CAREER: Financial and Real Effects of Policy Reform in Emerging Markets

Stanford University, Stanford CA

Investigators

Abstract

Evaluation of the financial and real effects of policy reforms is important, because there is a paucity of facts about the effects of policy reform on financial markets and the impact of financial market fluctuations on the real side of emerging economies. For example, the opening of emerging stock markets to foreign investors in the late 1980s and early 1990s coincided with a boom in emerging market equity prices. The conventional wisdom is that these stock market liberalizations caused the booms. However, with a myriad of other economic events happening concurrently, it is not obvious that the stock market liberalizations were responsible for the boom. It is also fashionable to blame the recent emerging markets crises in Asia and Latin America on liberalized stock markets, but this view ignores the fact that stock market liberalization took place almost ten years before the onset of the crises. By evaluating and documenting the facts about the effects of policy reform on the financial and real side of developing economies, this research program makes substantive contributions to economic knowledge. In addition to increasing the general state of knowledge, this research also has the potential to make a significant contribution to general economic welfare. This project evaluates the real and financial effects of economic policy reform in emerging markets. The goal is to systematically document a coherent and reliable set of facts about the effects of policy reform on financial markets and the impact of financial market fluctuations on the real side of emerging economies. The investigator's past research on stock market liberalization and on inflation stabilization has made progress in this direction using aggregate data. CAREER funding will permit the investigator to build on, and extend, his existing research by constructing an extensive data set on emerging market firms. Systematic use of firm-level data is central to obtaining more robust conclusions about the financial and real effects of policy reform in emerging markets. The educational activities disseminate the findings of this research to business practitioners and public policy makers. The educational activities also train future scholars to work in this area of research, with a particular emphasis on increasing the participation of underrepresented minorities through an undergraduate research initiative. Finance theory and macroeconomic theory are used to generate sharp predictions about the financial and real effects of economic policy reform. These predictions are tested against the data using event study techniques. A major component of the research program to date is the construction of a time series of major economic events that coincided with the economic policy reforms. This list of events is used to isolate the impact of the economic policy reforms from the potentially confounding effects of other economic events.