Working Papers
Fiscal Consolidation and Public Debt. January 2024. CEPR Discussion Paper No. DP18548. (with Sakai Ando, Nikhil Patel, Adrian Peralta-Alva, and Andrea F. Presbitero)
Abstract. High public debt is urging policy makers to consider strategies to rebuild buffers and preserve debt sustainability. We focus on discretionary fiscal consolidation, defined as an increase in the ratio of primary balance (the difference between government revenues and non-interest expenditures) to GDP not driven by business cycle considerations, and evaluate whether—and under which conditions—it is likely to be associated with a durable reduction in public debt to GDP ratios. Our findings, based on a large sample of advanced and emerging countries, indicate that, on average, discretionary fiscal consolidation has a minimal impact on debt ratios. However, discretionary consolidations implemented during economic upturns or in scenarios where they can “crowd in” private investment, are more likely to be associated with sustained reductions in debt ratios.
Measuring U.S. Core Inflation: The Stress Test of COVID-19. January 2024. NBER Working Paper No. 29609, CEPR Discussion Paper No. DP17002. (with Laurence M Ball, Daniel Leigh and Antonio Spilimbergo).
Abstract. We compare alternative approaches to filtering out transitory effects of industry price shocks on US inflation during 2020-21. The Fed’s preferred measure of underlying or core inflation, which excludes food and energy prices, performed poorly, and was as almost as volatile as headline inflation. Measures that exclude a fixed set of industries, such as the Atlanta Fed’s sticky-price inflation, were less volatile. The least volatile were measures that filter out large price changes in any industry, such as the Cleveland Fed’s median and Dallas Fed’s trimmed mean; these drifted down when the economy was weak and rose as it rebounded.
The Politics of the Paycheck Protection Program. January 2024. CEPR Discussion Paper No. DP16842. (with Deniz Igan, Thomas Lambert, and Eden Zhang).
Abstract. Does political ideology shape loan allocation through the Paycheck Protection Program (PPP)? We hand-collect detailed data on the contributions of both banks and bank employees to political campaigns in the 2020 presidential election to construct measures of political ideology. For identification, we exploit the staggered implementation of the PPP under both Trump and Biden administrations. Our preliminary findings show that ideological distance with the administration distorts small business lending of banks. We conjecture that those misaligned with the Biden administration (Republican-leaning banks) consider the second phase of PPP in 2021 a legacy policy and carry it out more enthusiastically potentially to make up for the loss in political capital with the current administration. Our study has important implications for the effectiveness in implementing government aid programs and for the dynamics of banks’ political capital.
Doing More for Less? New Evidence on Lobbying and Government Contracts. November 2023 (with Senay Agca, Deniz Igan and Fuhong Li).
Abstract. This paper exploits the unanticipated sequestration of federal budget accounts in March 2013 to examine how contractors adjusted lobbying activities in response to the sequester. The sequestration reduced the funds disbursed through procurement. Firms with limited exposure to the cuts reduced lobbying spending after the event, whereas firms with high exposure maintained, or even increased, lobbying expenses. More affected firms appear to have intensified lobbying efforts to distinguish themselves, and to improve their chances of procuring a larger share of the reduced pie. These effects are stronger for government-dependent sectors and sectors where competition is more intense.
What Policy Combinations Worked? Bank Lending During Covid-19. October 2023. IMF Working Paper No. 2023/025 (with Divya Kirti, Sole Martinez Peria and Jan Strasky)
Abstract. This paper analyzes the impact of fiscal, monetary, and prudential policies during the COVID-19 pandemic on bank lending across a broad sample of countries. We combine a comprehensive announcement level dataset of policy actions with bank and firm-level information to analyze the effectiveness of different types of policies. We document that different types of policies were introduced together and hence accounting for policy combinations, or packages, is crucial. Lending grew faster at banks in countries that announced packages combining fiscal, monetary, and prudential measures relative to those that relied on some, but not all, policy dimensions. Within packages including all three types of policy measures, banks in countries with more and larger measures saw faster loan growth. The impact was larger among more constrained banks with low equity levels. Large packages combining fiscal, monetary and prudential policies also increased liquidity for bank dependent firms, but did not disproportionately benefit unviable firms.
Sovereign Debt Restructuring and Reduction in Debt-to-GDP Ratio. October 2023. SSRN Working Paper. (with Sakai Ando, Tamon Asonuma, and Alexandre Sollaci)
Abstract. How effective have sovereign debt restructurings been in reducing debt-to-GDP ratios? We explore this empirically based on a newly assembled comprehensive dataset that covers 115 countries between 1950 and 2021. We show that debt restructuring has a significant and long-lasting impact on the debt-to-GDP ratio. The impact is even larger when combined with fiscal consolidation. In the short run, restructurings with face value reduction and higher creditor coordination tend to be more effective, compared to the average. In the long run, however, the depth of treatment is important, irrespective of how restructuring is executed.
Back to Trend: COVID Effects on E-commerce in 47 Countries. September 2023. NBER Working Paper No. 29729. (with Joel Alcedo, Alberto Cavallo, Bricklin Dwyer, and Antonio Spilimbergo)
Abstract. We study E-commerce across 47 economies and 26 industries during the COVID-19 pandemic using online transaction data from Mastercard. The online share of total credit card transactions surged during the pandemic, especially as governments made transfers to households in lockdown. As the fiscal support and mobility restrictions waned, online shares went back to pre-pandemic trends in almost all countries. We find little evidence of long-lasting structural changes in E-commerce spending patterns.
Deposit and Credit Reallocation in a Banking Panic: The Role of State-Owned Banks. August 2023. NBER Working Paper No. 30557 (with Viral V. Acharya, Abhiman Das, Nirupama Kulkarni, & Nagpurnanand R. Prabhala).
