Working Papers
2024
January 4, 2024
The Return of Industrial Policy in Data
Description: This paper introduces the New Industrial Policy Observatory (NIPO) dataset and documents emergent patterns of policy intervention during 2023 associated with the return of industrial policy. The data show that the recent wave of new industrial policy activity is primarily driven by advanced economies, and that subsidies are the most employed instrument. Trade restrictions on imports and exports are more frequently used by emerging market and developing economies. Strategic competitiveness is the dominant motive governments give for these measures, but other objectives such as climate change, resilience and national security are on the rise. In exploratory regressions, we find that implemented measures are correlated with the past use of measures by other governments in the same sector, pointing to the tit-for-tat nature of industrial policy. Furthermore, domestic political economy factors and macroeconomic conditions correlate with the use of industrial policy measures. We intend for the NIPO to be a publicly available resource to help monitor the evolution and effects of industrial policies.
2023
December 22, 2023
Divided We Fall: Differential Exposure to Geopolitical Fragmentation in Trade
Description: This paper assesses differences in countries’ macroeconomic exposure to trade fragmentation along geopolitical lines. Estimating structural gravity regressions for sector-level bilateral trade flows between 185 countries, we find that differences in individual countries’ geopolitical ties act as a barrier to trade, with the largest effects concentrated in a few sectors (notably, food and high-end manufacturing). Consequently, countries’ exposure via trade to geopolitical shifts varies with their market size, comparative advantage, and foreign policy alignments. Introducing our estimates into a dynamic many-country, many-sector quantitative trade model, we show that geoeconomic fragmentation—modelled as an increased sensitivity of trade costs to geopolitics and greater geopolitical polarization—generally leads to lower trade and incomes. However, emerging markets and developing economies (EMDEs) tend to see the largest impacts: real per-capita income losses for the median EMDE in Asia are 80 percent larger, and for the median EMDE in Africa 120 percent larger, than for the median advanced economy. This suggests that the costs of trade fragmentation could fall disproportionally on countries that can afford it the least.
December 22, 2023
Getting to Know GMMET: The Global Macroeconomic Model for the Energy Transition
Description: This paper presents GMMET, the Global Macroeconomic Model for the Energy Transition, and provides documentation of the model structure, data sources and model properties. GMMET is a large-scale, dynamic, non-linear, microfounded multicountry model whose purpose is to analyze the short- and medium-term macroeconomic impact of curbing greenhouse gas (GHG) emissions. The model provides a detailed description of GHG-emitting activities (related to both fossil fuel and non-fossil-fuel processes) and their interaction with the rest of the economy. To better capture real world obstacles of the energy transition, GMMET features a granular modelling of electricity generation (capturing the intermittency of renewables), transportation (capturing network externalities between charging stations and electric vehicle adoption), and fossil fuel mining (replicating estimated supply elasticities at various time horizons). The model also features a rich set of policy tools for the energy transition, including taxation of GHG emissions, various subsidies, and regulations.
December 22, 2023
Emigration, Business Dynamics, and Firm Heterogeneity in North Macedonia
Description: High emigration rates are a challenge in the Western Balkans. High emigration rates might lead to inadequate skilled labor and affect firm creation, capital formation, and economic convergence. The 2021 North Macedonia census reveals that more than 12.4% of North Macedonians live abroad. To assess the consequences, we estimate the impact of emigration on the number of firms and capital formation. Business dynamics can affect emigration reversely. To alleviate the endogeneity bias, we use a shift-share instrument with the historical diaspora networks and destination countries’ GDP growth rate as a source of exogenous variations. Our results show that (1) In the short run, a 1 percentage point increase in the emigration rate leads to a 2.91% decrease in the number of firms in the area of origin; (2) The long-run effects of emigration on the number of firms are less negative than the short-run impacts; (3) Emigration mainly reduces the number of micro and small firms; (4) Emigration affects the number of firms and capital formation more in the industrial sector than the other sectors, through the skilled labor shortage channel. This paper contributes to the literature on emigration and provides implications and policy considerations for developing countries, where high emigration rates are prevalent.
December 22, 2023
Designing a Presumptive Income Tax Based on Turnover in Countries with Large Informal Sectors
Description: Turnover (sales) is frequently used in developing countries as a presumptive income tax base, to economize on the costs of tax administration and taxpayer compliance. We construct a simple model where a size threshold separates firms paying turnover tax from those paying profit tax (regular income tax), and where firms have the option of producing in the untaxed, informal sector. The optimal turnover tax rate trades off two policy concerns: reducing informality and avoiding strategic reductions in sales by firms seeking to remain below the threshold for the profit tax. We provide analytical results and calibrate the model to compute the optimal policy using realistic parameter values. The optimal turnover tax rate for countries with large informal sectors is found to be around 2.5% across most scenarios, while the threshold separating the turnover tax regime from profit tax lies for the most part between $65,000 and $95,000. Introducing an optimally designed turnover tax reduces the rate of informality of businesses by about 12 percentage points in the calibrated model.
