Job Market Research
Unpacking Policy Uncertainty: Evidence from European Firms Link to Latest Draft
Abstract: The intensifying nature of policy uncertainty makes it a popular explanation for recent weak economic performance and puzzles. However, the empirical literature is limited in its ability to make causal claims because it largely relies on macro-level measures of policy uncertainty and treats the concept as homogenous but indeterminate. This research addresses these weaknesses by exploiting variation in firms' exposure to external markets to construct a firm-level measure of policy uncertainty. The approach both highlights a new channel for policy uncertainty and allows for stronger causal identification of the effects of policy uncertainty on economic performance. As part of this effort, I refine prior approaches to measuring policy uncertainty and distinguish between generic, fiscal, monetary, and trade policy uncertainty. I find that firms with greater exposure to external markets tend to experience larger declines in investment, sales, profits, and employment when fiscal and monetary policy uncertainty increase. Unexpectedly, increases in trade policy uncertainty appear to have a positive impact on exports for exposed firms. Both sets of findings can be rationalized in a standard model of firm investment under uncertainty. In particular, I present evidence that exposed firms may perceive increased uncertainty around trade agreement negotiations as a signal that negative outcomes are less likely in the near-term, incentivizing immediate investments. Online Appendix Slides
The Consequences of Policy Uncertainty: Disconnects and Dilutions in the South African Real Effective Exchange Rate-Export Relationship, with Magnus Saxegaard. (IMF Working Paper, WP/16/113, 2016)
Abstract: In recent years, the relationship between the real effective exchange rate (REER) and exports has weakened in South Africa–while exports still rise in response to real exchange rate depreciations, the REER-export elasticity is well below historical estimates. The literature has put forward a number of alternative explanations for recent disconnects and dilutions in the REER-export relationship–from increasingly multi-national supply-chains to muted exchange rate pass-through. This research explores a new explanation–the role of domestic economic policy uncertainty in reducing the responsiveness of exports to relative price changes. The primary channel for this effect is decreased and delayed investment as firms adopt a “wait and see” approach to exporting-related fixed costs (e.g., market entry costs, product entry costs, expansion/upgrading costs, or hiring costs to meet increased demand). To do so, we construct a novel ?news chatter? measure of South African policy uncertainty and examine how it, paired with other supply-side constraints, can improve our understanding of export competitiveness and performance. We find that increased policy uncertainty diminishes the responsiveness of exports to relative price changes. Moreover, increases in policy uncertainty are also directly associated with both short and long-run level effects on export performance. To date, the uncertainty explanation is robust to alternative explanations that center on credit constraints, supply-chains, and threshold/ boundary effects. Finally, we show that a measure of competitiveness that adjusts the REER for uncertainty and supply-side constraints greatly outperforms the unadjusted REER in tracking exports in South Africa. RSA Policy Uncertainty Index (Q1 1985 - Q3 2016)
Demand and Defective Growth Patterns: The Role of The Tradable and Non-Tradable Sectors in an Open Economy
with A. Michael Spence. (American Economic Review: Papers & Proceedings, 104(5), 2014, pg. 272-277).
Abstract: There are lessons advanced markets can glean from developing market experiences with defective growth patterns. This paper focuses on the U.S. economy where there are relatively detailed data on structural trends and where the structural divergences and rigidities of the eurozone are less present. We examine the structural evolution of the economy in relation to cyclical forces and balance sheet shocks by employing Jensen and Kletzer’s (2005) approach for measuring the tradability of an industry based on its geographic concentration. The data show that external demand is already helping shift the U.S.’s structure back toward a more sustainable balance; the tradable sector has generated more than half of gross gains since the start of the recovery even though it is only a third of the economy. However, there are also potential hurdles to this growth pattern. Most of the post-crisis employment growth originated in largely non-tradable industries, indicating a divergence between drivers of employment and drivers of value added. This trend has and will continue to result in worsening income inequality.
with Matthew Clair and Peter Blair Henry (Proceedings of the American Philosophical Society, 157(1), 2013, pg. 32-57).
