Persistent Exchange Rate Volatility Despite Quasi-Stable Capital Flows
Abstract: This paper develops a two country, overlapping generations model with two assets, currency and capital. Boundedly rational agents allocate saving between a portfolio of the two assets, following strategies of imitation, experimentation, and election. Our main result is that, despite a convergence in the real interest rate and capital flows to a quasi-steady state, the exchange rate continues to exhibit persistent volatility. This result remains stable to a number of robustness checks, and indeed volatility is amplified if agents' propensity to experiment with new strategies is greater.
Notes: Coauthored with Cameron Shelton. | Technical Appendix | [MATLAB Code]
Endogenous Transactions Costs and Institutions in the 2007/08 Financial Crisis
Abstract: This paper examines the manner by which transactions costs in financial markets, broadly defined, not only derive from the regulatory-institutional framework, but in turn affect the development of this framework. We document the increasing presence of such costs in the U.S. financial sector since 1980, along with how changes in transactions costs coevolved with regulatory and institutional innovations over the past 30 years. Such transactions costs amplified an ever-greater disconnect between market prices and their economic fundamentals, and increased financial fragility to the point that the system became vulnerable to the 2007/08 financial crisis.
Notes: Coauthored with Terence Tan. | Working paper | Published | Technical Appendix | Foils
Effect of Quantitative Easing on Financial Flows to Developing Countries
Abstract: This paper examines the effects of quantitative easing (QE) policies in the United States on gross financial inflows to developing countries. Our results support the notion that QE may have been transmitted through liquidity, portfolio balancing, and confidence channels. Moreover, we find that QE had an additional effect over and above these observable channels, which we cannot attribute to either market expectations or changes in the structural relationships between inflows and the observable fundamentals. Our baseline estimates place the lower bound of the effect of QE at around 3 percent of gross inflows, for the average developing economy. We also find evidence of heterogeneity among different types of flows; portfolio (especially bond) flows tend to be more sensitive than FDI to our measured QE effects. Finally, we perform a simulations to explore the potential effects of QE withdrawal on financial flows to developing countries.
Notes: Coauthored with Sanket Mohapatra and Marc Stocker. | Working paper | Published | Technical Appendix | Foils | [STATA Log]
Foreign Bank Behavior During Financial Crises
Abstract: One of the persistent policy problems faced by governments contemplating financial liberalizations is the question of whether to allow foreign banks entry into the domestic economy. This question has become ever more urgent in recent times, due to rapid financial globalization, coupled with the credit contractions experienced as a result of the 2007/08 financial crisis. This paper examines the question of whether opening the financial sector to foreign participation is a good idea for developing countries, using a unique bank-level database of foreign ownership. In particular, we examine whether the credit supply of majority foreign-owned financial institutions differ systematically conditional on a crisis event in their home economies. We show that foreign banks that were exposed to crises in their home countries exhibit changes in lending patterns that are lower by between 13 and 42 percent than their non-crisis counterparts.
Notes: Coauthored with Jon Adams-Kane and Julian Caballero. | Working paper | Published | Technical Appendix | Foils
Channels of Transmission of the 2007/09 Global Crisis
Abstract: During a financial crisis, credit provision by international banks may be stymied by three distinct, but related, channels: changes in lending standards as a result of increased economic uncertainty, changes in funding availability from interbank liquidity markets, and changes in solvency due to effects on bank balance sheets. In this paper, we illuminate the manner by which each of these channels independently operated to affect developed-country bank lending in developing countries during the global financial crisis of 2007/09. We quantify how changes in banks' uncertainty about the value of their asset holdings, access to interbank liquidity, and internal balance sheet considerations altered their supply of credit in the run-up, during, and in the immediate aftermath of the financial crisis, both in terms of their relative magnitudes, as well as the sensitivity of these magnitudes to the crisis.
