Working Papers
2024
June 28, 2024
Firms’ Response to Climate Regulations-Empirical Investigations Based on the European Emissions Trading System
Description: Using a novel cross-country dataset, which merges firm-level financials with information on firms’ participation in the European Unions’ Emissions Trading System (ETS), we investigate how firm performance is affected by tightening of environmental policies that put a price on pollution. We find that more stringent policies do not have a strong negative impact on the profitability of ETS-regulated or non-ETS firms. While firms report an increase in their input costs during periods of high carbon prices, their reported turnover is also higher. Among ETS-regulated firms which must purchase emission certificates under the EU ETS, tightening of climate policies in periods of high carbon prices results in increased investment, particularly in intangible assets. We establish robustness of our results using a quantile regression analysis, ensuring our key findings are not driven by distributional irregularities. Our findings provide support for the benefits of EU ETS on accelerating firms’ climate transition, while keeping firm-level financial costs at bay.
June 28, 2024
The Catalytic Impact of IMF Lending on Official Development Assistance
Description: This paper explores the catalytic impact of IMF lending to Low-Income Countries on Official Development Assistance (ODA) during 1990-2019. It disentangles the effect on the amounts of ODA on countries’ participation in IMF programs (“extensive margin”) and the size of the IMF-supported program (“intensive margin”). To address selection biases, we rely on the interaction of past IMF program participation and IMF liquidity as an instrument for program participation and employ the review of access limits as an instrument for the size of disbursements. We document that a one percentage point (pp) of GDP increase in IMF disbursements catalyzes additional ODA of 2.7 pp of GDP. In addition, we find that IMF disbursements catalyze ODA mostly from multilateral donors (1.3 pp of GDP) and to lesser extent from traditional bilateral donors (0.6 pp of GDP). Among multilateral donors, the strongest effect is on World Bank disbursements, followed by the EU. Finally, we document that catalytic effects on ODA have decreasing returns to large IMF disbursement amounts.
June 28, 2024
The Diagnostic Financial Accelerator
Description: We develop a model with diagnostic expectations (DE) and a financial accelerator (FA) that generates mutually reinforcing shock amplification, especially in the case of demand shocks. However, supply shocks can be dampened via a debt deflation channel, which is strengthened amid DE. Importantly, the model results in a worsening of the inflation-output volatility trade-off confronting policymakers. In contrast to most of the literature—which argues against targeting the level of asset prices—our financial accelerator model with DE suggests that targeting house price growth may result in welfare gains.
June 28, 2024
Promise (Un)kept? Fintech and Financial Inclusion
Description: The emergence of financial technologies—fintech—has become an engine of change, promising to expand access to financial services and give a boost to financial inclusion. The ownership of accounts in formal financial institutions increased from 51 percent of the world’s adult population in 2011 to 76 percent in 2021, but there is still significant variation across countries. So has the rapid growth of fintech delivered the promise of broadening financial services to the under-served populations? In this paper, I use a comprehensive dataset to investigate the relationship between fintech and financial inclusion in a panel of 84 countries over the period 2012–2020 and obtain interesting empirical insights. First, the magnitude and statistical significance of fintech on financial inclusion varies according to the type of instrument. While digital lending has a significant negative effect on financial inclusion, digital capital raising is statistically insignificant. Second, the overall impact of fintech is also statistically insignificant for the full sample, but becomes positive and statistically highly significant in developing countries. Policymakers need to develop an adequate regulatory framework that balances fostering innovation and ensuring equitable treatment of individuals and groups. This requires better financial education, strong regulatory institutions, and well-calibrated prudential regulations for a level playing field and effective supervision.
June 28, 2024
Germany’s Foreign Direct Investment in Times of Geopolitical Fragmentation
Description: Global geopolitical tensions have risen in recent years, and European energy prices have been volatile following Russia’s invasion of Ukraine. Some analysts have suggested that these shifting conditions may significantly affect FDI both to and from Germany. To shed light on this issue and other factors affecting German FDI, we leverage two detailed and complementary FDI datasets to explore recent trends in German FDI and how it is affected by geopolitical tensions and energy prices. In doing so, we also develop a new measure of geopolitical alignment. Our main findings include the following: (i) the post-pandemic recovery in Germany’s inward and outward FDI has been weaker than in the US or the rest of the European Union (EU27) as a whole; (ii) Germany’s outward FDI linkages with geopolitically distant countries have been weakening since the Global Financial Crisis; (iii) the relationship between Germany’s outward FDI and geopolitical distance has become more pronounced over the last six years; (iv) Germany’s outward FDI to China-Russia bloc countries is more sensitive to recent geopolitical developments compared with that to US-bloc countries; and (v) Germany’s outward FDI in energy-intensive sectors decreases as destination countries’ energy costs increase, but energy costs do not appear to have a statistically significant effect on outward FDI in non-energy intensive sectors.
