Working Papers
2024
November 1, 2024
Public Investment Management Bottlenecks in Low-income Countries
Description: This paper uses principal component analysis (PCA) to identify bottlenecks to effective public investment management in LIDCs. The paper describes the current state of affairs regarding public investment and public investment management in LIDCs, drawing on the results of IMF Public Investment Management Assessments (PIMAs). PCA is used to analyze which public investment institutions are likely to be most important for investment efficiency estimates across the countries covered by PIMAs so far. Drawing on alternative input data, we identify five PIMA institutions that are systematically highly correlated to estimates of public investment efficiency in LIDCs and are likely to be high priorities in many PIM reform processes: Project management, Project appraisal, Procurement, Availability of funding, and Project selection. This does not mean that these five are the only important institutions – this will depend on country circumstances. The practical steps to strengthen PIM in LIDCs are elaborated in a separate How-to-Note.
November 1, 2024
Demand for Ethanol Considering Spatially Differentiated Fuel Retailers
Description: The document presents an innovative analysis of ethanol demand, emphasizing the significant role of spatially differentiated fuel retailers in shaping consumer preferences and fuel-switching behavior. Utilizing a nested logit model and data from Brazilian fuel retailers, the study reveals that ethanol demand is highly responsive to price changes, with relative price elasticity exceeding that of gasoline. Key findings indicate that retailer characteristics, such as branding and location, influence consumer preferences, highlighting the importance of considering spatial differentiation in demand estimation models. The study's results have profound implications for policy-making, suggesting that encouraging the use of ethanol as an alternative energy source can serve as an effective climate change mitigation strategy. The recommendations stress the need for policies that account for consumer price sensitivities and the competitive landscape of fuel retailers. This could enhance the adoption of cleaner fuels and reduce dependency on imported oil, aligning with broader environmental and economic objectives.
November 1, 2024
The Political Economy of Fossil Fuel Subsidy Removal: Evidence from Bolivia and Mexico
Description: We study the impact of fossil fuel subsidy removal on presidential popularity using difference-indifference approaches and a stylized theoretical model. Analyzing macro level data for two subsidy removal events in Mexico and Bolivia in the early 2010s, we find evidence of a negative impact on presidential approval. Our theoretical probabilistic voting model predicts that the decline in popularity is driven by high income groups if subsidies are regressive, and that lack of trust in the government lowers popularity of the removal in all income groups. We confirm these predictions using micro level data for the Mexican subsidy removal event.
November 1, 2024
Following the Money: Who is Keeping Coal Alive?
Description: The 2023 United Nations Climate Change Conference reinforced already existing pressure to transition away from fossil fuels, in particular for the most polluting source, coal. We use a comprehensive dataset on bank loans for coal projects to shed light on which type of banks continue to finance coal and how coal phase-out commitments affect coal financing. We find that coal financing is becoming increasingly concentrated, partly in banks with a very high coal exposure. We also find that many coal loans have maturities much shorter than the remaining lifetime of coal assets, thus exposing equity holders of coal assets to the risk of a more difficult loan rollover. An econometric analysis shows that countries with a strong commitment to coal phase-out, fixed in national law for example, receive less coal financing. Using an instrumental variable, we identify this effect as causal.
November 1, 2024
Inelastic Demand Meets Optimal Supply of Risky Sovereign Bonds
Description: We present evidence of inelastic demand for risky sovereign bonds and explore its implications for optimal government debt policies. Using monthly changes in the composition of a major international bond index, we identify flow shocks unrelated to fundamentals that shift the available bond supply. From these shocks, we estimate an inverse demand elasticity of -0.30 and show that it increases with countries’ default risk. We formulate a sovereign debt model with endogenous default and inelastic investors, calibrated to our empirical estimates. By penalizing additional borrowing, an inelastic demand acts as a disciplining device that reduces default risk and bond spreads.
