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Publications (237)
Central bank balance sheet expansion, through actions like quantitative easing, is run through commercial banks. While this increases liquid central bank reserves held on commercial bank balance sheets, demandable uninsured deposits issued to finance the reserves also increase. Subsequent shrinkage in the central bank balance sheet may entail shrin...
The average distance of U.S. banks from their small corporate borrowers increased before the global financial crisis, especially for banks in competitive counties. Small distant loans are harder to make, so loan quality deteriorated. Surprisingly, such lending intensified as the Fed raised interest rates from 2004. Why? We show that banks' response...
India introduced credit scoring technology in 2007. We study its adoption by the two main types of banks operating there: new private banks (NPBs) and state-owned public sector banks (PSBs). Soon after the technology is introduced, NPBs start checking the credit scores of most borrowers before lending. PSBs do so equally quickly for new borrowers b...
We develop a theory of how corporate lending and financial intermediation change based on the fundamentals of the firm and its environment. We focus on the interaction between the prospective net worth or liquidity of an industry and the firm’s internal governance or pledgeability. Variations in prospective liquidity can induce changes in the natur...
Exchange rate appreciation in capital-receiving countries, induced by easy monetary policy in funding countries, increases the expected net worth of firms in receiving countries and their ability to buy assets. Anticipating this higher liquidity for their assets, corporations in capital-receiving countries lever up, and neglect alternative sources...
Why do firms choose high debt when they anticipate high valuations, and underperform subsequently? We propose a theory of financing cycles where the importance of creditors’ control rights over cash flows (“pledgeability”) varies with industry liquidity. The market allows firms take on more debt when they anticipate higher future liquidity. However...
Over the last few years, central banks in industrial countries have undertaken a variety of policies that deviated from ordinary monetary policy. Why were these policies used? Did they work? What will be the effect of phasing them out? And what long-term concerns do they raise? Clearly, markets were broken, and there was a need to repair them. Some...
The McFadden Act of 1927 was one of the most hotly contested pieces of legislation in U.S. banking history, and its influence was felt over half a century later. This paper studies the congressional voting behavior surrounding the act's passage. We find that congressmen in districts in which landholdings were concentrated and credit was costlier we...
In April of 2015, the International Monetary Fund gathered leading academic economists and policymakers, to discuss the shape of future macroeconomic policy. This book presents their combined insights. The chapters of the book address the policy debate in a number of areas: (i) whether the global economy has entered a “new normal” of low growth, ne...
This paper studies the long run effects of financial crises using new bank and town level data from around the Great Depression. We find evidence that banking markets became much more concentrated in areas that experienced a greater initial collapse in the local banking system. There is also evidence that financial regulation after the Great Depres...
Leading economists consider the shape of future economic policy: will it resume the pre-crisis consensus, or contend with the post-crisis “new normal”?
What will economic policy look like once the global financial crisis is finally over? Will it resume the pre-crisis consensus, or will it be forced to contend with a post-crisis “new normal”? Have w...
Using differences in regulation as a means of identification, we find that a reduction in local financial intermediation capacity reduces the recovery rates on assets of failing banks. It also depresses local land prices and is associated with subsequent distress in nearby banks. Fire sales appear to be one channel through which lower local interme...
Given weak post-crisis aggregate demand both advanced economies and emerging economies engage in competitive monetary easing, creating financial risks. To ensure stable and sustainable growth, the international rules of the game need to be revisited. Since internalizing spillovers to other countries may be difficult, large central banks could reint...
Theory suggests the reduction in financing capacity after the failure of a financial intermediary can reduce the value of financial assets. Forced sales of the intermediary's assets could consume liquidity, depressing the liquidation value of the assets of healthy intermediaries and causing contagious runs. These financial fire sales can both cause...
To address the moral hazard problem that can motivate bank executives to take excessive risks and to fail to raise capital when needed, a group of 13 distinguished financial economists recommends that systemically important financial institutions be required to issue contingent convertible debt (CoCos) and to hold back a substantial share—as much a...
Theory suggests the reduction in financing capacity after the failure of a financial intermediary can reduce the value of financial assets. Forced sales of the intermediary’s assets could consume liquidity, depressing the liquidation value of the assets of healthy intermediaries and causing contagious runs. This paper investigates these predictions...
