Working Papers

Incorporation, Selection and Firm Dynamics: A Quantitative Exploration


This paper studies how incorporation, which provides limited liability to firm owners, affects firm dynamics and macroeconomy. I propose an endogenous growth model of firm dynamics with endogenous entry and exit, where firms spend resources to improve their productivity and choose whether to incorporate or not. Incorporation provides liability protection which ensures that firm value is bounded from below, at the expense of high set-up and maintaining cost. An important model feature is that firms have heterogeneous (high and low) types which differ in their capacity to improve productivity. This heterogeneity allows for the possibility of selection as high-type firms, who have higher growth potential, benefit more from incorporation. I calibrate the model by using Danish firm-level data, specifically exploiting the heterogeneity in exit rates by age conditional on size to identify firm types in growth potential and therefore selection. The quantitative results suggest that both treatment and selection effects of incorporation are important and accounting for firm heterogeneity is quantitatively relevant in explaining the observed better performance of incorporated firms. I find significant welfare gains from subsidizing incorporated firms and large welfare losses from removing incorporation choice. These welfare results are largely driven by the change in the degree of selection, i.e. the change in the composition of firm types.
Technology Adoption and the Latin American TFP Gap
Draft available upon request

We develop a novel methodology to study the dynamics of technology adoption across countries. We identify changes in “technology” as changes in the productivity of the frontier country that have a lagged effect on the productivity of the adopting country. A simple calibration illustrates how the results of the analysis can be used to estimate the differentials in TFP and TFP growth that are attributable to technology. We illustrate our methodology by studying the adoption process between Latin America and the Caribbean (LAC) countries and the US. Our analysis suggests an 8 year adoption lag, after which technologies are fully or nearly-fully adopted; this estimate suggests that technology can account for a productivity gap of 4-10% (provided that there is full adoption in the long-run), and a TFP growth differential between 0-0.5%. We illustrate that our estimates are consistent both with the timing of the IT revolution, and with cross-country patent citation data. Finally, we provide a simple theory about the potential determinants of the measured adoption lags which highlights a possible link between the static wedges and technology adoption decisions.


Lack of Selection and Limits to Delegation: Firm Dynamics in Developing Countries
American Economic Review, 2021, 111(1): 231–275

Paper Online Appendix NBER WP Replication Files

Delegating managerial tasks is essential for firm growth. Most firms in developing countries, however, do not hire outside managers but instead rely on family members. In this paper, we ask if this lack of managerial delegation can explain why firms in poor countries are small and whether it has important aggregate consequences. We construct a model of firm growth where entrepreneurs have a fixed time endowment to run their daily operations. As firms grow large, the need to hire outside managers increases. Firms’ willingness to expand therefore depends on the ease with which delegation can take place. We calibrate the model to plant-level data from the U.S. and India. We identify the key parameters of our theory by targeting the experimental evidence on the effect of managerial practices on firm performance from Bloom et al. (2013). We find that inefficiencies in the delegation environment account for 11% of the income per capita difference between the U.S. and India. They also contribute to the small size of Indian producers, but would cause substantially more harm for U.S. firms. The reason is that U.S. firms are larger on average and managerial delegation is especially valuable for large firms, thus making delegation efficiency and other factors affecting firm growth complements.
Innovation, Reallocation and Growth
American Economic Review, 2018, 108(11): 3450-91

Paper Online Appendix Replication Files

We build a model of firm-level innovation, productivity growth and reallocation featuring endogenous entry and exit. A new and central economic force is the selection between high- and low-type firms, which differ in terms of their innovative capacity. We estimate the parameters of the model using US Census micro data on firm-level output, R&D and patenting. The model provides a good fit to the dynamics of firm entry and exit, output and R&D. Taxing the continued operation of incumbents can lead to sizable gains (of the order of 1.4% improvement in welfare) by encouraging exit of less productive firms and freeing up skilled labor to be used for R&D by high-type incumbents. Subsidies to the R&D of incumbents do not achieve this objective because they encourage the survival and expansion of low-type firms.
Estimating Optimal Hodrick-Prescott Filter Smoothing Parameter for Turkey
Iktisat Isletme ve Finans, 2011, 26 (306).

Paper (in Turkish)

This study aims at estimating the optimal smoothing parameter for Hodrick-Prescott filter for Turkey using 1987-2007 quarterly real Gross Domestic Product (GDP) data. Two alternative methods, proposed by Pedersen (2001) and Dermoune et al (2008) are used for estimation which gives the values for the HP Filter smoothing parameter for Turkey as 98 and 19, respectively. Using these estimates, we find that (1) estimated trend component of Turkish GDP is very volatile, which is in line with the conjectures of Aguiar and Gopinath (2007) for emerging market countries (2) absolute volatilities for the cyclical variations in GDP and its components are smaller compared to 1600 (3) our estimates give similar results with the frequently used smoothing parameter value in terms of relative volatility of components of GDP with respect to volatility of GDP.
Measuring market based monetary policy expectations in Turkey
Iktisat Isletme ve Finans, 2010, 25 (295)

PDF (in Turkish w/ Extensive Summary in English)

This paper compares the ability of different market instruments in terms of predicting monetary policy decisions to nd out which one best captures market participants’ policy expectations. Towards this end, policy rate expectations implied by various market instruments and different approaches are derived for the period between July 2006 and October 2009. Empirical results show that market based monetary policy expectations in Turkey can most successfully be obtained by using the one week Turkish Lira Interbank Bid Rate (TRLIBID).
Transmission of Monetary Policy in Turkey: The Effects of Monetary Policy on Financial Markets
Iktisat Isletme ve Finans, 2009, 24 (278)

Paper (in Turkish)

In this paper, the effects of Central Bank of Turkey’s interest rate decisions on relatively longer-term interest rates in financial markets and risk premia as well as on returns of the ISE-100, ISE-Financial indexes and exchange rates are studied by separating the anticipated component of monetary policy from that unexpected by financial markets. The results show that policy rate changes have significant effects on financial markets, especially on bond yields. Equity returns are not significantly driven by monetary policy surprises, whereas the responses of exchange rates are small. Thus, it appears that the transmission of monetary policy in Turkey is mainly through its effects on longer-term interest rates.

