A Vision and Action Plan for Financial Sector Development and Reforms in India (with Eswar Prasad), Brookings Institution Report, January 2018.

Working Papers:

International commodity prices and domestic bank lending in developing countries (with Andrea Presbitero and Rupa Duttagupta), IMF Working Paper No. 17/279, December 2017 (submitted)

Abstract: We study the role of the bank-lending channel in propagating fluctuations in commodity prices to credit aggregates and economic activity in developing countries. We use data on more than 1,600 banks from 78 developing countries to analyze the transmission of changes in international commodity prices to domestic bank lending. Identification relies on a bank-specific time-varying measure of bank sensitivity to changes in commodity prices. We find that a fall in commodity prices reduces bank lending, although this effect is confined to low-income countries and driven by commodity price busts. Banks with relatively lower deposits and poor asset quality transmit commodity price changes to lending more aggressively, reinforcing the hypothesis that the overall credit response to commodity prices could work through the credit supply channel.

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-1976, 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.

Work in Progress:

State-contingent Leverage Regulation: Rules vs Discretion (with Tirupam Goel)

The Exchange Rate Disconnect and the Bank Lending Channel