To produce significant net present value, an entrepreneur has to differentiate her enterprise from the ordinary. To take collaborators with her, she needs to have substantial ownership, and thus financing. But it is hard to raise finance against differentiated assets. So an entrepreneur has to commit to undertake a second transformation, standardiz...
Does credit availability exacerbate asset price inflation? What channels could it work through? What are the long run consequences? In this paper we address these questions by examining the farm land price boom (and bust) in the United States that preceded the Great Depression. We find that credit availability likely had a direct effect on inflatin...
The McFadden Act of 1927 was one of the most hotly contested pieces of legislation in U.S. banking history, and its influence was felt over half a century later. This paper studies the congressional voting behavior surrounding the act’s passage. We find that congressmen in districts in which landholdings were concentrated and credit was costlier we...
The nature of the firm and its financing are closely interlinked. To produce significant net present value, an entrepreneur has to transform her enterprise into one that is differentiated from the ordinary. To achieve the control that will allow her to execute this strategy, she needs to have substantial ownership, and thus financing. But it is har...
The McFadden Act of 1927 was one of the most hotly contested pieces of legislation in U.S. banking history, and its influence was still felt over half a century later. The act was intended to force states to accord the same branching rights to national banks as they accorded to state banks. By uniting the interests of large state and national banks...
The McFadden Act of 1927 was one of the most hotly contested pieces of legislation in U.S. banking history, and its influence was still felt over half a century later. The Act was intended to force states to accord the same branching rights to national banks as they accorded to state banks. By uniting the interests of large state and national banks...
Does credit availability exacerbate asset price inflation? What channels could it work through? What are the long run consequences? In this paper we address these questions by examining the farm land price boom (and bust) in the United States that preceded the Great Depression. We find that credit availability likely had a direct effect on inflatin...
The current crisis has underlined the crucial importance of this area. Leading researchers in the field Maureen O'Hara, Kose John, Raghuram Rajan, and Anthony Saunders discuss how they approach research in this volatile area.View Video: Frontiers of Research on Financial Institutions - Featured Panel.If video player is not visible, click here.
We analyze how the e¢ciency of capital allocation depends on the prevalence of conglomerates in an economy characterized by imperfect investor protection. We show that conglomerates that allocate capital according to a "winner-picking" rule (Stein, 1997) may have negative e¤ects on the equilibrium allocation of capital, once we consider the relatio...
What determines the sustainability of sovereign debt? In this paper, we develop a model where myopic governments seek electoral popularity but can nevertheless commit credibly to service external debt. They do not default when they are poor because they would lose access to debt markets and be forced to reduce spending; they do not default when the...
A simple model is developed in the paper in which two market conditions change over time: (i) investor sentiment or price-insensitive demand; and (ii) feedback trader risk or the propensity of investors to chase trends. The model shows that these conditions partially explain the three anomalies associated with the IPO market: (i) underpricing; (ii)...
This report was written by The Committee on International Economic Policy and Reform, a non-partisan and non-ideological group of independent experts, comprised of academics and former government and central bank officials. The objective of the group is to analyze global monetary and financial problems, offer systematic analysis and advance reform...
Raghuram Rajan was one of the few economists who warned of the global financial crisis before it hit. Now, as the world struggles to recover, it's tempting to blame what happened on just a few greedy bankers who took irrational risks and left the rest of us to foot the bill. In Fault Lines, Rajan argues that serious flaws in the economy are also to...
Is there any need to clean up a banking system by closing some banks and forcing others to sell assets if the risk of a crisis becomes high? Impaired banks that may be forced to sell illiquid assets in the future have private incentives to hold, rather than sell, those assets Anticipating a potential fire sale, liquid buyers expect high returns, re...
Wound complications in patients with significant co-morbidities is common; however, in our patient the problem was compounded by the inappropriate placement of negative pressure dressing.
We employ a novel data set on almost 30,000 trade credit contracts to describe the broad characteristics of the parties that
contract together and the key terms of these contracts. Whereas prior work has typically used information on only one side
of the buyer-seller transaction, we utilize information on both, allowing for the first analysis of bu...
