Thoughts on Research

I now regularly talk with graduate students about their dissertation topics, and these conversations have led me to reflect on where ideas come from. This essay is an attempt to understand my own research journey. Vanity is often a risk with these exercises, but I share these thoughts in case they prove useful to others contemplating a research career.

My experience at policy making institutions like the International Monetary Fund and the Federal Reserve have primarily shaped my research agenda. I was lucky at both the IMF and the Fed to travel to dozens of countries, meeting senior government and business leaders across a diverse range of countries and industries. At the IMF for example, I spent many hours talking to labor unions, CEOs and government officials in South Africa, learning first hand about the effects of inequality and the legacy of apartheid. Though I contributed little, these meetings left an indelible impression on me. At the Fed, I again got very lucky and worked with senior officials who had devoted a lifetime to analyzing banking and housing issues in the U.S., and I learned a great deal of practical wisdom from them after the 2008-2009 financial crisis. I also travelled to Basel bank regulatory and research meetings across the world, learning about these issues first hand at member countries. Working with one or two brilliant co-authors, from whom I am still learning how to synthesize and translate knowledge gained from real experience into disciplined academic research, also proved pivotal. Finally, coming to the U.S. as the usual poor immigrant kid living in an inner city instilled in me a great curiosity about the economic and social history of my adopted country—I went to Hillcrest High School, which was ranked as the most violent high school in New York City in the 1980s; that honor was well deserved!

While it was not conscious at the time, this curiosity about the U.S. along with my work in Southern Africa led to a series of papers on the economic and political consequences of inequality.[1] These papers show that inequality can significantly reduce the provision of public goods, like education, and hinder the development of institutions, like finance, that foster economic growth. Inequality and its effects on politics can also shape financial regulation, determining economic outcomes far into the future. More recent work also suggests that economic inequality can distort consumption and credit choices. Individuals at the top of the income ladder might overweight their consumption towards visible status goods, like luxury cars, to signal their relatively high status. Clearly, there are benefits to inequality and costs to using policy to compress the distribution of income, but at a first pass, this line of research makes clear some of the costs and dangers of too much inequality. I wrote those papers well before the issue of inequality became topical.

The financial crisis of 2008-2009 was an earthquake with aftershocks that continue to this day. It sparked my curiosity and I moved to the Federal Reserve in 2010. There I eventually wrote a stream of papers on the crisis. This was not conscious. I first began by using the prism of economic history to understand how banks might destabilize the real economy, and identify the long run effects of these shocks. It then seemed natural to continue that work with modern data, and so I wrote a series of papers arguing that the economic collapse in the wake of the financial crisis was also driven by distress at financial institutions. This seems obvious now, but the conventional wisdom at the time focused on the balance sheet channel at households, and was hostile to any other mechanism. Quantitative easing (QE) and other unconventional policies emerged in the US in the wake of the crisis. And with little evidence on the efficacy of these policies, they also drew my interest, and I have studied their effects both on real estate markets and on firms. The research on the crisis and QE have had some impact on how people now think about these issues, but it is better to let others judge this.

Real estate is a major source of collateral and wealth in the economy, and a well-spring of much grief. It remains to me a source of wonderment that individuals so consistently misprice these assets, often with the connivance of financial institutions and the real estate industry. This mispricing is naturally at the intersection of behavioral finance, as well as information frictions, and I suspect that the next set of papers will try to understand better how cognitive limitations as well as information frictions might generate the remarkable fluctuations in real estate prices that we have observed.

To close, in retrospect much of this research was a case of “following my nose”: Getting exposed to questions that seemed important and interesting to me, and just allowing my curiosity and intuition to lead the way. Sometimes, mainly through luck, it worked out, and sometimes because of my own lack of skills, important and interesting questions led nowhere. It all seems to have worked wonderfully, and it continues to be an exciting journey. But knowing what I know now about the importance of serendipity in these journeys, I probably would have chosen a different path.

[1] Many of these early papers were joint with Raghuram Rajan, to whom I owe an enormous debt.