Global Financial Cycles and Macroeconomic Linkages (Job Market Paper)Link
Failure to sufficiently model financial sector and a possible time-varying relationship between the financial and macroeconomic sectors have been identified as two major shortcomings of the most prominent macroeconomic models. To this end, I examine time-varying linkages between the global financial and macroeconomic sectors. I examine the existence of global financial cycles and study if the financial sector is an important source of shocks for the global macroeconomic sector. I also study if there is time variation in the contribution of the financial shocks. I find evidence of quantitatively meaningful global cycles in credit and equity price. There is large degree of heterogeneity on the impact of the global factors across countries. The cycles are stronger in the years leading up to and following the crisis, including the house-price cycle. However, I do not find evidence of quantitatively meaningful joint global financial cycle encompassing all financial variables. Both global and country-specific financial shocks contribute to the fluctuations in the global macroeconomic sector. I find evidence of time variation in the size and the transmission of the financial shocks, especially for equity-price and house-price shocks. There is evidence of increase in the transmission of the financial shocks as well as increase in the size of the shocks during financial crises, especially during the recent financial crisis. The contribution of the global and the US equity-price and house-price shocks increase significantly during the recent financial crisis.
Decentralization and Regional Convergence: Evidence From Night-time Lights Data (Journal of Public Economics, Under Review)Link
(with Bibek Adhikari)
The proponents of decentralization argue that it improves economic growth by increasing government efficiency and accountability. However, the critics argue that decentralization increases regional inequality by increasing the differences in institutional capacities and socio-economic endowments across regions. The empirical evidence is mixed and is based mostly on developed countries due to lack of income data at lower administrative regions. This paper fills that gap by analyzing the impact of decentralization on regional convergence using first and second administrative regions data from a global sample of developed and developing countries. We construct a panel dataset from 1992 to 2010 using intensity of night-time lights captured by U.S. Air Force satellites to proxy for local economic performance. We combine lights data with a new database of fiscal, political, and administrative decentralization derived from actual laws that are institutionalized and circumscribed. We find that decentralization hinders regional convergence between first as well as second subnational regions within a country. These impacts are larger for developing countries. The results are economically meaningful, statistically significant, and robust to alternative specifications.
Work in Progress
Joint Fiscal and Monetary Policy Under No-commitment: A New Monetarist Approach
(with Heon Lee)
Recent financial crisis has highlighted the friction between the actions of the monetary and fiscal authorities in achieving joint optimal policy. In this paper, we use Lagos-Wright framework to analyze the joint-optimal fiscal and monetary policy with long-maturity debt when the government does not have the ability to commit to the future policies. Absent commitment, the policy makers have to weigh the objective of smoothing distortion across periods against time-consistency problem caused by interaction between debt and monetary policy. Hence the trade-off facing the government is between the gain from varying debt level and the cost of less smooth intertemporal distortion. We find that there exist at least one stationary equilibrium with positive level of debt. The steady state features positive labor income tax rate and inflation above Friedman rule. In fact, the optimal interest rate is typically above the Friedman rule. We also find that the government smooths distortion for low level of debt. But when the debt level is large enough, the government has incentive to increase inflation above the Friedman rule that grows with level of debt. Moreover, if the debt is one-period, threshold for such inflationary incentive is at a lower level of debt than in the presence of the long-maturity debt.
Liquidity Risk and Banking
(with Joe Haslag)
In this paper, we analyze the role of banking when liquidity risk arise due to heterogeneous belief of the agents in the New Monetarist environment. Existing literature assume that the agents form common belief based on rational expectation, which is a strong assumption. In the model, we relax the assumption and allowed agents to have heterogeneous beliefs about the future prices. Heterogeneity in our model is endogenous, where agents choose forecasting technology based on their costs, which leads to heterogeneity among agents.