Working Papers
2016
May 23, 2016
Fiscal Buffers, Private Debt, and Stagnation: The Good, the Bad and the Ugly
Description: We revisit the empirical relationship between private/public debt and output, and build a model that reproduces it. In the model, the government provides financial assistance to credit-constrained agents to mitigate deleveraging. As we observe in the data, surges in private debt are potentially more damaging for the economy than surges in public debt. The model suggests two policy implications. First, capping leverage leads to milder recessions, but also implies more muted expansions. Second, with fiscal buffers, financial assistance to credit-constrained agents helps avoid stagnation. The growth returns from intervention decline as the government approaches the fiscal limit.
May 23, 2016
Monetary and Fiscal Policies and the Dynamics of the Yield Curve in Morocco
Description: We estimate the latent factors that underlie the dynamics of the sovereign bond yield curve in Morocco during 2004–14 based on the Dynamic Nelson-Siegel model. On this basis, we explore the interaction between macroeconomic variables and the yield curve, which is of direct relevance to macroeconomic policy-making. In Morocco’s context, we find that tighter monetary policy increases short-end maturities, and that the impact is small and short-lived. Economic activity is also briefly but significantly impacted, suggesting that even under a pegged exchange rate, monetary policy autonomy and effectiveness can be increased through greater central bank independence. Fiscal improvements significantly lower yield levels. Policy conclusions are that improvement in the fiscal and monetary policy frameworks, as well as greater financial sector development and inclusion, could benefit Morocco and strengthen the transmission mechanisms and effectiveness of macroeconomic policies.
May 23, 2016
Testing Shock Transmission Channels to Low-Income Developing Countries
Description: The paper examines the transmission of business cycle fluctuations and credit conditions from advanced and emerging market economies to Low-Income Developing Countries (LIDCs), using a global vector autoregressive (GVAR) framework and related countryspecific error correction models. We compile a dataset on bank credit, exports, output, and real effective exchange rate for 24 LIDCs and 16 Advanced and Emerging Markets, accounting for 74 percent of World GDP, from 1990Q1 to 2013Q4. Impulse response analyses show that business cycles in oil- and commodity-exporting, as well as frontier LIDCs are more synchronized with those in emerging market economies. Furthermore, credit conditions in the US seem to have a significant impact on exports and real economic activity in LIDCs, while these variables are basically unresponsive to credit availability in emerging markets or economies in other parts of the world.
May 20, 2016
How do Experts Forecast Sovereign Spreads?
Description: This paper assesses how forecasting experts form their expectations about future government bond spreads. Using monthly survey forecasts for France, Italy and the United Kingdom between January 1993 and October 2014, we test whether respondents consider the expected evolution of the fiscal balance—and other economic fundamentals—to be significant drivers of the expected bond yield differential over a benchmark German 10-year bond. Our main result is that a projected improvement of the fiscal outlook significantly reduces expected sovereign spreads. This suggests that credible fiscal plans affect market experts’ expectations and reduce the pressure on sovereign bond markets. In addition, we show that expected fundamentals generally play a more important role in explaining forecasted spreads compared to realized spreads.
May 20, 2016
Spillovers from Japan’s Unconventional Monetary Policy to Emerging Asia: a Global VAR approach
Description: We use a Global VAR model to study spillovers from the Bank of Japan’s quantitative and qualitative easing (QQE) on emerging Asia.1 Our main result is that, despite an appreciation of their currencies vis-à-vis the yen, the impact on emerging Asia’s GDP tended to be positive and significant. Our results suggest that the positive effect of QQE on expectations, by improving confidence, more than offset any negative exchange rate spillover due to expenditure switching from domestic demand to Japanese goods. They also suggest that spillovers from QQE might have worked mainly through the impact of expectations and improved confidence, captured by increases in equity prices, rather than through balance sheet adjustments which might have been captured by movements in the monetary base.