Abstract. We study a bank run in India in which private bank branches experience sudden and considerable loss of deposits, which migrate to state-owned public sector banks (PSBs) that serve as safe havens. We trace the consequences of the deposit reallocation using granular bank-firm relationship and branch balance sheet data. The flight to safety is not a flight to quality. Lending shrinks and credit quality improves at the run banks but worsens at the PSBs receiving the flight-to-safety flows, especially the weaker ones. The resource reallocation is inefficient in the aggregate.
Cross-border Spillovers: How US Financial Conditions affect M&As Around the World. June 2023. NBER Working Paper No. 31235 (with Katharina Bergant and Raghuram Rajan).
Abstract. We find that financial conditions in the core have significant spillover effects on cross-border mergers and acquisitions (M&As). On average, a 1 percentage point easing of the IMF US Financial Conditions Index is associated with approximately a 10% higher volume of cross-border M&As. The spillovers are stronger for countries with more liabilities denominated in foreign currency (or in US dollars). We find that the spillovers are driven by changes in US financial conditions, rather than changes in Euro Area conditions. Deals that happen when financial conditions in the US are tighter (and therefore acquisitions fewer) add more value for the acquirers, as reflected in higher acquirer excess stock returns around the announcement.
Tracking Economic and Financial Policies During COVID-19: An Announcement-Level Database. June 2022. IMF Working Paper No. 2022/114. (with Divya Kirti, Sole Martinez Peria and Jan Strasky).
Abstract. We introduce a new comprehensive announcement-level database tracking the extraordinary fiscal, monetary, prudential, and other policies that countries adopted in response to Covid-19. The database provides detailed information, including sizes where available, for 28 granular policies adopted by 74 countries during 2020. About 5,500 policy measures were announced during this period. Importantly, the database is organized and presented in a format easy for researchers to use in empirical analyses. Announcements were highly correlated across the broad fiscal, monetary, and prudential categories and at more granular levels. Advanced economies (AEs) introduced larger fiscal measures than emerging and developing economies (EMDEs) and relied primarily on large unconventional monetary policies. Bank capital requirements were relaxed widely in both AEs and EMs, while relaxation of provisioning requirements was more common among EMs. Supervisory expectations and reporting requirements were widely relaxed.
The Transmission of Monetary Policy Within Banks: Evidence from India. April 2016. (with Abhiman Das, and Nagpurnanand Prabhala).
Abstract. India’s central bank frequently injects liquidity into banks or drains liquidity by altering the cash balances that banks must maintain with it. We analyze the lending responses within banks to these quantitative tools of monetary policy. We use internal data from over 125,000 branches of banks, and estimate empirical specifications that control for time-varying unobserved heterogeneity in banks and geographies. We show that the within-bank variation in lending is economically significant, and is explained by a rich suite of branch asset, liability, and organizational variables. Branches that are larger, make loans with smaller ticket size, are deposit rich, make shorter term loans, have fewer non-performing assets, and greater managerial capacity respond more to monetary policy. Responses are more sluggish in state-owned banks. Thus, besides the external financing frictions faced by banks, internal frictions within banks significantly explain the lending responses to funding shocks.
Publications
Understanding U.S. Inflation During the COVID Era. Brookings Papers on Economic Activity, 2022. IMF Working Paper No. 22/208, NBER Working Paper No. 30613, covered in New York Times, Wall Street Journal, The Economist. (with Laurence Ball and Daniel Leigh).
Abstract: This paper analyzes the dramatic rise in U.S. inflation since 2020, which we decompose into a rise in core inflation as measured by the weighted median inflation rate and deviations of headline inflation from core. We explain the rise in core with two factors, the tightening of the labor market as captured by the ratio of job vacancies to unemployment, and the pass-through into core from past shocks to headline inflation. The headline shocks themselves are explained largely by increases in energy prices and by supply chain problems as captured by backlogs of orders for goods and services. Looking forward, we simulate the future path of inflation for alternative paths of the unemployment rate, focusing on the projections of Federal Reserve policymakers in which unemployment rises only modestly to 4.4 percent. We find that this unemployment path returns inflation to near the Fed’s target only under optimistic assumptions about both inflation expectations and the Beveridge curve relating the unemployment and vacancy rates. Under less benign assumptions about these factors, the inflation rate remains well above target unless unemployment rises by more than the Fed projects.
The Relationship Dilemma: Why Do Banks Differ in the Pace at Which They Adopt New Technology? 2021. The Review of Financial Studies NBER Working Paper No. 25694. (with N.R. Prabhala, and Raghuram G. Rajan).
Abstract: India introduced credit scoring technology in 2007. We study adoption by the two main types of banks operating there, new private banks (NPBs) and state-owned public sector banks (PSBs). NPBs start checking the credit scores of most borrowers before lending, soon after the technology is introduced. PSBs do so equally quickly for new borrowers but very slowly for prior clients, although lending without checking scores is reliably associated with more delinquencies. We show that an important factor explaining the difference in adoption is the stickiness of past bank structures and associated managerial practices. Past practices hold back better practices today.
Populism and Civil Society 2021. Economica, Volume88, Issue352, October 2021, Pages 863-895. IMF Working Paper No. 18/245. (with Tito Boeri, Chris Papageorgiou, and Antonio Spilimbergo).
Abstract: Since Tocqueville (1835), civil society has been recognized as a cornerstone of liberal democracy. But populists claim to be the only legitimate representatives of the people, leaving no space for civil society. Are populism and civil society enemies? To answer this question, we look at voters’ choices in Europe. We find that individuals belonging to associations are less likely by 1.6 to 2.8 percentage points to vote for populist parties, which is large considering that the average vote share for populist parties is between 12 and 22 percent. This results survives to a large number of robustness checks.