Old Working Papers

The Role of Monetary Policy in Turkey During the Global Financial Crisis
Braude, Jacob, et al., editors. The Great Recession: Lessons for Central Bankers. MIT Press, 2013.

Book Chapter Working Paper

Turkey is an interesting case study because it was one of the hardest hit emerging economies by the global financial crisis, with a year-over-year contraction of 15 percent during the first quarter of 2009. At the same time, anticipating the fallout from the crisis, the Central Bank of the Republic of Turkey (CBRT) decreased policy rates by an astounding 1025 basis points over the November 2008 to November 2009 period. In this context, this paper addresses the following broad question: If an inflation targeting framework underpinned by a flexible exchange rate regime was not adopted, how much deeper would the recent recession have been? Counterfactual experiments based on an estimated structural model, which, along with standard nominal and real rigidities, includes a financial accelerator mechanism in an open-economy framework, provide quantitative evidence which suggests that the recession would have been substantially more severe. In other words, the interest rate cuts implemented by the CBRT and exchange rate flexibility both helped substantially soften the impact of the global financial crisis.
Monetary Policy and Output Gap : Mind the Composition
CBT Research Notes in Economics, 2013


We estimate an output gap measure for Turkey in a Bayesian framework with special reference to its components. Our results suggest that Turkey experienced a notable divergence between domestic and external demand with no sign of overheating for the whole economy in the post-Lehman crisis period. This finding confirms the basis for the new policy framework of the Central Bank of Turkey (CBT), which was characterized by rapid credit expansion and growing current account deficit without significant inflationary pressures. Under these circumstances, conventional monetary policy practice focusing solely on aggregate output gap may suggest policy prescriptions inconsistent with financial stability. In this regard, extracting the components of output gap would help policymakers make a suitable policy design to avoid any contradiction among objectives.
Stylized Facts for Business Cycles in Turkey
Working Papers, 2012, Central Bank of Turkey


This study documents the stylized facts about the business cycles in Turkey using quarterly data between 1987 and 2009. In particular, we document the business cycle turning points and average duration of cycles for Turkey, as well as the optimal smoothing parameter for Hodrick-Prescott (HP) filter estimated in line with our estimate of average business cycle duration for 1987-2009 period, 20 quarters, which is shorter compared to developed countries, and comparable to other developing countries. For filtering procedure, we use this estimated parameter, in addition to 1600, in HP filter and compare our findings. We find that business cycle relationships between macroeconomic variables in Turkey are mostly in accordance with the patterns observed for developing countries, which significantly differ from developed countries’ business cycle facts. In particular, the real side of the economy is characterized by high volatility of consumption and a countercyclical pattern for net exports. Other important findings are that financial variables such as credit or sovereign spreads are very volatile and strongly correlated with output. In addition, the results show that the properties of the relationship between economic activity, prices and the interest rates differs between pre-2001 and post-2001 period, whereas the relationship among the real variables shows a smaller change between these periods.
Did Korean Monetary Policy Help Soften the Impact of the Global Financial Crisis of 2008-2009?
IMF Working, Papers 2012, 12-5


Korea was one of the Asian economies hardest hit by the global financial crisis. Anticipating the downturn that would follow the episode of extreme financial stress, the Bank of Korea (BOK) let the exchange rate depreciate as capital flowed out, and preemptively cut the policy rate by 325 basis points. But did it work? This paper seeks a quantitative answer to the following question: Were it not for an inflation targeting framework underpinned by a flexible exchange rate regime, how much deeper would the recession have been? Taking the most intense year of the crisis as our baseline (2008:Q4-2009:Q3), counterfactual simulations indicate that rather the actual outcome of a -2.1 percent contraction, the outturn would have been -2.9 percent if the BOK had not implemented countercyclical and discretionary interest rate cuts. Furthermore, had a fixed exchange rate regime been in place, simulations indicate that output would have contracted by -7.5 percent over the same four-quarter period. In other words, exchange rate flexibility and the interest rate cuts implemented by the BOK helped substantially soften the impact of the global financial crisis on the Korean economy.
Shock Therapy! What Role for Thai Monetary Policy?
IMF Working Papers, 2012, 12-269


Thailand had to endure three major shocks during 2008–2011: the global financial crisis, the Japanese earthquake, and the Thai floods of 2011. Over this period, consistent with its inflation targeting framework, the Bank of Thailand (BOT) let the exchange rate depreciate and cut interest rates (to, for example, a historically low level of 1¼ percent by mid-2009). This paper seeks to uncover the role of monetary policy in softening the impact of these shocks. Specifically, it seeks to address the following question: if an inflation targeting framework underpinned by a flexible exchange rate regime had not been in place, how would the economic contractions associated with these shocks have differed? Counterfactual simulations based on an estimated structural model indicate that countercyclical monetary policy and exchange rate flexibility added up to a total of 4 percentage points to real GDP growth during periods when Thailand had to weather these three major shocks.