Professor of Economics
Department of Economics
Professor of Finance
Kenan-Flagler Business School
University of North Carolina at Chapel Hill
Chapel Hill, NC 27599
Office Phone: (919)966-5346
Professor Chari's research is in the fields of international finance, emerging markets and open-economy macroeconomics. She received a PhD in International Finance from The Anderson School at UCLA and an undergraduate degree in Philosophy, Politics and Economics from Balliol College at Oxford University. In addition to teaching at the University of North Carolina, she has taught both international and finance courses at University of Chicago's Booth School of Business , the University of Michigan, and the Haas School of Business at Berkeley. She is also a Research Associate in the National Bureau of Economic Research's International Finance and Macroeconomics (IFM) Program and worked with the Indian Prime Minister's Economic Advisory Council (PMEAC).
"Risk Sharing and Asset Prices: Evidence from a Natural Experiment." Journal of Finance, Vol. 59, No. 3, pp. 1295-1324 (with Peter Blair Henry). Nominated for Smith Breeden prize for the best paper published in the Journal of Finance, 2004.
When countries liberalize their stock markets, firms that become eligible for foreign purchase (investible), experience an average stock price revaluation of 15.1 percent. Since the historical covariance of the average investible firm's stock return with the local market is roughly 200 times larger than its historical covariance with the world market, liberalization reduces the systematic risk associated with holding investible securities. Consistent with this fact: (1) the average effect of the reduction in systematic risk is 6.8 percentage points, or roughly two fifths of the total revaluation; and (2) the firm-specific revaluations are directly proportional to the firm-specific changes in systematic risk.
"Heterogeneous Market-Making in Foreign Exchange Markets: Evidence from Individual Bank Responses to Central Bank Interventions." Journal of Money, Credit and Banking, Vol. 39, No.5, pp. 1131-1161, 2007. Appendix 1 , Appendix 2
Using high-frequency data this paper finds strong evidence that, on average, central bank interventions lead to increased volatility and a widening of bid-ask spreads in the intra-day market for foreign exchange. The results also show that there is dispersion in the bid-ask spread revisions posted by individual banks in response to the central bank entering the market. The findings are consistent with predictions from standard models of market microstructure with heterogeneous agents and have implications for the market power of central banks as well as the payoff generated by trading large amounts of international reserves."Firm Specific Information and the Efficiency of Investment." Journal of Financial Economics, Vol. 87, No. 3, pp. 636-655, 2008 (with Peter Blair Henry).
In the three-year period following stock market liberalizations, the growth rate of the typical firm's capital stock exceeds its pre-liberalization mean by an average of 4.1 percentage points. Cross-sectional changes in investment are significantly correlated with the signals about fundamentals embedded in the stock price changes that occur upon liberalization. Panel data estimations show that a 10-percentage point increase in a firm's expected future sales growth predicts a 2.9- to 3.5-percentage point increase in the growth rate of its capital stock, depending on the specification; country-specific changes in the cost of capital are also important, generating an economically and statistically significant change in capital stock growth in almost every specification; firm-specific changes in risk premia do not affect investment."Incumbents and Protectionism: The Political Economy of Foreign Entry Liberalization." Journal of Financial Economics, Vol. 88, No. 3, pp. 633-656, 2008 (with Nandini Gupta).
This paper investigates the influence of incumbent firms on the decision to allow foreign direct investment into an industry. Based on data from India's economic reforms, the results suggest that firms in concentrated industries are more successful at preventing foreign entry, that state-owned firms are more successful at stopping foreign entry than similarly placed private firms, and that profitable state-owned firms are more successful at stopping foreign entry than unprofitable state-owned firms. These findings continue to hold after controlling for industry characteristics such as the presence of natural monopolies and the size of the workforce. The pattern of foreign entry liberalization supports the private interest view of policy implementation.
"The Value of Control in Emerging Markets" Review of Financial Studies, vol. 23, No. 4, pp. 1741-1770, 2010 (with Paige Ouimet and Linda Tesar).
When a developed-country multinational firm acquires majority control of a firm in an emerging market, there is an economically large and statistically significant increase in the acquiring firms' stock price. Between 1986-2006 developed-market acquirers experience positive and significant abnormal returns of 1.16%, on average, over a three-day event window. Positive acquirer returns and dollar value gains appear unique to emerging-market M&A and are not replicated when the same developed-market acquirers take over firms in developed markets. The size of the stock price increase is more pronounced: (a) the weaker the contracting environment in the emerging market and (b) for industries with high asset intangibility.