Whither India’s Economy Post-COVID? 2020. Brookings-NCAER India Policy Forum.
Abstract. India’s economy was weak in 2019, but appeared to be near a trough. A protracted slide in growth had continued since 2016. The continued challenges in implementation of the 2017 national Goods and Services Tax, and credit stresses in the domestic financial sector beginning in 2018 weighed on growth and sentiment. Sectors such as construction, housing, and autos reflected extremely low levels of activity. The Reserve Bank of India eased monetary policy and pledged to stabilize the financial sector, while the government introduced a large corporate tax cut to attract manufacturing activity, among other measures. While we did not believe any of these measures represented a forceful cyclical policy stimulus that would result in a sharp rebound, we thought that, together, they would help put a floor under the deceleration in growth, and combined with better external conditions, we would see India's growth climbing back towards its long-term trend by early 2021. However, just as the Indian economy was starting to look up at the beginning of this year, the rising tide gave way to the COVID-19 shock. Against this backdrop, this paper presents a synthesis of our research on the macroeconomic and fiscal implications of the COVID-19 crisis for India, and lays out the challenges in setting and implementing policy. Discretionary fiscal policy support – defined as targeted support to households and businesses, the kind of policy support that can revive any economy quickly in times of an unprecedented shock – has been tepid so far, in our view. Monetary policy has been the main “game in town”, and has eased significantly, combined with large injections of banking system liquidity. The transmission of conventional monetary policy, however, continues to pose challenges. In addition, the exchange rate has remained remarkably stable during this crisis; the real effective exchange rate has, in fact, strengthened, and will likely be a drag on growth. Therefore, while pent-up demand, favorable base effects, and massive policy support in advanced economies driving a global recovery could help lift India’s economy, we struggle to see any domestic fundamental forces to drive India’s growth forward in the medium run. In particular, the accelerating spread of the virus, continued risk aversion and confidence concerns in the domestic financial sector, and deteriorating fiscal and debt positions are the three key risks to India’s recovery in the medium term.
Cash and the Economy: Evidence from India’s Demonetization, 2020. The Quarterly Journal of Economics, Volume 135, Issue 1, February 2020, Pages 57–103 (with Gabriel Chodorow-Reich and Gita Gopinath, and Abhinav Narayanan), NBER Working Paper No. 25370.
Abstract: We analyze a unique episode in the history of monetary economics, the 2016 Indian ``demonetization.'' This policy made 86\% of cash in circulation illegal tender overnight, with new notes gradually introduced over the next several months. We present a model of demonetization where agents hold cash both to satisfy a cash-in-advance constraint and for tax evasion purposes. We test the predictions of the model in the cross-section of Indian districts using several novel data sets including: the geographic distribution of demonetized and new notes for causal inference; nightlight activity and employment surveys to measure economic activity including in the informal sector; debit/credit cards and e-wallet transactions data; and banking data on deposit and credit growth. Districts experiencing more severe demonetization had relative reductions in economic activity, faster adoption of alternative payment technologies, and lower bank credit growth. The cross-sectional responses cumulate to a contraction in aggregate employment and nightlights-based output due to the the cash shortage of at least 2 p.p. and of bank credit of 2 p.p. in 2016Q4 relative to their counterfactual paths, effects which dissipate over the next few months. Our analysis rejects money non-neutrality using a large scale natural experiment, something that is yet rare in the vast literature on the effects of monetary policy.
How do Central Bank Governors Matter? Macroeconomic Policy, Regulation and the Financial Sector, 2019, Journal of Money, Credit, and Banking, Volume 51, Issue2-3 March-April 2019 (with Ariell Reshef).
Abstract: Do employment and educational characteristics of central bank governors affect financial regulation? To answer this question, we construct a new and unique dataset based on curriculum vitae of all central bank governors around the world in 1970-2011, and merge this with data on financial regulation and other variables. The proportion of governors that had past experience in finance increases from 10 percent in 1980 to 30 percent in 2010. Past experience in finance matters, and the effect is large: Over the average duration in office (5.6 years), a central bank governor with financial sector experience deregulates three times more than a governor without financial sector experience. Experience in finance after tenure as governor is not important. Similar results hold for past experience at the International Monetary Fund; in contrast, past experience at the Bank of International Settlements and the United Nations have the opposite effect, slowing the pace of deregulation. Our findings are consistent with the view that past work experiences of central bankers shape their beliefs and preferences, which, in turn, are consequential for policy outcomes.
Dialogue between a Populist and an Economist 2018. American Economic Review Papers and Proceedings Volume 108, pp.191-95 (with Tito Boeri, Chris Papageorgiou, and Antonio Spilimbergo )
Abstract: In this imaginary dialogue, a populist and an economist discuss the role of economic shocks to explain populism. A simple correlation between economic shocks and populism is weak. However, economic shocks can explain well the phenomenon of populism in countries with low pre-existent level of trust. This is confirmed both at the macro cross-country level and also by micro evidence obtained from surveys. Finally, this finding is consistent with the “ideational approach” in political science, which emphasizes how the populist narrative opposes the “corrupt elite” to the “virtuous people.”