We develop a model of internal governance where the self-serving actions of top management are limited by the potential reaction of subordinates. Internal governance can mitigate agency problems and ensure that firms have substantial value, even with little or no external governance by investors. External governance, even if crude and uninformed, c...
Is there any need to clean up a banking system by closing some banks and forcing others to sell assets if the risk of a crisis becomes high? Impaired banks that may be forced to sell illiquid assets in the future have private incentives to hold, rather than sell, those assets Anticipating a potential fire sale, liquid buyers expect high returns, re...
In an integrated world, one of the more intractable problems we have to deal with is how to ensure all countries undertake
macroeconomic policies that are in the global interest even when these go against short-term domestic political compulsions.
It is unlikely that countries will sign up to a common set of policy rules, nor is it probable that pe...
Do low interest rates alleviate banking fragility? Banks finance illiquid assets with demandable deposits, which discipline bankers but expose them to damaging runs. Authorities may choose to bail out banks being run. Unconstrained bailouts undermine the disciplinary role of deposits. Moreover, competition forces banks to promise depositors more, i...
Rajan examines the problems of failed states, including the repeated return to power of former warlords, which he argues causes institutions to become weaker and people to get poorer. He notes that economic power through property holdings or human capital gives people the means to hold their leaders accountable. In the absence of such distributed p...
The U.S. Federal Reserve's recent decision to ease the money supply set off a round of recriminations. What the ensuing debate has overlooked are the problematic underlying domestic economic strategies in both the developed and the developing world. Put simply, consumers in industrial economies buy too much, and those in developing ones, too little...
At this year’s conference two panel discussions have been organized to address the most recent financial crisis and the associated policy implications. We recommend that you highlight your program schedule to ensure your participation in these engaging panel sessions.
The unshackling of India from its historically low rate of growth has occurred. The challenge of maintaining high growth rates in some states and igniting them in the presently bypassed and marginalized states has to be met squarely. Sustaining high overall growth rates would require that rising inequalities be checked, if not reversed, to broaden...
The United States accuses China of subsidizing its entire export economy through artificially undervaluing its currency. China accuses the United States of fiscal profligacy while flooding the world with easy credit to keep its economy afloat. This dispute reflects the reality that the world's two largest economies are built on opposite dynamics of...
Development economics was the study of how to create the plumbing that would allow developing economies to become developed. The financial crisis leads us to question whether industrialized countries have the plumbing problem solved and thus leads us to question whether we need a development economics that is separate from macroeconomics. Indeed, i...
In these excerpts from The Squam Lake Report, fifteen distinguished economists analyze where the global financial system failed, and how such failures might be prevented (or at least their damage better contained) in the future. Although there were many contributing factors to the crisis—including “agency” problems throughout the financial system a...
Risk Aversion Before and After the Crisis Luigi Guiso (European Institute), Paola Sapienza (Northwestern University) and Luigi Zingales (University of Chicago) Behavioral and Neurobiological Foundations of Probabilistic Sophistication Mathieu d’Acremont (California Institute of Technology), Eleonora Fornari (Universite de Lausanne), and Peter Bossa...
40) Aggregate demand for emerging markets in downturn – not possible because of limited govt capacity. 41) Momentum in prices when fed starts boom. Arsonist sets fire and says wind made the blaze even more.
The discussion in this panel will be on the financial crisis. Participants include: John Cochrane (University of Chicago) Simon Johnson (M.I.T.) Raghuram Rajan (University of Chicago) Myron Scholes (Platinum Grove Asset Management, Stanford University)
Corporate investors (CIs) differ from venture capitalists (VCs) in a basic aspect: as incum-bent producers in an industry, corporations possess unique resources that VCs lack. For young, startup firms seeking financing, this offers a double-edged sword: access to the corporation's unique resources vis-à-vis the risk of expropriation by the corporat...
Raghuram Rajan was one of the few economists who warned of the global financial crisis before it hit. Now, as the world struggles to recover, it's tempting to blame what happened on just a few greedy bankers who took irrational risks and left the rest of us to foot the bill. In Fault Lines, Rajan argues that serious flaws in the economy are also to...
