On 20 September 2016, Sameer Khatiwada defended his PhD dissertation in International Economics, entitled “Essays on Monetary Policy, Firm Dynamics and Debt”, at the Graduate Institute. Assistant Professor Rahul Mukherjee presided the committee, which included Professor Cédric Tille, Thesis Director, and Professor Philippe Bacchetta, from the University of Lausanne. In the aftermath of the financial and economic crisis of 2008–09, the US Federal Reserve Bank engaged in unconventional monetary policy measures to revive economic output and lower the unemployment rate, with some success in the US but at a cost to the rest of the world, in particular to the emerging and developing economies. Mr Khatiwada tries to get a grip on this issue by examining a large set of countries beyond just the European Union (EU), as it includes developing and emerging market economies.
What made you choose your research topic?
It is hard to pin down the exact reason, but I think it largely stemmed from my professional experience, academic and policy interests. I embarked on the PhD at the Graduate Institute while working full time at the International Labour Organization (ILO) in Geneva. Working as an economist for a UN agency that promotes fair globalisation and decent work, I was naturally interested in looking at a research question with policy relevance.
In the aftermath of the deepest economic and financial crisis to hit the US since the Great Depression, the new Obama administration engaged in expansionary fiscal measures as evidenced by the relatively large fiscal stimulus programme known as the American Recovery and Reinvestment Act (ARRA). But, on the back of rising public debt and dwindling political support for fiscal measures, appetite for further spending quickly evaporated and austerity became the currency of choice. Therefore, the task of reviving economic output and lowering unemployment rested on the shoulders of the Fed, which by early 2009 had exhausted its conventional measures and had to resort to unconventional tools. These unconventional tools seem to have had a positive impact on the US – albeit there is debate over the magnitude – but the same cannot be said about the rest of the world. This was a topic of enormous policy relevance to the emerging markets and developing economies and I was mostly interested in understanding the impact of Fed’s pull back from the unconventional measures – also known as “tapering”.
What did you find?
My research suggests that the unconventional tools – large-scale asset purchase programmes (also known as quantitative easing, QE) – employed by the Fed were associated with an increase in capital inflow, while “tapering” was associated with a period of retrenchment. The impact of “retrenchment” was severe for many developing and emerging economies (EMEs). Its magnitude varied depending on the different episodes of QE and the types of assets (bonds or equities). The EU countries behaved differently than the EMEs, yet peripheral Europe exhibited similar characteristics as the EMEs.
I also find support for the importance of “pull factors” and individual country characteristics for capital inflows. However, I show that QE accounts for most of the variation in capital inflows between 2008 and 2014. Moreover, my research points out that recipient countries can play a limited role in controlling capital flows. Indeed, the statements made by the G20 countries during the episodes of QE show that countries are increasingly cognisant of their inability to control flows and have thus called for better monetary policy coordination to avoid excessive volatility and negative spillovers to the rest of the world.
Can you give us an example of the applicability of your research?
One of the major theoretical implications of my findings is that countries are increasingly unable to control and manage capital flows. Most of the monthly changes in capital flows are explained by what we call “push factors” (e.g. unconventional monetary tools in the US), rather than the usual determinants of capital inflows, also called “pull factors”. On the one hand, most emerging markets would prefer unfettered access to international capital, as it is a key source of much-needed finance for economic growth and job creation. On the other hand, countries are increasingly cognisant that excess volatility in capital flows could have negative repercussions on the rest of the economy. Not surprisingly, most emerging economies tend to put in place capital control measures with a view to better manage flows. Nonetheless, new research has demonstrated that capital controls, unless in a situation of complete autarky, do not work as well as economic theory seems to suggest.
As part of the reform of the global financial system, the G20 countries have called for a better management and regulation of global capital flows. In 2008 and 2009, the focus was on reversing the outflow of capital from the emerging and developing countries as this was at the height of the recession. Then in 2010, the talk shifted towards avoiding volatility in capital inflows and in 2012 in Los Cabos, the G20 communiqué clearly stated that “excess volatility of financial flows and disorderly movements in exchange rates have adverse implications for economic and financial stability”. Furthermore, in 2013 in St. Petersburg, the G20 reiterated that due to the recalibration in monetary policy in the advanced economies, volatility in capital flows would increase and would have adverse consequences on growth and employment in emerging and developing economies. For example, in response to the news of the Fed’s tapering (in the summer of 2013), the governor of India’s central bank, Raghuram Rajan, said that the “international monetary cooperation has broken down”. In short, G20 countries have made abundantly clear that volatility in capital flows was one of the major concerns for countries and there is a need for monetary policy coordination.
What are you going to do now that you are a doctor?
I am currently working as the Employment Specialist with the Decent Work Technical Support Team at the ILO’s Regional Office for Asia and the Pacific in Bangkok. In my interactions with the ILO’s constituents, development partners and other national and regional stakeholders, I engage in discussions beyond labour market issues with a view to influencing policy to improve labour market outcomes. Considering the implications of broader macroeconomic frameworks on employment outcomes, it is important for the ILO to get involved in policy debates surrounding fiscal and monetary policies. This is particularly salient in light of the newly adopted Sustainable Development Agenda, notably its goal 8 on decent work and inclusive economic growth. Promotion of pro-employment macroeconomic policies is simply not possible without the ILO’s active engagement with the development community on macro-issues.
Besides my policy work with the ILO, I am continuing my academic and policy research on the spillover effects of advanced economy monetary policies on the rest of the world. I am currently involved in an ongoing research project using a different empirical methodology than the one I have used in my PhD research to examine the impact of US monetary policy on large emerging markets. In this project, we go beyond financial variables and also look at the impact on real variables such as economic output and employment.
How will you remember your doctoral experience?
I worked a full-time job while pursuing a PhD in Economics at the Institute, which would have surely failed had it not been for an incredible group of individuals. One person without whom I would have never managed to complete this dissertation is my PhD supervisor, Prof. Cédric Tille. I owe him my deepest thanks and gratitude. He made time to see me every month and in retrospect, that was the single most important factor for the timely completion of my thesis. I could not have imagined having a better advisor for my PhD study.
I joined the ILO after graduating from the Kennedy School at Harvard University in 2008 and when my friends in Geneva would ask what the most important aspect of my graduate education at HKS was, I would say: my classmates! Similar to that experience, these last four years at the Institute in Geneva, I have met some incredibly smart classmates who have helped me deepen my understanding of macroeconomics and gain insights into development challenges facing the world.
Full citation of the thesis: Khatiwada, Sameer. “Essays on Monetary Policy, Firm Dynamics and Debt”. PhD thesis, Graduate Institute of International and Development Studies, 2016.
Illustration: The Marriner S. Eccles Federal Reserve Board Building, 13 August 2008. By AgnosticPreachersKid (Own work) [CC BY-SA 3.0], via Wikimedia Commons.