Working Papers
2024
October 11, 2024
A New Dataset of High-Frequency Monetary Policy Shocks
Description: This paper presents a new dataset of monetary policy shocks for 21 advanced economies and 8 emerging markets from 2000-2022. We use daily changes in interest rate swap rates around central bank announcements to identify unexpected shocks to the path of monetary policy. The resulting series can be used to examine cross-country heterogeneity in the impact of monetary policy shocks. We establish a new empirical fact on monetary policy spillovers across countries: the monetary policy decisions of small open economy central banks, and not just major central banks, have substantial spillover effects on swap rates and bond yields in other countries.
October 11, 2024
Parametric Pension Reform Options in Korea
Description: Population aging in Korea will pose substantial challenges to the financial sustainability of its public pension system. Under current policies and plausible assumptions, public pension spending can increase by as much as 4 percent of GDP during 2020-70, while contribution revenue will largely stay constant. This expected rise in public pension spending mainly reflects the increase in the old-age dependency ratio (and therefore the number of pension recipients), the deceleration in GDP growth in response to demographic changes, and, to a lesser extent, the maturing of the National Pension Scheme. Three pension policies are considered to stabilize the public debt- to-GDP ratio: a retirement age increase, higher social security contributions, and a lower pension replacement rate, and a combination of all three. The adjustments need to be large to stabilize the debt-to-GDP ratio if each policy lever is used in isolation. A combination of smaller adjustments of multiple parameters yields better results.
October 11, 2024
Divergence in Post-Pandemic Earnings Growth: Evidence from Micro Data
Description: We use a comprehensive employer-employee dataset to examine post-pandemic worker earnings in the US. Our findings reveal that earnings grew faster in counties that were less severely impacted at the onset of the pandemic. This divergence in growth was both substantial and persistent, particularly for lower-paid and nonmanagerial workers, as well as for those in smaller firms. Both wage increases and additional hours contributed to this earnings growth. This evidence aligns with a job-ladder framework, where labor market competition leads to a dispersion of earnings across counties but compresses earnings among workers in counties with strong labor markets. Our findings provide a microfoundation for the wage Phillips curve and have direct implications for stabilization policies.
October 11, 2024
IMF-Supported Programs in Low-Income Countries: Fragile versus Non-Fragile States
Description: This paper examines the macroeconomic frameworks of IMF-supported programs with low-income countries from 2009 to 2022, focusing on how macroeconomic targets and their achievement differ between fragile and conflicted-affected states (FCS) and non-FCS. Key findings include similar program targets for FCS and non-FCS, optimism in all dimensions considered other than inflation, and no significant correlation between targets and outcomes. For variables other than inflation, country-independent targets equal to the mean or median outcomes of other programs outperform program projections as predictors of actual outcomes. This underscores the challenges in setting realistic, country and program-specific targets in IMF-supported programs with low-income countries. Finally, we discuss potential caveats, including GDP rebenchmarking, non-linear relationship between initial conditions and targets, and repeat programs. We do not study, and make no claims about, causality.
October 11, 2024
Inflation and Labor Markets: A Bottom-Up View
Description: U.S. inflation surged in 2021-22 and has since declined, driven largely by a sharp drop in goods inflation, though services inflation remains elevated. This paper zooms into services inflation, using proprietary microdata on wages to examine its relationship with service sector wage growth at the Metropolitan Statistical Area (MSA) level. We estimate the wage-price pass-through with a local projection instrumental variable model that exploits variation in labor market tightness across MSAs. Our findings reveal a positive and significant relationship between wages and price growth, with a lag. This suggests that the effects of tight labor markets are persistent and may influence the pace of progression toward the inflation target.
October 11, 2024
What Can Artificial Intelligence Do for Stagnant Productivity in Latin America and the Caribbean?
Description: Since 1980, income levels in Latin America and the Caribbean (LAC) have shown no convergence with those in the US, in stark contrast to emerging Asia and emerging Europe, which have seen rapid convergence. A key factor contributing to this divergence has been sluggish productivity growth in LAC. Low productivity growth has been broad-based across industries and firms in the formal sector, with limited diffusion of technology being an important contributing factor. Digital technologies and artificial intelligence (AI) hold significant potential to enhance productivity in the formal sector, foster its expansion, reduce informality, and facilitate LAC’s convergence with advanced economies. However, there is a risk that the region will fall behind advanced countries and frontier emerging markets in AI adoption. To capitalize on the benefits of AI, policies should aim to facilitate technological diffusion and job transition.
