Working Papers
2023
March 17, 2023
A Deep Dive into Tax Buoyancy: Comparing Estimation Techniques in a Large Heterogeneous Panel
Description: This paper provides new empirical evidence on tax buoyancy (tax revenues responsiveness to changes in economic activity) over the period 1990-2020 using a large panel of 185 countries. This study compares short-term and long-term buoyancy coefficients for total tax revenues and different individual taxes by reviewing and contrasting a range of estimators. Our results broadly confirm the main body of the literature on long-term buoyancy hovering around one. We find evidence of lower estimates for short-term buoyancy relative to previous literature, suggesting a limited automatic stabilization power of taxes. As a robustness exercise, in addition to changes in tax rates, we introduce novel control variables for tax exemptions and bases to disentangle discretionary from automatic tax revenue changes. The marginal changes in the results when controlling for policy actions suggest that, on average, the economic cycle does not necessarily influence tax reforms.
March 17, 2023
Peering Through the Fog of Uncertainty: Out-of-Sample Forecasts of Post-Pandemic Tourism
Description: This paper uses an augmented gravity model framework to investigate the historical impact of infectious diseases on international tourism and develops an out-of-sample prediction model. Using bilateral tourism flows among 38,184 pairs of countries during the period 1995–2017, I compare the forecasting performance of alternative specifications and estimation methods. These computations confirm the statistical and economic significance of infectious-disease episodes in forecasting international tourism flows. Including infectious diseases in the model improves forecast accuracy by an average of 4.5 percent and as much as 7 percent relative to the standard gravity model. The magnitude of these effects, however, is likely to be much greater in the case of COVID-19, which is a highly contagious virus that has spread fast throughout populations across the world.
March 17, 2023
Central Bank Digital Currency and Financial Inclusion
Description: In this paper, we develop a model incorporating the impact of financial inclusion to study the implications of introducing a retail central bank digital currency (CBDC). CBDCs in developing countries (unlike in advanced countries) have the potential to bank large unbanked populations and boost financial inclusion which can increase overall lending and reduce bank disintermediation risks. Our model captures two key channels. First, CBDC issuance can increase bank deposits from the previously unbanked by incentivizing the opening of bank accounts for access to CBDC wallets (offsetting potential flows from deposits to CBDCs among those already banked). Second, data from CBDC usage allows for the building of credit to reduce credit-risk information asymmetry in lending. We find that CBDC can increase overall lending if (1) bank deposit liquidity risk is low, (2) the size and relative wealth of the previously unbanked population is large, and (3) CBDC is valuable to households as a means of payment or for credit-building. CBDC can still be optimal for household welfare even when overall lending decreases as households benefit from the value of using CBDC for payments, CBDC provides an alternative "safe" savings vehicle, and CBDC generates greater surplus in lending by reducing credit-risk information asymmetry. Most countries are considering a "two-tier" CBDC model, where central banks issue CBDC to commercial banks which in turn distribute them to consumers. If non-bank payment system providers can distribute CBDC, fewer funds will flow into deposit accounts from the unbanked because a bank account is no longer needed to access CBDC. If CBDC data is shareable with banks, those without bank accounts can still build credit and access lower interest rate loans. This design is optimal for welfare if the gains from greater access to CBDC outweigh the contraction in lending.
March 17, 2023
Macroeconomic Shocks and Conflict
Description: This paper contributes to the research on the macroeconomic origins of conflict. Based on a sample of 133 low- and middle-income countries over a 30-year period, it analyses to what extent changes in a country’s commodity terms-of-trade (ToT) can explain an increase in the incidence and intensity of conflicts through their effect on aggregate income. While the evidence from previous studies on the link between macroeconomic conditions and conflict is rather inconclusive, we find a significant relationship. Our baseline model finds that a negative commodity ToT shock leads to an increase in the number of conflict events and fatalities. Moreover, the effect plays out over several years albeit with decreasing strength after the second year; and its magnitude is twice as large for Low-Income Countries and Fragile and Conflict-affected States when compared with the sample average. In addition, our results show that macroeconomic shocks are creating more violence in countries with higher inequality and in cases where fiscal policy faces relatively stronger constraints on financing a response to the initial shock to incomes. Our results are robust to a number of plausible variations in model specification. The paper’s results, in conjunction with previous studies that emphasize the economic cost of conflicts, suggest the presence of a fragility trap—a vicious cycle of worsening economic conditions and deteriorating conflicts. Effective policies and well-tailored external financial support could be expected to help countries address this challenge.
