Working Papers
2019
January 15, 2019
Has Higher Household Indebtedness Weakened Monetary Policy Transmission?
Description: Has monetary policy in advanced economies been less effective since the global financial crisis because of deteriorating household balance sheets? This paper examines the question using household data from the United States. It compares the responsiveness of household consumption to monetary policy shocks in the pre- and post-crisis periods, relating changes in monetary transmission to changes in household indebtedness and liquidity. The results show that the responsiveness of household consumption has diminished since the crisis. However, household balance sheets are not the culprit. Households with higher debt levels and lower shares of liquid assets are the most responsive to monetary policy, and the share of these households in the population grew. Other factors, such as economic uncertainty, appear to have played a bigger role in the decline of households’ responsiveness to monetary policy.
January 15, 2019
Fiscal Implications of Government Wage Bill Spending
Description: This paper discusses the short- and medium-term fiscal implications of government wage bill spending. Working with a sample of 137 advanced, emerging and low-income countries, we use a panel VAR approach to identify differences in the dynamic behavior of revenues, nonwage expenditures, and the overall fiscal balance in response to changes in the wage bill. We show that the interaction between wage bill changes and these three fiscal items is alike and varies overtime. Higher wage bill spending does not revert in the medium term, but the initial worsening of the fiscal balance associated with it, though it persists, eventually halves as revenues increase while non-wage spending remains broadly unchanged. We also show that countries differ in how these three fiscal variables behave following wage bill changes and seek to explain this variation by a set of country characteristics, including the level of development, access to natural resources and public indebtedness levels.
January 15, 2019
Macroeconomic Consequences of Tariffs
Description: We study the macroeconomic consequences of tariffs. We estimate impulse response functions from local projections using a panel of annual data that spans 151 countries over 1963-2014. We find that tariff increases lead, in the medium term, to economically and statistically significant declines in domestic output and productivity. Tariff increases also result in more unemployment, higher inequality, and real exchange rate appreciation, but only small effects on the trade balance. The effects on output and productivity tend to be magnified when tariffs rise during expansions, for advanced economies, and when tariffs go up, not down. Our results are robust to a large number of perturbations to our methodology, and we complement our analysis with industry-level data.
January 15, 2019
Effective Trade Costs and the Current Account: An Empirical Analysis
Description: A view receiving increased support is that the height of trade costs in prime export sectors has a strong effect on current account balances: countries specializing in sectors that face relatively high trade costs, such as services, tend to run current account deficits, and similarly, countries specializing in low trade cost sectors, such as manufacturing, tend to run current account surpluses. To test this view, we first infer comparative advantages and trade costs, by sector, within a large sample of countries for the period 1970–2014. Then we construct effective trade costs—trade costs weighted by sectoral comparative advantage—to gauge the height of a country’s overall trade costs. Results reveal that, although higher effective exporting costs are associated with lower current account balances, their impact is quantitatively limited; furthermore, the effective costs of importing often have no statistically significant effect.
January 15, 2019
Revenue Implications of Destination-Based Cash-Flow Taxation
Description: We estimate the revenue implications of a Destination Based Cash Flow Tax (DBCFT) for 80 countries. On a global average, DBCFT revenues under unchanged tax rates would remain similar to the existing corporate income tax (CIT) revenue, but with sizable redistribution of revenue across countries. Countries are more likely to gain revenue if they have trade deficits, are not reliant on the resource sector, and/or—perhaps surprisingly—are developing economies. DBCFT revenues tend to be more volatile than CIT revenues. Moreover, we consider the revenue losses resulting from spillovers in case of unilateral implementation of a DBCFT. Results suggest that these spillover effects are sizeable if the adopting country is large and globally integrated. These spillovers generate strong revenue-based incentives for many—but not all—other countries to follow the DBCFT adoption.
January 15, 2019
Public Debt Through the Ages
Description: We consider public debt from a long-term historical perspective, showing how the purposes for which governments borrow have evolved over time. Periods when debt-to-GDP ratios rose explosively as a result of wars, depressions and financial crises also have a long history. Many of these episodes resulted in debt-management problems resolved through debasements and restructurings. Less widely appreciated are successful debt consolidation episodes, instances in which governments inheriting heavy debts ran primary surpluses for long periods in order to reduce those burdens to sustainable levels. We analyze the economic and political circumstances that made these successful debt consolidation episodes possible.
January 11, 2019
Bank Profitability and Financial Stability
Description: We analyze how bank profitability impacts financial stability from both theoretical and empirical perspectives. We first develop a theoretical model of the relationship between bank profitability and financial stability by exploring the role of non-interest income and retail-oriented business models. We then conduct panel regression analysis to examine the empirical determinants of bank risks and profitability, and how the level and the source of bank profitability affect risks for 431 publicly traded banks (U.S., advanced Europe, and GSIBs) from 2004 to 2017. Results reveal that profitability is negatively associated with both a bank’s contribution to systemic risk and its idiosyncratic risk, and an over-reliance on non-interest income, wholesale funding and leverage is associated with higher risks. Low competition is associated with low idiosyncratic risk but a high contribution to systemic risk. Lastly, the problem loans ratio and the cost-to-income ratio are found to be key factors that influence bank profitability. The paper’s findings suggest that policy makers should strive to better understand the source of bank profitability, especially where there is an over-reliance on market-based non-interest income, leverage, and wholesale funding.
January 11, 2019
Countercyclical Fiscal Policy and Gender Employment: Evidence from the G-7 Countries
Description: Would countercyclical fiscal policy during recessions improve or worsen the gender employment gap? We give an answer to this question by exploring the state-dependent impact of fiscal spending shocks on employment by gender in the G-7 countries. Using the local projection method, we find that, during recessions, a positive spending shock of 1 percent of GDP would, on average, lift female employment by 1 percent, while increasing male employment by 0.6 percent. Consequently such a shock would improve the female share of employment by 0.28 percentage point during recessions. Our findings are driven by disproportionate employment changes in female-friendly industries, occupations, and part-time jobs in response to fiscal spending shocks. The analysis suggests that fiscal stimulus, particularly during recessions, could achieve the twin objectives of supporting aggregate demand and improving gender gaps.
January 11, 2019
The Impact of Bailouts on the Probability of Sovereign Debt Crises: Evidence from IMF-Supported Programs
Description: This paper studies the role of IMF-supported programs in mitigating the likelihood of subsequent sovereign defaults in borrowing countries. Using a panel of 106 developing countries from 1970 to 2016 and an entropy balancing methodology, we find that IMF-supported programs significantly reduce the likelihood of subsequent sovereign defaults. This finding is robust to different specifications of the entropy balancing and alternative identification strategies. Our results suggest that a country that signs a program with the IMF, typically experiences a slight improvement in its sovereign credit rating and a decrease in both government debt-to-GDP and fiscal deficit-to-GDP.
January 11, 2019
A Governance Dividend for Sub-Saharan Africa?
Description: Countries in Sub-Saharan Africa (SSA) tend to lag those in most other regions in terms of governance and perceptions of corruption. Weak governance undermines economic performance through various channels, including deficiencies in government functions and distortions to economic incentives. It thus stands to reason that SSA countries could strengthen their economic performance by improving governance and reducing corruption. This paper estimates that strengthening governance and mitigating corruption in the region could be associated with large growth dividends in the long run. While the process would take considerable time and effort, moving the average SSA country governance level to the global average could increase the region’s GDP per capita growth by about 1-2 percentage points.