Rules of the Monetary Game 2018. Currencies, Capital, and Central Bank Balances Conference Volume, Hoover Institution, Stanford University RBI Working Paper No. 04/2016. Covered in New York Times. (with Raghuram Rajan)
Abstract: Aggressive monetary policy actions by one country can lead to significant adverse cross-border spillovers on others, especially as countries contend with the zero lower bound. If countries do not internalize these spillovers, they may undertake policies that are collectively suboptimal. Perhaps instead, countries could agree to guidelines for responsible behavior that would improve collective outcomes. This paper puts forward some of the practical issues that need to be considered in framing possible rules of the monetary game. We argue that policies could be broadly characterized and rated based on analytical inputs and discussion. Policies that generally have positive or domestic effects could be rated Green, policies that should be used temporarily and with care could be rated Orange, and policies that should be avoided at all times could be rated Red. We provide a brief review of the some of the frameworks that have been used in the literature to measure and analyze spillovers. We make the case that models may reflect the policy biases of those devising them, and may be at too early a stage to be able to draw strong conclusions from them. Therefore, while more empirical analysis should be undertaken, it should be seen as an input to a dialogue rather than definitive, with the analysis being refined as we understand outcomes better. The paper also discusses the specific role of the IMF in this context.
India's Exports: The New Normal? 2018. IMF-Bank of Korea-Peterson Institute Conference Volume (with Sajjid Chinoy, and Siddhartha Nath).
Abstract: Contrary to the perception of India being a closed economy, exports to GDP have doubled over the last 15 years, and at 20% of GDP India’s are at the same as Indonesia’s. Furthermore, we estimate that the slowdown in export growth over the last decade explains at least two thirds of the headline GDP slowdown, thereby underscoring the increasing imports of exports. Furthermore, India’s merchandise exports have undergone a quiet revolution over the last two decades with new-age engineering, electronic and pharmaceutical exports gradually replacing India’s traditional exports of leather, textile, gems and jewelry. In this paper, using sectoral and firm level data, we ascertain what drives India’s exports. Sectoral data reveal that export volumes are largely driven by changes in partner country growth. Interestingly, this is particularly true in the engineering and electronics sector. That said, we find a structural break around 2005 — well before the global financial crisis and the subsequently documented de-globalization — after which these partner country growth elasticities have fallen sharply, with the decline being largest in India's new age exports. In contrast, changes in the exchange rate and supply side constraints, at the margin, are not found to impact India’s export volumes. Using firm level data broadly produces the similar results. Controlling for external demand conditions and domestic supply constraints, we find little evidence that exchange rate movements hurt competitiveness at the firm level. In fact, the value of imported intermediates increases significantly in response to an appreciation of the rupee. There is however, interesting variation across sectors, with firms in sectors with lower domestic value added content such as drugs and pharmaceuticals, exhibiting a sharper increase in the value of imported intermediates, and a muted response of exports to an appreciation of the exchange rate; while firms in sectors with domestic high value added such as textiles showing a larger response of exports to exchange rate movements.
Effect of Fed Announcements on Emerging Markets: What Determines Financial Markets' Reactions? 2017. IMF Economic Review Palgrave Macmillan; International Monetary Fund, vol. 66(4), pages 732-762, December. IMF Working Paper No. 14/109. (with Papa N'Diaye, and Lam Nguyen)
Abstract: This paper analyzes market reactions to the 2013-14 Fed announcements related to the tapering of asset purchases and examines how these reactions are influenced by financial depth. The study focuses on long-term government bond yields and uses daily data for all emerging markets. Controlling for all time-invariant country characteristics as well as time-varying macroeconomic fundamentals (changes in current account, fiscal balance, GDP growth, and inflation), countries with deeper domestic financial markets (as measured by higher bank credit, M2, M3, or stock market capitalization) experienced smaller increases in government bond yields during four-day windows around Federal Open Market Committee (FOMC) announcements related to tapering. Countries with better macroeconomic fundamentals (measured by improvements in current account, fiscal balance, and GDP growth) also experienced smaller increases in government bond yields around such episodes.
Information and Legislative Bargaining: The Political Economy of U.S. Tariff Suspensions 2017. The Review of Economics and Statistics 2018 Vol. 100, 303-318 (CEPR DP No. 7951, IMF Working Paper No. 10/211). (with Rod Ludema and Anna Maria Mayda)
Abstract: How does information supplied by firms influence policy? How efficient is legislative bargaining within Congress? To answer these questions, this paper studies the political influence of individual firms on Congressional decisions to suspend tariffs on U.S. imports of intermediate goods. We develop a model of legislative bargaining in which firms influence legislators by transmitting information about the value of protection, using verbal messages and lobbying expenditures. We estimate our model using firm-level data on tariff suspension bills and lobbying expenditures from 1999-2006. We find that, controlling for lobbying expenditures, an increase in the number of import-competing firms expressing opposition to a suspension significantly reduces the probability of the suspension being granted, suggesting that firm messages do indeed contain policy-relevant information. We further find that lobbying expenditures by proponent and opponent firms sway this probability in opposite directions. The effect of the number of opponents is significantly larger than that of both opponent and proponent lobbying. We estimate that the greater information content of verbal opposition fully accounts for its larger impact relative to opponent lobbying and explains about three quarters of its greater effect relative to proponent lobbying, with the remaining one quarter explained by legislative bargaining costs.
Spillover Effects of Exchange Rates: A Study of the Renminbi, 2017. American Economic Journal: Economic Policy, 9 (4):344-66. (IMF Working Paper No. 12/88). (with Aaditya Mattoo and Arvind Subramanian)
Abstract: This paper estimates the effect of China's exchange rate changes on exports of developing countries in third markets. We develop an identification strategy in which the degree of competition between China and its developing country competitors in specific products and destinations plays a key role. We exploit variation across exporters, importers, products and time-afforded both by disaggregated trade data and bilateral exchange rates-to estimate this "competitor country effect." We find robust evidence of a statistically and quantitatively significant effect. Our estimates suggest that a 10 percent appreciation of China's real exchange rate boosts a developing country's exports of a 4-digit HS product to third markets on average by about 1.5-2.5 percent.