March 17, 2023
Capital Controls in Times of Crisis – Do They Work?
Description: This paper provides an analysis of the use and effects of capital controls in 27 AEs and EMDEs which experienced at least one financial crisis between 1995 and 2017. Countries often turn to using capital controls in crisis: some ease inflow controls while others tighten controls on outflows. A key finding is that countries with pervasive controls before the start of the crisis are shielded compared to countries with more open capital accounts, which see a significant decline in capital flows during crises. In contrast, the effectiveness of capital controls introduced during crises appears to be weak and difficult to identify. There is also some evidence that the introduction of outflow controls during crises is negatively associated with sovereign debt ratings, but that investors may actually forgive with time.
March 17, 2023
Public Debt and Household Inflation Expectations
Description: We use randomized controlled trials in the US, UK, and Brazil to examine the causal effect of public debt on household inflation expectations. We find that people underestimate public debt levels and increase inflation expectations when informed about the correct levels. The extent of the revisions is proportional to the size of the information surprise. Confidence in the central bank considerably reduces the sensitivity of inflation expectations to public debt. We also show that people associate high public debt with stagflationary effects and that the sensitivity of inflation expectations to public debt is considerably higher for women and low-income individuals.
March 17, 2023
Determinants and Social Dividends of Digital Adoption
Description: We identify key drivers of digital adoption, estimate fiscal costs to provide internet subsidies to households, and calculate social dividends from digital adoption. Using cross-country panel regressions and machine learning, we find that digital infrastructure coverage, internet price, and usability are the most statistically robust predictors of internet use in the short run. Based on estimates from a model of demand for internet, we find that demand is most price responsive in low-income developing countries and almost unresponsive in advanced economies. We estimate that moving low-income developing and emerging market economies to the levels of digital adoption in emerging and advanced economies, respectively, will require annual targeted subsidies of 1.8 and 0.05 percent of GDP, respectively. To aid with subsidy targeting, we use microdata from over 150 countries and document a digital divide by gender, socio-economic status, and demographics. Finally, we find substantial aggregate and distributional gains from digital adoption for education quality, time spent doing unpaid work, and labor force participation by gender.
March 17, 2023
Public-Private Wage Differentials and Interactions Across Countries and Time
Description: We compile a novel database on average public and private sector wages and public-private wage differentials, which we use to analyze how average public-private wage differentials vary according to gender and skill level as well as over time. We further examine the dynamic relationship between public and private wage levels and the implications for inflation. On average, public-sector workers earn around 10 percent more relative to comparable private sector workers, with the premium being higher for women, low-skilled workers, and in developing countries. The average public sector wage premium varies counter-cyclically, increasing during economic downturns, and increases prior to elections. Both private sector wages and inflation respond positively to changes in public wages, albeit with significant heterogeneity in the effects across countries reflecting differences in labor market characteristics and prevailing macroeconomic conditions.
March 17, 2023
Fiscal Consolidation: Taking Stock of Success Factors, Impact, and Design
Description: Surges in public debt in many countries since the COVID-19 pandemic have rekindled interest in fiscal consolidations, which often entail difficult policy choices in the face of economic and political constraints. This paper presents findings from a survey of the literature on fiscal consolidations, focusing on the pre-existing conditions, impact and design aspects of past consolidation episodes. These findings provide insight into factors that influence the chance of successful consolidations, their growth and distributional impact, the pace, phasing, duration and policy mix of reforms to mitigate the impact, and the role of fiscal institutions and capacity development in successful consolidations.
March 17, 2023
Measurement and Use of Cash by Half the World’s Population
Description: The use of cash for payments is not well measured. We view the value of cash withdrawn from ATMs, or as a share of all payments, as a more accurate and timely measure of cash use compared to the standard measure of currency in circulation, or as a ratio to GDP. These two measures are compared for 14 advanced and emerging market economies. When aggregated, the trend in cash use for payments is currently falling for half the world’s population. Such a measure can help inform policy decisions regarding CBDC and regulatory decisions concerning access to and use of cash.