Working Papers
2024
August 23, 2024
Advancing Labor Market Reforms in Korea
Description: This paper examines structural challenges facing the Korean labor market and analyzes the macroeconomic effects of potential labor market reforms. Our cross-country empirical analysis finds that easing of employment protection legislation tends to have positive macroeconmic effects during periods of strong growth but could turn contractionary in periods of slack. By contrast, increased spending on active labor market policies and reductions to the labor tax wedge tend to be more effective in periods of slack. Our analysis thus highlights the importance of considering economic and policy conditions when designing labor market reforms. Under the current disinflationary policy stance, the government’s focus on the working hour reform seems appriorate. With growth recovering, deregulation to reduce employment protection for regular workers can also be considered, combined with targeted support to vulnerable groups.
August 23, 2024
Trade Implications of China's Subsidies
Description: Available data show a marked increase in subsidy utilization in China and in other major economies between 2009 and 2022. In this paper, we investigate the effects that China's subsidies have on international trade flows at the product level over this period. The results indicate that the subsidies promoted Chinese exports and limited imports. These effects have been magnified by supply-chain linkages: subsidies given to upstream industries expand significantly the exports of downstream industries. Additional analysis of the price and quantity effects at the product level shows that China's subsidies lowered export prices and boosted export quantities in certain sectors such as metal products, furniture and autos, but not in others such as electrical machinery where the evidence is more consistent with quality upgrading.
August 16, 2024
How Widespread is FDI Fragmentation?
Description: This paper examines the extent to which FDI has fragmented across countries, the ways it has done so, using a modified gravity approach. The paper finds that FDI fragmentation is, for now, not a widespread phenomenon. Instead, fragmentation is circumscribed in two ways. First, the paper finds that geo-economic fragmentation has occurred only for certain industries that likely have strategic value, including computer manufacturing, information and communications, transport, as well as professional, scientific and technical services. Secondly, fragmentation appears to be more pronounced for outward FDI from the US, notably in a shift of US FDI from China to advanced Europe and the rest of Asia. This shift appears to be driven by both the intensive and extensive margin. Fragmentation is also more pronounced for immediate rather than ultimate FDI, with evidence of ultimate parent companies aligning the geopolitical mix of their intermediaries more closely to that of their final FDI host destinations. Overall, the results suggest that fragmentation, where found, may be a response to targeted policies that have placed curbs on certain types of FDI on national security grounds, rather than an indiscriminate breakup of investment links between non-ally countries.
August 16, 2024
Shedding Light on the Local Impact of Temperature
Description: We use a new dataset to estimate the impact of temperature on economic activity at a more geographically and temporally disaggregated level than the existing literature. Analyzing 30-kilometer grid cells at a monthly frequency, temperature has a negative, highly statistically significant, and quantitatively large effect on output: a 1 °C increase in monthly temperature is associated with a 0.77 percent reduction in nighttime lights, a proxy for local economic activity. The effects of even a temporary increase in temperature persist for almost one year after the shock. Increases in temperature have an especially large, negative impact on growth in poorer countries, indicating that they are more vulnerable to the impact of climate change.
August 16, 2024
Programmability in Payment and Settlement
Description: Programmability in payment and settlement has yet to realize its potential to support policy goals such as efficiency, safety, and innovation. This paper proposes a comprehensive framework for understanding and evaluating programmability. It explores two key dimensions: external programmatic access, which is the ability for external participants to access the system data and functions with code, and internal programmatic capabilities, the extent to which internal execution of programs is supported and guaranteed. By developing strategies based on these dimensions, financial institutions, regulators, and related actors can better improve resilience, reduce costs and interoperability, all while managing associated risks. The resulting hybrid systems are coordinated efforts balancing the advantages of permissionless blockchains, such as composability, with regulatory requirements and a wider range of technologies. The paper describes these programmatic models to inform and guide the development of digital finance, bridging policy discussions with technical considerations.
August 16, 2024
Industrial Policies for Innovation: A Cost-Benefit Framework
Description: When and how should governments use industrial policy to direct innovation to specific sectors? This paper develops a framework to analyze the costs and benefits of industrial policies for innovation. The framework is based on a model of endogenous innovation with a sectoral network of knowledge spillovers (Liu and Ma 2023), extended to capture implementation frictions and alternative policy goals. Simulations show that implementing sector-specific fiscal support is only preferable to sector-neutral support under restrictive conditions—when externalities are well measured (e.g., greenhouse gas emissions), domestic knowledge spillovers of targeted sectors are high (typically in larger economies), and administrative capacity is strong (including to avoid misallocation to politically connected sectors). If any of these conditions are not fully met, welfare impacts of industrial policy quickly become negative. The optimal allocation of support entails greater subsidies to greener sectors, but other factors such as cross-sector knowledge spillovers matter. For a sample of technologically advanced economies, existing industrial policies seem to be directing innovation to broadly the right sectors, but to an excessive degree in most economies, including China and the United States.
