Supply Chains in Times of Crisis: Evidence from Kenya’s Production Network

Trading relationships between suppliers and buyers play a key role in transmitting both local and international shocks. We use transaction-level data from Kenya to study the relevance of a firm’s domestic network position and links to international supply chains in determining its trajectory during the COVID-19 crisis. We document that firms with high exposure to import and export markets tend to be larger, older, and employ more workers. The specialisation of direct importers, often intermediaries, on international markets made them very vulnerable to the initial COVID-19 shock. Exporters, one-third of whom operate in primary sectors, experienced a less severe decline in sales. We find that both importers and exporters adjust their domestic supply chains in response to international trade shocks — before and during the crisis alike. Sourcing from international markets does not crowd out domestic purchases, while sales abroad and at home can act as substitutes. Diversified domestic supply chains helped firms to mitigate the impact of the COVID-19 crisis and recover more strongly.     

Risk premia,asset price bubbles,and monetary policy

We develop a dynamic general equilibrium asset pricing model with heterogeneous beliefs to study the effects of monetary policy on prices, risk premia, asset price bubbles, and financial stability. We propose a new framework for monetary policy with respect to bubbles. Because bubble risk premia arise from an interaction between disagreements among investors and dynamic trading constraints, under a non-accommodative monetary policy, liquidity adjusted risk and bubble risk premia increase. What matters for policy is the trading constrained fraction/mass of agents that disagree about fundamentals (i.e. optimists/pessimists). Accommodative policy can lead to a larger fraction of trading constrained agents that disagree, larger bubbles, and increased systemic risk. An implication of our results is that accommodative monetary policy in response to the Covid-19 crisis does not increase systemic risk due to asset price bubbles, as long as the policy keeps inflation under control.     

Public debt and welfare in a quantitative Schumpeterian growth model with incomplete markets

This paper quantifies the welfare effects of counterfactual public debt policies using an endogenous growth model with incomplete markets. The economy features public debt, Schumpeterian growth, infinitely-lived agents, uninsurable income risk, and discount factor heterogeneity. Two versions of the model are specified, one with households holding equity in the group of innovating firms. The model is calibrated to the U.S. economy to match the degree of wealth inequality, the share of R&D expenditure in GDP, the firms’ exit rate, the average growth rate, and other standard long-run targets. When comparing balanced growth paths, I find large welfare gains in equilibria characterized by governments accumulating public wealth. The result is robust to the mechanism used to generate a highly concentrated wealth (i.e., preference heterogeneity or “superstar” income shocks). Welfare effects decompositions show that level effects and growth effects reinforce each other. The responses of both the intermediate goods and their market conditions are key in explaining the large level effects. The version of the model without equity is computationally easier to solve, allowing to consider transitional dynamics. Taking into account the dynamic adjustment to the new long-run equilibrium, I show that the transitional welfare costs are not large enough to change the sign of the welfare effects stemming from a change in public debt. I find that eliminating public debt would lead to a 0.8% increase in welfare, while moving to a debt/GDP ratio of 100% would entail a welfare loss of 0.5%. A decomposition analysis shows that growth accounts for approximately 50% of the overall welfare effects.     

Government expenditure and economic growth: A heterogeneous-agents approach

This study examines the relationship between productive government expenditures and economic growth. An R&D-based model of endogenous growth is used, in which agents have heterogeneous entrepreneurial abilities. We show that if the number of high-ability entrepreneurs is non-negligible, then the relationship between the government expenditure/GDP ratio and the economic growth rate is depicted by an inverted U-shaped curve with a flat top. The flat top of the curve indicates that changes in the size of the government expenditures have a limited impact on growth. We calibrate the model using U.S. data and empirically confirm our theoretical predictions. The theoretical and numerical results suggest that the debate on the relationship between the size of the government and economic growth may be off the mark unless the size of the government is extremely large or small.     

Differential pricing and production strategies for heterogeneous products under cannibalization and promotional effects

This study examines the optimal pricing and production strategy of a closed-loop supply chain consisting of a manufacturer, a recycler, and consumers. Considering the cannibalization and promotion effects of remanufactured products on new and secondhand products, we constructed Stackelberg game models under different scenarios. We analyze the impact of the changes in the two effects on the optimal prices and production strategies of the manufacturer and recycler, as well as their countermeasures. We find that (i) how the cannibalization and promotional effects influence the manufacturer and the recycler's pricing and production strategies differ under different scenarios; (ii) when the two effects exceed a threshold, the manufacturer abandons new or remanufactured products, and the recycler prefers to stop production on its new products or continue to remanufacture products; and (iii) the two effects always reduce the profits of the manufacturer and increase the profits of the recycler.