@article{xu2022reshaping,
title={Reshaping global trade: the immediate and long-run effects of bank failures},
author={Xu, Chenzi},
journal={Quarterly Journal of Economics},
volume={137},
number={4},
pages={2107--2161},
year={2022},
publisher={Oxford University Press}
}

I show that a disruption to the financial sector can reshape the patterns of global trade for decades. I study the first modern global banking crisis originating in London in 1866 and collect archival loan records that link multinational banks headquartered there to their financing abroad. Countries exposed to bank failures in London immediately exported significantly less and did not recover their lost growth relative to unexposed countries. Their market shares within each destination remained significantly lower for four decades. Decomposing the persistent market-share losses shows that they primarily stem from lack of extensive margin growth, as the financing shock caused importers to source more from new trade partners. Exporters producing more substitutable goods, those with little access to alternative forms of credit, and those trading with more distant partners experienced more persistent losses, consistent with the existence of sunk costs and the importance of finance for intermediating trade.

@article{frydman2023banking,
title={Banking Crises in Historical Perspective},
author={Frydman, Carola and Xu, Chenzi},
journal={Annual Review of Financial Economics},
year={2023},
volume={15},
pages={265--290},
}

This article surveys the recent empirical literature on historical banking crises, defined as events taking place before 1980. Advances in data collection and identification have provided new insights into the causes and consequences of crises both immediately and over the long run. We highlight three overarching threads that emerge from the literature: First, leverage in the financial system is a systematic precursor to crises; second, crises have sizable negative effects on the real economy; and third, government interventions can ameliorate these effects. Contrasting historical episodes reveals that the process of crisis formation and evolution varies significantly across time and space. Thus, we also highlight specific institutions, regulations, and historical contexts that give rise to these divergent experiences. We conclude by identifying important gaps in the literature and discussing avenues for future research.

@techreport{xu2022real,
title={Real effects of supplying safe private money},
author={Xu, Chenzi and Yang, He},
year={2022},
institution={National Bureau of Economics Research}
}

Privately issued money usually bears devaluation risk that lowers its liquidity and usefulness as a medium of exchange. We evaluate the real economic consequences of eliminating devaluation risk and increasing the safety of private monies in the historical context of the National Banking Act of 1864 in the United States. The Act introduced a new type of federally-regulated bank that supplied safe currency to the local economy as an alternative to the previously existing varieties of unsecured notes. Towns faced a discontinuous cost in creating these banks, which we leverage as a source of exogenous variation in the change in their monetary transaction costs. We estimate the effects of gaining access to safe private money using a market access approach derived from general equilibrium trade theory, and we find that lowering monetary transaction costs increased production of traded goods overall, increased the production share of trade-cost sensitive goods, and spurred structural transformation with more manufacturing output, manufacturing employment, and urban population. Moreover, the growth in manufacturing output overall appears driven by employment and inputs rather than capital investment. These effects indicate that supplying safer money that lowered overall trade costs had a causal impact on US economic development.

@techreport{coppola2023liquidity,
title={Liquidity, Debt Denomination, and Currency Dominance},
author={Coppola, Antonio and Krishnamurthy, Arvind and Xu, Chenzi},
year={2023},
institution={National Bureau of Economics Research}
}

The international monetary system of the last four centuries has experienced the rise, persistence, and fall of specific currencies as the dominant unit of denomination in global debt contracts. We provide a liquidity-based theory to explain this pattern. Firms issue debt that can be extinguished by trading their revenues for financial assets of the same denomination. When asset markets differ in their liquidity, as modeled via endogenous search frictions, firms optimally choose to denominate their debt in the unit of the asset that is most liquid. Equilibria with a single dominant currency emerge from a positive feedback cycle whereby issuing in the more liquid denomination endogenously raises the benefits of that denomination. This feedback mechanism has historically been seeded by governments that created the largest pool of liquid assets in the same denomination. Once dominance is established, a country's costs of investing in the ability to create liquid assets, such as by increasing fiscal capacity, are lower while the incentives to do so are higher, thereby entrenching dominance. We explain the historical experiences of the Dutch florin, the British pound sterling, the US dollar, and the transitions between them. Our theory highlights normative features of liquidity provision in the international monetary system through the lens of the Bretton Woods arrangement, and we discuss the implications of modern policy tools such as central bank swap lines. We rationalize the current dollar-dominant international financial architecture and provide predictions about the potential rise of the Chinese renminbi.

We study the role of export credit agencies in shaping behavior by using the effective shutdown of the Export-Import Bank of the United States (EXIM) from 2015--2019 as a natural experiment. We show that exporting firms that previously relied on EXIM support saw a 18% drop in sales after the agency closed down, driven by a reduction in exports. Firms affected by the shutdown were unable to make up for the loss of subsidized financing, especially if they were financially constrained, and consequently laid off employees and curtailed investment. These negative effects were more pronounced for firms with higher export opportunities or marginal returns to capital. We also find aggregate effects on the exports of the most affected product categories. Taken together, our findings suggest that alleviating financing frictions can boost exports even in countries with well-developed financial markets, and that government policies aimed at doing so do not necessarily lead to a misallocation of resources.

We provide empirical causal evidence that international trade can generate wealth that relaxes collateral constraints in the banking sector, leading to increased credit to both the traded and non-traded sectors of the economy. Using Peru's Free Trade Agreement with China in 2009 as a shock to product-level trade costs, we trace out the impact on exporting firms, the banking sector, and finally the non-traded sector of the economy. First, exports to China in the product categories with the largest change in tariffs grew differentially more than product exports to other destinations. Exporting firms differentially exposed to the change in tariffs grew and became more profitable. Banks indirectly exposed to these exporting firms through their loan portfolio also grew, became more profitable, and extended more credit. Firms that were indirectly exposed to the trade shock through their banks also received more credit. We decompose these increases in firm borrowing and find that 62% of the increase in lending was to firms in the non-traded sector despite these firms being an overall smaller component of the aggregate economy.

What explains the differences in how often countries default on their external debt and how quickly they re-access external credit markets afterwards? While some countries borrow again within a few years, often only to default again, others remain excluded for decades. In this paper we first document this pattern of "serial" default in the London market during the period from 1820 to 1939 using the frequency, duration, and scale of default. We provide a model of investor learning about sovereigns' likelihood of default based on the publicly observed circumstances of default, which generates predictions for their bond prices and terms of future issuance. Second, we test these hypotheses using a newly created dataset of text-based measures of the circumstances of borrowing and default. These qualitative measures come from the universe of historical financial newspapers published in Britain, and they allow us to more fully capture the information set that was available to investors.

We introduce novel data on the universe of multinational banking activity during the first age of globalization from 1870 1914 and show that these financial connections significantly increased trade volumes. First, we describe the data and show that the distribution of countries `exporting' banks is very skewed: the top four exporters are responsible for almost 80% of all multinational banks. Second, we show that there is a significant positive relationship between a multinational banking connection and exports using a standard gravity framework. We also employ a near-neighbors approach to disentangle the causal effect of bank entry from the possibility that banks simply anticipated exports growth.