"India Transformed? Insights from the Firm Level 1988-2007" Brookings India Policy Forum Journal 2010, Vol. 6, pp. 155-228. (with Laura Alfaro) Read about this paper in the The Economist, Business Standard , and Business World .
Using firm-level data this paper analyzes, the transformation of India's economic structure following the implementation of economic reforms. The focus of the study is on publicly-listed and unlisted firms from across a wide spectrum of manufacturing and services industries and ownership structures such as state-owned firms, business groups, private and foreign firms. Detailed balance sheet and ownership information permit an investigation of a range of variables such as sales, profitability, and assets. Here we analyze firm characteristics shown by industry before and after liberalization and investigate how industrial concentration, the number, and size of firms of the ownership type evolved between 1988 and 2005. We find great dynamism displayed by foreign and private firms as reflected in the growth in their numbers, assets, sales and profits. Yet, closer scrutiny reveals no dramatic transformation in the wake of liberalization. The story rather is one of an economy still dominated by the incumbents (state-owned firms) and to a lesser extent, traditional private firms (firms incorporated before 1985). Sectors dominated by state-owned and traditional private firms before 1988-1990, with assets, sales and profits representing shares higher than 50%, generally remained so in 2005. The exception to this broad pattern is the growing importance of new and large private firms in the services sector. Rates of return also have remained stable over time and show low dispersion across sectors and across ownership groups within sectors.
"Foreign Direct Investment in India's Retail Bazaar: Opportunities and Challenges" World Economy, Vol. 35, No. 1, pp. 79-90, 2012. (with Madhav Raghavan)
Despite encouraging signs, India's retail market remains largely off-limits to large international retailers like Wal-Mart and Carrefour. Opposition to liberalizing FDI in this sector raises concerns about employment losses, unfair competition resulting in large-scale exit of incumbent domestic retailers and infant industry arguments to protect the organized domestic retail sector that is at a nascent stage. Based on international evidence, we suggest that allowing entry by large international retailers into the Indian market may help tackle inflation especially in food prices. Moreover, technical know-how from foreign firms, such as warehousing technologies and distribution systems can improve supply chain efficiency in India, in particular for agricultural produce. Better linkages between demand and supply have the potential to improve the price signals that farmers receive and also serve to enhance agricultural and other exports.
"Foreign Ownership and Firm Performance: Emerging Market Acquisitions in the United States" IMF Economic Review 2012, Vol. 60, pp. 1-42. Lead Article. doi:10.1057/imfer.2012.1. An earlier version circulated as NBER Working Paper No. 14786. Read about this paper in the NBER Digest, June 2009.
This paper examines the recent upsurge in foreign direct investment by emerging-market firms into the United States. Traditionally, direct investment flowed from developed to developing countries, bringing with it superior technology, organizational capital, and access to international capital markets, yet increasingly there is a trend towards ''capital flowing uphill'' with emerging market investors acquiring a broad range of assets in developed countries. Using transaction-specific information and firm-level accounting data we evaluate the operating performance of publicly traded U.S. firms that have been acquired by firms from emerging markets over the period 1980-2006. Our empirical methodology uses a difference-in-differences approach combined with propensity score matching to create an appropriate control group of non-acquired firms. The results suggest that emerging country acquirers tend to choose U.S. targets that are larger in size (measured as sales, total assets and employment) relative to matched non-acquired firms. In the years following the acquisition target firm sales and employment decline while profitability rises compared to matched non-acquired firms, suggesting significant restructuring of the target firms.
"Capital Market Integration and Wages" American Economic Journal-Macroeconomics 2012, Vol. 42, No. 2, pp. 101-132. http://dx.doi.org/10.1257/mac.4.2.102 (with Peter Blair Henry and Diego Sasson)
For three years after the typical emerging economy opens its stock market to inflows of foreign capital, the average annual growth rate of the real wage in the manufacturing sector increases by a factor of three. No such increase occurs in a control group of countries that do not liberalize. The temporary increase in wage growth drives up the level of the average worker's annual compensation by $487 U.S.-an increase equal to nearly one-fifth of their annual pre-liberalization salary. Overall, the results suggest that trade in capital may have a larger impact on wages than trade in goods.
