Research

Working Papers

"Interest Rate Uncertainty and Sovereign Default Risk" (with Alok Johri and Cesar Sosa-Padilla), Journal of International Economics, Volume 139, November 2022 [Draft] [NBER Version] [JIE Link]

"Financial Crises and Labor Market Recoveries: A Bayesian Evaluation". [submitted] [Draft]

"Financial Crises, Unemployment and Monetary Policy Rules".

Work in Progress

"Anticipated Reforms, Financial Efficiency and International Capital Flows" (with Alok Johri). [Draft coming soon] [Slides]

Abstract:

Economic reform packages are announced with great fanfare in emerging economies, especially around election periods but political realities often lead to partial implementation eventually. We build a small open economy model where the banking sector faces a costly-state-verification problem in making loans to entrepreneurs. We show that financial reform announcements can induce a surge of capital inflows into the economy on the expectation of efficiency gains in the domestic banking system. If this news turns out to be over optimistic, the economy can experience a sudden stop like event as foreign lenders pull their funds out of the domestic banking system. This leads to a boom-bust cycle where the initial announcement causes a surge in capital inflows, a drop in credit spread, a rise in investment, consumption, output, credit and asset prices followed by a sharp current account reversal accompanied by a recession, a jump in spread and a drop in asset prices.

Unlike the previous literature on sudden stops, these flows are driven neither by exogenous variations in domestic TFP nor by exogenous changes in the interest rates charged on loans taken from world markets, instead the driving source is infrequent changes in expectations regarding the speed of future financial efficiency gains. In order to model the inefficiency of the financial system in a parsimonious way, we introduce an intermediation cost parameter in the financial intermediaries’ budget constraint which can be seen as the substantive difference between an open economy financial accelerator model such as Gertler, Gilchrist and Natalucci (2007) and our model. As reform packages are announced, agents expect a fall in future intermediation costs and a future rise in leverage and a fall in credit spread. These changes encourage capital inflows from foreign lenders. We calibrate the economy to South Korea and show that changes in expectations around financial reforms in Korea may have played a role in the financial crisis of 1997-98.