Katherine A. Smith

Does Nation Building Spur Economic Growth

Nation building, the simultaneous allocation of economic and military aid in con- ict environments, has cost the world trillions of dollars over the last half century. Yet few attempts have been made to quantify the potential growth eects for the recip- ient country from the provision of this aid. Using a forty-ve year panel dataset, we construct a measure of nation building using a three-way interaction term between military assistance, economic aid, and conict regime. We nd that spending on na- tion building has a positive eect on economic growth. Once conict ceases, however, continued military operations coupled with economic aid harms growth.

What can Islamic financing tell us about macro-prudential policies?

ABSTRACT Macro-prudential policies are theoretically effective at mitigating a debt deflation crisis by forcing individuals to internalize their impact on aggregate prices reducing systemic risk caused by pecuniary externalities. To better understand the potential effectiveness of a macro-prudential time varying tax/subsidy on debt/dividends, we empirically estimate the impact of an Islamic financing presence on financial crises. Adherence to Islamic financing principles for a nontrivial portion of a country’s population has similar impacts to a macro-prudential policy in that these limited asset holders are likely to hold less debt or use debt-like instruments rather than conventional debt, driving down their marginal rate of substitution and the price of equity in equilibrium. To empirically estimate the effects of this policy, we interact an Islamic financing variable with debt in an otherwise standard model of financial crises. The results show that this macro-prudential-like policy decreases the likelihood of a banking crisis by 50%. The contribution of the article is twofold. First, we show that an Islamic finance presence encourages precautionary savings like a macro-prudential policy. Second, using an Islamic finance presence to capture macro-prudential potential effects, we find empirically that the likelihood of banking crises are cut roughly by half when such policies are in effect.

Product Differentiation and Consumer Surplus in the Microfinance Industry

Abstract During the last 15 years, high repayment rates of up to 96% have drawn many new lending institutions to the microfinance industry. While a decade ago, the industry was dominated primarily by monopolies ostensibly focused on social welfare, the current market is filled with various types of financial institutions offering a variety of lending arrangements. The goal of this article is to capture the degree to which consumers have benefitted from these structural changes within the microfinance industry. Using a Bertrand differentiated product framework, we model the price setting and demand functions of Microfinance Institutions (MFIs). With a 7 year panel data set covering over 70 countries, we empirically estimate parameters of the Nash price equilibrium and simulate the shape and structure of the underlying demand equation. We use simulated demand parameters to derive and compare measures of consumers’ surplus across regions and countries. Our research indicates that growth in the MFI industry has brought about declines in market concentration, and furthermore that each 0.01 unit change in the Hirschman–Herfindahl index correlates with a 2% increase in consumers’ surplus.

Can Financing Constraints Explain The Asset Pricing Puzzles In Production Economies

General Equilibrium asset pricing models have a difficult time simultaneously delivering a sizable equity premium, a low and counter cyclical real risk free rate, and cyclical variation in return volatility. To explain these stylized facts, this article introduces occasionally binding financing constraints that impede producers’ ability to invest. The financial frictions drive a wedge between the marginal rate of substitution and firms’ internal stochastic discount factors so that the shadow value of capital is not tied to the average price of capital. The model delivers higher and more volatile asset returns during recessions as well as a counter cyclical equity premium.