June 21, 2024
Drivers of Post-COVID Private Consumption in the U.S.
Description: Private consumption in the U.S. has recovered swiftly from the pandemic trough and has been running above the pre-pandemic trend even as interest rates rose sharply. This paper examines the underlying drivers for this strong growth in consumption. Using both state- and household-level data, we find that excess savings from the pandemic, large increases in household wealth (especially housing), along with solid real income gains contributed to strengthening post-pandemic consumption. Compared with pre-COVID estimates, the marginal propensity to consume out of housing wealth is substantially higher, which, together with large gains in housing prices, made the wealth effect a key driver for post-pandemic consumption growth.
June 21, 2024
Escaping the Financial Dollarization Trap: The Role of Foreign Exchange Intervention
Description: Financial dollarization is considered a source of macroeconomic instability in many emerging economies. Dollarization constrains the ability of central banks to stimulate output during economic downturns. In contrast to the conventional monetary transmission mechanism, a monetary policy loosening in a dollarized economy leads to a currency depreciation, adverse balance sheet effects, and a contraction in investment and output growth. In this paper we evaluate the role of foreign exchange reserves in facilitating macroeconomic stabilization in a financially dollarized economy. We first show empirically that foreign exchange intervention in response to capital outflows can largely reduce the volatility of output and the real exchange rate in dollarized economies. We then develop a small open economy model with foreign currency debt and balance sheets effects. Our quantitative model shows that an active foreign exchange intervention policy is sufficient for offsetting the output volatility associated with financial dollarization. These results can explain the prevalence of low macroeconomic volatility in some dollarized economies (Christiano et al., 2021) and they highlight the role of foreign exchange reserves in reducing the welfare costs of dollarization.
June 21, 2024
Green Fiscal Rules? Challenges and Policy Alternatives
Description: This paper studies the impact of green fiscal rules – designed to protect climate-related spending –on debt dynamics. Simulations of green rules that exempt green spending from the rule limits for an emergingmarket economy illustrate that they can lead to unsustainable debt dynamics when the net zero emissions goal is pursued mostly using spending-based instruments (e.g., investment and subsidies). Or the rule would need to implicitly assume a large fiscal adjustment in the non-green budget, which would undermine its credibility. It will be needed to build broad public consensus for a more comprehensive fiscal strategy that tackles the difficult policy tradeoffs that will be required and takes into account long-term effects. A more appropriate mix of climate policies, including actively employing carbon pricing, should be pursued within the overall setting of fiscal and debt objectives. Developing ‘green’ medium-term fiscal frameworks would help to integrate climate change considerations into fiscal policy design in a more comprehensive manner.
June 21, 2024
Post-pandemic Productivity Dynamics in the United States
Description: We study U.S. labor productivity growth and its drivers since the COVID-19 pandemic. Labor productivity experienced large swings since 2020, due to both compositional and within-industry effects, but has since returned to its pre-pandemic trend. Industry-level panel regressions show that measures of labor market churn are associated with higher productivity growth both in the cross-section and over time. Sectors with higher investment in digitalization, particularly in teleworkable industries, also experience higher productivity growth on average. There has also been an increase in business formation since the pandemic, but its impact on productivity dynamics will likely need more time to be reflected in the data.
June 21, 2024
A Conceptual Policy Framework for Leveraging Digitalization to Support Diversification in Sub-Saharan Africa
Description: The need for Sub-Saharan African (SSA) countries to diversify their economies is more urgent than ever. However, despite its established economic benefits, several challenges have precluded diversification in SSA. Against this backdrop, interesting initiatives to further adopt digital technologies, particularly during the COVID-19 pandemic, suggest that digitalization is a promising avenue to overcome barriers to diversification. Fast-paced advances in the diffusion of digital technologies and knowledge have the potential to transform SSA economies through several channels. By connecting people and facilitating the rapid diffusion of information, digitalization also promises to reshape the industrial structure of activities in new and unprecedented ways. Therefore, digitalization has the potential to promote diversification and growth in SSA by acting both as an enabler and driver of economic activities, helping support resilience. Yet, while the empirical literature on SSA suggests that digitalization can provide new opportunities for growth, employment, productivity, and inclusion, the impact on diversification has not been studied. This paper aims to fill this important gap in the literature. It also aims to strengthen IMF engagement with SSA policy makers by providing a conceptual policy framework, encompassing both horizontal and sectoral policies, on how to leverage digitalization to support diversification and boost resilience in a post-COVID world.