Working Papers
2024
March 29, 2024
Trade in Low Carbon Technologies: The Role of Climate and Trade Policies
Description: Curbing carbon emissions to meet the targets set in the Paris Agreement requires the deployment of low carbon technologies (LCTs) at a global scale. This paper assesses the role of climate and trade policies in fostering LCT diffusion through trade. Leveraging a comprehensive database of climate policies and a new database identifying trade in low carbon technologies and the tariffs applied to these goods, this paper shows that the introduction of new climate policies has a positive and significant impact on LCT imports. Zooming into specific climate policies, the paper finds that, except for non-binding ones, all climate policies stimulate LCT imports. The paper also highlights the role of trade policies as an engine of LCT diffusion—reductions in tariffs applied on LCT goods have a sizeable impact on LCT imports. On the flip side, results suggest that more protectionist measures would impede the spread of low-carbon technologies.
March 29, 2024
Central Bank Exit Strategies Domestic Transmission and International Spillovers
Description: We study alternative approaches to the withdrawal of prolonged unconventional monetary stimulus (“exit strategies”) by central banks in large, advanced economies. We first show empirically that large-scale asset purchases affect the exchange rate and domestic and foreign term premiums more strongly than conventional short-term policy rate changes when normalizing by the effects on domestic GDP. We then build a two-country New Keynesian model that features segmented bond markets, cognitive discounting and strategic complementarities in price setting that is consistent with these findings. The model implies that quantitative easing (QE) is the only effective way to provide monetary stimulus when policy rates are persistently constrained by the effective lower bound, and that QE is likely to have larger domestic output effects than quantitative tightening (QT). We demonstrate that “exit strategies” by large advanced economies that rely heavily on QT can trigger sizeable inflation-output tradeoffs in foreign recipient economies through the exchange rate and term premium channels. We also show that these tradeoffs are likely to be stronger in emerging market economies, especially those with fixed exchange rates.
March 29, 2024
The Riskiness of Credit Origins and Downside Risks to Economic Activity
Description: We construct a country-level indicator capturing the extent to which aggregate bank credit growth originates from banks with a relatively riskier profile, which we label the Riskiness of Credit Origins (RCO). Using bank-level data from 42 countries over more than two decades, we document that RCO variations over time are a feature of the credit cycle. RCO also robustly predicts downside risks to GDP growth even after controlling for aggregate bank credit growth and financial conditions, among other determinants. RCO’s explanatory power comes from its relationship with asset quality, investor and banking sector sentiment, as well as future banking sector resilience. Our findings underscore the importance of bank heterogeneity for theories of the credit cycle and financial stability policy.
March 22, 2024
Cross-Border Impacts of Climate Policy Packages in North America
Description: We quantify cross-border effects of the recent climate mitigation policies introduced in Canada and the U.S., using the global general equilibrium model IMF-ENV. Notably, with the substantial emission reductions from Canada’s carbon tax-led mitigation policies and the U.S.’ Inflation Reduction Act, these two countries would bridge two-thirds of the gap toward their Nationally Determined Contribution (NDC) goals. While the broadly divergent policies are believed to elicit competitiveness concerns, we find the aggregate cross-border effects within North America to be very limited and restricted to the energy intensive and trade exposed industries. Potential carbon leakages are also found to be negligible. A more meaningful difference triggered by policy heterogeneity is rather domestic, especially with U.S. subsidies increasing energy output while the Canada model with a carbon tax would marginally decrease it. This analysis is complemented by a stylized model illustrating how such divergence can affect the terms of trade, but also how these effects can be countered by exchange rate flexibility, border adjustments or domestic taxation.
March 22, 2024
A Proposal to Improve Country-Level Data on Total Factor Productivity Growth
Description: The assumption behind popular data on national capital stocks, and therefore total factor productivity, is that countries were in a steady state in the first year that investment data became available. This paper argues that this assumption is highly implausible and is necessarily responsible for implausible data on the ratio of capital to output and productivity growth. It is not credible that countries with similar incomes had huge differences in their capital stocks. This paper claims, with evidence, that implausible features of the data can be greatly reduced by using data on electricity usage or national stocks of road vehicles.
