Abstract: In contrast to standard theory, recent empirical evidence shows that currency depreciations are not always expansionary. I posit a new channel of exchange rate transmission that works by affecting the lending capacity of banks, and show that this channel can offset the trade channel, explaining the muted response of economic activity to exchange rate shocks. To circumvent endogeneity concerns, I exploit a large and unanticipated currency appreciation shock from Switzerland in January 2015 when the Swiss National Bank surprised the markets by abandoning the lower bound on the chf/eur exchange rate. Using a novel hand-collected dataset on foreign currency exposure of Swiss banks and bank-firm relationships, I show that the currency appreciation shock enabled banks with a net foreign currency liability exposure to increase credit supply; non-financial firms that had a pre-shock relationship with positively affected banks were able to invest more, partially offsetting the negative impact of currency appreciation on exporters. At the firm-level, I compare the bank channel with the export channel and corporate balance-sheet channels and show how exchange rate shocks can have heterogeneous effects across sectors and types of firms depending on the relative strength of these channels. Extending my findings to historical currency devaluations over the period 1950- 2016, I provide suggestive evidence that foreign currency exposure of the banking sector can explain the differential response of economic activity to exchange rate shocks quite generally.
- Conference Presentations and Invited Seminars: London Business School, University of British Columbia (Sauder School of Business), University of Rochester (Simon Business School), UT Austin (McCombs School of Business), INSEAD, University of Maryland-Baltimore County, Federal Reserve Bank of New York, World Bank Research Group, Bank for International Settlements, Yale Finance Doctoral Conference (Yale SOM), WEAI Graduate Student Dissertation Workshop (Invited Attendee), IMF Research Department, EGSC, Washington University, St. Louis, Cass Business School 6th Emerging Scholars in Banking and Finance Conference
Commodity Prices and Bank Lending (with Rupa Duttagupta and Andrea Presbitero), IMF Working Paper No. 17/279, December 2017 (under review)
Abstract: We analyze the transmission of changes in commodity prices to bank lending in developing countries. Identification relies on a bank-specific time-varying measure of bank sensitivity to changes in commodity prices, based on daily data on bank stock prices. We find that a fall in commodity prices reduces bank lending, and this effect is stronger for commodity exporters and driven by commodity price busts. We complement this bank-level analysis with loan-level data from a credit register, which allows us to identify the effect of a commodity price shock on the supply of credit at the extensive margin, controlling for borrower-specific time-varying unobserved factors that could drive borrowers’ demand for credit. Results show that banks with relatively lower deposits and poor asset quality transmit the changes in commodity prices more aggressively, indicating that commodity prices swings affect credit supply.
- Conference Presentations and Invited Seminars: Cass Business School, London, 2017; Georgetown Center for Economic Research Conference, 2017; CSAE Conference, Oxford, 2017; SPR Department IMF, 2017; DIAL Development Conference, Paris, 2017; International Finance and Banking Society Conference, UK, 2017; Indian Institute of Management (IIM), Bangalore, 2017; Asian Development Bank Institute, Tokyo, 2017
- This paper won the CRISIL Doctoral Symposium best paper award at IIM, Bangalore, 2017
Inflation and Disintermediation (with Matthew Baron)
Abstract: This paper explores a novel channel through which unexpected inflation leads to adverse short-run effects on the macroeconomy. We hypothesize that unexpected inflation shocks weaken the banking sector (mainly due to asset-liability mismatch), which leads to credit contraction, which, in turn, transmits the shock to the real economy. We test this hypothesis in two settings. In the first setting, which looks at a sudden and unexpected inflation shock in the U.S. in mid-1970s, we exploit across-state differences in reserve requirements for state-chartered non-member banks and within-state differences between state- and nationally-chartered banks. These differences substantially affect bank cash holdings, and thus banks’ inflation exposure. Through the affected banks, the inflation shock is then transmitted to the real economy through a lending contraction, with small bank-dependent non-financial firms most affected. In a second setting, we use newly-uncovered historical data on individual banks’ financial statements to explore prominent high inflation episodes of the past, from France in the 1920s to Argentina, Brazil, Turkey, and Venezuela in recent decades. We exploit banks’ cross-sectional heterogeneity in exposure to large, unexpected inflations to show the importance of the banking channel in these prominent historical inflation episodes.
A Vision and Action Plan for Financial Sector Development and Reforms in India (with Eswar Prasad), Brookings Institution Report, January 2018.
Work in Progress
State-contingent Leverage Regulation: Rules vs Discretion (with Tirupam Goel)
China’s Impact on Global Financial Markets (with Grace Weishi Gu and Eswar Prasad)
Exchange Rate Exposure: Firm Level Analysis on Multinational Firms (Lei Zhu and Dazhi Zheng), Western Economic Association International (WEAI), 2018
Rent-extracting Mergers (Alex Xi He and Daniel le Maire), Graduate Student Dissertation Workshop, WEAI, 2018