Working Papers
2018
March 14, 2018
The Distributional Effects of Government Spending Shocks in Developing Economies
Description: We construct unanticipated government spending shocks for 103 developing countries from 1990 to 2015 and study their effects on income distribution. We find that unanticipated fiscal consolidations lead to a long-lasting increase in income inequality, while fiscal expansions lower inequality. The results are robust to several measures of income distribution and size of the fiscal shocks, to an alternative identification strategy, across expansions and recessions and across country groups (low-income countries versus emerging markets). An additional contribution of the paper is the computation of the medium-term inequality multiplier. This is on average about 1 in our sample, meaning that a cumulative decrease in government spending of 1 percent of GDP over 5 years is associated with a cumulative increase in the Gini coefficient over the same period of about 1 percentage point. The multiplier is larger for total government expenditure than for public investment and consumption (with the former having larger effect), likely due to the redistributive role of transfers. Finally, we find that (unanticipated) fiscal consolidations lead to an increase in poverty.
March 13, 2018
The Long-Run Decoupling of Emissions and Output: Evidence from the Largest Emitters
Description: For the world's 20 largest emitters, we use a simple trend/cycle decomposition to provide evidence of decoupling between greenhouse gas emissions and output in richer nations, particularly in European countries, but not yet in emerging markets. If consumption-based emissions—measures that account for countries' net emissions embodied in cross-border trade—are used, the evidence for decoupling in the richer economies gets weaker. Countries with underlying policy frameworks more supportive of renewable energy and climate change mitigation efforts tend to show greater decoupling between trend emissions and trend GDP, and for both production- and consumption-based emissions. The relationship between trend emissions and trend GDP has also become much weaker in the last two decades than in preceding decades.
March 13, 2018
The Effective Lower Bound for the Policy Rate in Euroized Economies—An Application to the Case of Albania
Description: Based on the experience of the Bank of Albania, the paper proposes a framework to estimate the interest rate lower bound in small, open, and euroized economies. The paper introduces a stylized monitoring tool to assess the unintended consequences of low policy rates. The paper is the first attempt to estimate the impact of low interest rate on the public’s demand for banknote by denomination. A strong preference for banknotes leads economic agents to require a higher remuneration of banks’ deposits, lifting the lower bound above zero. Financial euroization also lifts the lower policy bound due to the higher propensity of substituting domestic with foreign currency–denominated assets as a function of the interest rate differential. Policies aiming at reducing financial euroization contribute to bring down the lower bound.
March 13, 2018
The Distribution of Gains from Globalization
Description: We study economic globalization as a multidimensional process and investigate its effect on incomes. In a panel of 147 countries during 1970-2014, we apply a new instrumental variable, exploiting globalization’s geographically diffusive character, and find differential gains from globalization both across and within countries: Income gains are substantial for countries at early and medium stages of the globalization process, but the marginal returns diminish as globalization rises, eventually becoming insignificant. Within countries, these gains are concentrated at the top of national income distributions, resulting in rising inequality. We find that domestic policies can mitigate the adverse distributional effects of globalization.
March 13, 2018
Financial Development and Inclusion in the Caribbean
Description: Many Caribbean financial systems are relatively well developed for their size but benefits are concentrated in a small part of the population. In several large countries, the financial development levels are below what is warranted by that country’s own macroeconomic fundamentals. SMEs, in particular, remain severely credit constrained, and data to inform better analysis remains scarce. Using available data, this paper takes stock of the current state of financial development and inclusion in the Caribbean region and, based on a quantitative general equilibrium model, examines potential trade-offs between growth, inequality, and financial stability—all critical considerations when policies are designed. A case study for Jamaica is examined in detail.
March 12, 2018
Growth Accelerations and Reversals in Emerging Market and Developing Economies: The Role of External Conditions
Description: This paper investigates how country-specific external demand, external financial conditions, and terms of trade affect medium-term growth in Emerging Market and Developing Economies and the occurrence of growth accelerations and reversals. The importance of country-specific external conditions for medium-term growth has increased over time—in particular, the growing contribution of external financial conditions accounts for one-third of the increase in average income per capita growth between 1995–2004 and 2005–14. Stronger external demand and financial conditions significantly increase the probability of growth accelerations, while a strengthening of any of the three conditions significantly decreases the probability of reversals.
March 12, 2018
International Technology Sourcing and Knowledge Spillovers: Evidence from OECD Countries
Description: How much do firms benefit from foreign R&D and through what channel? We construct a global network of corporate innovation using more than 1.5 million patents granted to firms in OECD countries. We test the “international technology sourcing” hypothesis that foreign innovation activities tap into foreign R&D and improve home productivity through knowledge spillovers. We find that firms with stronger inventor presence in technology frontier countries benefit disproportionately more from their R&D. The strength of knowledge spillovers depends on the direction of technology sourcing. Knowledge externality is larger for firms in technology frontier countries than for firms in non-frontier countries.
March 9, 2018
The Global Banking Network: What is Behind the Increasing Regionalization Trend?
Description: This paper analyses the nature of the increasing regionalization process in global banking. Despite the large decline in aggregate cross-border banking lending volumes, some parts of the global banking network are currently more interlinked regionally than before the Global Financial Crisis. After developing a simple theoretical model capturing banks' internationalization decisions, our estimation shows that this regionalization trend is present even after controlling for traditional gravitational variables (e.g. distance, language, legal system, etc.), especially among lenders in EMs and non-core banking systems, such as Australia, Canada, Hong Kong, and Singapore. Moreover, this regionalization trend was present before the GFC, but it has increased since then, and it seems to be associated with regulatory variables and the opportunities created by the retrenchment of several European lenders.
March 9, 2018
Banks’ Maturity Transformation: Risk, Reward, and Policy
Description: The aim of this paper is twofold: first, to study the determinants of banks’ net interest margin with a particular focus on the role of maturity transformation, using a new measure of maturity mismatch; second, to analyse the implications for banks from the relaxation of a binding prudential limit on maturity mismatch, in place in Italy until mid-2000s. The results show that maturity transformation is a relevant driver of the net interest margin, as higher maturity transformation is typically associated with higher net interest margin. However, ‘excessive’ maturity transformation— even without leading to systemic vulnerabilities— increases banks’ interest rate risk exposure and lowers their net interest margin.
March 9, 2018
Is There a Phillips Curve? A Full Information Partial Equilibrium Approach
Description: Empirical tests of the New Keynesian Phillips Curve have provided results often inconsistent with microeconomic evidence. To overcome the pitfalls of standard estimations on aggregate data, a Full Information Partial Equilibrium approach is developed to exploit sectoral level data. A model featuring sectoral NKPCs subject to a rich set of shocks is constructed. Necessary and sufficient conditions on the structural parameters are provided to allow sectoral idiosyncratic components to be linearly extracted. Estimation biases are corrected using the model's restrictions on the partial equilibrium propagation of idiosyncratic shocks. An application to the US, Japan and the UK rejects the purely forward looking, labor cost-based NKPC.