Few questions to me seem as pressing as “what causes economic crises”, “what policies and institutions best mitigate the severity of crises”, or “what are the political antecedents and consequences of crises?”. Much of my research explores these very questions, probing a range of comparative and international factors along both economic and political dimensions.
Of course, there are several types of crises, and some of my research examines debt sustainability and the likelihood of debt crisis onset, wherein I argue that democracies often perversely are more likely to experience debt problems than non-democracies (though the effect depends on the financial conditions of the economy). This is because there are two aspects of democracy, “market friendly” democracy in addition to “adjustment difficulty” democracy, and the financial structure of the economy intersects with these different aspects of democracies to produce debt shocks.
Most of my current work however focuses on the onset of banking crises, the occurrence of which significantly amplifies both the economic and political consequences of economic disruption. What are the best institutions to manage the onset of a banking crisis? One prominent institution is central bank independence (CBI), widely considered the paragon of economic stability and vital to achieve prudent economic management. In fact, leading monetary theory suggests that independent central banks should have greater leeway to combat crises, because of their implicit credibility to maintain low long-run inflation. But in new research, I show that this institution exacerbates the economic consequences of banking crises, and demonstrate that an institutional redesign of central banks can improve outcomes during these destabilizing events. Specifically, I show that banking mandates for central banks which prioritize employment goals at least equal to inflation lead to this superior economic management. This challenges a long-standing orthodoxy in monetary theory that inflation mandates are necessary, but in doing so I show not that banking crises are better managed only at the cost of higher inflation. Instead, I show that crises are both better managed and without any long-run cost to inflation, suggesting an overall more flexible design.
In other work, I broaden the scope of the economic management problem arising from independent central banks and inflation mandates. Is it only during banking crises that this institutional design impairs economic management, or is it a wider problem? I also show that this institutional design leads to excessive swings in unemployment rates during normal business cycles, and trace this effect from monetary policy. I further examine how monetary policy deals with credit booms under the regime of CBI. This is important because, on the one hand, tighter monetary policy could possibly enhance asset quality during credit booms, leading to higher stability. On the other hand, if tighter policy is mistimed and deployed too late in a credit boom, it may simply spark the onset of instability. In another paper, I examine the political consequences of central bank independence. If CBI generates potentially adverse economic consequences, does this generate political aftershocks? In another paper, I argue that the negative amplification effects arising from CBI does in fact lead to political instability.