The Impact of a Fixed Exchange Rate Regime on Growth and Volatility in an Oil-‐‑dependent Economy
By Shihab Osman Malik and Faisal Bandar Alsaadi
This study examines the relationship between the fixed exchange rate regime, economic growth, and output volatility in oil-‐‑producing Saudi Arabia over the post-‐‑Bretton Woods period (1973–2016). We assess the implications of the current exchange rate regime on macroeconomic and growth performance, and evaluate its sustainability in the context of oil-‐‑dependency and market dynamics. We develop and employ a theoretical framework and empirical specification based on previous literature to find that for Saudi Arabia, the fix is associated with faster growth and lower output volatility. We believe the result is primarily driven by the credibility of the fix in terms of establishing a strong nominal anchor and monetary policy framework.
Advisor: Lori Leachman | JEL Codes: E42, F31, F36, F41, O53
Macroeconomic and Capital Market Determinants of Venture Capital Investment
By Jeffrey Zeren
This thesis explores the impact of macroeconomic, equity and credit market conditions on venture capital investment. The theoretical methodology outlines the logical foundation that supports the relationships between each explanatory variable and the supply and demand of venture financing. The hypotheses suggested by theory are tested using five multi-vector ordinary least squares regression that analyze the impact of the macroeconomic and capital market variables, after adjustment for multicollinaerity and overspecification bias, on each stage of venture capital investment. The next empirical strategy uses category variables and interaction terms to vastly expand the number of observations in the dataset and provide a more robust analysis of select variables. The results show that macroeconomic conditions associated with increased economic activity and productivity growth cause an increase in venture capital investment at all development stages, though early and late stage investments are the most sensitive to growth and productivity advances. In addition, strong public equity market valuations and initial public offering successes are positively associated with venture capital investments. Finally, optimism in credit markets are found to have an indirect impact on venture capital investment, through confounding factors related to investor and entrepreneurial confidence.
Advisors: Mary Beth Fisher, Michelle Connolly, Kent Kimbrough | JEL Codes: G2, G24, E44
The Puzzle of Mobile Money Markets: An Example of Goldilocks Conditions
By Ricardo Martínez-Cid and Gonzalo Pernas
This paper investigates the supply-side and demand-side factors that explain the success of mobile money markets. Namely, we argue that there exists a set of Goldilocks conditions that best supports mobile money services. A population must have exposure to financial services to understand mobile money and have a high enough level of income to have a use for these services. However, the population must also not have access to highly developed banking architecture, such that their banking needs are already satisfied. By comparing El Salvador and Kenya, countries in different stages of development, we find empirical support for our hypothesis. Our evidence suggests that low income regions and households with some exposure to financial services are more likely to use mobile money than fully banked people who enjoy a higher income.
Advisor: Michelle Connolly, Erica Field | JEL Codes: E40, E42, G21, G23, O12, O16, O17
The Investment Cost of Currency Crises in Emerging Markets: An Empirical Treatment from 1994-2015
By Eric Ramoutar
Currency crises – large and sudden depreciations in the value of a country’s currency – have been an unfortunate by-product of increased financial openness over the last half century. This study extends the already vast literature on the impact of currency crises by estimating how currency crises affect domestic investment in emerging markets. Specifically, the study uses panel data with fixed effects and various robust standard errors as well as a generalized method of moments estimator to investigate the impact of currency crises on domestic investment in a sample of 14 countries that experienced currency crises between 1994 and 2015 and 10 that did not. The results of the analysis initially indicate that, after controlling for a host of macroeconomic fundamentals, currency crises contribute significantly to dampened domestic investment. Ultimately, after controlling for banking crises, the study concludes that relatively severe, but not all, currency crises have a significant depressing effect on investment. The results further indicate that all currency crises should not be treated equally; those involving exceptionally large depreciations lead to an even greater decline in domestic investment.
Advisor: Cosmin Ilut, Kent Kimbrough, Lori Leachman | JEL Codes: E4, F3, F4, E42, F31, F32, F41, G01
Modeling Variation in U.S. Bank Holding Companies’ Net Interest Margins
By Daniel Dorchuck
This study explores variation in US bank holding companies’ (BHCs) net inter-est margins (NIMs) and the effects of interest rate risk exposure on NIMs. Interest rate risk (IRR) is intrinsic in maturity transformation and financial intermediation as banks take on short-term liabilities in the form of deposits and create assets in the form of loans with longer maturities and different repricing profiles. Accordingly, interest rate risk is necessary for bank holding companies (BHCs) to be profitable in financial intermediation, and net interest margins are chosen as a variable of inter-est because they are an isolated measure of bank’ profitability from interest earning assets. Naturally, BHCs employ maturity pairing and derivative hedging to mitigate IRR and ultimately increase and smooth earnings. Synthesizing banks’ balance sheet and income statement data, macroeconomic variables, credit conditions, and interest rate environment variables, this study hopes to expand on existing work by provid-ing insight on the determinants of NIMs as well as interest rate derivatives’ efficacy in increasing and stabilizing net interest margins. The models presented establish links between long term rate exposure, risk-averse capital positions, and increased margins. Additionally, the models suggest that banks earn smaller spreads (NIMs) in higher interest rate environments but benefit from steeper yield curves.
