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Matthew Ferranti (Harvard) "Hedging Sanctions Risk: Cryptocurrency in Central Bank Reserves"
I demonstrate that the risk of financial sanctions by fiat reserve currency issuers can motivate ex-ante shifts in international reserve holdings, because countries facing a higher risk of US sanctions increased the gold share of their reserves from 2016 to 2021 moreso than countries facing a lower risk of US sanctions. Then, I describe a dynamic Bayesian copula model to simulate the joint returns of Bitcoin and other reserve assets, using an informative prior to adjust the expected returns but preserve the historical volatility. Under mean-variance preferences, a modest risk of financial sanctions can significantly increase optimal gold and Bitcoin allocations, suggesting that gold and Bitcoin are imperfect substitutes. The risk of financial sanctions may diminish the appeal of US Treasuries, propel broader diversification in central bank reserves, and bolster the long-run fundamental value of cryptocurrency.
Namrata Narain (Harvard) "The Role of American Investors in Directing Global Innovation"
Entrepreneurial ability to finance risky innovation is a key input into economic growth. Since the late 1990s, U.S.-based venture capital investors have been a large source of such risky funds available to entrepreneurs in countries across the globe. In India and China in particular, U.S.-based investors are credited for their key role in the development of these countries' modern technology sectors. In this paper, I document the rise of venture capital investments from U.S. investors into India and China since early 2000s. I estimate the causal effect of U.S. venture capital investors on the sectoral allocation of innovation by exploiting the sudden redirection of U.S. funds from China to India after 2018 caused in part by geo-political tensions between China and the U.S. I find that the largest reallocation of funds occurred within the group of U.S. venture capitalists that were investing in both India and China on the eve of the geopolitical tensions and detect a strong response of Indian investors in response to the U.S. capital influx. I provide preliminary evidence on direct cross-border sharing of knowledge using patent citation data.