Working Papers
2025
April 11, 2025
Shifting Advantages: Do Subsidies Shape Cross-Border Investment?
Description: Industrial policies have been on the rise with subsidies provided to firms accounting for the lion’s share of interventions. The effects of these measures on productivity, trade, investment and other economic and non-economic variables are largely an open question. This paper examines empirically the link between subsidies and inward cross-border investment using data on greenfield investments across a large sample of advanced and emerging economies between 2010 and 2020. Employing a difference-in-difference approach, we find that—while the average effect of all subsidies is zero—financial subsidies, such as loans and loan guarantees, increase new cross-border investment projects by an average of 7%. These effects are primarily driven by capital-intensive sectors in capital-abundant countries, suggesting that subsidies can affect foreign direct investment—but they reinforce (rather than reshape) countries’ comparative advantage.
April 11, 2025
Inflation Targeting and the Legacy of High Inflation
Description: As inflation targeting (IT) turns 35, it has become a key institutional monetary framework by central banks. Yet, this paper shows that stark differences exist among inflation targeting countries in the conduct of monetary policy. Behind such heterogeneity, the legacy of a high inflation history appears as a preponderant factor. We propose a model that diverges from existing IT workhorse models by adding path-dependence (to a forward-looking model) and potentially imperfect central bank credibility. We show that achieving low inflation (hitting the target) requires more aggressive monetary policy, and is costlier from an output point of view, when individuals’ past inflationary experiences shape their inflation expectation formation. In turn, we provide empirical evidence of the need for these two theoretical additions. Countries that experienced a high level of inflation before adopting the IT regime tend to respond more aggressively to deviations of inflation expectations from the central bank’s target. We also point to the existence of a credibility puzzle, whereby the strength of a central bank’s monetary policy response to deviations from the inflation target remains broadly unchanged even as central banks gain credibility over time. Put differently, a country’s inflationary past casts a long and persistent shadow on central banks.
April 11, 2025
K Wasn’t Built in a Day
Description: Physical capital takes time to build. Yet, the measurement of time to build and of its response to firm behavior remain scant. We fill this gap using project-level data from India. We document new facts on cross-sectional heterogeneity in time to build; and exploit quasi-experimental variation in credit supply to establish that firms accelerate ongoing projects and start fewer new projects when credit dries up. We rationalize our findings with a novel model of endogenous time to build. A credit crunch increases firm appetite for immediate relative to delayed cash flows. Firms then accelerate projects closer to completion and postpone unbegun projects. Such a mechanism is borne out in the data: projects proxied to be more mature are sped up the most. We quantify our model to match our causal estimates, and the joint distribution of project costs and gestation lags. Endogenous time to build generates endogenous amplification and state-dependence of investment on the distribution of projects along completion stages. Endogenous time to build is policy relevant. Contractionary monetary policy faces headwinds when the distribution of projects skews towards mature projects. Tax policy, in turn, can flexibly reshuffle investment expenditures over time with tax credits.
April 11, 2025
IMF-ENV: Integrating Climate, Energy, and Trade Policies in a General Equilibrium Framework
Description: IMF-ENV is a global dynamic computable general equilibrium (CGE) model developed by the IMF's Research Department. The model features a database of 160 countries and regions, along with 76 sectors, and can be calibrated to a wide range of country-sector combinations. The model's general equilibrium structure, combined with its high level of detail, enables it to assess both direct and indirect domestic structural changes and cross-border spillover effects of policies. This makes it suitable for examining the medium- and long-term macroeconomic effects as well as structural shifts arising from national and/or global climate mitigation, energy, fiscal and trade policies. The model reports impact on macroeconomic variables, sectoral outcomes, employment and bilateral trade flows, along with detailed information for energy demand and supply, electricity generation and GHG emissions.
April 11, 2025
The Global Impact of AI: Mind the Gap
Description: This paper examines the uneven global impact of AI, highlighting how its effects will be a function of (i) countries’ sectoral exposure to AI, (ii) their preparedness to integrate these technologies into their economies, and (iii) their access to essential data and technologies. We feed these three aspects into a multi-sector dynamic general equilibrium model of the global economy and show that AI will exacerbate cross-country income inequality, disproportionately benefiting advanced economies. Indeed, the estimated growth impact in advanced economies could be more than double that in low-income countries. While improvements in AI preparedness and access can mitigate these disparities, they are unlikely to fully offset them. Moreover, the AI-driven productivity gains could reduce the traditional role of exchange rate adjustments due to AI’s large impact in the non-tradable sector—a mechanism akin to an inverse Balassa-Samuelson effect.
