Discussion of Growth, Volatility and Access to Finance

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1 Discussion of Growth, Volatility and Access to Finance by Jean Imbs and Erwan Morellec Alberto Martin CREI and UPF January 2009 Alberto Martin (CREI and UPF) Discussion of Growth, Volatility... January / 10

Martin CREI and UPF January 2009 Alberto Martin (CREI

2 Main Idea (my interpretation) Aggregate volatility and growth: negatively correlated (Ramey and Ramey, 1995) At the sectorial level, positive correlation between volatility and growth (Imbs, 2007) This paper provides a framework to reconcile these two ndings... Irreversible investment (nondecreasing K ) + Financial frictions (costly outside funds) Financial frictions related to institutional quality Main results (and empirics): At the sectorial level, volatility " the capital stock (irreversibility...) Investor protection # cost of funds and increases capital stock (ok...) If investor protection and aggregate volatility are negatively correlated volatility and growth negatively correlated accross countires, but... this correlation should not survive controlling for institutional quality Alberto Martin (CREI and UPF) Discussion of Growth, Volatility... January / 10

.. Irreversible investment (nondecreasing K ) + Financial frictions (costly outside funds) Financial frictions related to institutional quality Main results (and empirics): At the sectorial level,

3 General Assessment Very preliminary stage: Simple model + suggestive empirics No discussion yet (i.e., intro, conclusions): hard to know the exact message that they wish to convey Potentially: Interesting contribution on an important topic Is volatility bad per se for investment and growth?, or... Is it simply the result of bad institutions, which themselves hurt capital accumulation? In this discussion: Important policy implications for developing countries Relationship to research on institutions? Acemoglu, Johnson, Robinson, and Thaicharoen (JME, 2003) Brief overview of results Comments on goals and procedure Alberto Martin (CREI and UPF) Discussion of Growth, Volatility... January / 10

.. Is it simply the result of bad institutions, which themselves hurt capital accumulation?

4 Sketch of Model Risk-neutral rm with discount factor ρ and pro ts given by where k is the capital stock, and π(x, k) = 1 1 α x α k 1 α, x is a demand shock governed by geometric brownian motion dx t = µx t d t + σx t db t. Outside funds costly for the rm: to raise e, pay deadweight cost C (e, ψ), with C e, C ψ > 0, where a higher ψ means lower quality of investor protection Remark I: Marginal valuation of k depends only on x k Remark II: Optimality then requires positive investment only if x k > k x Alberto Martin (CREI and UPF) Discussion of Growth, Volatility... January / 10

Outside funds costly for the rm: to raise e, pay deadweight cost C (e, ψ), with C e, C ψ > 0, where a higher ψ means lower quality of investor

5 Intuition of the Model (from Abel and Everly) Ambiguous impact of irreversibility on K when there is uncertainty: Higher cost of capital (negative impact on K ): Given uncertainty, irreversibility reduces optimal capital stock (anticipation) Hangover e ect (positive impact on K ): Dependence of K on past behavior Both e ects increase with uncertainty: ambiguous impact of uncertainty on K Under speci c type of mean-preserving spread, greater uncertainty increases K Constant E (x α t ), assumed in this paper Alberto Martin (CREI and UPF) Discussion of Growth, Volatility... January / 10

K on past behavior Both e ects increase with uncertainty: ambiguous impact of uncertainty on K Under speci c type of mean-preserving spread, greater

6 Theoretical Predictions Result 1: Volatile sectors should have high investment rates Positive within-country correlation between volatility and investment Result 2: Higher investor protection associated with higher capital accumulation Result 3: If aggregate volatility correlates negatively with investor protection, then... Negative correlation between aggregate volatility and growth, which Should not survive controls for investor protection Alberto Martin (CREI and UPF) Discussion of Growth, Volatility... January / 10

volatility correlates negatively with investor protection, then.

7 Empirical Results Result 1: regression with sector and country xed e ect yields investment positive sectorial relationship between volatility and growth Result 2: Positive role of institutional quality on investment Result 3: Negative correlation between institutional quality and aggregate volatility Aggregate regression of growth and investment on volatility Strong negative e ect of volatility on investment and growth Controling directly for institutional quality This e ect disappears once institutional controls are introduced Alberto Martin (CREI and UPF) Discussion of Growth, Volatility... January / 10

Aggregate regression of growth and investment on volatility Strong negative e ect of volatility on investment and growth Controling directly for

8 General Comments for next version On the di erent e ects/implications sectorial and aggregate volatility Motivation (cheap shot): Should we expect same implications of volatility at sectorial and aggregate levels? What type of questions can we answer with a model encompassing both? On aggregate volatility: not in the model On sectorial volatility: role of irreversibility Other stories could explain sectorial ndings Why choose this explanation over others? Can your mechanism be tested directly? Alberto Martin (CREI and UPF) Discussion of Growth, Volatility... January / 10

On aggregate volatility: not in the model On sectorial volatility: role of irreversibility Other stories could explain sectorial ndings Why

9 Main Contribution What is the contribution/intended message of this paper? As of now: negative aggregate volatility might simply be indicator of bad institutions Result on sectorial volatility: follows Jean s previous work Result on relationship between investor protection and investment: out there Why not expand on this? Does aggregate volatility not matter at all? More generally: my impression is that there is a mismatch between Theory: all of the stress is on sectorial implications of irreversibility Aggregate volatility not in the model How is it related to sectorial volatility and institutional quality? Empirics: most eye-catching result is on aggregate volatility Alberto Martin (CREI and UPF) Discussion of Growth, Volatility... January / 10

protection and investment: out there Why not expand on this? Does aggregate volatility not matter at all?

10 To conclude... A minor comment: I missed something about your second empirical test Theory predicts growth increasing in investor protection given volatility Empirical regression is on the interaction of investor protection and volatility In short: interesting paper, I look forward to seeing where it leads Alberto Martin (CREI and UPF) Discussion of Growth, Volatility... January / 10

increasing in investor protection given volatility Empirical regression is on the interaction of

Discussion of Growing Like China

Discussion of Growing Like China by Song, Storesletten and Zilibotti Alberto Martin CREI and UPF December 2008 Alberto Martin (CREI and UPF) Discussion of Growing Like China December 2008 1 / 10 This paper