Essays in International and Monetary Economics

The forthcoming chapters delve into monetary and international economics, with a particular focus on the role of uncertainty and risk in driving the strategies of economic agents. They explore the interplay between individual behaviors and macroeconomic trends by leveraging micro data to answer macroeconomic questions. The first chapter explores the drivers of inflation inequality across households. In particular, it examines how households use heterogeneously the quality margin of the varieties they purchase to insure themselves against shocks. Using household scanner data of supermarket consumption for Germany, I analyse the extent to which households trade down in the quality of goods in the aftermath of a recession. First, I document that, on average, lower income households tend to purchase lower quality goods. Furthermore, lower income households exhibit a low propensity to trade down, presumably due to a limited capacity to do so. This is in contrast with the rest of households, who appear to trade further down in the quality of goods. This is suggestive evidence of a lower bound in the quality margin available for certain households. Next, I analyse the aggregate effects of this phenomenon on product-level inflation, namely, the effect of an aggregate demand shift towards lower quality varieties in the beginning of a recession. For it, I employ a shift-share research design based on population growth of narrowly defined groups of households to predict the amount of trading down when the recession hits, therefore identifying a reasonably exogenous demand shifter. The intuition is that in the regions where the household groups that are more likely to trade down in the quality of goods grow faster, the amount of trading down once the recession starts will be larger. I find that a generalised demand shift toward lower quality goods during recessions leads to an increased price of low quality varieties compared to the price of higher quality varieties. In particular, on average, a 1% increase in the demand for lower quality varieties due to households trading down in the quality of the varieties they purchase translates into a 0.33% increase in the relative price of low compared higher quality varieties. The second chapter, co-authored with Giancarlo Corsetti and Luca Dedola, investigates whether and how heterogeneity in consumption risk and inflation across households affect consumption demand and growth under the lens of an incomplete markets framework. Our model of household-level risk sharing imposes minimal restrictions on the financial market structure, allowing for both aggregate and idiosyncratic tradeable risks to be at least partially diversified, and for precautionary saving motives. We bring the model to bear on empirical evidence, using household-level scanner data from Euro area regions and United Kingdom, together with a matching model for financial market participation. Our contribution is twofold: first, we develop a theoretical framework mapping consumption (rather than income) risk and inflation differentials onto consumption growth at regional level; second, we assess theoretical conditions empirically, exploiting heterogeneity in risk and risk sharing, by preference, income, residence and participation in financial markets. Our empirical analysis provides evidence that tradeable risk is insured primarily among financial market participants, and across regions of the euro area than regions across the border (provided that differences in inflation are accounted for). Consumption risk, proxied using variability of consumption growth within regions and income groups, weigh on consumption demand. The third chapter, co-authored with Meredith Crowley, Elisa Faraglia and Chryssi Giannitsarou, explores how British firms adapted to the uncertain commercial environment through establishing new EU subsidiaries and operations. In particular, we first study the intertemporal variation in the number of newly-established subsidiaries of British firms in the EU from 2016 to 2021. We find that, in the post-referendum period, more subsidiaries were established by British parents in months and sectors in which the uncertainty over the future commercial relationship between the UK and EU was higher. This evidence suggests that subsidiaries were established to help firms hedge the risk of losing their access to the EU market. Finally, we use annual balance sheet data to examine the characteristics of British parent firms establishing their first subsidiary in the EU before and after the Brexit referendum. We conduct a difference-in-differences analysis in which we compare the characteristics of British parent firms establishing a first subsidiary in the EU to those of EU parent firms establishing a first subsidiary in another EU country before and after the referendum. We find that, in the year in which British parent firms established a first subsidiary in the EU and the year before that, the growth of turnover, profits, assets and cash flow was substantially lower for those firms establishing their first subsidiary between 2016 and 2022 relative to between 2012 and 2015 and relative to the change in growth for EU parent firms between these two periods.

Name dc:type.qualificationname

Doctor of Philosophy (PhD)

Level dc:type.qualificationlevel

Doctoral

Grantor dc:publisher.institution

University of Cambridge

Year dc:date.issued

2024

Author dc:creator

• Domenech Palacios, Maria Del Mar

Advisor dc:contributor.advisor

• Faraglia, Elisa

• consumption inequality
• Heterogeneity
• inequality
• inflation inequality
• instrumental variables
• micro data
• policy uncertainty
• risk sharing
• scanner data
• shift-share research design
• trading down
• uncertainty

Licence

• https://www.repository.cam.ac.uk/bitstreams/78f57df6-71dd-4ae1-90c0-c5fe4873c164/download
• https://www.rioxx.net/licenses/all-rights-reserved/

Language dc:language

eng

DOI dc:identifier.doi

https://doi.org/10.17863/CAM.111924

OAI identifier oai:identifier

oai:www.repository.cam.ac.uk:1810/373563