"Learning from the Doers: Developing Country Lessons for Advanced Economy Growth" (with Peter Blair Henry) American Economic Review Papers & Proceedings, 104(5), pp. 260-265, 2014. http://dx.doi.org/10.1257/aer.104.5.260.
From 1980 to 1992, emerging and developing countries grew by 3.4 percent per year. Their annual rate of growth increased to 5.4 percent between 1993 and 2012. No such increase occurred for advanced nations, whose average growth from 1980-2012 was roughly constant (excluding the impact of the 2008-09 Recession). Developing nations turned themselves around by embracing discipline—sustained commitment to a pragmatic and flexible growth strategy. Three illustrations of discipline through the lens of trade, fiscal, and debt reforms in the developing world offer relevant, practical lessons for recovery in advanced economies and continued catch-up growth in developing nations.
"Deregulation, Misallocation, and Size: Evidence from India" (with Laura Alfaro) The Journal of Law and Economics. Vol. 57(4), pp. 897-936.
This paper examines the impact of the deregulation of compulsory industrial licensing in India on firm size dynamics and reallocation of resources within industries. Following deregulation, resource misallocation declines and the left-hand tail of the firm size distribution thickens significantly, suggesting increased entry by small firms. However, the dominance and growth of large incumbents remains unchallenged. Quantile regressions reveal that the distributional effects of deregulation on firm size are significantly non-linear. The reallocation of market shares toward a small number of large firms and a large number of small firms is characterized as the “shrinking middle” in Indian manufacturing. Small- and medium-sized firms may continue to face constraints in their attempts to grow.
"Two Tales of Adjustment: East Asian Lessons for European Growth" (with Peter Blair Henry) IMF Economic Review Vol. 63(1) pp. 164-196; doi:10.1057/imfer.2015.3. (Special Volume in Honor of Stanley Fischer)
Hit by the Global Financial Crisis in 2008, Europe fell into recession and Euro Zone governments implemented expansionary fiscal policy to counteract the shock. In 2010, they changed tack and pursued fiscal consolidation. East Asia was also hit by a financial crisis (1997–1998), but unlike their European counterparts, they consistently pursued expansionary to neutral fiscal policy until their economies recovered. Prior to the crisis of 2008, the average annual growth rate of the East Asian crisis countries exceeded that of the European Periphery by 4.21 percentage points. After the European pivot to fiscal consolidation, this difference widened to 7.13 percentage points. The 2.92 percentage-point increase in the difference in difference is statistically significant. Panel regressions that control for country-fixed effects, changes in exchange rates, and differences in debt-to-GDP ratios confirm that Europe’s pivot from stimulus to austerity had a negative and statistically significant impact on European growth.
"Understanding Inflation in India" (with Larry Ball and Prachi Mishra) Prepared for Brookings India Policy Forum 2015.
This paper examines the behavior of quarterly inflation in India since 1994, both headline inflation and core inflation as measured by the weighted median of price changes across industries. We explain core inflation with a Phillips curve in which the inflation rate depends on a slow-moving average of past inflation and on the deviation of output from trend. Headline inflation is more volatile than core: it fluctuates due to large changes in the relative prices of certain industries, which are largely but not exclusively industries that produce food and energy. There is some evidence that changes in headline inflation feed into expected inflation and future core inflation. Several aspects of India’s inflation process are similar to inflation in advanced economies in the 1970s and 80s.
"The Real Effects of Capital Control Taxes: Firm-Level Evidence from a Policy Experiment" (with Laura Alfaro and Fabio Kanczuk) Forthcoming Journal of International Economics. A previous version of this paper circulated under the title "The Real Effects of Capital Controls: Credit Constraints, Exporters and Firm Investment." See coverage in The Hutchins Roundup from Brookings. Read about this paper in the NBER Digest, March 2015.
Emerging-market governments adopted capital control taxes to manage the massive surge in foreign capital inflows in aftermath of the global financial crisis. Theory suggests that the imposition of capital controls can drive up the cost of capital and curb investment. This paper evaluates the effects of capital controls on firm-level stock returns and real investment using data from Brazil. On average, there is a statistically significant drop in cumulative abnormal returns consistent with an increase in the cost of capital for Brazilian firms following capital control announcements. The results suggest significant variation across firms and financial instruments. Large firms and the largest exporting firms appear less negatively affected compared to external finance-dependent firms, and capital controls on equity inflows have a more negative announcement effect on equity returns than those on debt inflows. Real investment falls in the three years following the controls. Overall, the findings have implications for macro-finance models that abstract from heterogeneity at the firm level to examine the optimality of capital control taxation.
