Jihad Dagher

On the Stability of Money Demand in Ghana: A Bounds Testing Approach

This paper adopts the bounds testing procedure developed by Pesaran et al. (2001) to test the stability of the long-run money demand for Ghana. The results provide strong evidence for the presence of a stable, well-identified long-run money demand during a period of substantial changes in the financial markets. The empirical evidence points to complex dynamics between money demand and its determinants while suggesting that deviations from the equilibrium are rather short-lived.

What Fuels the Boom Drives the Bust: Regulation and the Mortgage Crisis

We show that the lightly regulated non-bank mortgage originators contributed disproportionately to the recent boom-bust housing cycle. Using comprehensive data on mortgage originations, which we aggregate at the county level, we first establish that the market share of these independent non-bank lenders increased in virtually all US counties during the boom. We then exploit the heterogeneity in the market share of independent lenders across counties as of 2005 and show that higher market participation by these lenders is associated with increased foreclosure filing rates at the onset of the housing downturn. We carefully control for counties’ economic, demographic, and housing market characteristics using both parametric and semi-nonparametric methods. We show that this relation between the pre-crisis market share of independents and the rise in foreclosure is more pronounced in less regulated states. The macroeconomic consequences of our findings are significant: we show that the market share of these lenders as of 2005 is also a strong predictor of the severity of the housing downturn and subsequent rise in unemployment. Overall our findings lend support to the view that more stringent regulation could have averted some of the volatility on the housing market during the recent boom-bust episode.

Benefits and Costs of Bank Capital

We find that capital in the range of 15–23 percent of risk-weighted assets would have been sufficient to absorb losses in the vast majority of historic banking crises in advanced economies. Further capital increases would have had only marginal effects on preventing additional crises. Appropriate capital requirements may be somewhat below this range, as banks tend to hold capital in excess of regulatory minima, and other bail-in-able instruments can contribute to loss absorption capacity. While long-term social costs associated with this level of capital appear acceptable, the short-term costs of transitioning to higher bank capital may be substantial, which calls for a careful timing of such transition.

A Model for Full-Fledged Inflation Targeting and Application to Ghana

A model in which monetary policy pursues full-fledged inflation targeting adapts well to Ghana. Model features include: endogenous policy credibility; non-linearities in the inflation process; and a policy loss function that aims to minimize the variability of output and the interest rate, as well as deviations of inflation from the long-term low-inflation target. The optimal approach from initial high inflation to the ultimate target is gradual; and transitional inflation-reduction objectives are flexible. Over time, as policy earns credibility, expectations of inflation converge towards the long-run target, the output-inflation variability tradeoff improves, and optimal policy responses to shocks moderate.

Inflation and the Maturity Structure of Nominal Debt

Episodes of high inflation are generally accompanied by a shortening of the maturity of nominal debt contracts. This paper develops a multiperiod general equilibrium model with incomplete markets to study the relationship between inflation and the maturity structure of nominal bonds. The model shows that under the presence of a small risk of price stabilization, high inflation can lead to a significant shortening of the maturities of nominal bonds traded among agents, yielding a negative relationship between inflation and maturity. The paper shows evidence of this negative correlation from Turkish data on Treasury auctions.

Regulatory Cycles: Revisiting the Political Economy of Financial Crises

Financial crises are traditionally analyzed as purely economic phenomena. The political economy of financial booms and busts remains both under-emphasized and limited to isolated episodes. This paper examines the political economy of financial policy during ten of the most infamous financial booms and busts since the 18th century, and presents consistent evidence of pro-cyclical regulatory policies by governments. Financial booms, and risk-taking during these episodes, were often amplified by political regulatory stimuli, credit subsidies, and an increasing light-touch approach to financial supervision. The regulatory backlash that ensues from financial crises can only be understood in the context of the deep political ramifications of these crises. Post-crisis regulations do not always survive the following boom. The interplay between politics and financial policy over these cycles deserves further attention. History suggests that politics can be the undoing of macro-prudential regulations.

Growth and Strategic Savings

We model the relationship between a firm’s growth opportunities and its financing policy. Financially constrained firms have an incentive to maintain reserve borrowing capacity when expected future investment opportunities are high. These strategic savings allow firms to respond optimally to new opportunities when there are frictions on equity financing. The incentive for saving decreases with the cost of borrowing, and thus shifts in monetary policy can have a stronger impact on the financing of high growth firms. We show that, based on differences in growth opportunities alone, the model can explain differences in financing and performance we document between high and low growth IT firms during the Dot-Com boom and its subsequent bust.