 Hello, my name is Claire Jones, I'm here in Cintra with the winner of this year's Young Economist Prize, Federico Cotchen, and the chair of the judging panel, Philip Hartman. Federico, congratulations. Could you give us a summary of your paper please? Of course. Thank you very much Claire for the introduction. It's really such an honor for me to be receiving this prize. And in my paper, I revisited the role of finance for both macro and development by analyzing the role of external financing at different stages of firm life cycles. So you might ask, why should we care about the life cycle for this question? Well, in theory firms rely more on external financing early in their lives as they have not had time to accumulate internal funds and grow out of their borrowing constraints. And even though this has been like analyzing in a theoretical perspective, little do we know about how constrained young firms are and more generally how important are financial frictions at different stages of firm life cycles. So the kind of objective of this paper is to fill this gap in the literature. So I start by documenting a set of facts about the nature of external financing over a firm's lifetimes using firm level micro data of a set of 18 European countries which analyze a set of facts about the use of debt, the cost of this debt as well as the frequency and size of equity injections that turn for ship from shareholders. Then I interpret this data by using a quantitative model of firm dynamics which is going to be characterized by two key ingredients. The first key ingredient is that young firms are going to be learning about their profitability over time. A kind of intuition is that when you start a firm, you're really uncertain of whether your business is going to be profitable or not. And the second key ingredient is that firms are going to face a detailed capital structure decision to be able to capture the different sources of external financing that I observe in the data. Using this model, I find that finance does matter and the presence of these financial frictions or this lack of financing can reduce output per worker which is proportional to the wages to equilibrium wage in these economies by around 15% in high-income countries such as Germany or France and by 24% in middle-income countries such as Romania or Czech Republic. Meaning that the losses observed in middle-income countries are 60% higher than the ones observed in high-income countries. And kind of understanding the different mechanisms or channels that drive these output losses is important especially to guide policy. And kind of like the main finding of my paper is that finance matters not because of the usual channels purely explored in the literature but rather for a channel through which financial frictions start firms exit decisions. And this is going to be especially the case for young firms. Excellent. Great summary of the paper. Philip, we had some exceptional entries this year from young economists all over the world. It was whittled down to 10, some absolutely fantastic posters we saw in the foyer of the event. But what was it for you that really made Federico's paper stand out? Let me first say it was very hard choice because the 10 of you were closely together but in the end there was unanimity in the jury for choosing your paper for the price. I give you a few examples what drove the decision of the committee. So first of all at the scientific level we found that this life cycle modeling this over the whole lifetime of firms where you can distinguish the situation of firms at different points in time at different ages in an aggregate model a more open economy model was quite unique. And particularly to combine such a model with a very granular representation of the financing structure of the firms. And second we appreciated the committee appreciated the very nice blend of both theoretical and empirical work. We found both very hard and robust and well done and even integrated so that we gained a lot of trust in the results because both from the empirical side and the theoretical side they linked very nicely together. And last what should I say as a European you research European data you displayed in your analysis for example in the empirical analysis the diversity of Europe how different the different countries are that you mentioned how different the firms are across these countries and you captured all this in your and in the combination of theoretical and empirical analysis really well done Federico. Thank you very much. I heard you want to go to in a year's time or something like that come from New York to Europe to Madrid. That's right I'm very excited and you know very excited of the opportunity that next year after one year postdoc in New York I'm going to be joining Senfi in Madrid as an assistant professor so I'm really looking forward for this new opportunity to be able to interact further with economies in Madrid as well as in brother Europe to be able to continue pushing this research agenda of understanding the better the the need of access to financing for young firms and in particular in the context in the context of Europe. That's great so it sounds as though this is a research track that you'll keep on pursuing I mean we've been surrounded by policymakers of the highest caliber and academics of the highest caliber too over the past couple of days here in Central. What do you think are the big policy implications from your research? I think that kind of like the the key economic intuition of why finance matters for for the decision to exist for these young firms is because when you start the firm you're going to be very you're probably going to be uncertain of how profitable you're going to be and this is going to interact with the access to financing that you may get. For example if you want to borrow using debt you're probably will have to pay higher interest rates compared to a firm that is more certain about their fundamentals and kind of understanding these two characteristics of young firms I think it's important to to guide policy because this suggests that policy is targeted to young firms in particular facilitating being able to borrow at lower interest rates could help them to stay around in the market don't don't exit prematurely as I call them in the paper to be able to learn where this project is profitable or not. And Philip I think you had some thoughts on some of the policy implications. Yes I think I can build on what Federico just said to integrate it in the European policy context. So first of all not only in Europe we had a number of major shocks in short sequence in the last few years that will turn out to be very disruptive for corporate sectors. So the process of entry and exit of young firms and their prospects will be critical for the reallocation of resources between different firms that the most efficient firms stay in the market because small firms that still have a lot of growth potential tend to create most of the employment and now you have had all these shocks in different sectors and there is a reorganization of the of the of the corporate sector and they have been very important policies for example guaranteeing some firms for example to support some of the mechanisms here during as disruptive shock like the covid pandemic. Moreover we have some important policy projects in Europe that are meant to promote young firms and improve the capital markets the financing side indeed in in Europe and it is in fact one of the priorities in this is the so-called capital markets union which has a certain share of work regulatory reforms reforms of the organization of financial markets also for small firms for example that require private equity equity that is not traded in public markets and so we actually even the ECB has recently put out a report where we promote we make proposals how the risk capital markets the funding through for example private equity of young and innovative firms could be promoted in order to finance for example the green transition or the digital transition so when you come to Europe I'm we are looking very much forward for you to pursuing your agenda and we hope that you will tackle some of these issues and directly supporting further initiatives at that front. That is actually one of the research agendas that I will be very interested in pursuing I think that one of the interesting takeaways also of my paper is that equity financing frictions are the ones that are the most important when you compare these high and middle income countries so actually a facilitating or reducing this cost of potential equity markets I think it's particularly important both for young and small firms and I think that more broadly there are like very interesting research agenda to explore for example to better understand how the firms grow why are they if it's going from the misallocation of resources lack of financing this is a couple of interesting points that I will be very excited to pursuing and particularly working in the context of Europe it's a very exciting research agenda that I would like to explore in the future. Sounds good it sounds like we've got a lot to look forward to from you Federico thanks again Philipp thanks for all your hard work through the judging process and congratulations and enjoy your final night in Cintra. Thank you very much Claire thank you very much Philippe.