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Latest publications

Duncan, Alfred & Nolan, Charles, 2019. "Disputes, debt and equity," Theoretical Economics, Econometric Society, vol. 14(3), September.

We show how the prospect of disputes over firms’ revenue reports promotes debt financing over equity. This is demonstrated in a costly state verification model with a risk-averse entrepreneur. The prospect of disputes encourages incentive contracts that limit penalties and avoid stochastic monitoring, even when the lender can commit to stochastic monitoring. Consequently, optimal contracts shift from equity toward standard debt. In short, when audit signals are weakly correlated with true incomes, standard debt contracts emerge as optimal; if audit signals are highly correlated with true incomes, optimal contracts resemble equity. When audit costs are sufficiently high, stochastic monitoring may be optimal. Optimal standard debt contracts under imperfect audits are shown to reproduce key empirical facts of U.S. firm borrowing.

Duncan, Alfred & Nolan, Charles, 2019. "Reform of the UK Financial Policy Committee", Scottish Journal of Political Economy, DOI:10.1111/sjpe.12228

Duncan, Alfred & Nolan, Charles, 2018. "Financial Frictions in Macroeconomic Models". Oxford Research Encyclopedia of Economics and Finance. Oxford Research Encyclopedias . Oxford University Press.

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Research

 
Disputes, debt and equity

Co-authored with Charles Nolan

Theoretical Economics (2019)

Model ingredients

  • Costly state verification, risk averse entrepreneurs, imperfect audits, full commitment audit strategies.

Main result

  • Low quality audits encourage debt financing over equity.

Financial frictions in macroeconomic models

Co-authored with Charles Nolan

Oxford research encyclopedia of economics and finance (2018)

​Abstract

In recent decades, macroeconomic researchers have looked to incorporate financial intermediaries explicitly into business-cycle models. These modeling developments have helped us to understand the role of the financial sector in the transmission of policy and external shocks into macroeconomic dynamics. They also have helped us to understand better the consequences of financial instability for the macroeconomy. Large gaps remain in our knowledge of the interactions between the financial sector and macroeconomic outcomes. Specifically, the effects of financial stability and macroprudential policies are not well understood.

Reports, blogs and press

 
Firm creation in the UK during lockdown

Co-authored with Anthony Savagar and Miguel Leon-Ledesma

National Institute Economic Review, August 2020, no 253.

Business creation is an informative measure of real economic activity. During exceptional events such as the Covid-19 pandemic, it is important to develop tools that allow us to measure in real time the effect of social distancing policies on the economy. The data available from the UK’s Companies House allows us to track new daily company incorporations. The main advantage of this data is in its near real-time nature. Here we look at the results of our analysis of new companies’ incorporations in the UK since the start of the lockdown measures up until 30 June 2020. We aim to quantify the extent of supply-side disruption caused by social-distancing measures.

How is coronavirus affecting the creation of new firms and new jobs?

Co-authored with Anthony Savagar and Miguel Leon-Ledesma, Petr Sedlacek and Petr Sedlacek

Economics Observatory, 21st Oct 2020

New business creation is a key part of any economy, notably for generating new job opportunities. The sharp decline in start-up activity in the UK during lockdown is likely to have a strongly negative impact on aggregate employment in the future, regardless of the shape of the recovery.

Press coverage

Daily Telegraph (12 May 202028 July 2020)

Percentage change in company registrations

March 23 2020 - June 30 2020 relative to the same period in 2019.

Macroprudential Objectives and Challenges

 

Co-authored with Charles Nolan

Duke Law School FinReg Blog, 29 June 2020

Microprudential regulation aims to prevent the government from being faced with a choice between spending taxpayer money to bailout an insolvent financial institution or suffering a financial and economic collapse. Banking collapses are so costly that it is difficult to resist bailouts when they happen. But the expectation of bailouts generates moral hazard, stoking leverage and risk taking. Microprudential regulation, in the form of leverage and liquidity restrictions of varying complexity, aims to limit the opportunities for bank executives, shareholders, and depositors to take advantage of expected bailouts.

Macroprudential policy, on the other hand, goes further. For macroprudential policymakers, it is not sufficient for banks not to fail during a recession: banks should remain healthy and able to lend freely to solvent businesses and households. The banking sector should not only be stable, it should not amplify macroeconomic shocks. Ultimately, macroprudential policy should ensure that conventional monetary policy, which relies on a healthy banking sector, remains effective even in crisis periods. [read more]

 

Teaching

EC3003 Principles of macroeconomics

  • Data driven module with a focus on UK business cycles.

  • The module is taught mostly by distance.

  • In-person lessons focus on data analysis and policy development exercises.

  • Example plot taken from teaching materials.

EC562 Financial economics

  • An advanced undergraduate introduction to financial economics.

  • Includes an introduction to the Julia programming language for applications in finance.

EC881 Advanced macroeconomics

  • Core PhD macroeconomics module.

  • Focuses on

    • dynamic programming,

    • solution methods, and

    • estimation methods.