Establishing Rules of the Game for the International Monetary System, 2016. Central Banking Journal.
What is Responsible for India's Sharp Disinflation? Monetary Policy in India: A Modern Macroeconomic Perspective. 2016. (Eds.) Chetan Ghate and Ken Kletzer. Springer Verlag: India, 2016. (IMF WP No. 16/166). (with Sajjid Chinoy and Pankaj Kumar).
Abstract: We analyze the dramatic decline in India's inflation over the last two years using an augmented Phillips Curve approach and quantify the role of different factors. Our results suggest that, contrary to popular perception, the direct role of lower oil prices in India's disinflation was relatively modest given the limited pass-through into domestic prices. Instead, we find that inflation is a highly persistent process in India, reflecting very adaptive expectations and the backward looking nature of wage and support price-setting. As a consequence, we find that a moderation of expectations, both backward and forward, and a rationalization of Minimum Support Prices (MSPs), explain the bulk of the disinflation over the last two years.
Monetary Transmission in Developing Countries : Evidence from India, 2016. Monetary Policy in India: A Modern Macroeconomic Perspective. (Eds.) Chetan Ghate and Ken Kletzer. Springer Verlag: India, 2016. (IMF WP No. 16/167). (with Peter Montiel and Rajeswari Sengupta)
Abstract: We examine the strength of monetary transmission in India, using a conventional structural VAR methodology. We find that a tightening of monetary policy is associated with a significant increase in bank lending rates and conventional effects on the exchange rate, though pass-through to lending rates is only partial and exchange rate effects are weak. We could find no significant effects on real output or the inflation rate. Though the message for the effectiveness of monetary transmission in India is therefore mixed, our results for India are more favorable than is often found for other developing countries.
India-US Trade and Investment: Have They Been Up To Potential? Global Economy Journal, 2016. Volume 16, Issue 3, Pages 539-567. (with Devesh Roy)
Abstract. This paper documents stylized facts about the evolution of trade and foreign direct investment (FDI) between India and the United States over the last four decades. We ask the question: does India-US trade and FDI deviate from its potential i.e. the level that would have been predicted by standard determinants? Using an augmented gravity model and a large sample of countries over 1970-2009, we find that while India's exports to the US are 34% higher than predicted, US exports to India are in line with its potential. Notably, we find strong reversals in the nature of these trading relationships over time. India loses its over-trading status while US turns out to be under-exporting to India in the period after 1990. We also find significant variation in trade performance across product categories. For primary and intermediate goods during post-1990, US exports to India turn significantly below normal. Conducting similar analysis for bilateral FDI flows for the period 1985-2009, we show that while US direct investments in India are in line with predictions based on fundamentals, India has actually been an under-investor in the US market.
Understanding Inflation in India Brookings-NCAER India Policy Forum, 2015, (NBER WP No. w22948). (with Laurence Ball and Anusha Chari).
Abstract: This paper examines the behavior of quarterly inflation in India since 1994, both headline inflation and core inflation as measured by the weighted median of price changes across industries. We explain core inflation with a Phillips curve in which the inflation rate depends on a slow-moving average of past inflation and on the deviation of output from trend. Headline inflation is more volatile than core: it fluctuates due to large changes in the relative prices of certain industries, which are largely but not exclusively industries that produce food and energy. There is some evidence that changes in headline inflation feed into expected inflation and future core inflation. Several aspects of India's inflation process are similar to inflation in advanced economies in the 1970s and 80s.
Lobbying Expenditures on Migration: A Descriptive Analysis, CESifo Econ Stud, 2015 61 (3-4): 560-604. (with Giovanni Facchini and Anna Maria Mayda).
Abstract: In this article we carry out a descriptive analysis of lobbying expenditures on migration in the USA between 1998 and 2005. While political action committees (PAC) contributions and lobbying are in general positively correlated, our results suggest that this is not the case when it comes to lobbying on migration. As a result, any analysis of the role of lobbying in migration should not focus on PAC contributions alone. Comparing lobbying on migration and trade, we find that substantially more resources are spent on the latter than on the former. Finally, lobbying on migration appears to be more concentrated than lobbying on trade both across sectors and across organizations.
Monetary Policy and Bank Lending Rates in Low-Income Countries: Heterogeneous Panel Estimates, Journal of Development Economics, 2014, 111, 117-131. (with Peter Moniel, Peter Pedroni, and Antonio Spilimbergo).
Abstract: This paper studies the transmission of monetary shocks to lending rates in a large sample of advanced, emerging, and low-income countries. Transmission is measured by the impulse response of bank lending rates to monetary policy shocks. Long-run restrictions are used to identify such shocks. Using a heterogeneous structural panel VAR, we find that there is wide variation in the response of bank lending rates to a monetary policy innovation across countries. Monetary policy shocks are more likely to affect bank lending rates in the theoretically expected direction in countries that have better institutional frameworks, more developed financial structures, and less concentrated banking systems. Low-income countries score poorly along all of these dimensions, and we find that such countries indeed exhibit much weaker transmission of monetary policy shocks to bank lending rates than do advanced and emerging economies.
Wall Street, Capitol Hill, and K Street: Political Influence and Financial Regulation, Journal of Law and Economics, 2014, Vol. 57, No. 4, pp. 1063-1084. [Simon Johnson's column on the paper]. (Working paper version Three's Company: Washington, Wall Street and K Street with supplemental appendix) (with Deniz Igan).