April 11, 2025
“Checking the Receipts” Audits of Emergency Finance
Description: This paper explores one dimension of the IMF’s COVID response – support for conducting and publishing independent audits of COVID-related spending. The economic impact of COVID was felt across the globe and created stresses on the balance of payments of member countries. Many members turned to the IMF for emergency financing . The IMF Managing Director urged member countries to “do what it takes but keep the receipts.” In line with this guidance, the majority of IMF emergency financing included commitments by members to put in place transparency and accountability measures. In 56 member countries, Fund financing included commitments for SAIs to audit spending related to the response to COVID. SAI audit reports were ultimately published in 50 member countries. This paper examines how these commitments were implemented, and the broader lessons which can be derived.
April 11, 2025
A New GCC Fiscal Era – A Look at the Macro and Firm-Level Impact of Tax Reforms
Description: In 2014, the collapse of global oil prices and the resulting increase in fiscal deficits and debt triggered a wave of spending cuts, tax policy and subsidy reforms. The introduction of excises and VAT, broadening of CIT, and subsidy reform have changed the GCC fiscal landscape. Little is known on how those recent changes have been impacting the economy. This paper first highlights the fiscal history and current fiscal landscape across the GCC. It then utilizes both macroeconomic and firm-level financial data to analyze the impact of tax policy reforms on economic and firm-level outcomes using panel data techniques. The paper finds that the different reforms have had a minor impact on GDP growth, inflation, and other economic variables, while the impact on firms is more nuanced. VAT is not found to impact firm financials, suggesting well-functioning VAT refund systems. Changes to CIT, however, have some impact especially on smaller companies, while the impact of excises depends on analyzed subgroups. The emerging picture suggests that tax policy reforms have had an overall rather small impact on the GCC economies, but care should be taken in exact policy design.
April 11, 2025
Do ESG Considerations Matter for Emerging Market Sovereign Spreads?
Description: This paper aims to investigate the determinants of sovereign spreads for a panel of 79 emerging markets and development economies (EMDEs) over the period 2001-2021, with a particular focus on the role of Environmental, Social, and Governance (ESG) factors. Using panel fixed-effect regressions, our results show that improvements in ESG factors tend to reduce sovereign spreads, alongside domestic variables capturing growth, fiscal and external balances, and global factors such as U.S. interest rates and changes in global risk sentiment. In particular, we find that governance is a key factor in explaining movements in sovereign spreads, including perceptions of government effectiveness, regulatory quality, and the control of corruption. Social and environmental aspects, proxied by population purchasing power and greenhouse gas emissions, respectively, also play significant roles. Our contribution to the literature is threefold: first, we confirm the results of previous papers on the relevance of ESG in explaining emerging market spread movements; second, we delve deeper by unpacking the elements that matter most within ESG factors; and third, we construct an aggregate ESG indicator using principal components analysis to summarize its overall impact.
April 11, 2025
Firm Financing During Sudden Stops: Can Governments Substitute Markets?
Description: We analyze whether central bank credit lines and government-backed guarantees helped mitigate the impact of the pandemic's sudden stop, marked by the abrupt withdrawal of international capital, using administrative data on the universe of Chilean firms. Our regression discontinuity design reveals that eligible firms increased domestic borrowing at lower costs. These policies reduced the cost of domestic debt compared to foreign debt, easing access to capital. An open economy model explains the complementarity of both interventions--credit lines and guarantees--in relaxing collateral constraints, reducing financial intermediaries' risk aversion and boosting domestic credit supply amidst shrinking international flows.
April 4, 2025
Micro-Evidence on the Consumption Impact of Income-Support Policies During COVID-19
Description: Income-support policies can boost consumption during a catastrophic episode like the COVID-19 pandemic. Using data on Chilean municipalities, we investigate the impact on private consumption of income-support policies, such as lump-sum transfers and withdrawals of funds from the contributors’ mandatory pension accounts. We find that both emergency income and pension withdrawals had statistically significant effects with an estimated average marginal propensity to consume of about 20 percent. Consumption of durable goods is more sensitive to these policies than other goods, especially in the programs’ initial stages. Higher educational attainment and financial leverage, proxying better access to bank credit, are associated with weaker consumption reaction across municipalities.