We examine the effects of aid on the growth of manufacturing, using a methodology that exploits the variation within countries and across manufacturing sectors, and corrects for possible reverse causality. We find that aid inflows have systematic adverse effects on a country's competitiveness, as reflected in the lower relative growth rate of expor...
This article was originally presented as the Homer Jones Memorial Lecture, organized by the Federal Reserve Bank of St. Louis, St. Louis, Missouri, April 15, 2009.
We introduce a new hybrid approach to joint estimation of Value at Risk (VaR) and Expected Shortfall (ES) for high quantiles of return distributions. We investigate the relative performance of VaR and ES models using daily returns for sixteen stock market indices (eight from developed and eight from emerging markets) prior to and during the 2008 fi...
When citizens in a poor constrained society are unequally endowed, they are likely to find it hard to agree on reforms, even though the status quo hurts them collectively. Each citizen group or constituency prefers reforms that expand its opportunities, but in an unequal society, this will typically hurt another constituency's rents. Competitive re...
Economists have argued that a high concentration of land holdings in a country can create powerful interest groups that retard the creation of economic institutions, and thus hold back economic development. Could these arguments apply beyond underdeveloped countries with backward political institutions? We find that in the early 20th century, the d...
This paper investigates the relationship between short-term interest rates and bank risk. Using a unique database that includes quarterly balance sheet information for listed banks operating in the European Union and the United States in the last decade, we find evidence that unusually low interest rates over an extended period of time contributed...
It is often the case that banks in the US are willing to borrow in the fed funds market (the interbank market for funds) at higher rates than the ones they could obtain by borrowing at the Fed's discount window. This phenomenon is commonly explained as the consequence of the existence of a stigma effect attached to borrowing from the window. Most p...
We develop a model of internal governance where the self-serving actions of top management are limited by the potential reaction of subordinates. We find that internal governance can mitigate agency problems and ensure firms have substantial value, even without any external governance. Internal governance seems to work best when both top management...
Landed elites in the United States in the early decades of the twentieth century played a significant role in restricting the development of finance. States that had higher land concentration passed more restrictive banking legislation. At the county level, counties with very concentrated land holdings tended to have disproportionately fewer banks...
In a 40-plus year career notable for path-breaking work on capital structure and innovations in capital budgeting and valuation, MIT finance professor Stewart Myers has had a remarkable influence on both the theory and practice of corporate finance. In this article, two of his former students, a colleague, and a co-author offer a brief survey of Pr...
We examine the effects of aid on growth in cross-sectional and panel data-after correcting for the possible bias that poorer (or stronger) growth may draw aid contributions to recipient countries. Even after this correction, we find little robust evidence of a positive (or negative) relationship between aid inflows into a country and its economic g...
In the mid-1990s, mainstream economists of nearly all stripes commonly recommended capital account liberalization—that is, allowing a free flow of funds in and out of a country's economy—as an essential step in the process of economic development. But then came the East Asian financial crisis of 1997–98, in which even seemingly healthy and well-man...
Summary Traditional economic models predict that capital should flow from capital-rich to capital-poor economies. In recent years,
capital has been flowing in the opposite direction, although foreign direct investment flows do behave more in line with theory.
Do these perverse patterns of flows dampen growth in non-industrial countries by depriving...
Using firm-level data we investigate the relationship between trade credit and suppliers' market structure and find a [intersection]-shaped relationship between competition and trade credit, with a discontinuous increase in credit provision between monopoly and duopoly. This "big jump" arises because monopolists are more likely to not offer any tra...
of Australia, and the Australian Prudential Regulatory Authority for valuable comments. Yian Liu provided
Developments in the financial sector have led to an expansion in its ability to spread risks. The increase in the risk bearing capacity of economies, as well as in actual risk taking, has led to a range of financial transactions that hitherto were not possible, and has created much greater access to finance for firms and households. On net, this ha...
In principle, more capital should go to the fastest-growing countries and the least to the slowest-growing group. This issue is examined by sorting 59 developing countries into a range from low to high average growth rates over the period 1970-2004. These countries are then divided into three groups with roughly equal aggregate populations. China a...