October 22, 2024
Beyond Energy: Inflationary Effects of Metals Price Shocks in Production Networks
Description: We examine the role of metals as economic inputs by using a production network model, calibrated for various countries using input-output (I-O) tables. Empirically, we employ local projections to study how metal shocks influence inflation, testing country-level heterogeneity in the sensitivity to these shocks. Our findings indicate that metals price shocks have significant and persistent effects on core and headline inflation, with particularly pronounced effects on countries that are highly exposed to metals in their production networks. This is in contrasts to oil supply shocks, which predominantly affect headline inflation. A shift of the global economy towards a higher relative metals intensity due to the energy transition could lead to commodity price shocks increasingly influencing core rather than headline inflation. This could make commodity price shocks less visible on impact but more persistent. Central banks should consider this shift when assessing inflation dynamics and risks.
October 16, 2024
Shifting Perceptions: Unpacking Public Support for Immigrant Workers Integration in the Labor Market
Description: This paper investigates public perceptions and support for policies aimed at integrating immigrant workers into domestic labor markets. Through large-scale surveys involving 6,300 respondents from Canada, Italy, and the United Kingdom, we provide new insights into attitudes toward migrant integration policies and the impact of different information provisions on belief updating. We identify three key factors that shape policy support: pre-existing stereotypes about immigrants, awareness of labor market integration policies for migrants, and, most critically, the perceived economic and social impact of these policies. Our findings reveal that providing information about the economic effects of integrating immigrants in the labor market significantly alters perceptions and increases support for these policies. Notably, explanations of the economic mechanisms underlying these policies are more effective than simply presenting policy effects or real-life stories of integration challenges. The survey also identifies the primary barriers to policy support, with fairness considerations toward unemployed native workers emerging as the top concern. It reveals that addressing individuals’ specific concerns through tailored mitigation measures can enhance support for policies aimed at better integration migrants. Nevertheless, a significant challenge remains in overcoming mistrust in the government’s commitment and ability to effectively implement these policies and accompanying measures.
October 16, 2024
Private Participation and its Discontents: Insights from Large-Scale Surveys
Description: This paper investigates public attitudes toward product market regulation (PMR) reforms aimed at fostering private participation and competition in two network sectors—electricity and telecommunications. Despite the benefits of such reforms, including enhanced productivity and lower prices, they often face significant public resistance. We conduct large-scale surveys of 6,300 individuals in three emerging market and developing economies (Mexico, Morocco, and South Africa) to analyze the role of socioeconomic characteristics, beliefs, and perceptions in shaping support for PMR reforms. Our findings reveal that individual beliefs and perceptions, particularly those related to how policies work and market economy views, are major predictors of reform support. Randomized information treatments show that raising awareness about the costs of the status quo and the benefits of PMR reforms significantly increases public support. Among initially skeptical individuals, societal concerns play a larger role in respondents’ reasons for nonsupport, consistent with models of social preferences. However, offering tailored complementary and compensatory measures can further enhance support among those skeptical individuals.
October 11, 2024
Central Bank Digital Currencies and Financial Stability: Balance Sheet Analysis and Policy Choices
Description: This paper offers a comprehensive analysis of the implications for financial stability of a central bank issuing a digital currency to the public at large. We start with a systematic analysis of balance sheet changes that arise from the new liability for the central bank and the banking system, and examine how they depend on preconditions, central bank choices, and banking system responses. Based on this, we discuss the range of implications for financial stability that may arise in steady state, in the context of adoption, and in crisis times. Threats to financial intermediation in steady state arise mainly in situations where the central bank balance sheet expands, and triggers adjustment mechanisms that lead to more costly or less stable funding of the banking system, while in crisis times run risk may increase. Our analysis of policy choices to control these effects considers macroprudential policy, and an expansion of central bank lending to commercial banks, but finds that a main contribution needs to come from a design of the CBDC that encourages its use as a means of payment rather than a store of value.
October 11, 2024
Reported Social Unrest Index: September 2024 Update
Description: This is the third update of the reported Social Unrest Index (Barrett et al. 2022), describing the evolution of social unrest worldwide since June 2023. It shows that the global incidence of unrest has stayed broadly stable in the last year. However, the global distribution has not been even, with a concentration of major events in Europe and sub-Saharan Africa and, to a lesser extent, in the Western Hemisphere.