary business cycle models with nominal bonds hardly generate equity home bias for plausible preference parameter values. By incorporating inflation-indexed bonds, I show in chapter 2 that international monetary business cycle models can explain home bias in equities. Inflation-indexed bonds can hedge real exchange rate risk and domestic equities serve as a hedge against domestic labor income risk conditional on real exchange rates. Moreover, this chapter accounts for counter-cyclical movements of net foreign asset positions. These results are robust in environments either with complete markets or with incomplete markets.How does international financial market integration alter international risk sharing? Chapter 3 develops a tractable center-periphery model with portfolio choice to investigate this issue. I compare three stages of financial integration. The first stage is financial autarky. The second stage is the central country becomes financially integrated with peripheral countries, but there is no financial integration between peripheral countries. The third stage is all financial markets are integrated into each other. From financial autarky to partial financial integration, volatility of consumption in all countries drops. From partial financial integration to full financial integration, volatility of consumption in peripheral countries decreases; however, consumption volatility rises in the central country when the central country is relatively large. When peripheral countries are large, the degree of international risk-sharing for all countries increases in the process of financial integration.What's the optimal monetary policy in an economy with financial frictions? Chapter 3 investigates optimal monetary policies in a dynamic stochastic general equilibrium model with sticky prices, sticky wages and credit-market imperfections. Credit frictions distort allocations and prices, and generate large volatility of aggregate variables via the financial accelerator. Policy-makers can take advantage of a debt deflation channel to push down volatility of endogenous variables through the financial decelerator. In the optimized linear interest rate rule, interest rate decreases in asset prices but the response is quantitatively small. This optimized rule exhibits high persistence. Within a class of simple linear interest rate rules, a strict inflation-targeting rule has a larger welfare loss.

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Essays on business cycles in open economies (2010)

This dissertation consists of three chapters about business cycles in open economies. The first chapter addresses the question of why housing investment is so volatile, especially in economies with developed mortgage markets. To this end, the chapter develops an augmented Real Business Cycle model with a housing collateral constraint. The collateral constraint creates a link between the housing market and borrowing capacity, a link that amplifies the response of housing demand to shocks and becomes stronger in economies with deeper mortgage markets. The second chapter examines an anomaly between international business cycle models and empirical evidence in cross-country employment correlation. It shows that the wealth effect on leisure plays a determining role in generating a negative employment comovement in the models, hence proposing a solution to the anomaly. The last chapter compares macroeconomic consequences of dollarized emerging countries under two alternative monetary policies: the inflation targeting rule and the fixed exchange rate regime. It shows that the floating exchange rate regime can be dominated by the fixed exchange rate regime in the role of cushioning shocks and in welfare terms.

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Essays on new open economy macroeconomics (2009)

This thesis consists of three essays on the issues related to endogenous currency of pricing in utility-based open economy models. The first essay endogenizes both the currency of liability denomination and the currency of export pricing to study twin dollarization in East Asian economies, a phenomenon where firms borrow in US dollars and also set export prices in US dollars. This essay shows that twin dollarization is an optional strategy for all firms when exchange rate flexibility is limited, and it can reduce the welfare loss caused by a fixed exchange rate regime. The second essay examines the role of US dollar as an oil currency and its impact on the world dollar standard and the global economy in a two-country general equilibrium model with sticky prices. When the oil price is denominated in US dollars, US firms bear less exchange rate risk than foreign firms when facing oil price shocks. As a result of this asymmetry, all the firms have an incentive to set export prices in dollars, this will generate an endogenously determined dollar standard in international goods pricing. In such a case, the households in the US are better off than those in the rest of the world in term of welfare, though it is costly for the US to have a dollar standard. The third essay re-examines the issue of the degree of exchange rate flexibility in an open economy monetary policy game. It focuses on an environment where the currency of pricing is endogenous, and monetary authorities take into account the way in which firms make this choice. It is shown that there is a unique equilibrium to the monetary policy game, where all firms follow PCP, and Friedman’s classic defense [i.e. Friedman’s classic defence] of flexible exchange rates is upheld. Meanwhile, an alternative method to sustain flexible exchange rates is also provided.

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Essays on nominal rigidities, financial constraints and transfers (2009)

One principal research in macroeconomics is concerned with the importance of nominal rigidities. This dissertation applies nominal rigidities in closed- and open-economy models to study issues on firms’ pricing decisions, optimal monetary policy in a financially constrained economy, and the choice of exchange rate regime in the presence of transfer problem. Chapter 1 presents empirical evidence for price and wage stickiness, and the development of models with nominal rigidities in macroeconomics and international finance.Chapter 2 incorporates state-dependent pricing in a closed-economy model toexplain the asymmetric responses of output and prices to monetary shocks. The modelfocuses on the effects of strategic complementarity and substitutability in firms’ pricing decisions, as well as the mixed strategies used by an individual firm. The strategic interactions among firms’ pricing decisions lead to asymmetric response of prices and output to monetary shocks. The model implies asymmetries in positive versus negative monetary shocks, and the asymmetric responses are affected by the degree of real rigidity in marginal cost, the magnitude of price-adjusting costs and the market power of an individual firm.Chapter 3 studies the optimal monetary policy of a small open economy with nominal rigidities and exchange-rate sensitive collateral constraints. This model attemptsto explain the observed monetary policy behaviour of emerging markets. The modelimplies pro-cyclical optimal monetary policy when the collateral constraint binds, andan economy with large external shocks that may favour a fixed exchange rate, whichare consistent with the observed features of monetary policy used by emerging markets.The last chapter studies the transfer problem using a two-country DSGE modelwith nominal rigidities. The model compares the effects of a transfer shock underflexible and sticky wages, as well as under fixed and floating exchange rate regimes.The results of this model are consistent with the conventional wisdom in internationalmacroeconomics with nominal rigidities, which suggests that a flexible exchange rate can help reduce internal instability after some negative shocks via exchange rate adjustment. However, the welfare analysis of this model implies the donor country isbetter off to maintain the gold standard instead of going to a floating exchange rate,even with nominal rigidities.

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