research fields
Economic Growth, International Finance
papers
Sudden Stops, Banking Crises and Investment Collapses in Emerging Markets with Joseph P. Joyce (Journal of Development Economics, forthcoming) We evaluate whether financial openness leaves emerging market economies vulnerable to the adverse effects of capital reversals ("sudden stops") on domestic investment. We investigate this claim in a broad sample of emerging markets during the period 1976-2002. If the banking sector does not experience a systemic crisis, sudden stop events fail to have a significant impact on investment. Bank crises, on the other hand, have a significant negative effect on investment even in the absence of a contemporaneous sudden stop crisis. We also find that openness to capital flows exacerbates the severity of the adverse impact of banking crises on investment. Our results provide statistical support for the policy view that a strong banking sector which can withstand the negative fallout of capital flight is essential for countries that open their economies to international financial flows.
The Welfare Consequences of Irrational Exuberance with Michal Jerzmanowski (Journal of Macroeconomics, 30, 2008) This paper studies the effects of stock market valuation on research investment, the rate of innovation and welfare. In the presence of financing constraints for R&D investment, episodes of high market valuation can ease these constraints and raise the economy-wide investment in R&D and the rate of innovation. If in a decentralized equilibrium the rate of innovation is inefficiently low, then such episodes may lead to an increase in aggregate welfare even if higher valuation is not entirely justified by fundamentals. We present a Schumpeterian-style growth model with a costly financial intermediation process to characterize the relationship between market value, entry of new firms, and the aggregate rate of innovation. We use the model to measure welfare consequences of a stock market run-up that may only partly be justified by fundamentals. In particular we apply the model to the US economy in the 1990s and calibrate the impact of the NASDAQ boom on the rate of innovation, output growth and welfare. The welfare effect depends on the underlying change in fundamentals. We find that with an acceleration in US trend productivity growth from a pre-1995 rate of 1.4% to a rate of 2.0 % per annum, the NASDAQ boom will have resulted in a net welfare gain of 0.55%. If the new growth rate is as high as 3%, the net gain was 1.35% of the present discounted value of consumption.
Financial Development and Wage Inequality: Theory and Evidence with Michal Jerzmanowski (under review) We provide an explanation for the joint occurrence of widening wage inequality and changes in organizational form in response to financial market developments in the US economy in the last two decades. We present an endogenous growth model with imperfect credit markets and establish how improving the efficiency of these markets affects modes of production, innovation and wage dispersion between skilled and unskilled workers. We argue that financial market development is an independent source of the rise in the skill premium in the US since the 1980s, and can also explain an economically significant portion of the increase in residual wage inequality. The experience of US states following banking deregulation and the more recent surge in venture capital provide empirical support for our hypothesis.
Information, Investor Expectations and Productivity Growth (under review) This paper develops a framework of investor expectations that takes into account various key aspects of the technology investment process - path dependence, imperfect information, and learning. The framework is incorporated into an innovation-based model of growth to study how imperfect information on the fundamentals affects expectations, investment, and productivity growth. The paper demonstrates that while imperfect information may lead to delays in the response of investment to changes in the underlying fundamentals, it also contributes to faster and more stable growth on average. Conversely, improvements in the quality of information - of the kind that take place when investors become more experienced and knowledgeable about the underlying fundamentals - contribute to more volatile and lower average growth. This result does not rely on a diminishing impact of new innovations. Instead, the paper provides an alternative, information-based explanation for why productivity slowdowns occur.
ongoing projects
Bank Regulation, Credit Growth and Deposit Mobilization in India Recent studies have suggested that a major impediment to financial intermediation in India is not a lack of saving but the low level of deposit mobilization in the formal banking sector. This research examines the extent to which low deposit mobilization is a consequence of priority sector lending requirements that constrain domestic banks in India to lend 40% of their portfolio to designated priority sector activities. The empirical analysis exploits recent federal policy changes in priority sector lending requirements to examine the impact of these reforms on credit growth and deposit mobilization at the level of districts across the major states of India.

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