Working Papers
2025
February 28, 2025
Not all Housing Cycles are Created Equal: Macroeconomic Consequences of Housing Booms
Description: This paper shows that not all housing price cycles are alike. The nature of the housing expansion phase—especially whether a housing price boom characterized by rapid and persistent house price growth is present—plays a key role in shaping the severity of the subsequent contraction, and the net macroeconomic impact over the full cycle. Analyzing 180 housing expansions across 68 countries, we classify 49 percent as housing booms, characterized by rapid and persistent real house price increases. We find that economic downturns are significantly deeper and longer when housing contractions are preceded by a housing boom. The housing contraction is more severe the more intensive the preceding housing boom, and when accompanied by a credit boom. Overall, while housing booms spur stronger economic growth during the expansion phase, their sharp reversals lead to severe housing contractions, resulting in significant net negative effects on the real economy.
February 28, 2025
Pension Reform and Stock Market Development
Description: We highlight the strong connection between developing fully-funded, individually-owned, collectively-managed, mandatory/incentivized (FICMI) pension schemes and the development of domestic stock markets. We do so by building a stylized model and complementing the analysis with cross-country empirical analysis and case studies. We also highlight the challenges of individual impatience, network externalities, and coordination failure in long-term equity investments, which are crucial for stock market development and technological innovation. We find that FICMI pension schemes—when sufficiently wide in coverage and large in size—can serve as coordination devices to support long-term equity investments. Such investments will not only promote domestic stock market development and make it easier for firms to raise long-term equity capital, therefore supporting long-term economic growth, but also enhance financial inclusion and enable more households to benefit from the overall economic development, therefore contributing to inclusive growth. Moreover, we find that the introduction of FICMI pension schemes can impact household savings in two ways: first, FICMI pension can increase household savings through “forced/incentivized” savings channel, where households save too little without FICMI pension (such as in many EMDEs); and second, FICMI pension can decrease household savings and increase household consumption by reducing non-pension savings and decreasing precautionary savings, where households save too much without FICMI pension (such as in China). In both cases, FICMI pension schemes can help move the economy closer to the optimal level of household savings, and may also help improve the structure of such savings. Finally, we discuss the enabling conditions (such as a strong political commitment to the reform and a well-designed fiscal strategy for financing the transition) and policy design for FICMI pension schemes.
February 28, 2025
Monetary Policy and Inflation Expectations: High-Frequency Evidence from Brazil
Description: We investigate the impact of high frequency monetary policy shocks in Brazil using daily data and Rigobon’ s identification via heteroskedasticity. We show that positive changes in interest rates cause inflation expectations to decline and the exchange rate to appreciate. To the best of our knowledge, this is the first paper to study how monetary policy affects inflation expectations in an emerging economy using high frequency identification techniques.
February 21, 2025
Economic Benefits from Deep Integration: 20 years after the 2004 EU Enlargement
Description: EU enlargement has stalled since the last member joined over ten years ago, marking the longest period without expansion since 1973. This elapsed time contrasts with the potential income gains membership promises. Drawing on the biggest EU enlargement in 2004 and employing a synthetic difference-in-difference estimator on regional data, we estimate that EU membership has increased per capita incomes by more than 30 percent. Capital accumulation and higher productivity contributed broadly equally, while employment effects were small. Gains were initially driven by the industrial sector and later by services. Despite substantial regional heterogeneity in gains—larger for those with better financial access and stronger integration in value chains prior to accession—all regions that joined the EU benefited. Moreover, existing members benefited too, with average income per capita around 10 percent higher. The estimated gains suggest that deep integration carries significant additional economic benefits beyond simple trade unions, providing valuable lessons for future EU enlargement and regional integration efforts elsewhere.
February 21, 2025
Understanding the Macroeconomic Effects of Natural Disasters
Description: Climate change is causing more frequent and devastating natural disasters. The goal of this paper is two-fold. First, it examines the dynamic effects of natural disasters on the growth of output and its components. Government expenditure in advanced economies (AEs) rises immediately in the same year of the natural disaster, offsetting the decline in private investment growth and thereby mitigating the negative effect on output growth. As a result, output growth in AEs is not significantly affected by natural disasters. In contrast, the increase in government expenditure in emerging markets and developing countries (EMDEs) after a natural disaster is smaller and thus, unable to mitigate the contemporaneous negative effect on output growth (which mainly reflects the fall in investment in non-small-island EMDEs and in net exports in small-island EMDEs). In addition, the output recovery in the subsequent year does not fully offset the decline during the year of the disaster. Second, this paper assesses the role of pre-existing country characteristics in mitigating the adverse impact of natural disasters. The paper finds that small islands and countries with limited pre-disaster fiscal space tend to experience more significant declines in output growth following a natural disaster.