Abstract: This paper explores the link between the political influence of the financial industry and financial regulation in the run-up to the global financial crisis. We construct a detailed database documenting the lobbying activities, campaign contributions, and political connections of the financial industry from 1999 to 2006 in the United States. We find strong evidence that spending on lobbying by the financial industry and network connections between lobbyists and the legislators were positively linked to the probability of a legislator changing positions in favor of deregulation. The evidence also suggests that hiring connected lobbyists who had worked for legislators in the past enhanced the effectiveness of lobbying activities.
How Does Trade Evolve in the Aftermath of Financial Crises?, 2014 (IMF Working Paper No. 11/3), IMF Economic Review, 62: 213-247, (with Abdul Abiad and Petia Topalova).
Abstract: International trade collapsed in 2008-09, particularly in countries that experienced a financial crisis. Was this collapse unique or part of a broader historical pattern? Using an augmented gravity model and 179 episodes from 1970-2009, we find that financial crises are associated with sharp declines in imports of the crisis country-19 percent, on average, in the year following a crisis-and this decline is persistent, with imports recovering to their gravity-predicted levels only after 10 years. In contrast, exports of the crisis country fall modestly and then remain close to or even above the predicted level. The protracted drop in imports post-crisis is consistent with evidence of a sustained depreciation of the exchange rate and impaired credit conditions following crises.
Emigration and Wages in Source Countries: A Survey of the Empirical Literature, in Robert E. B. Lucas, ed., International Handbook on Migration and Economic Development, Cheltenham: Edward Elgar, 2014, pp. 241-266.
Abstract: This chapter summarizes the emerging empirical literature on the effect of emigration on wages in a source country. The evidence can be broadly divided into four categories: (i) case studies, (ii) simulation exercises, (iii) studies using regional variation and finally, (iv) national level studies. Overall, a substantial body of the evidence points towards a strong and positive relationship between emigration and source country wages. Importantly, the effect has been found to be statistically and economically significant. The estimates from the national-level studies across a wide range of countries range from two percent to five and a half percent increase in wages owing to a 10 percent emigrant supply shock. The impact of emigration on wages has important implications in source countries, for wage inequality across schooling groups and for national income distribution between labor and other factors.
Dynamics of Firm Lobbying 2014. American Economic Journal: Economic Policy, 6(4): 343-79. (NBER Working Paper No. w1757), (with William Kerr and William Lincoln).
Abstract: How is economic policy made? In this paper we study a key determinant of the answer to the question: lobbying by firms. Estimating a binary choice model of firm behavior, we find significant evidence for the idea that barriers to entry induce persistence in lobbying. The existence of these costs is further confirmed in studying how firms responded to a particular policy change: the expiration of legislation relating to the H-1B visa. Due to its influence on firm behavior, we argue that this persistence fundamentally changes the environment in which legislation is made.
India's External Sector: Do We Need To Worry? 2013. Economic and Political Weekly (with C. Rangarajan).
Abstract: The deterioration in India's current account has led to a series of debates in the policy arena relating to sustainability, the importance of exchange rates in influencing the trade balance, and the role of high and rising inflation. Against this background, this article takes a step back and analyses the performance of the external sector in India since 1990. It estimates the sustainable current deficit to GDP ratio to be 2.3%. Importantly, even to sustain a 2.3% CAD, India would need net capital infl ows of the order of at least $50-70 billion annually over the next five years. Given the uncertainty around both the push factors (e g, rising global risk aversion) as well as the pull factors (slower growth in India) that determine capital flows, attracting such magnitudes of flows could very well be an uphill task.
Has India's Growth Story Withered? 2013.Economic and Political Weekly.
Abstract: This paper analyzes the growth performance in India over the past two decades. We use several statistical and economic methodologies to estimate the growth rate of potential output. The annual growth rate of potential output is estimated for 2011 to be in the range of 7.7-8.2 percent. All the estimation techniques suggest that there was a big boost to potential growth between 2002 and 2007, but since then it has not increased significantly. Based on statistical approaches and conditional on moderate annual growth forecasts of 7-7.5 percent between 2012 and 2014, there is some evidence that the recent decline in growth is likely to be driven by structural factors. Most of the methodologies indicate that output gap continues to be positive, suggesting caution in further loosening the monetary policy stance. Overall, while the Indian growth story may/may not have withered, the evidence does give indications that the growth story may have faltered.
Financial and Distributional Implications of the Food Security Law 2013.Economic and Political Weekly.
Abstract: The financial implications of the National Food Security Bill, which has now become law, are going to be huge. This analysis points out that one needs to take into account not only the cost of the food subsidy but also the costs of setting up or running new institutions and bureaucracies, and the costs that are likely to arise if there are political pressures to protect the existing beneficiaries. There are still more imponderables, and the fi nal cost could add up to much more than what is now estimated.
Democracy and Reforms, 2013. American Economic Journal: Macroeconomics, 5(4): 179-204. (NBER Working Paper No w18117, IZA DP No. 4032, CEPR DP No. 7194), (with Paola Giuliano and Antonio Spilimbergo)
Abstract: Empirical evidence on the relationship between democracy and economic reforms is scarce, limited to few reforms and countries and for few years. This paper studies the impact of democracy on the adoption of economic reforms using a new dataset on reforms in the financial, capital, public, and banking sectors, product and labor markets, agriculture, and trade for 150 countries over the period 1960?2004. Democracy has a positive and significant impact on the adoption of economic reforms but there is no evidence that economic reforms foster democracy. Our results are robust to the inclusion of a large variety of controls and estimation strategies.
