Working Papers
2024
December 20, 2024
On Cross-Border Crypto Flows: Measurement Drivers and Policy Implications
Description: Cross-border crypto flows (CBCFs) are not systematically measured and are poorly understood. After defining CBCFs and the channels through which they materialize, we review the various approaches to measure them through two case studies. We also quantify the dynamics and drivers of CBCFs through a push/pull factor SVAR model. We find an increasingly large volume of CBCFs, although considerable heterogeneity remains across estimates. Furthermore, CBCFs are more sensitive to push factors than regular capital flows. Our findings call for accurate and comprehensive measurement and monitoring of CBCFs and the need to rethink capital account restrictions in a more digitalized world.
December 20, 2024
Monetary Policy and Inflation Scares
Description: A salient feature of the post-COVID inflation surge is that economic activity has remained resilient despite unfavorable supply-side developments. We develop a macroeconomic model with nonlinear price and wage Phillips curves, endogenous intrinsic indexation and an unobserved components representation of a cost-push shock that is consistent with these observations. In our model, a persistent large adverse supply shock can lead to a persistent inflation surge while output expands if the central bank follows an inflation forecast-based policy rule and thus abstains from hiking policy rates for some time as it (erroneously) expects inflationary pressures to dissipate quickly. A standard linearized formulation of our model cannot account for these observations under identical assumptions. Our nonlinear framework implies that the standard prescription of "looking through" supply shocks is a good policy for small shocks when inflation is near the central bank's target, but that such a policy may be quite risky when economic activity is strong and large shocks drive inflation well above target. Moreover, our model implies that the economic costs of "going the last mile" – i.e. a tight stance aimed at returning inflation quickly to target – can be substantial.
December 20, 2024
Industrialization and the Big Push: Theory and Evidence from South Korea
Description: We study how one-time subsidies for adoption of modern technology drove Korea's industrialization in the 1970s. Leveraging unique historical data, we provide causal evidence consistent with coordination failures: adoption improved adopters' performance and generated local spillovers, with firms more likely to adopt when other local firms had already adopted. We incorporate these findings into a quantitative model, where the potential for multiple steady states depends on parameters mapped to the causal estimates. In our calibrated model, Korea's one-time subsidies shifted its economy to a more industrialized steady state, increasing heavy manufacturing's GDP share by 8.6% and export intensity by 16.2%. Larger market access amplifies the effects of these subsidies, as the gains from adoption increase with firms' scale.
December 20, 2024
Chasing the Dream: Industry-Level Productivity Developments in Europe
Description: European countries are lagging behind in productivity growth, with significant productivity gaps across industries. In this study, we use comparable industry-level data to explore the patterns and sources of total factor productivity (TFP) growth across 28 countries in Europe over the period 1995–2020. Our empirical results highlight four main points: (i) TFP growth is driven largely by the extent to which countries are involved in scientific and technological innovation as the leader country or benefiting from stronger knowledge spillovers; (ii) the technological gap is associated with TFP growth as countries move towards the technological frontier by adopting new innovations and technologies; (iii) increased investment in information and communications technology (ICT) capital and research and development (R&D) contributes significantly to higher TFP growth; and (iv)the impact of human capital tends to be stronger when a country is closer to the technological frontier. The core findings of this study call for policy measures and structural reforms to promote innovation and facilitate the diffusion of new and existing technologies across Europe.
December 20, 2024
A Confidence-Financial Inclusion Nexus in the Caucasus and Central Asia?
Description: We document novel evidence that confidence in macrofinancial stability has a positive impact on financial inclusion in CCA countries and more broadly. This channel is particularly important for CCA countries, with confidence gains of 1 unit leading to 0.7 unit improvement in financial inclusion. Institutional factors such as level of governance and reliance on transparent policy rules and robust financial safety nets explain a large fraction of the variability in confidence in the region. We find that governance reforms are critical for deepening financial inclusion while the impact of inflation targeting, fiscal rules and deposit insurance schemes is positive and material only when governance levels exceed certain thresholds.