February 21, 2025
Understanding Trade Dynamics in Sub-Saharan Africa
Description: This paper explores export and import dynamics in sub-Saharan Africa (SSA), both regionally and across various country groups. The findings underscore the significant associations that domestic demand and exports have with import changes, albeit the magnitude of these associations varies across countries. Variations in consumption and investment are highly correlated with changes in imports across the region and in nearly all country groups. Changes in exports are also associated with increased import growth, with this link being most notable in resource-intensive countries. Furthermore, an appreciation of the real effective exchange rate is correlated with reduced import growth in East African countries, while resource-intensive countries experience a less pronounced correlation. Exports, on the other hand, show a strong sensitivity to global economic cycles, reflecting the region's reliance on commodities. Finally, the correlation between exchange rates and exports exhibits considerable heterogeneity across countries.
February 21, 2025
Prometheus Unbound: What Makes Fintech Grow?
Description: The rise of financial technologies—fintech—could have transformative effects on the financial landscape, expanding the reach of services beyond the confines of geography and creating new competitive sources of finance for households and firms. But what makes fintech grow? Why do some countries have more financial innovation than others? In this paper, I use a comprehensive dataset to investigate the emergence and spread of fintech in a diverse panel of 98 countries over the period 2012–2020. This empirical analysis helps ascertain economic, demographic, technological and institutional factors that enable the development of fintech. The magnitude and statistical significance of these factors vary according to the type of fintech instrument and the level of economic development (advanced economies vs. developing countries). Finally, these findings reveal that policies and structural reforms can help promote financial innovation and cultivate fintech ventures—particularly by strengthening technological and institutional infrastructures and reducing cybersecurity threats.
February 21, 2025
Artificial Intelligence and the Philippine Labor Market: Mapping Occupational Exposure and Complementarity
Description: This paper combines labor force survey microdata with measures of occupational AI exposure and complementarity to examine the potential impact of recent advancements in AI on the Philippine labor market. We find that around one third of workers are highly exposed to AI with around sixty percent of those also rated highly complementary, indicating potential productivity gains. College-educated, young, urban, female, and well-paid workers in the services sector are most exposed. Business process outsourcing (BPO) is identified as the sector with the highest proportion of jobs at risk of displacement. Addressing regulatory gaps, infrastructure needs, and workforce reskilling is crucial to maximize benefits and mitigate negative impacts.
February 21, 2025
A New Perspective on Temperature Shocks
Description: Prevailing research suggests that climate change disproportionately burdens emerging markets and developing economies with greater output losses compared to advanced economies, positing that colder regions are less impacted than their warmer counterparts. This study revisits the empirical relationship between temperature fluctuations and real growth, with a novel focus on differentiating between transitory versus permanent temperature shifts, aligning naturally with the definitions of weather and climate change, respectively. Our findings reveal that richer and colder economies exhibit better adaptation only in response to weather shocks, whereas the pattern reverses for climate change disturbances, challenging the conclusions of previous studies.
February 14, 2025
Sandcastles and Financial Systems: A Sandpile Metaphor
Description: Social welfare costs from bank resolution, including contagion and moral hazard, are often thought to be minimized when supervisors can direct the merger of a failing bank with a sound, healthy one. However, social losses may become even larger if the absorbing institutions fail themselves. We ask whether social welfare losses are indeed lower when supervisors intervene rather than not. We use the sand pile/Abelian model as a metaphor to model financial losses which, as sand grains that fall onto a pile, eventually lead to a slide/failure. When capital in the system is insufficient to absorb the failing institution there will be welfare losses. Results suggest that, over the longer-term, social costs are lower when supervisors manage mergers. Additionally, financial networks that have a structure that minimizes social losses also minimize crises frequency. However, the bank employed resolution strategy will determine which financial network structures are associated with the minimum average loss per bankruptcy event.