Growth and risk at the industry level: The real effects of financial liberalization

This paper analyzes the effects of financial liberalization on growth and volatility at the industry level in a large sample of countries. We estimate the impact of liberalization on production, employment, firm entry, capital accumulation, and productivity. In order to overcome omitted variables concerns, we employ a number of alternative difference-in-differences estimation strategies. We implement a propensity score matching algorithm to find a control group for each liberalizing country. In addition, we exploit variation in industry characteristics to obtain an alternative set of difference-in-differences estimates. Financial liberalization is found to have a positive effect on both growth and volatility of production across industries. The positive growth effect comes from increased entry of firms, higher capital accumulation, and an expansion in total employment. By contrast, we do not detect any effect of financial liberalization on measured productivity. Finally, the growth effects of liberalization appear temporary rather than permanent.     

Practical guidelines for the estimation and inference of a dynamic logistic model with fixed-effects

This paper shows how to simply compute one of the estimators proposed by Honoré and Kyriazidou (2000), as well as its variance, through a reshaping of the original dataset that is then used in a weighted logistic regression with clustering.     

Power laws in firm size and openness to trade: Measurement and implications

Existing estimates of power laws in firm size typically ignore the impact of international trade. Using a simple theoretical framework, we show that international trade systematically affects the distribution of firm size: the power law exponent among exporting firms should be strictly lower in absolute value than the power law exponent among non-exporting firms. We use a dataset of French firms to demonstrate that this prediction is strongly supported by the data, both for the economy as a whole and at the industry level. Furthermore, the differences between power law coefficients for exporters and non-exporters are larger in sectors that are more open to trade. While estimates of power law exponents have been used to pin down parameters in theoretical and quantitative models, our analysis implies that the existing estimates are systematically lower than the true values. We propose two simple ways of estimating power law parameters that take explicit account of exporting behavior.     

Decomposing the effects of financial liberalization: Crises vs. growth

We present a new empirical decomposition of the effects of financial liberalization on economic growth and on the incidence of crises. Our empirical estimates show that the direct effect of financial liberalization on growth by far outweighs the indirect effect via a higher propensity to crisis. We also discuss several models of financial liberalization and growth whose predictions are consistent with our empirical findings.     

Macroeconomic Volatility and Welfare in Developing Countries: An Introduction

Macroeconomic volatility, both a source and a reflection ofunderdevelopment, is a fundamental concern for developing countries.Their high aggregate instability results from a combinationof large external shocks, volatile macroeconomic policies, microeconomicrigidities, and weak institutions. Volatility entails a directwelfare cost for risk-averse individuals, as well as an indirectone through its adverse effect on income growth and development.This article provides a brief overview of the recent literatureon macroeconomic volatility in developing countries, highlightingits causes, consequences, and possible remedies. It then introducesthe contributions of a recent conference on the subject, sponsoredby the World Bank and Pompeu Fabra University, Barcelona.     

A Model for Monetary Policy Analysis for Sub-Saharan Africa

We develop a small open economy DSGE model usable for monetary policy in Sub-Saharan Africa. In this paper we apply the model to quarterly data from Ghana from 1981–2007. We find that permanent, but not transitory, technology shocks are the most important source of fluctuations. We find that the estimated monetary policy rule suggests that policy is aimed almost exclusively at fluctuations in output and ignores inflation, imports and exports. A negative result is that there appears to be significant issues in identifying some important parameters.     

Do Investors Pay Sufficient Attention to Banks’ Unrealized Gains and Losses on Available-for-sale Securities?

Abstract

Unrealized gains and losses on available-for-sale securities (AFSGL) are included in Other Comprehensive Income (OCI) and directly affect shareholders’ equity but are not included in earnings. We investigate whether unrealized AFSGL help predict future earnings and whether analysts and investors incorporate the information conveyed by unrealized AFSGL in a timely manner. We conduct our investigation on a sample of banks because unrealized AFSGL are material in the banking industry. First, we show that unrealized AFSGL are material and help in predicting next period realized AFSGL and future earnings change. Second, we document that financial analysts are slow to react to unrealized AFSGL and update their forecasts after AFSGL are realized in earnings. Third, we find that investors are also slow to react to unrealized AFSGL and do so only after AFSGL are included (realized) in earnings and after financial analysts update their forecasts. We document an annual difference of 5% in future abnormal returns between banks in the top and bottom quintiles of past unrealized AFSGL. A zero-cost trading strategy that relies on public information about unrealized AFSGL generates a sizeable monthly alpha that ranges between 1.8% and 1.9%.