Q&A with Pablo D'Erasmo

Q: Where did you grow up?

PD: In Ramos Mejia, a suburb of Buenos Aires in Argentina.

Q: What did your parents do for a living?

PD: My mom was an elementary school teacher. My dad owned a small truck company. He retired three years ago.

Q: How did your father's experiences running a business shape your interest in economics?

PD: I spent a lot of my time with my dad at work. In fact, my first job was part-time in his company. We often talked about his business. Argentina is a difficult place to own a business. Financing is hard to obtain. You have to navigate the ups and downs of the exchange rate, inflation, and economic activity. So, those discussions with my dad about the economy and how it affected his business influenced my decision to go into economics. The frequent crises are the reason why there are so many economists from Argentina. You want to understand what's going on.

Q: Tell me more about these crises.

PD: When I was about to finish elementary school in 1989, Argentina went through a hyperinflation, a period where the annual inflation rate was at times above 3,000 percent. Prices rose at a speed that you couldn't comprehend. Stores stopped listing prices. During high school, Argentina went through a transformation. Inflation was back to low levels and the government sold off a lot of state-owned companies - the telephone company, most of the utilities - to the private sector, and the unemployment rate increased. It was another great period for economic analysis. Right after I finished college, Argentina went into a sovereign debt crisis and the government restricted cash withdrawals from bank accounts. This led to the collapse of the exchange rate regime and a large devaluation. Once you get to college, you quickly learn that one or two macroeconomics classes won't teach you enough to understand these crises. That's why I started to think about getting a master's degree and then a doctorate.

Q: Your latest article for Economic Insights is about bank lending to nonbank financial institutions, or NBFIs, here in the United States. How does the NBFI sector in the United States compare with the NBFI sector in Argentina?

PD: In Argentina, banks dominate the financial sector. NBFIs play a much smaller role. Banks offer limited credit to households or firms, and the reach of NBFIs is modest at best. Government bonds and real estate are the main domestic investment alternatives. Providing credit is a risky business in Argentina. Lending in pesos exposes financial institutions to fluctuations in the inflation rate. Last year the inflation rate in Argentina was close to 31 percent. That was the lowest in seven years but still 10 times the annual inflation rate in the United States. Lending in a foreign currency - say, in dollars - exposes financial institutions to exchange rate fluctuations. There are some alternatives to this, but the financial sector in Argentina has not been able to provide a solution. Banks and NBFIs extend only short-term credit, and options are very limited for maturities beyond a year or two. History tells us that it's very hard to predict what's going to happen in the long term in Argentina. So, it's almost impossible for companies or households to borrow at a reasonable rate.

Q: What role does the government play in discouraging banks and NBFIs from providing liquidity? What could a government do differently?

PD: The government is a key player affecting macroeconomic conditions and making sure rules are clear and stable. If the government in a country like Argentina, where domestic capital markets are small, runs a large deficit and loses access to external capital markets, the central bank will ultimately need to finance those expenses. So, you have a central bank printing money, as we would say, and that leads to inflation. Meanwhile, an external shock can easily increase the volatility of the exchange rate, and fluctuations in the exchange rate also affect the provision of credit. Normally, a lender can use foreign currency as a hedge against domestic inflation, but if you are an Argentine lender, large devaluations in your own currency make it hard for firms that are selling in pesos to repay their loans to you. So, the government is key for determining macroeconomic conditions and thus the state of the financial sector and access to credit.

Q: In Part II of your article, you write "a heterogeneous mix of specialized and diversified banks should create a more resilient financial system, with risk distributed across both industry and institution types." This finding logically should apply to any lending that banks do, not just lending to NBFIs. How does lending to all nonfinancial institutions compare with lending to NBFIs?

PD: Banks that specialize in a particular NBFI sector tend to have a smaller loan-to-asset ratio and smaller ratio of NBFI loans to total loans, which means they are less specialized in the aggregate. But there is also evidence that shows that, when they lend to nonfinancial firms, banks tend to specialize as well. We haven't studied whether the banks that specialize in lending to NBFIs also specialize in their lending to nonfinancials. That's something interesting to look at in a future article.