Policy Uncertainty, Multinational Firms, and Reallocation

Multinationals are often considered a tool through which economic shocks originating in a region get magnified. This paper, in contrast, shows that elevated economic policy uncertainty (EPU) in a country is associated with increase in investment by a firm in other regions. I find that (multinational) firms hold back investment in a country subjected to higher EPU, which they reallocate to projects in other countries. I find the impact to be higher for firms with tighter financial constraints. I also find that the reallocation is directed more towards countries that provide a better legal environment. The study uses establishment-level data of mining firms as a laboratory. Limited input–output linkage across mines allows me to study the impact caused particularly through the allocation decision of firms. The empirical strategy exploits variations in: i) parent country of mines operating in the same country; & ii) country of operation of mines owned by same firm. Overall, my findings highlight that multinationals could potentially stabilize the escalation of regional policy uncertainty shocks to global crisis

Home bias in open economy financial macroeconomics

Home bias is a perennial feature of international capital markets. We review various explanations of this puzzling phenomenon highlighting recent developments in macroeconomic modeling that incorporate international portfolio choices in standard twocountry general equilibrium models. We refer to this new literature as Open Economy Financial Macroeconomics. We focus on three broad classes of explanations: (i) hedging motives in frictionless financial markets (real exchange rate and nontradable income risk), (ii) asset trade costs in international financial markets (such as transaction costs or differences in tax treatments between national and foreign assets), and (iii) informational frictions and behavioral biases. Recent theories call for new portfolio facts beyond equity home bias. We present new evidence on cross-border asset holdings across different types of assets: equities, bonds and bank lending and new micro data on institutional holdings of equity at the fund level. These data should inform macroeconomic modeling of the open economy and a growing literature of models of delegated investment