Commodity Prices and Bank Lending (with Rupa Duttagupta and Andrea Presbitero), Economic Inquiry, August 2019

Abstract: We analyze the transmission of changes in commodity prices to bank lending in a large sample of developing countries. A bank-level analysis shows that a fall in commodity net export prices is associated with a reduction of bank lending, particularly for commodity exporters and during episodes of terms-of-trade decline. We complement this 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, controlling for unobserved factors that could drive borrowers’ credit demand. Results show that banks with relatively lower deposits and poor asset quality transmit the changes in commodity prices to lending more aggressively.

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

Working Papers

Banks’ Foreign Currency Exposure and the Real Effects of Exchange Rate Shocks 

Using a large and unanticipated currency appreciation shock from Switzerland in January 2015, I study the causal effect of currency appreciation on bank lending and economic activity. I construct a novel dataset on foreign currency exposures of Swiss banks and 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 lending 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 and can explain why currency depreciations are not always expansionary.

  • 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

China’s Impact on Global Financial Markets (with Grace Weishi Gu and Eswar Prasad), NBER Working paper No. 26311

Abstract: We analyze shifts in the structure of China’s capital outflows over the past decade. The composition of gross outflows has shifted from accumulation of foreign exchange reserves by the central bank to nonofficial outflows. Unlocking the enormous pool of domestic savings could have a significant impact on global financial markets as China continues to open up its capital account and as domestic investors look abroad for returns and diversification. We analyze in detail the allocation patterns of Chinese institutional investors (IIs), which constitute the main channel for foreign portfolio investment outflows. We find that, relative to benchmarks based on market capitalization, Chinese IIs underweight developed countries and high-tech sectors in their international portfolio allocations but overinvest in high-tech stocks in developed countries. To further examine Chinese IIs’ joint decisions on destination country-sector pairs, we construct continuous measures of revealed relative comparative advantage and disadvantage in a sector for a country based on trade patterns. We find that, in their foreign portfolio allocations, Chinese IIs overweight sectors in which China has a comparative disadvantage. Moreover, Chinese IIs concentrate such investments in countries that have higher relative comparative advantage in those sectors. Diversification and information advantages related to foreign imports to China seem to influence patterns of foreign portfolio allocations, while yield-seeking and learning motives do not.

Inflation and Disintermediation (with Matthew Baron)

Abstract: In a country-level panel from 1870 to 2016, large increases in inflation are associated with lower future bank credit-to-GDP, even in the absence of monetary tightening. The lending contraction is primarily driven by banks with balance sheets most negatively exposed to inflation increases. To better understand how inflation shocks transmit to the macroeconomy through a banking channel, we study an unexpected inflation increase in the U.S. in early-1977. Our identification strategy exploits differences in reserve requirements across U.S. states for Fed nonmember banks, leading banks to be differentially exposed to unexpected inflation increases. More exposed banks reduce lending, which in turn reduces new mortgages, construction employment, and credit to bank-dependent firms. Our results suggest that an important consequence of inflation is its distortion of the banking sector.

Work in Progress

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


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