How Effective Is Monetary Transmission in Developing Countries? A Survey of the Empirical Evidence. 2013. Economic Systems, 2013, Elsevier, vol. 37(2), pages 187-216. (IMF Working Paper No.12/143), (with Peter Montiel),
Abstract: This paper surveys the evidence on the effectiveness of monetary transmission in developing countries. We summarize the arguments for expecting the bank lending channel to be the dominant means of monetary transmission in such countries, and present a simple model that suggests why this channel may be both weak and unreliable under the conditions that usually characterize those economies. Next, we review the empirical methodologies that have been employed in the recent literature to assess monetary policy effectiveness, both in developing countries as well as in industrial and emerging economies, essentially based on vector autoregressions (VARs). It is very hard to come away from this review of the evidence with much confidence in the strength of monetary transmission in developing countries. We distinguish between the "facts on the ground" and "methodological deficiencies" interpretations of the absence of evidence for strong monetary transmission. We suspect, however, that "facts on the ground" are indeed an important part of the story. The fact that a wide range of empirical approaches have failed to yield evidence of effective monetary transmission in developing countries, and that the strongest evidence for effective monetary transmission has arisen for relatively prosperous and more institutionally developed countries such as some central and Eastern European transition economies (at least in the later stages of their transition) and Tunisia, makes us doubt whether methodological shortcomings are the whole story. If this conjecture is correct, the stabilization challenge in developing countries is acute indeed, and identifying the means of enhancing the effectiveness of monetary policy in such countries is an important challenge.
Trade Liberalization and Wage Inequality in India: A Mandated Wage Equation Approach. 2013. India Growth and Development Review, Vol. 6 Issue: 1, pp.113 - 127. (with Debkusum Das)
Abstract: This paper uses an empirical approach based on the "mandated wage equations" to examine the relationship between trade liberalization and urban manufacturing wages in India. The main result in the paper is that trade reforms have been associated with a rise in the relative wages of medium-skilled workers (defined as having completed secondary schooling). We do not find any evidence for trade reforms to be associated with an increase or decrease in wage inequality between low and high-skilled workers. The results are consistent with the predictions of the Stolper-Samuelson theorem.
Monetary Transmission in Low-Income Countries: Effectiveness and Policy Implications, 2012. IMF Economic Review, 2012, 60, 270-302. (with Peter Montiel and Antonio Spilimbergo).
Abstract: This paper reviews the monetary transmission mechanism in low-income countries (LICs). We use monetary transmission in advanced and emerging markets as a benchmark to identify aspects of the transmission mechanism that may operate differently in LICs. In particular, we focus on the effects of financial market structure on monetary transmission. The weak institutional framework prevalent in LICs drastically reduces the role of securities markets. Consequently, traditional monetary transmission through market interest rates and market-determined asset prices are weak or nonexistent. The exchange rate channel, in turn, tends to be undermined by heavy central bank intervention in the foreign exchange market. The weak institutional framework also has the effect of increasing the cost of bank lending to private firms. Coupled with imperfect competition in the banking sector, this induces banks to maintain chronically high excess reserves and to invest in domestic public bonds or (when possible) in foreign bonds. With the financial system not intermediating funds properly, the bank lending channel also becomes impaired. These factors undermine both the strength and reliability of monetary transmission, which has important implications for the conduct of monetary policy in LICs.
The Power of Political voice: Women's Political Representation and Crime in India, American Economic Journal, Applied Economics, 2012, 4(4): 165-93.(with Lakshmi Iyer, HBS, Anandi Mani, Warrick, and Petia Topalova, IMF),
Abstract: Using state-level variation in the timing of political reforms, we find that an increase in female representation in local government induces a large and significant rise in documented crimes against women in India. Our evidence suggests that this increase is good news, as it is driven primarily by greater reporting rather than greater incidence of such crimes. In contrast, we find no increase in crimes against men or gender-neutral crimes. We also examine the effectiveness of alternative forms of political representation: Large scale membership of women in local councils affects crime against them more than their presence in higher-level leadership positions.
Explaining Inflation in India: The Role of Food Prices, (with Devesh Roy, IFPRI), Brookings-NCAER India Policy Forum. Volume 8, 2011-12.
Abstract. This paper conducts a forensic examination of inflation in India with a focus on food price inflation, using a disaggregated high-frequency commodity level dataset spanning the last two decades. First, we document stylized facts about the behavior of overall inflation in India. We establish that low inflation has historically been a rare occurrence in the Indian economy in the last two decades; the long-term trend in the inflation rate exhibits a U-shaped pattern with a structural break in the trend in 2000 and an inflection point in 2002. The long-term trend in food inflation has followed a pattern similar to overall inflation. Domestic and international food price inflation rates have been moderately correlated, though there is significant variation across commodities based on their tradability. Furthermore, we find food price inflation to be consistently higher than non-food, quite persistent, and having a significant pass-through to non-food inflation. Further, the price of food relative to non-food co-moves strongly with aggregate inflation rate. Next, we explicitly quantify the contribution of specific commodities to food price inflation. We find that animal source foods (milk, fish), processed food (sugar, edible oils), fruits and vegetables (e.g. onions) and cereals (rice and wheat) are the primary drivers of food price inflation. Finally, we conduct case studies of some of the top contributors to food price inflation. Combining the insights from macro as well as micro analyses, the paper suggests specific policy implications.
Exchange Rates and Wages in an Integrated World, (with Antonio Spilimbergo, IMF), American Economic Journal, Macroeconomics, 3, 2011, pp. 1-33.
Abstract: We analyze how the pass-through from exchange rate to domestic wages depends on the degree of integration between domestic and foreign labor markets. Using data from 66 countries over the period 1981-2005, we find that the elasticity of domestic wages to real exchange rate is 0.15 after a year for countries with high barriers to external labor mobility, but about 0.40 in countries with low barriers to mobility. The results are robust to the inclusion of various controls, different measures of exchange rates, and concepts of labor market integration. These findings call for including labor mobility in macro models of external adjustment.