"Corporate balance sheets in emerging markets: A comparison of the Global Crisis and the Asian Financial Crisis" with Laura Alfaro, Gonzalo Asis and Ugo Panizza. VoxEU, Center of Economic and Policy Research, June 2017.
"Understanding Inflation in India" with Laurence Ball and Prachi Mishra. VoxEU, Center of Economic and Policy Research, April 2017.
"Austerity and Recovery: East Asian Lessons for Europe," with Peter Blair Henry. VoxEU, Center of Economic and Policy Research, March 2015.
"Are capital controls effective? Firm-level evidence from Brazil," with Laura Alfaro and Fabio Kanczuk. VoxEU, Center of Economic and Policy Research, Janaury 2015.
Book Review of "Who Needs to Open the Capital Account?" by Jeanne, Subrahmanian and Williamson in Journal of International Economics , Vol. 90, pp. 232–235, 2013.
"Reforms and the Competitive Environment." Book Chapter in Indian Economic Policies, edited by Jagdish N. Bhagwati and Arvind Panagariya. Oxford University Press, forthcoming. (with Laura Alfaro)
Book Review of "Boom Bust Cycles and Financial Liberalization" Journal of Economic Literature, Vol. 45, No. 4, pp. 1024-1093, 2007.
Comments on "Capital Flows and Exchange Rate Volatility: Singapore's Experience," in NBER Volume "International Borrowing, Capital Flows and Capital Controls in Emerging Economies: Policies, Practices and Consequences," Sebastian Edwards ed., University of Chicago Press, 2007.
"The Transformation of India: Incumbent Control, Reforms and Newcomers," with Laura Alfaro. VoxEU, Center of Economic and Policy Research, December 2009.
"Technical Note on the Sustainability of India’s Current Account for the Prime Minister’s Economic Advisory Council," 2011.
"US still holds key to equities markets," Op-ed in the Financial Express, January 2010.
"How Capital Controls Work and Sometimes Don’t." NPR Marketplace, January 22nd, 2016.
"Shaky Stocks And A Global Correction." Listen to the podcast at NPR On Point with Tom Ashbrook, August 25th, 2015.
"The Global Strength of the Super Dollar." Listen to the podcast at NPR On Point with Tom Ashbrook, March 17th, 2015.
"Lessons from a forgotten crisis." Australian Financial Review, March 2014.
"India should make it easy to hire, fire workers" Rediff Business, October 2012.
"Economics Journal: Who’s Afraid of Wal-Mart?" Wall Street Journal (Blog), December 2011.
"Warning Signs Over Crony Capitalism in India" CNBC, March 2011.
"India: Writing is on the wall." Financial Times, March 2011.
"Economic Focus: Dancing Elephants" The Economist, January 2011.
"The More Things Change" Business Standard, July 2009.
July 2017: "Are Early Stage Investors Biased Against Women?" by Ewens and Townsend.
July 2017: "Interntational Spillovers and Local Credit Cycles" by Baskaya, di Giovanni, Kalemli-Ozcan and Ulu.
November 2016: "Sovereign Yields and the Risk-Taking Channel of Currency Appreciation" by Hofmann, Shim and Shin.
July 2015: "Do Access to Credit Programs Disincentivise Growth: Evidence from a Policy Experiment" by Bhue, Prabhala and Tantri.
April 2015: "Economic Outlook and Macro Economic Policies" .
January 2015: "Are Capital Controls Countercyclical?" by Fernandez-Rebucci-Uribe.
November 2014: "The International CAPM Redux" by Brusa-Ramadorai-Verdelhan.
"Gender Representation in Economics Across Topics and Time: Evidence from the NBER Summer Institute" (with Paul Goldsmith-Pinkham)
We document the representation of female economists on the conference programs at the NBER Summer Institute from 2001-2016. Over the period from 2013-2016, women made up 20.6 percent of all authors on scheduled papers. However, there was large dispersion across programs, with the share of female authors ranging from 7.3 percent to 47.7 percent. While the average share of women rose slightly from 18.5% since 2001-2004, a persistent gap between finance, macroeconomics and microeconomics subfields remains, with women consisting of 14.4 percent of authors in finance, 16.3 percent of authors in macroeconomics, and 25.9 percent of authors in microeconomics. We examine three channels potentially affecting female representation. First, using anonymized data on submissions, we show that the rate of paper acceptance for women is statistically indistinguishable to that of men. Second, we find that the share of female authors is comparable to the share of women amongst all tenure-track professors, but is ten percentage points lower than the share of women among assistant professors. Finally, within conference program, we find that when a woman organizes the program, the share of female authors and discussants is higher.