October 11, 2024
Europe’s Shift to EVs Amid Intensifying Global Competition
Description: European countries have set ambitious goals to reduce their carbon emissions. These goals include a transition to electric vehicles (EVs)—a sector that China increasingly dominates globally—which could reduce the demand for Europe’s large and interconnected auto sector. This paper aims to size up the tradeoffs between Europe’s shift towards EVs and key macroeconomic outcomes, and analyze which policies may sharpen or ease them. Using state-of-the-art macroeconomic and trade models we analyze a scenario in which the share of Chinese cars in EU purchases rises by 15 percent over 5 years as a result of both a positive productivity shock for car production in China and a demand shock that shifts consumer preferences towards Chinese cars (given China’s dominance in the EV sector). We find that for the EU as a whole, the GDP cost of this shift is small in the short term, in the range of 0.2-0.3 percent of GDP, and close to zero over the long term. Adverse short-run effects are more significant for smaller economies heavily reliant on the car sector, mainly in Central Europe. Protectionist policies, such as tariffs on Chinese EVs, would raise the GDP cost of the EV transition. A further increase in Chinese FDI inflows that results in a significant share of Chinese EVs being produced in Central European economies, on the other hand, would offset losses in these economies by supporting their shift from supplying the internal combustion engine (ICE) production chain to that of EVs.
October 4, 2024
Global Shocks Unfolding: Lessons from Fragile and Conflict-affected States
Description: This paper investigates the consequences of global shocks on a sample of low- and lower-middle-income countries with a particular focus on fragile and conflict-affected states (FCS). FCS are a group of countries that display institutional weakness and/or are negatively affected by active conflict, thereby facing challenges in macroeconomic policy management. Examining different global shocks associated with commodity prices, external demand, and financing conditions, this paper establishes that FCS economies are more vulnerable to these shocks compared to non-FCS peers. The higher sensitivity of FCS economies is mainly driven by procyclical fiscal responses, aggravated by the lack of effective spending controls and timely access to financial sources. External financing serves as a source of stability, partially mitigating the adverse impact of global shocks. This paper contributes to a better understanding of how conditions of fragility, which are on the rise in many parts of the world today, can amplify the effects of negative exogenous shocks. Its results highlight the diverse nature of underlying sources of vulnerabilities, spanning from fiscal and external buffers to institutional quality and economic structure, with lessons applicable to a broader set of countries. Efficient and timely external financial support from external partners, including international financial institutions, should help countries’ counter-cyclical responses to mitigate adverse shocks and achieve macroeconomic stability.
October 4, 2024
The Economics of Decarbonizing Electricity Production
Description: Electricity production is the sector with the largest share of global emissions and there are many options for decarbonizing it. Identifying the lowest cost option for achieving decarbonization (and full reliability) is a complex optimization problem at the intersection of economics and engineering. Key determinants are the cost of individual technologies, the geographical potential, the complementarities between energy sources and supporting infrastructure like electricity grids and energy storage. This paper reviews the literature on the subject and draws high-level conclusions from the abundance of specialized analyses. It finds that energy-economy models have strongly changed projections of the optimal electricity mix in recent years. While the models differ in detail, models project that the share of renewable energy, mostly solar and wind power, increases steadily in a “below 2°C” scenario and becomes the dominant source of energy by 2050. An electricity system based on solar and wind power can use flexibility options as a complement instead of baseload energy. Models vary by the degree to which renewable energy is supported by carbon capture and storage, bioenergy, and nuclear energy.
October 4, 2024
Measuring Soft Power: A New Global Index
Description: Soft power is difficult to measure directly, and existing indicators—mostly subjective and not always transparent—fail to take into account the multidimensional nature of soft power. In this paper, we introduce a new comprehensive Global Soft Power Index (GSPI) composed of six dimensions for a broad sample of countries over a long span of time. The proposed framework allows for comparisons not only at the “headline” level of the GSPI, but also at the level of the sub-indices, which in turn helps identify and study how countries differ at a granular level of soft power. In a final step of the analysis, we present a possible macro-financial application to investigate the relationship between soft power and exchange rates. The results indicate that some dimensions of the GSPI play an important role in explaining exchange rate volatility. Overall, the composite GSPI presented in this paper provides a systematic approach to measure soft power along its multiple dimensions. By capturing the matrix of soft power characteristics, the GSPI offers significant advantages in comparative analysis of soft power across countries and over time.