May 20, 2016
Macroprudential Policy and Financial Stability in the Arab Region
Description: Several characteristics of the structure of the Arab economies, their economic policy framework, and their banking systems make macroprudential policy a particular relevant tool. For most oil exporters, heavy reliance on the extractive sector for generating fiscal revenues and export earnings translates into increased vulnerabilities to oil price shocks. In the case of oil importers, relatively small external and fiscal buffers make them highly vulnerable to shocks. This paper discusses the experience of Arab countries in implementing macroprudential policies and contains recommendations to strengthen their macroprudential framework.
April 26, 2016
Financial De-Dollarization: A Global Perspective and the Peruvian Experience
Description: We re-appraise the cross-country evidence on the dollarization of financial systems in emerging market economies. Amidst striking heterogeneity of patterns across regions, we identify a broad global trend towards financial sector de-dollarization from the early 2000s to the eve of the global financial crisis of 2008–09. Since then, de-dollarization has broadly stalled or even reversed in many economies. Yet a few of them have continued to de-dollarize. This suggests that domestic factors are also important and interact with global factors. To gain insight into such an interaction, we examine the experience of Peru since the early 1990s and find that low global interest rates, low global risk-aversion, and high commodity prices have fostered de-dollarization. Domestic macro-prudential measures that raise the relative cost of domestic dollar loans and the introduction and adherence to inflation targeting have also been key.
April 25, 2016
Structural Reform in Germany
Description: This paper provides a quantitative evaluation of the macroeconomic, distributional, and fiscal effects of three reform proposals for Germany: i) a reduction in the social security tax in the low-wage sector, ii) a publicly financed expansion of full-day child care and full-day schooling, and iii) the further deregulation of the professional services sector. The analysis is based on a macroeconomic model with physical capital, human capital, job search, and household heterogeneity. All three reforms have positive short-run and long-run effects on employment, wages, and output. The quantitative effects of the deregulation reform are relatively small due to the smal size of professional services in Germany. Policy reforms i) and ii) have substantial macroeconomic effects and positive distributional consequences. Ten years after implementation, reforms i) and ii) taken together increase employment by 1.6 percent, potential output by 1.5 percent, real hourly pre-tax wages in the low-wage sector by 3 percent, and real hourly pre-tax wages of women with children by 2.7 percent. The two reforms create fiscal deficits in the short run, but they also generate substantial fiscal surpluses in the long-run. They are fiscally efficient in the sense that the present value of short-term fiscal deficits and long-term surpluses is positive for any interest (discount) rate less than 9 percent.
April 21, 2016
Dispelling Fiscal Illusions: How Much Progress Have Governments Made in Getting Assets and Liabilities on Balance Sheet?
Description: When rights and obligations are not recognized as assets and liabilities on a government’s balance sheet, the government’s deficit can be reduced by selling off-balance-sheet assets or incurring off-balance-sheet liabilities. This paper examines how much progress has been made in recognizing assets and liabilities and thus dispelling the fiscal illusions that such transactions create. Looking at the accounts, government-finance statistics, and long-term fiscal projections produced in 28 advanced economies in the period since 2003, it finds good progress in the recognition of some assets and liabilities, such as accounts payable and simple financial assets, but much less in others, such as civil-service pensions.
April 21, 2016
Effective Macroprudential Policy: Cross-Sector Substitution from Price and Quantity Measures
Description: Macroprudential policy is increasingly being implemented worldwide. Its effectiveness in influencing bank credit and its substitution effects beyond banking have been a key subject of discussion. Our empirical analysis confirms the expected effects of macroprudential policies on bank credit, both for advanced economies and emerging market economies. Yet we also find evidence of substitution effects towards nonbank credit, especially in advanced economies, reducing the policies’ effect on total credit. Quantity restrictions are particularly potent in constraining bank credit but also cause the strongest substitution effects. Policy implications indicate a need to extend macroprudential policy beyond banking, especially in advanced economies.