@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.

This paper surveys the recent empirical literature on historical banking crises, defined as events that took place before 1980. Advances in data collection and identification have provided new insights into the causes and consequences of crises 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 negative effects on the real economy; and third, government interventions can ameliorate these costs. Contrasting historical episodes over time also reveals that the process of crisis formation and evolution is often context-dependent. Thus, we also highlight specific institutions and contexts that give rise to 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.

We provide a novel theory for US dollar dominance in global debt contracts that links corporate financing decisions to money market liquidity. Illiquid money markets entail search frictions for issuers that trade their revenue streams for the assets required to extinguish their debt. Equilibria with a single dominant currency emerge naturally from endogenous positive feedback cycles, seeded by the initial supply of short-term government debt. The debt denomination choices of liquidity demanders and liquidity suppliers are complementary, further reinforcing global currency dominance. We rationalize features of post-WWII dollar dominance and relate our theory to several historical experiences, such as the prominence of the Dutch florin in the 17th and 18th centuries, pound sterling in the pre-WWI era, and the ongoing debate about the potential rise of the Chinese renmenbi.

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.