We are delighted to announce that Liliana Varela of the LSE Department of Finance has been awarded an ERC Starting Grant for her research proposal 'A Micro to Macro Approach to International Capital Flows'.
ERC Starting Grants are open to researchers with a scientific track record showing great promise, and an excellent research proposal. Proposals are evaluated by selected international peer reviewers, who assess them on the basis of excellence as the sole criterion.
Liliana said: "I am thrilled with this unique opportunity to develop a frontier research agenda, aiming to unpack cross-border financial flows and assess their dynamics from micro to macro".
Liliana's project proposes a micro-to-macro approach to study the granular origins of international capital flows. Traditionally, research in international economics has focused on using an aggregate, macroeconomic approach to assess the dynamics of international capital flows. Under this view, capital flows and their dynamics can be traced back to aggregate shocks, as microeconomic disturbances are small and cancel out in the aggregate. Although economy-wide shocks are no doubt important, this approach has difficulty in explaining key empirical regularities and has left the literature with a number of puzzles, such that the failure of the Uncovered Interest Rate Parity and the disconnect of the exchange rate with fundamentals. This project takes on the challenge of unpacking international capital flows at the micro-level. Its starting point is the hypothesis that, if international activities are unequally distributed and dominated by a few key players, the behaviour of individual agents matters and could account for a non-negligible part of dynamics of capital flows. The proposed research will shed light on the dynamics of international capital flows, exchange rates and investors’ beliefs and, in this way, open the black box of firms’ cross-border investment decisions.
The grant is for five years, beginning in the Spring of 2022.
Letting young talent thrive in Europe and go after their most innovative ideas - this is the best investment in our future
President of the European Research Council Prof. Maria Leptin said: “Letting young talent thrive in Europe and go after their most innovative ideas - this is the best investment in our future, not least with the ever-growing competition globally. We must trust the young and their insights into what areas will be important tomorrow. So, I am thrilled to see these new ERC Starting Grant winners ready to cut new ground and set up their own teams. Some of them will be coming back from overseas, thanks to the ERC grants, to do science in Europe. We must continue to make sure Europe remains a scientific powerhouse.”
Read the ERC’s full press release.
Liliana’s grant is the second ERC grant awarded to LSE Finance faculty in this year’s funding round. Dimitri Vayanos, Professor at the LSE Finance Department and the Director of the Financial Markets Group, has been awarded an ERC Advanced Grant for his proposal 'Inefficient Capital Markets and the Macroeconomy'.
Liliana Varela is an Assistant Professor of Finance and a research fellow of the CEPR. Her work focuses on international macroeconomics and finance, and especially on what drives cross-border capital flows, how these flows affect firms and the macroeconomy, and whether they can affect financial stability and create conditions for crises.