"The Costs of (sub)Sovereign Default Risk:Evidence from Puerto Rico" (with Ryan Leary and Toan Phan)
Puerto RicoÕs unique characteristics as a U.S. territory allow us to examine thechannels through which (sub)sovereign default risk can have real effects on the macroe-conomy. Post-2012, during the period of increased default probabilities, the cointe-grating relationship between real activity in Puerto Rico and the U.S. mainland breaksdown and Puerto Rico spirals into a significant decline. We exploit the cross-industryvariation in default risk exposure to identify the impact of changes in default risk onemployment. The evidence suggests that there are significantly higher employmentgrowth declines in government demand and external finance dependent industries. Anadditional real effect of default anticipation is that heightened default risk Grangercauses Puerto RicoÕs austerity measures. An event study analysis using governmentbond yields and stock returns confirms that news of increased default risk increases thecost of capital for the Puerto Rican government and for publicly traded Puerto Ricanfirms.
"Taper Tantrums: QE, its Aftermath and Emerging Market Capital Flows" (with Karlye Dilts-Stedman and Christian Lundblad)
This paper examines the impact of unconventional monetary policy (UMP) on emerging market capital flows and asset prices. We combine U.S. Treasury capital flows data with high-frequency Treasury futures data to identify monetary policy shocks. Affine term structure model estimates indicate that the shocks represent revisions in the expected path of short term interest rates and required risk compensation effects that become more pronounced in the UMP period. The data suggest that the shocks have a larger impact on asset valuations than physical flows, on equity positions and valuations relative to debt and significantly higher effects during tapering than the quantitative easing and the pre-crisis conventional monetary policy sub-periods.
"Lessons Unlearned? Corporate Debt in Emerging Markets" (with Laura Alfaro, Gonzalo Asis and Ugo Panizza)
This paper documents a set of stylized facts about leverage and financial fragility in the non-financial corporate sector in emerging markets since the Global Financial Crisis (GFC). Corporate debt vulnerability indicators prior to the Asian Financial Crisis (AFC) attributed to corporate financial roots provide a benchmark for comparison. The firm-level data suggest that emerging markets post-GFC have lower leverage ratios than the five Asian crisis countries (Asian Five) in the run-up to the AFC. However, a broader set of emerging market countries show weaker liquidity, solvency, and profitability indicators. More countries are also in the Altman Z-score's "grey zone", that is, at risk for corporate distress. Regression estimates confirm that leading up to the AFC and in the aftermath of the GFC, firms with higher leverage have Z-scores that are closer to the financial distress range. The data also corroborate two macro-related hypotheses: first, that leverage interacted with currency depreciation had a statistically significant adverse impact on Z-scores in pre-AFC; and second, that in countries with higher GDP growth leverage is correlated with less corporate financial fragility. Consistent with Gabaix (2011) the paper finds a granularity effect in that large firms are systemically important. Idiosyncratic shocks to large firms significantly correlate with GDP growth in our emerging markets sample. Also, the more-levered large firms are more vulnerable to exchange rate shocks than smaller firms with comparable levels of leverage. While this result holds for the average country in our sample, there is substantial cross-country heterogeneity.
"Does Capital Scarcity Matter?" (with Peter Blair Henry and Racha Moussa) NBER Working Paper, October 2017
This paper quantifies the welfare impact of a permanent increase in the level of per capita income brought about by a temporary increase in the growth rate of GDP per capita following capital account liberalization. In the immediate aftermath of liberalization, and under a range of assumptions, differences between the autarkic and integrated equilibrium consumption paths are large. Yet the welfare impact of these differences is small when using infinite horizon consumption streams to compute welfare gains. The results suggest that a finite horizon framework may be more appropriate and policy-relevant for evaluating the welfare consequences of economic policy changes that induce temporary growth effects but have a permanent impact on the level of per capita incomes.