Working Papers
2024
March 8, 2024
An Assessment of the 2019 and 2020 Pension Reforms in Mexico
Description: In recent years the Mexican pension system has changed significantly. In 2019 the existing means-tested social pension was made universal – covering everyone over the age of 65 – and the benefit level increased. In 2020, the main regime of the private sector was substantially reformed, increasing contribution rates for the funded defined contribution system, lowering the minimum years of contributions needed to receive an earnings-related pension, and increasing minimum pensions. This paper tries to assess the likely outcomes of those reforms, discusses design inefficiencies of the reforms and offers policy options to improve pension system design.
March 8, 2024
Strengthening Income Stabilization through Social Protection in Emerging and Developing Economies: The Brazilian Experience
Description: Social protection programs are crucial for stabilizing household income, especially during crises. Brazil's response to the pandemic, the Auxilio Emergencial (AE) program, demonstrated the value of a resilient social safety net and digital tools. This study assesses AE's effectiveness in income stabilization, poverty reduction, and inequality. Results show that the pre-pandemic social protection system would have only buffered about a quarter of income loss, with unemployment insurance more significant for higher-income households, and social safety net transfers crucial for lower-income households, especially those in informal employment. AE successfully supported lower-income households during the pandemic, but its generosity went beyond the stabilization of income, resulting in large fiscal costs.
March 8, 2024
Specialization, Market Access and Real Income
Description: This paper estimates the impact of external demand shocks on real income. We utilize a first order approximation to a wide class of small open economy models that feature sector-level gravity in trade flows, which allows us to measure foreign shocks and characterize their welfare impact in terms of reducedform elasticities. We use machine learning techniques to group 4-digit manufacturing sectors into a smaller number of clusters, and show that the cluster-level elasticities of income with respect to foreign shocks can be estimated using high-dimensional statistical techniques. Foreign demand shocks in complex intermediate and capital goods have large positive impacts on real income, whereas impacts in other sectors are negligible. We showthat the estimates imply that countries that specialize in these sectors enjoy greater gains from increased openness, and that (small) export subsidies to these sectors are welfare-improving. Finally, a calibrated multisector production and trade model with input-output linkages and external economies of scale can match the empirical estimates.
March 8, 2024
Debt Surges—Drivers, Consequences, and Policy Implications
Description: Many countries find themselves with elevated debt levels, increased debt vulnerabilities, and tight financing conditions, while also facing increased spending needs for development and transition to a greener economy. This paper aims to place the current debt landscape in a historical context and investigate the drivers of debt surges, to what degree they result in a crisis as well as examine post-surge debt trajectories and under what conditions debt follows a non-declining path. We find that fiscal policy and stock-flow adjustments play important roles in debt dynamics with the valuation effects arising from currency depreciation explaining more than half of stock flow adjustments in LICs. Debt surges are estimated to result in a financial crisis with a probability of 11–20 percent and spending-driven fiscal expansions during debt surges tend to result in a high probability of non-declining debt path.
March 8, 2024
Accounting for Climate Risks in Costing the Sustainable Development Goals
Description: This paper evaluates the additional spending needed to meet core targets of selected Sustainable Development Goals (SDGs) while accounting for the associated cost to address climate risks. The SDGs under study are those related to human and physical capital development. An additional 3.8 percent of global GDP, or US$3.4 trillion, of public and private spending will be required by 2030 to achieve a strong performance in the selected SDGs while addressing associated climate risks. This includes an increase of 0.4 percent of global GDP (US$358 billion) compared to estimates that do not account for mitigation and adaptation needs within these sectors. LIDCs and SSA experience the highest climate-related cost augmentation relative to GDP, while EMEs (driven by large Asian emerging economies) bear the largest cost in absolute terms.
March 1, 2024
Fiscal Implications of Global Decarbonization
Description: Internationally coordinated climate mitigation policies can effectively put the world on a path toward achieving the agreed Paris temperature goals. Such coordination could be initiated by large players, such as China, the US, India, the African Union, and the European Union. We find that the implications for fiscal revenues over time will be shaped by a combination of rising carbon prices, the gradual erosion of existing fuel tax bases, and possible revenue sharing arrangements. Public spending rises during the transition to build green public infrastructure, promote innovation, and support clean technology deployment. Countries will also need financing for compensating vulnerable households and industries, and to transfer funds to poor countries. With well-designed climate-fiscal policy relying on carbon pricing, global decarbonization will have anything from moderately positive to moderately negative impacts on fiscal balances in high-income countries. For middle and low-income countries, net fiscal impacts are generally positive and can be significant. Revenue sharing at the global level would make an historical contribution to breaching the financial divide between rich and poor countries.
