Working Papers

The Spread of Deposit Insurance and the Global Rise in Banking Risk since the 1970s, with Charles W. Calomiris

“International R&D Sourcing and Knowledge Spillover: Evidence from OECD Countries, with Estelle P. Dauchy

Are Innovative Firms Financially Constrained? Evidence from R&D Tax Incentives in OECD Countries, with Estelle P. Dauchy

We study the forecasting power of financial variables for macroeconomic variables for 62 countries between 1980 and 2013. We find that financial variables such as credit growth, stock prices and house prices have considerable predictive power for macroeconomic variables at one to four quarters horizons. A forecasting model with financial variables outperforms the World Economic Outlook (WEO) forecasts in up to 85 percent of our sample countries at the four quarters horizon. We also find that cross-country panel models produce more accurate out-of-sample forecasts than individual country models.

Fixed investment was the most important contributing factor to the boom-bust cycle in Cyprus over the last decade. Investment boomed during a credit boom in mid-2000s, during which the corporate sector borrowed heavily. Investment collapsed after 2008 when the credit boom ended. Investment and corporate balance sheets further deteriorated during the Cypriot banking crisis over 2012-2014. Using firm-level investment and balance sheet data, we find that corporate indebtedness is negatively associated with investment both before and after the banking crisis, although the effect is weaker after the Cypriot banking crisis, possibly due to the reduced role of credit in driving post-crisis investment and growth. Our results suggest the need to repair corporate balance sheets to support sustainable investment.

Rollover risk imposes market discipline on banks' risk-taking behavior but it can be socially costly. I present a two-sided model in which a bank simultaneously lends to a firm and borrows from the short-term funding market. When the bank is capital constrained, uncertainty in asset quality and rollover risk create a negative externality that spills over to the real economy by ex ante credit contraction. Macroprudential and monetary policies can be used to reduce the social cost of market discipline and improve efficiency.

Financial Constraints, Intangible Assets, and Firm Dynamics: Theory and Evidence

I study whether firms' reliance on intangible assets is an important determinant of financing constraints. I construct new measures of firm-level physical and intangible assets using accounting information on U.S. public firms. I find that firms with a higher share of intangible assets in total assets start smaller, grow faster, and have higher Tobin's q. Asset tangibility predicts firm dynamics and Tobin's q up to 30 years but has diminishing predicative power. I develop a model of endogenous financial constraints in which firm size and value are limited by the enforceability of financial contracts. Asset tangibility matters because physical and intangible assets differ in their residual value when the contract is repudiated. This mechanism is qualitatively important to explain stylized facts of firm dynamics and Tobin's q.

The Tax-Adjusted Q Model with Intangible Assets: Theory and Evidence from Temporary Investment Tax Incentives, with Estelle P. Dauchy, Southern Economic Journal, forthcoming

We propose a tax-adjusted q model with physical and intangible assets and estimate it with a self-collected comprehensive database of intangible assets. The presence of intangibles changes the accounting and economic measures of q. We show that when tax changes are temporary, the q model can be estimated by adjusting for the firm’s intangible stock and intangible intensity. We estimate our model using temporary investment tax incentive policies in the United States in the early 2000s. When the q model accounts for intangible assets, the estimated investment elasticity to tax incentives is generally larger than otherwise. It is also larger for intangible-intensive firms, and increases with firm size.

Embodied Technological Progress and Investment in Vintage Capital”

Embodied progress is an important source of productivity growth, but measuring it is difficult. This paper provides a framework to disentangle embodied and disembodied progresses. Intuitively, a faster rate of embodied progress should reduce the service life of capital goods and discourage continued investment in old vintages. I propose a model in which consumers have a taste for old-fashioned goods. The model features a nontrivial allocation of new investment across capital vintages and endogenous capital service lives. It suggests that data on capital service life and investment allocation can be used to indirectly infer the rate of investment-specific technological change.

Policy Papers

Monetary Policy in the New Normal, with an IMF staff team, Staff Discussion Notes No. 14/3, April 04, 2014