Advisor: Mary Beth Fisher, Kent Kimbrough | JEL Codes: E44, G20, G21 Tagged: Depository Institutions, Interest Rate Derivatives, Interest Rate Risk, Net Interest Margins, US Commercial Banking
Proposing an Alternative to the European Central Bank’s Fiscal Convergence Criteria
By Junaid Arefeen
The recent onset of the sovereign debt crisis in the Eurozone has brought the viabil-ity of the Eurozone as a currency area into question. The unsustainable debt and deficit balances accumulated by several Eurozone nations since the adoption of the common currency in 1999, and the consequent incidence of high levels of sovereign default risk in the euro-area, indicate that the fiscal convergence criteria employed by the European Central Bank to monitor the fiscal discipline and sustainability of its members have been largely ine↵ectual. This paper draws upon the theory of optimum currency areas, and proposes a set of business cycle convergence criteria that can be employed as an alternate means to minimize the risk of fiscal imbalances and sovereign default. Economic theory suggests that a currency union with convergent business cycles will be insulated from asymmetric shocks, removing the need for countries to rely wholly on their fiscal policies when dealing with negative shocks (as would be the case in a currency union with non-synchronous countries su↵ering from negative asymmetric shocks). Therefore, as the risk of fiscal imbalances is minimized, a currency union with synchronous business cycles is expected to have low incidences of sovereign default risk. This paper tests this economic intuition empirically, and employs a multivariable panel regression model to determine the relationship between business cycle convergence and sovereign default risk (proxied using sovereign yield spreads). The regressions reveal that the degree of business cycle convergence is one of the main determinants of yield di↵erentials, and the relationship between the two is negative (as expected). The consistency of the results to numerous robustness checks provide a strong case for substituting the current fiscal convergence criteria with measures that assess the degree of business cycle convergence.
Advisors: Andrea Lanteri, Cosmin Ilut, Kent Kimbrough | JEL Codes: E32, E43, F34, F44, F45 | Tagged: Cycle Convergence, Optimum Currency Area, Sovereign Default Risk
Understanding the Argentine Peso’s Devaluation in 2014 —Analysis on Argentina’s Fiscal Sustainability from 1993 to 2013
By Feng Pan
This research analyzes the fiscal sustainability of Argentina from 1993 to 2013. Specifically, it explains the peso devaluation in early 2014 and suggests that it is primarily due to the fundamental problems in Argentina’s economy. This paper highlights Argentina’s inability to enhance its fiscal conditions and suggests possible future economic developments in Argentina. This paper concludes that there is high
chance of hyperinflation, debt default, and the eventual dissolution of the managed exchange rate regime in Argentina in the future.
Advisor: Alison Hagy, Craig Burnside | JEL Codes: E43, E44, E52, E58, E62, F31 | Tagged: Argentine Peso, Exchange Rate, Fiscal Sustainability
The Rise of Mobile Money in Kenya: The Changing Landscape of M-PESA’s Impact on Financial Inclusion
By Hong Zhu
M-PESA, the hugely popular mobile money system in Kenya, has been celebrated for its potential to “bank the unbanked” and increase access to financial services. This paper provides evidence to support this idea and explores mechanisms through which this might be the case. It specifically looks at the savings products held by individuals and how this changes in relation to M-PESA use. It then constructs an index for measuring the extent to which individuals are integrated into the formal financial sector. This paper argues that M-PESA’s effect on financial inclusion is a growing phenomenon, which suggests that keeping pace with the rapid evolutions of this mobile money system should be a high priority for researchers. As this paper elucidates, M-PESA has become notably more integrated with the formal financial sector in 2013 as compared to 2009, which holds implications for user behavior.
Advisor: Michelle Connolly, Xiao Yu Wang | JEL Codes: D14, E42, G21, G23, O1, O17, O16, O33 | Tagged: Financial Inclusion, Mobile Money, Savings,Technology
Book-building versus Auctions: An investigation into which IPO pricing and selling method more effectively promotes the aims of an IPO issuer
by Amrith Krushnakumaar
Abstract
In recent years, book-building has emerged as a method of choice among investment banks in the U.S and around the world for pricing and selling initial public offerings (IPOs). Proponents of the book-building method argue that discriminatory share allocations, the pooling of IPOs and other standard book-building practices price new shares more accurately, thus enabling the issuer to maximize proceeds received from the IPO, and minimize fluctuations in share price immediately after the IPOs. However, in view of the average first-day price increases common among IPOs marketed by the book-building method, and the potential for investment banks to abuse their power when allocating shares, skeptics claim that book-building is inadequate in helping the issuer meet its aims. Amid calls by regulators and critics to reform the existing book-building method, W.R Hambrecht, an investment bank, introduced the auction method of pricing and selling IPOs for the first time in the United States in 1999. This paper aims to determine which method might be more effective in promoting an issuer’s aims by employing a matched methodology to fairly compare more recent book-building and auction IPOs in the U.S.
Professor Edward Tower, Faculty Advisor
Professor Allen H. Huang, Faculty Advisor
JEL Codes: D21, D22, E44, G1,
Could the Kaminsky-Reinhart Model Have Predicted the 2002 Uruguayan Currency and Banking Crises?
by Steven R. Vickers
Abstract
Because currency and banking crises cause substantial and prolonged disruptions
to an economy, economists have long sought ways to predict these events in advance.
One recent theory advanced is the “leading indicators” approach of Kaminsky (1998) and
Kaminsky and Reinhart (1999). Kaminsky (1998) presents four separate composite
indicators, and Kaminsky and Reinhart (1999) refines the model. This paper provides one
test of this theory by analyzing the currency and banking crises that arose in July 2002 in
Uruguay. This study tests the efficacy of these indicators by analyzing the behavior of
the indicators in the months directly preceding the Uruguayan crises. In general, three
indicators performed reasonably well, while one had exceptional predictive power.
Professor Stephanie Schmitt-Grohé, Faculty Advisor
JEL Codes: E47, G01, G15,