August 9, 2024
The Joint Effect of Emigration and Remittances on Economic Growth and Labor Force Participation in Latin America and the Caribbean
Description: We provide a consistent empirical framework to estimate the net joint effect of emigration and remittances on the migrants’ countries of origin key economic variables (GDP growth and labor force participation), while addressing the endogeneity concerns using novel “shift-share” instrumental variables in the spirit of Anelli and others (2023). Understanding this joint impact is crucial for the Latin America and the Caribbean region that has seen a continuous growth in remittances over the past decades, due to steady emigration, and where remittances represent the largest capital inflows for many countries now. Focusing on the past two decades (1999-2019), this study finds that on average emigration has a negative and statistically significant impact on contemporaneous economic growth and change in labor force participation in the countries of origin across LAC, while remittances partially mitigate this adverse impact—especially on economic growth—resulting in a small negative net joint effect. There are significant differences across subregions for all estimates, with the largest negative effects observed in the Caribbean. In addition, the negative impact of emigration and remittances on the change in labor participation is small, but for the youngest cohort (15-24) is twice as large as for the overall labor force participation. The results are robust to various specifications, variables, and measurements of emigration and remittances.
August 9, 2024
Fiscal R-Star: Fiscal-Monetary Tensions and Implications for Policy
Description: Since the Global Financial Crisis, fiscal policy in advanced economies has become more “active” – that is, increasingly unresponsive to rising debt levels. This paper explores tensions between active fiscal and monetary policies by introducing the concept of “fiscal r-star,” which is the real interest rate required to stabilize debt levels when the primary balance is set exogenously, output is growing at potential, and inflation is at target. It is proposed that the difference between monetary r-star and fiscal r-star—referred to as the “fiscal monetary gap”—is a proxy for fiscal-monetary policy tensions. An analysis of over 140 years of data from 16 advanced economies shows that larger fiscal-monetary gaps are associated with rising debt levels, higher inflation, financial repression, lower real returns on bonds and cash, with elevated risks of future debt, inflation, currency, housing, and systemic crises. Current estimates indicate that fiscal-monetary tensions are at historic highs. Given the tepid growth outlook, growth-enhancing reforms and fiscal consolidation, among other policy adjustments, may be needed to attenuate fiscal-monetary tensions over time.
August 9, 2024
The Role of IMF Arrangements in Restoring Access to International Capital Markets
Description: Using a database of emerging market fundamentals and bond index spreads across 56 frontier and emerging market countries rated below investment grade during the period 2002-22, we assess whether IMF arrangements can restore access to international capital markets (ICM) for countries in distress through liquidity and conditionality channels. We find that global financial conditions and debt/GDP are the most important determinants of access to ICM within the horizon of a typical IMF arrangement. Using an event study methodology, we show that spreads increase prior to the start of an IMF arrangement and then decrease gradually. By exploiting different characteristics of IMF arrangements, we find evidence that the reforms implemented under the IMF arrangement, as measured by rounds of successful IMF reviews, matter more in the medium term than the IMF’s role as a liquidity provider. These results are consistent with our analysis of 55 credit rating upgrades to ICM access levels, which suggests that debt reduction plays the largest role and that IMF arrangements lend credibility to reforms.
August 9, 2024
ECB Spillovers to Emerging Europe: The Past and Current Experience
Description: We provide new evidence on the spillover effects of ECB monetary policy shocks to emerging European economies, using a combination of empirical methods and model-based simulations and focusing on spillovers from interest rate and balance sheet policies implemented by the ECB. We consider an event study set around the ECB policy announcement in June 2022 and also use local projections to estimate regional spillovers in a panel of 16 Emerging European countries spanning 1999 to 2022. Identifying ECB monetary policy shocks as the unexplained component of changes in the three-month Euribor futures rate, we find that ECB monetary policy tightening induces more than one-for-one changes in government bond yields in Emerging Europe, as well as sizable increases in sovereign spreads, domestic currency depreciations, and significantly lower output. Model simulations using a two-country DSGE calibrated to the euro area and its Eastern European neighbors reveal that a conventional tightening, achieved through interest rate increases, provides a more favorable inflation-output trade-off compared to balance sheet tightenings. The extent of spillovers from quantitative tightening depends on the speed of balance sheet reduction, and it is larger under a fixed exchange rate regime.