Research

Capital Flows, Capital Controls and Business Cycles (PDF FILE)

Abstract: This paper uses empirical and theoretical analyses to show that capital control policy of a short-term and volatile type of capital inflow (foreign portfolio liability) can be welfare improving. Panel data instrumental variable regressions suggest that increased foreign portfolio liability is strongly associated with output volatility but not with output growth. In contrast, increased foreign direct liability is strongly associated with increased output growth. Motivated by these results, a stochastic small open economy real business cycle model is developed. The model incorporates the two categories of capital inflows, endogenous collateral constraint, premium interest rate above world interest rate and convex borrowing costs in each capital inflow type. Capital control tax is imposed on foreign portfolio liability interest income. The model is calibrated to match the moments of the capital inflow categories as well as the standard business cycle variables. Model simulations indicate that an increase in the tax rate on portfolio liability interest income results in a significant welfare improvement. The central channel for the improvement is the increase in foreign direct liability induced by capital control on foreign portfolio liability which in turn increases output through its externality effect.

Energy price, energy efficiency, and capital productivity: Empirical investigations and policy implications (With Samuel Gamtessa) - Energy Economics (https://doi.org/10.1016/j.eneco.2018.04.020)

Earlier Version: How Can Energy Cost Lead to Energy Efficiency: Evidence from Canada, with Samuel Gamtessa – (Queens Economics Department Working Paper No. 1368) (PDF FILE)

An increase in energy-cost can induce energy efficiency improvement – a reduction in energy-output ratio. There are well-established theoretical conjectures of how this can take place. As the relative energy-cost increases, it induces firms to reallocate and selectively utilize the most energy-efficient vintages. In the long-run firms could also achieve energy efficiency through investments in energy-efficient capital. This study uses the Canadian KLEMS panel data set to investigate these relationships. We employ panel vector auto regressions as well as co-integration and error correction techniques to test whether the conjectures hold in the data. Our findings support the theoretical conjectures. The channels we empirically identify suggest that the effect of increased energy-cost can be an increase in energy efficiency: by decreasing energy- capital ratio and increasing output-capital ratio. The latter effect is observed only in the long-run

through induced investments in new capital.

Capital Inflow Transmission of Monetary Policy to Emerging Markets (Queens Economics Department Working Paper No. 1358) -- Under Review (PDF FILE)

Abstract:In this paper, I examine the effects of advanced economies’ conventional monetary policy on gross foreign direct and portfolio investment inflows to emerging economies. I use structural vector autoregressions to analyse and compare the response of each inflow category to world interest rate and emerging economies’ monetary and exchange rate shocks. Gross foreign direct inflows respond slowly to shocks while gross portfolio reacts on impact. Furthermore, the reaction of foreign direct investment to the shocks is not as high. These results suggest that monetary and exchange rate policies of emerging economies influence portfolio inflows more than they impact foreign direct investment inflows. These results also imply the existence of fundamental differences in capital flow categories beyond what we know to date. I address the “push” and “pull” debate in categories capital flows by quantitatively comparing the forecast error variance decomposition. I do not find evidence of “push” over “pull” factors in either class of inflows.

Investment growth, Corruption, and Illicit Money Transfer Preliminary Draft PDF

Abstract: In this paper, I consider heterogeneous agents inhabiting a developing country. There are three types of agents: elites, non-elites, and entrepreneurs. Entrepreneurs bribe elites to get licenses to invest in their companies and employ non-elites to work for them. The central question is ”will aggregate investment grow faster or slower?” Theoretically, the answer is - when the income level of the developing economy is low, investment grows faster than when there is no bribery. This is because of the higher marginal propensity to save by elites than entrepreneurs. This is in favor of the ”bribery greases the wheel of growth” view. As the income of the population increases, however, bribery ”sands the wheels of growth.” In addition, because of the risk of bribery, elites look for safe havens to save the illegally acquired resources and thus capital flight sets in. In the empirical analysis, I use two corruption indices of many countries: corruption perception index and corruption control index. I proxy the capital flight by the Swiss Bank deposit of countries to the ratio of their GDP. The results indicate that bribery may not necessarily decrease investment in extremely low-income countries. The negative coefficient of the squared per capita income implies that it does decrease investment growth as countries per capita income increases.

BSE disease outbreaks, structural change and market power in the Canadian beef industry (PDF FILE)

Abstract: This study examines farm to wholesale prices spreads to measure the impact of the Bovine Spongiform Encephalopathy (BSE) disease outbreak on the Canadian beef industry. The study uses structure break tests developed by Gregory and Hansen (1996) and Hansen (1992) examine possible breaks within cointegrating relationships. The study finds evidence that the industry began a realignment as a result of the UK BSE disease outbreak, and the Canadian BSE disease outbreak was simply the largest realignment of the process beginning with the UK disease outbreak. However, the only statistically significant break was the BSE disease outbreak itself in May 2003. Stability was not restored until the border was reopened in 2005. Specific results indicated that the processing sector exploited the border closure in May 2003 to enhance its market power and that the system returned to a competitive one after the border re-opened in July 2005.

Technical Report: Casting Light on the Arab Spring: A Survey of Influential Economic Factors in the Arab Spring Countries: PDF FILE

Could we have predicted the Arab Spring? (With Ugurhan Berkok)

Abstract: Differently from the current literature that mainly focuses on the balance of political or economic factors that lead to revolutions, this paper attempts to explain the role of combinations of various factors that led to the Arab Spring. We explain how the objectively measured political environment may have had an influence on the occurrence and timing of the unrest. On the other hand, though the socio-economic and economic factors such as unemployment—especially youth unemployment, inflation, and inequality had contributed to discontents before the uprisings, the revolution did not ultimately come about due to poverty and desperation of people. Instead, the reasons for the uprisings were centered upon improving economies and the hope for better living standards under potentially democratic governments. We discuss how technology, the social media, and cyberactivism allowed people to coordinate their protest. We then propose a simple theoretical model to show that government’s investment to suppress revolts through controlling the media, brainwashing the people and building military power will be unsuccessful unless it reverts to extreme measures to control unrest. Moreover, a widening membership and a lower income inequality decrease uprisings and their success in overthrowing a regime.