Notes: Coauthored with Jon Adams-Kane and Yueqing Jia. | Working paper | Published | Technical Appendix | [Stata Log]
Bilateral M&A Activity from the Global South
Abstract: This paper studies the factors associated with outbound bilateral mergers and acquisitions (M&A) activity by firms located in emerging economies. We document recent trends in emerging market M&A flows, which have risen dramatically over the past decade, and explore the factors that may have contributed to this rise. They find distinct patterns for M&A deals according to whether the acquisition targets are in other emerging economies or advanced countries, and that these differences can be attributed to differing theoretical motivations behind foreign direct investment. We also consider the implications of their model for future M&A originating in the global South, in light of the global financial crisis of 2008.
Notes: Coauthored with Mansoor Dailami and Sergio Kurlat. | Working paper | Published
Micro Impact of Financial Crises
Abstract: The existing literature on international financial crises has tended to focus on macroeconomic aspects, such as weaknesses in macroeconomic fundamentals and self-fulfilling expectations. More recent work has sought to fill in the gap in the microeconomic impact of financial crises. This paper utilizes a longitudinal household survey dataset for Bulgaria to examine differences in consumption expenditure from the year 1995 to 1997, during which time the economy experienced a financial crisis. Its primary finding is that the crisis had differential impacts on different groups in society, and these groups are represented in terms of both their asset and production dimensions as well as by their socioeconomic and demographic dimensions.
Notes: Coauthored with Jon Adams-Kane. Bulgarian National Bank Discussion Paper DP/46/2005. Honorable mention, SWEA Meeting 2005. | Working Paper | [Stata Log]
Competitive Devaluations: Bitter Pill or Bad Medicine?
Abstract: Devaluation and crises in emerging economies have tended to be followed by an outright economic collapse. This post-devaluation economic contraction is inconsistent with the conventional view that devaluation is expansionary/inflationary and needs to be accompanied by demand deflationary monetary and fiscal policy. This paper undertakes a detailed empirical analysis to determine whether real devaluation is contractionary rather than expansionary in the case of Thailand, which was the “trigger” country in the East Asian crisis of 1997-98.
Notes: Coauthored with Tracy Yang. | Published
Crisis, Contagion, and East Asian Stock Markets
Abstract: Following the 1997 financial crisis in East Asia, the issue of contagion has resurfaced. Contagion has most often been associated with high frequency events; hence, it has been measured on stock market returns, interest rates, the exchange rate, or linear combinations of them. This paper tests for evidence of contagion between selected East Asian stock markets, thereby exploring the importance of the linkages between stock markets as a transmission channel during the crisis.
Notes: Coauthored with Tracy Yang. | Published
Whither EMU? Revisiting the EMU, One Year On
Abstract: This essay seeks to draw together the diverse range of arguments pertaining to the economics of monetary integration and attempts to provide a formal framework for the study of monetary unions. Where possible, models are used to flesh out the more common verbal arguments that are often found in the literature, and where relevant, empirical work on European Monetary Union is reviewed and critiqued. The latter part of the paper draws on recent data for the euro-zone and attempts to assess the success of monetary integration in Europe with respect to the economic arguments already put forward. In particular, main macroeconomic indicators such as prices, unemployment and investment are examined and interpreted in the light of economic reasoning.
Notes: This is---in the main---my masters thesis.
Optimal Choice of Exchange Regime: Australia
Abstract: As the global economy moves toward greater financial and economic integration, the exchange rate regimes of individual nations have become an important policy issue. National choices have provided little consensus about which of the different regimes is preferred. This paper aims to provide an answer to the choice of exchange rate regime through the estimation of the optimal degree of exchage rate intervention, with respect to minimizing output variance, for the Australian economy. The results show that, for the case of Australia, the freely floating regime first introduced in 1976 and fully implemented in 1983 is not the optimal arrangement when the objective is to minimize the volatility of output. With such an objective, a managed float regime with a degree of intervention biased toward "leaning with the wind" is optimal. The results also show that the Reserve Bank has in fact been engaging in a "leaning with the wind" policy that is close to optimal.
Notes: A shortened, slightly more digestible form of my undergraduate honors thesis.