Abstract: From 1961 to 2011, Barbados’s GDP per capita grew roughly two times faster than Jamaica’s. As a result, the income gap between Barbados and Jamaica is now more than three times larger than at the time of independence. Qualitative historical analysis, exploiting the interplay between public policy and entrepreneurship before and after the 1973 oil price shock, demonstrates that pro-entrepreneurial policies in Barbados versus anti-business policies in Jamaica explain in part the economic divergence of these two islands.
with A. Michael Spence. (Comparative Economic Studies, 54(4), 2012, pg. 703-738).
Abstract: This paper examines the evolving structure of the American economy, specifically the trends in employment, value added, and value added per employee from 1990 to 2008. Employing historical time series data from the Bureau of Labor Statistics and the Bureau of Economic Analysis, US industries are separated into internationally tradable and non-tradable components, allowing for employment and value added trends at both the industry and the aggregate level to be examined. Value added grew across the economy, but almost all of the incremental employment increase of 27.3 million jobs was on the non-tradable side, where government and health care are the largest employers and provided the largest increments (an additional 10.4 million jobs) over the past two decades. There are obvious questions about whether those trends can continue; without fast job creation in the non-tradable sector during this period, the United States would already have faced a major employment challenge. The non-tradable sector also experienced much slower growth in value added per employee; because value added per employee is highly correlated with income, it goes a long way to explain the stagnation of wages across large segments of the workforce. The evolution of the US economy supports the notion of there being a long-term structural challenge with respect to the quantity and quality of employment opportunities in the United States.
with David Neves, Michael Samson, Ingrid van Niekerk, and Andries du Toit. (Finmark Trust, 2009, 60).
Abstract: This research examines the effectiveness of social grants in South Africa, and how recipients use their grants. As a form of social protection, social grants not only ameliorate poverty and provide a safety net, they also potentially promote social transformation. The main report pulls together a number of aspects. The research combines both qualitative and quantitative inquiries. The qualitative inquiry is built on a number of urban and rural case studies, and examines not only the way in which social grants are used, but also the larger context that drives decision-making. Four of these in-depth case studies are in the report. The quantitative analysis draws on a constructed panel dataset from Statistics South Africa’s Labour Force Surveys conducted in 2001, 2002 and 2003 (Stats SA, 2001; 2002; 2003), and employs a quasi-experimental propensity score matching approach to compare grant recipients with non-recipients of a similar socioeconomic status. The empirical research confirms that cash transfers in South Africa support consumption and improve the welfare of recipients and their broader households. The data also suggests that social grants facilitate investments in human capital (nutrition and schooling), along with investments in productive assets and activities. The qualitative and quantitative data suggest that social grants support financial activities. Grant beneficiaries have higher levels of savings, and are able to engage with credit markets on generally more favorable terms. The data also point to the way in which social grant income helps satisfy beneficiaries’ needs for precautionary savings.
Work in Progress
Abstract: When the 2013 Kenyan election transpired without violence or allegations of fraud, international legal scholars argued that the International Criminal Court’s (ICC) ongoing case against six of Kenya’s top leaders drove the positive outcome, acting as a catalyst for political stability in the country. This research examines whether investors’ valuations of listed Kenyan firms support such an assertion. I find little evidence of investors levying any aggregative opinion—good or bad—on the ICC’s intervention for the economy as a whole. While overall abnormal market returns tended to be negative during ICC news shocks, difference-in-differences estimations uncover that unconnected firms did not experience significantly negative revaluations surrounding adverse ICC news announcements. This finding suggests that investors in Kenyan firms have been discerning when it comes to the fallout associated with the ICC case by focusing their revaluation efforts on connected firms. To this end, there is strong evidence that connected firms experienced declines in abnormal returns during ICC shocks, with particularly negative revaluations for ICC-board linked firms. One explanation for the disproportionate impact on ICC-board linked firms is that these firms have more transparent links to the current President, and ICC accused, Uhuru Kenyatta, relative to firms with board members that serve as “inner circle” advisors to the ICC accused. This research not only confirms that close connections with political leadership have value for connected firms, but also that a lack of transparency about such connections can potentially shield connected firms from large negative shocks related to their connections.