March 22, 2024
Smooth Forecast Reconciliation
Description: How to make forecasts that (1) satisfy constraints, like accounting identities, and (2) are smooth over time? Solving this common forecasting problem manually is resource-intensive, but the existing literature provides little guidance on how to achieve both objectives. This paper proposes a new method to smooth mixed-frequency multivariate time series subject to constraints by integrating the minimum-trace reconciliation and Hodrick-Prescott filter. With linear constraints, the method has a closed-form solution, convenient for a high-dimensional environment. Three examples show that the proposed method can reproduce the smoothness of professional forecasts subject to various constraints and slightly improve forecast performance.
March 22, 2024
The Economic Impacts and the Regulation of AI: A Review of the Academic Literature and Policy Actions
Description: We review the literature on the effects of Artificial Intelligence (AI) adoption and the ongoing regulatory efforts concerning this technology. Economic research encompasses growth, employment, productivity, and income inequality effects, while regulation covers market competition, data privacy, copyright, national security, ethics concerns, and financial stability. We find that: (i) theoretical research agrees that AI will affect most occupations and transform growth, but empirical findings are inconclusive on employment and productivity effects; (ii) regulation has focused primarily on topics not explored by the academic literature; (iii) across countries, regulations differ widely in scope and approaches and face difficult trade-offs.
March 22, 2024
Deciphering the GloBE in a Low-Tax Jurisdiction
Description: Pillar Two rules of the Inclusive Framework agreement on a minimum corporate tax (known as ‘Global Anti-Base Erosion Rules’, for short GloBE) have important implications for the design of the corporate income tax. This chapter discusses these implications particularly from the perspective of low-tax jurisdictions. It argues that it is not possible to design a system that always guarantees generating exactly the bare minimum tax intended by the rules and motivates that this should not be the policy objective anyway. Importantly, if no profit tax already exists, countries need to consider whether to adopt one, and if yes, in what form. There is a case for introducing a general profit tax beyond the GloBE rules, together with a qualifying GloBE domestic minimum top-up tax as a backstop. The familiar alternatives of efficient economic rent tax designs, however, are no longer equivalent under the GloBE. In practice, given the specifics of the rules, an efficient rent tax on in-scope multinationals cannot be combined with a statutory tax rate below a certain cutoff, because the minimum tax becomes always binding. Under the GloBE, immediate expensing particularly maintains the time-value of fully deducting the cost of investment, without impacting the GloBE effective tax rate.
March 22, 2024
The Dynamic Effects of Local Labor Market Shocks on Small Firms in The United States
Description: We use payroll data on over 1 million workers at 80,000 small firms to construct county-month measures of employment, hours, and wages that correct for dynamic changes in sample composition in response to business cycle fluctuations. We use this to estimate the response of small firms' employment, hours and wages following tighter local labor market conditions. We find that employment and hours per worker fall and wages rise. This is consistent with the predictions of the response to a demand shock in the well-known “jobs ladder” model of labor markets. To check this interpretation, we show our results hold when instrumenting for local demand using county-level Department of Defense contract spending. Correction for dynamic sample bias is important -- without it, the hours fall by only one third as much and wages increase by double.
March 22, 2024
Global Value Chain and Inflation Dynamics
Description: We study the inflationary impacts of pandemic lockdown shocks and fiscal and monetary stimulus during 2020-2022 using a novel harmonized dataset of sectoral producer price inflation and input-output linkages for more than 1000 sectors in 53 countries. The inflationary impact of shocks is identified via a Bartik shift-share design, where shares reflect the heterogeneous sectoral exposure to shocks and are derived from a macroeconomic model of international production network. We find that pandemic lockdowns, and subsequent reopening policies, were the most dominant driver of global inflation in this period, especially through their impact on aggregate demand. We provide a decomposition of lockdown shock by sources, and find that between 20-30 percent of the demand effect of lockdown/reopening is due to spillover from abroad. Finally, while fiscal and monetary policies played an important role in preventing deflation in 2020, their effects diminished in the recovery years.