A Fistful of Dollars: Lobbying and the Financial Crisis, (with Deniz Igan and Thierry Tressel, IMF) (NBER WP No. w17076), NBER Macroeconomics Annual, 2011, Volume 26.
Abstract: Has lobbying by financial institutions contributed to the financial crisis? We use detailed information on financial institutions' lobbying and mortgage lending to answer this question, and find that lobbying was associated with more risk-taking during 2000-07 and worse outcomes in 2008. Lobbying lenders originated riskier mortgages, securitized at faster intensity, and expanded more. They suffered from higher delinquencies, experienced negative returns during key bank failures, but positive returns with the bailout announcement, and had a higher bailout probability. These findings suggest that lending by politically active lenders played a role in accumulation of risks and thus contributed to the crisis.
Do Interest Groups Affect US Immigration Policy?, (with Giovanni Facchini, Essex and Anna Maria Mayda, Georgetown), Journal of International Economics, 2011, Volume 85, Issue 1, September, pp. 114-128. (supplemental appendix)
Abstract: While anecdotal evidence suggests that interest groups play a key role in shaping immigration policy, there is no systematic empirical analysis of this issue. In this paper, we construct an industry-level dataset for the United States, by combining information on the number of temporary work visas with data on lobbying activity associated with immigration. We find robust evidence that both pro- and anti-immigration interest groups play a statistically significant and economically relevant role in shaping migration across sectors. Barriers to migration are lower in sectors in which business interest groups incur larger lobby expenditures and higher in sectors where labor unions are more important.
Policies, Enforcement, and Customs Evasion: Evidence from India, (with Arvind Subramanian, Peterson Institute for International Economics and Petia Topalova, IMF), Journal of Public Economics, 2008, Vol 92, Pages 1907-1925.
Abstract: We examine the effect of tariff policies on evasion of customs duties, in the context of the trade reform in India of the 1990s. By exploiting the variation in tariff rates across time and products, we identify a robust positive elasticity of evasion with respect to tariffs. A second contribution of the paper is to provide some evidence on the impact of enforcement. While we cannot identify the direct impact of enforcement on evasion, we can establish the extent to which enforcement-related factors, such as product characteristics that determine the ease of detection of evasion, affect the evasion elasticity. The results render support to the hypothesis that improvements in enforcement can reduce the responsiveness of evasion to tariffs.
Health Aid and Infant Mortality, (with David Newhouse, World Bank), Journal of Health Economics, 2009, Volume 28, Issue 4, July, Pages 855-872.
Abstract: This paper examines the relationship between health aid and infant mortality, using data from 118 countries between 1973 and 2004. Health aid has a beneficial and statistically significant effect on infant mortality: doubling per capita health aid is associated with a 2 percent reduction in the infant mortality rate. For the average country, this implies that increasing per capita health aid by US$1.60 per year is associated with 1.5 fewer infant deaths per thousand births. The estimated effect is small, relative to the 2015 target envisioned by the Millennium Development Goals. It implies that achieving the MDG target through additional health aid alone would require a roughly 15-fold increase in current levels of aid.
Trade Liberalization and Wage Inequality: Evidence from India, (with Utsav Kumar, Conference Board, New York), Review of Development Economics, 2008, Vol. 12, Issue 2, pp. 291-311.
Abstract: We evaluate empirically the impact of the dramatic 1991 trade liberalization in India on the industry wage structure. The empirical strategy uses variation in industry wage premiums and trade policy across industries and over time. In contrast to most earlier studies on developing countries, we find a strong, negative, and robust relationship between changes in trade policy and changes in industry wage premiums over time. The results are consistent with liberalization-induced productivity increases at the firm level, which get passed on to industry wages. We also find that trade liberalization has led to decreased wage inequality between skilled and unskilled workers in India. This is consistent with the magnitude of tariff reductions being relatively larger in sectors with a higher proportion of unskilled workers.
Emigration and Wages in Source Countries: Evidence from Mexico, Journal of Development Economics, 2007, no. 82, pp. 180-199.
Abstract: This paper presents the first econometric study of the effect of emigration on national wages in a source country. I examine empirically the effect of Mexican emigration to the United States on wages in Mexico using data from the Mexican and US censuses from 1970-2000. The main result in the paper is that emigration has a strong and positive effect on Mexican wages. There is also evidence for increasing wage inequality in Mexico due to emigration. Simple welfare calculations based on a labor demand-supply framework suggest that the aggregate welfare loss to Mexico due to emigration is small. However, there is a significant distributional impact between labor and other factors.
Stolper-Samuelson is Dead and Other Crimes of Both Theory and Data, (with Donald Davis, Columbia University), in Ann Harrison eds. Globalization and Poverty: University of Chicago Press and the National Bureau of Economic Research, 2007.
Emigration and Brain-Drain: Evidence from the Caribbean, The B.E. Journals in Economic Analysis & Policy, Berkeley Electronic Press, 2007, Vol 7, Issue 1 (Topics), Article 24, covered in the BBC.
Abstract: This paper quantifies the magnitude and nature of migration flows from the Caribbean and estimates their costs and benefits. The Caribbean countries have lost 10?40 percent of their labor force due to emigration to OECD member countries. The migration rates are particularly striking for the high-skilled. Many countries have lost more than 70 percent of their labor force with more than 12 years of completed schooling?among the highest emigration rates in the world. The region is also the world?s largest recipient of remittances as a percent of GDP. Remittances constituted about 13 percent of the region's GDP in 2002. Simple welfare calculations (under very conservative assumptions of elasticities) suggest that the losses due to high-skill migration (ceteris paribus) outweigh the official remittances to the Caribbean region.