December 20, 2024
The Urgency of Conflict Prevention – A Macroeconomic Perspective
Description: Can macroeconomic policy effectively help prevent armed conflicts? This paper contends that two key criteria need to be satisfied: the long-term benefits of prevention policies must exceed the costs associated with uncertain forecasts, and the policies themselves must be directly able to contribute to conflict prevention. This paper proposes policy simulations, based on a novel method of Mueller et al (2024a) that integrates machine learning and dynamic optimization, to show that investing in prevention can generate huge long-run benefits. Returns to prevention policies in countries that have not suffered recently from violence range from $26 to $75 per $1 spent on prevention, and for countries with recent violence, the rate of return could be as high as $103 per $1 spent on prevention. Furthermore, an analysis of the available data and results in the literature suggest that sound macroeconomic policies and international support for these policies can play key roles in conflict prevention. Based on these findings, this paper proposes actionable recommendations, for both global and domestic policymakers as well as international financial institutions and multilateral organizations, to promote peace and stability through macroeconomic policy.
December 20, 2024
Size and Resilience of the Blue Economy in Pacific Island Economies
Description: Economic output and livelihoods in Pacific Island economies (PIEs) rely greatly on ocean-related sectors and products, known as the ”Blue Economy”. Yet, marine ecosystems are under mounting pressure of climate change and human degradation, exposing PIEs to very large risks, while they have only limited technical and financial capacity to mitigate them. This paper aims: first to estimate the size of the Blue Economy in PIEs, based on comprehensive international input-output tables; and second to simulate the impact of selected shocks in PIEs, so as to provide insights on the resilience of the Blue Economy to shocks, including from climate change.
December 16, 2024
A Bitter Aftertaste: How State Aid Affects Recipient Firms and Their Competitors in Europe
Description: Industrial policy is once again at the forefront of the policy debate around the world. However, state aid is a contentious issue in the European Union given the need to maintain a level playing in its single market. This paper estimates the effects of state aid between 2016 and 2023 on listed nonfinancial firms in Belgium, France, Germany, the Netherlands, Spain, and the United Kingdom (until 2020) using a high-frequency identification approach to address endogeneity. It finds that firms that receive state aid increase employment and revenue, but not investment or labor productivity. Moreover, it finds that there are adverse spillover effects to competing firms that significantly undo any positive own effects. These findings suggest that, should there be a case for providing state aid to firms in the European Union, this should be done at the European level instead of the member state level to mitigate adverse spillovers. Pooling resources and competitively allocating aid across the Union could preserve market competition, encourage firm entry, and ensure a more efficient distribution of funds.
December 16, 2024
Industrial Policy in Europe: A Single Market Perspective
Description: European countries are increasingly turning to industrial policy to address the challenge of geopolitical fragmentation, enhance productivity, and accelerate the green transition. Well-targeted industrial policy has the potential to correct market failures and support production efficiency by exploiting scale effects and internalizing knowledge externalities. But even the most carefully designed unilateral industrial policies risk generating negative production externalities in other countries, and, under certain conditions, may not even be welfare-enhancing for the implementing country. The reason is that negative externalities of unilateral industrial policy can drive European and international production patterns away from underlying comparative advantages, create regional or global over-supply, and result in changes in terms of trade that reduce domestic welfare. This suggests significant benefits from coordination. Structural modeling and case studies show that a coordinated approach within the European Union and with international trading partners on a narrowly defined and carefully designed set of industrial policies could unlock untapped benefits. Closer European integration would facilitate the adjustment of firms and workers to coordinated and well-targeted industrial policies and amplify their benefits.
December 13, 2024
G3MOD: A Multi-Country Global Forecasting Model
Description: This paper develops G3MOD, a semi-structural gap-trend model designed for frequent external sector forecasts crucial in macroeconomic forecasting. Focused on the G3 economies (US, Euro Area, and China) and the rest of the world, G3MOD leverages insights from central banks’ policy models, to consistently translate external forecasts such as the IMF’s World Economic Outlook into a Quarterly Projection Model format. The model offers flexible simulations and policy assessments and is structured around trade and financial linkages. G3MOD supports model-based forecasts and risk evaluations, helping central banks integrate external forecasts and scenarios into their own forecasts, thus generating timely macroeconomic projections. Its calibration ensures alignment with historical data, economic coherence, and robust predictive capability, and it has been validated against major global projection models. The complete set of codes, calibrated parameter values, and supporting programs are posted with this working paper.