December 22, 2023
Flattening the Curve and the Flight of the Rich: Pandemic-Induced Shifts in US and European Housing Markets
Description: The pattern of increasing suburban house prices relative to urban centers initiated during the pandemic continues to hold across the top 30 US metropolitan statistical areas (MSAs). In contrast, European countries such as Denmark, France, and the United Kingdom did not experience a similar shift in valuations. We posit and find supporting evidence that these divergent patterns partially due to differences in the characteristics of suburban areas, particularly in terms of household income and property sizes; with European suburbs being relatively poorer and characterized by smaller housing units. We show that, in the US, MSAs with suburban features more akin to those in European cities generally experienced little to no increase in suburban housing prices compared to their urban centers. Finally, our findings indicate that migration patterns of the high-income population might have partially influenced the urban-suburban revaluation in the US.
December 22, 2023
Non-traded Gains From Trade - Selection in the Non-Traded Sector: Evidence from Brazil
Description: We investigate how trade shocks affect the allocation of labor across plants at the local labor market level. Using Brazil’s import liberalization as a quasi-natural experiment, we uncover a new margin for the gains from trade: the reallocation of labor from smaller to larger producers in the non-traded sector. We find that in response to liberalization, larger non-traded producers self-select into importing, expanding as they gain access to inputs from abroad. We then develop a parsimonious model of heterogeneous producers incorporating this mechanism. The theory is consistent with the empirical findings and show that reallocation among non-traded producers is welfare-enhancing. In contrast, this reallocation effect disappears when all nontraded producers make the same importing decision.
December 22, 2023
Inflation Indexation in Public Finances: A Global Dataset on Current Practices
Description: This paper presents a new global dataset on current practices for four budget items in terms of indexation to the price level and other nominal variables. Compiling data from documents of select multilateral organizations, governments, and related literature as well as conducting a survey among IMF country desks of 190 country-members, we show how indexation is internationally applied in (i) personal income tax brackets; (ii) pensions; (iii) social assistance programs; and (iv) public wages. The dataset shows that while indexation policies vary significantly across economies, some trends can be identified. For example, indexation is more common on pension and social grants than on taxes, and falls with the degree of economic development. We further discuss some applications of this new dataset. Those include an accounting exercise illustrating the impacts of indexation on fiscal outcomes during episodes of inflation surprises; and an analysis of the association between the overall degree of indexation combining the four budget items and inflation persistence.
December 15, 2023
Inflation Dynamics in the Gulf Cooperation Council (GCC): What is the Role of External Factors?
Description: Inflationary pressures have intensified in the Gulf Cooperation Council (GCC) in 2021-2022, mainly driven by a pick-up in tradeable goods inflation. Despite this increase, inflation remained relatively contained as compared to regional comparators. This paper aims to provide a comprehensive analysis of inflation dynamics in the region, with a focus on external factors because of GCC’s high reliance on international trade. Using a Global Vector Autoregressive model with quarterly data from 1987 to 2022, we find that external factors such as the imported inflation from main trading partners, mainly driven by China, and nominal effective exchange rate (NEER) are the main drivers of inflation in the GCC region. Additionally, we find that the direct pass-through of international commodity price shocks such as oil and raw agricultural materials is somewhat limited, after controlling for trading partners’ inflation, which can be explained by the prevalence of subsidies and administered prices in the region. Overall, since external factors are the main drivers of domestic inflation in the GCC, an increased focus on diversification, promoting food security, and ensuring prudent central bank policies, including through effective liquidity management frameworks, can play a key role in managing this impact.
December 15, 2023
Can Fiscal Consolidation help Central Banks Fight Inflation?
Description: This paper argues case that a tighter fiscal policy stance can meaningfully support central banks in fighting inflation in both advanced and emerging market economies. While the standard textbook result suggest that monetary policy is much more effective than fiscal policy in battling inflation in open economies due to the exchange rate channel, we show that a tighter fiscal stance is notably more effective in the current situation. This is so because when many countries currently need to tighten the policy stance simultaneously, the exchange rate channel does not provide monetary policy with an edge over fiscal policy. We also show that fiscal consolidation can be helpful in small open emerging markets and developing economies by reaffirming their commitment to price stability, and by putting the fiscal house in order which reduces risk premiums and strengthens the currency. Furthermore, we show that spillovers from major economies can be more adverse from tighter monetary policy. By applying a two-agent New Keynesian modeling framework with unconstrained and hand-to-mouth households, we show that any adverse effects of tighter fiscal policy (relative to tighter monetary policy) on consumption inequality can be handled with a combination of general spending cuts and targeted transfers to vulnerable households.