March 1, 2024
Is Inflation Good for Business? The Firm-Level Impact of Inflation Shocks in the Baltics, 1997-2021
Description: Using a large panel of firm-level data, this paper provides an analysis of how inflation shocks in the Baltics between 1997 and 2021 affected total factor productivity (TFP), gross profitability, and net fixed investment in nonfinancial sectors. First, we find that inflation and inflation volatility had mixed effects on TFP growth, profitability and net fixed investment in the first year as well as over the medium term, albeit at a dissipating rate. Second, focusing on subsamples, we find that inflation shocks had differential effects on large versus small firms. Third, we explore sectoral heterogeneity in how firms responded to inflation shocks and observe significant variation across tradable and non-tradable sectors. Finally, estimates from a state-dependent model suggest that firms’ response to inflation shocks varied with the state of the economy. The results suggest that nonfinancial firms in the Baltics have been agile in adjusting to inflation shocks, possibly by either transferring higher production costs to consumers or substituting inputs. Given the differences in the level and nature of the recent inflation shock and the sample period on which our analysis is based, empirical findings presented in this paper might not necessarily apply to the latest bout of inflation in the Baltics.
March 1, 2024
The Consequences of Falling Behind the Curve: Inflation Shocks and Policy Delays Under Rational and Behavioral Expectations
Description: Central banks in major industrialized economies were slow to react to the surge in inflation that began in early 2021. The proximate causes of this surge were the supply chain disruptions associated with the easing of COVID restrictions, fiscal policies designed to cushion the economic impact of COVID, and the impact on commodity prices and supply chains of the war in Ukraine. We investigate the consequences of policy delay in responding to inflation shocks. First, using a simple three-period model, we show how policy delay worsens inflation outcomes, but can mitigate or even reverse the output decline that occurs when policy responds without delay. Then, using a calibrated new Keynesian framework and two measures of loss that incorporate a “balanced approach” to weigh inflation and the output gap, we find that loss is monotonically increasing in the length of the delay. Loss is reduced if policy, when it does react, is more aggressive. To investigate whether these results are sensitive to the assumption of rational expectations, we consider cognitive discounting as an alternative assumption about expectations. With cognitive discounting, forward guidance is less powerful and results in a reduction in the costs of delay. Under either assumption about expectations, the costs of a short delay can be eliminated by adopting a less inertial policy rule and a more aggressive response to inflation.
March 1, 2024
Trade Spillovers of Domestic Subsidies
Description: As governments resort to industrial policies to achieve economic and non-economic objectives, the number of subsidies implemented each year has more than tripled in the last decade. Using detailed data across a large number of advanced and emerging economies, we empirically investigate the effects of domestic subsidies on international trade flows. Estimates from a difference-in-difference specification show that on average subsidies promote both exports and imports. These effects are partly driven by selection into subsidies, as governments target export-oriented and import-competing products. The results however mask significant differences across countries. Specifically, exports of subsidized products from G20 emerging markets increase 8 percent more than exports of other products, with no evidence of selection. The gravity estimates confirm that subsidies promote international relative to domestic trade. These spillover effects are concentrated in some industries, such as electrical machinery, and are stronger when subsidies are given through tax breaks than other policy instruments. The subsidy-led rise in trade calls for international cooperation to manage risks of retaliatory actions and possible drifts towards a subsidy war.
March 1, 2024
Medium-term Macroeconomic Effects of Russia’s War in Ukraine and How it Affects Energy Security and Global Emission Targets
Description: Russia’s war in Ukraine has disrupted the supply of natural gas for many European countries, triggering an energy crisis and affecting energy security. We simulate the medium-term effects of these trade disruptions and find that most European countries have limited GDP losses but those more dependent on Russian natural gas face moderate losses. European fossil fuel consumption and emissions are reduced and after accounting for the war impacts, achieving Europe’s emission targets becomes slightly less costly. In terms of energy security, the war eliminates European energy dependency from Russian imports, but most of the natural gas and oil imports will be substituted by other suppliers. We also find that constructing a new Russian pipeline to China does not provide significant macroeconomic benefits to either country.