Working Papers
2020
November 8, 2020
Protecting Lives and Livelihoods with Early and Tight Lockdowns
Description: Using high-frequency proxies for economic activity over a large sample of countries, we show that the economic crisis during the first seven months of the COVID-19 pandemic was only partly due to government lockdowns. Economic activity also contracted because of voluntary social distancing in response to higher infections. We also show that lockdowns can substantially reduce COVID-19 infections, especially if they are introduced early in a country's epidemic. Despite involving short-term economic costs, lockdowns may thus pave the way to a faster recovery by containing the spread of the virus and reducing voluntary social distancing. Finally, we document that lockdowns entail decreasing marginal economic costs but increasing marginal benefits in reducing infections. This suggests that tight short-lived lockdowns are preferable to mild prolonged measures.
November 8, 2020
COVID-19 Impact and Mitigation Policies: A Didactic Epidemiological-Macroeconomic Model Approach
Description: We develop an integrated epidemiological-macroeconomic model to analyze the interplay between the COVID-19 outbreak and economic activity, as a tool for capacity building purposes. We illustrate a workhorse framework that combines a rich epidemiological model with an economic block to shed light on the tradeoffs between saving lives and preserving economic outcomes under various mitigation policies and scenarios calibrated for emerging market and developing economies. In our benchmark setup, we link the effective contact frequency and labor supply decisions to the current state of the disease progression, allowing for relevant behavioral responses that introduce multiple feedback channels. We showcase the effects of various “smart” mitigation measures, e.g. improved quarantine capacity or targeted labor market restrictions, to alleviate the tradeoffs between health-related outcomes and economic activity, including in response to a second infection wave. The discovery of treatment or vaccine, and the possibility of temporary immunity for the recovered individuals are also considered. The model is further extended to a multisector framework to analyze the sectoral allocation effects of the COVID-19 shock.
November 8, 2020
Optimism Bias in Growth Forecasts—The Role of Planned Policy Adjustments
Description: Are IMF growth forecasts systematically optimistic? And if so, what is the role of planned policy adjustments on this outcome? Are program forecasts as biased as surveillance forecasts? We try to answer these questions using a comprehensive database on IMF forecasts of economic growth in surveillance and program cases during 2003–2017. We find that large planned fiscal and external adjustments are associated with optimistic growth projections, with significant non-linearities for both program and surveillance cases. Specifically, we find evidence that larger planned fiscal adjustment is associated with higher growth optimism in IMF non-concessional, non-precautionary financial arrangements. Our results show the tendency for optimism has persisted in the period after the Global Financial Crisis. Moreover, the strong correlation between the magnitude of the optimism and expected fiscal consolidation provides a cautionary signal for the post-COVID IMF projections as countries embark on a path of fiscal adjustment.
November 5, 2020
COVID-19 and the CPI: Is Inflation Underestimated?
Description: COVID-19 changed consumers’ spending patterns, making the CPI weights suddenly obsolete. In most regions, adjusting the CPI weights to account for the changes in spending patterns increases the estimate of inflation over the early months of the pandemic. Under-weighting of rising food prices and over-weighting of falling transport prices are the main causes of the underestimation of inflation. Updated CPI weights should be developed as soon as is feasible, but flux in spending patterns during the pandemic complicates the development as quickly as 2021 of weights that represent post-pandemic spending patterns.
October 30, 2020
External Financing Dependence and Corporate Saving in ASEAN5
Description: Using firm-level data on ASEAN5, this paper studies the differential effects of macro-financial and structural factors on corporate saving behavior through the lens of external financing dependence. The finding suggests that non-financial corporations in ASEAN5 have been subject to binding financial constraints over the past two decades. Greater capital account openness or exchange rate depreciation reduces the average saving rate of industries with low dependence on external funds, while it increases the saving rate of industries with high dependence on external funds. The effects are greater for export-oriented industries. An improvement in banking sector competition, banks’ lending efficiency, or policy clarity is associated with lower saving rate of firms across the board.
October 30, 2020
Mobile Phone Ownership and Welfare: Evidence from South Africa’s Household Survey
Description: Digitalization is accelerating as countries fight against the COVID-19 pandemic. In this context, the impact of mobile phone ownership on welfare (represented by consumption) is estimated for South Africa using rich household survey data in a panel format, the National Income Dynamics Study (NIDS) with 5 waves spanning 2008–17. The literature argues mobile phone ownership facilitates greater and more affordable access to information and generate welfare gains. We attempt to disentangle the two-way relationship between consumption and mobile phone ownership, which is inherently difficult, and add to the literature by investigating distributional effects. Estimated results suggest that consumption of mobile phone owners tends to be 10–20 percent above that of non-owners. Benefits tend to accrue more on individuals with relatively low levels of consumption, potentially as a greater number of new users, likely with higher marginal positive effects on consumption, and a faster rate of user cost reduction help reap greater gains.
October 30, 2020
The Economic Consequences of Conflict in Sub-Saharan Africa
Description: Sub-Saharan Africa has been marred by conflicts during the past several decades. While the intensity of conflicts in recent years is lower than that observed in the 1990s, the region remains prone to conflicts, with around 30 percent of the countries affected in 2019. In addition to immeasurable human suffering, conflicts impose large economic costs. On average, annual growth in countries in intense conflicts is about 2.5 percentage points lower, and the cumulative impact on per capita GDP increases over time. Furthermore, conflicts pose significant strains on countries’ public finances, lowering revenue, raising military spending, and shifting resources away from development and social spending.
October 30, 2020
The Sources of Fiscal Fluctuations
Description: This paper assesses the dynamic impact of global macroeconomic conditions, commodity price movements, shifts in portfolio preferences, and domestic shocks on fiscal outcomes—notably the budget deficit, its main components, and debt—across a wide range of countries. Heterogeneity is investigated across the level of development and other structural characteristics. Dynamics are explored via panel local projections, while robustness is assessed via dynamic panel and system GMM regressions. World growth, financial risk appetite, political events, and commodity export prices are key determinants of fiscal outcomes in EM, while domestic growth, commodity import prices, and banking crises appear to matter more in AE. Our estimates help quantify the amount of fiscal risk generated by various factors, and thus provide inputs for the design of potential insurance mechanisms or state-contingent debt instruments that could assist in smoothing fiscal fluctuations.
October 30, 2020
Unveiling the Effects of Foreign Exchange Interventions: Evidence from the Kyrgyz Republic
Description: This paper analyzes determinants and consequences of FX interventions in the Kyrgyz Republic. Most of the literature on the topic focuses on advanced and emerging economies and this paper provides new evidence from a low-income country. We find that FX interventions take place in response to movements in the exchange rate and its volatility. There is also evidence of “leaning against the wind”, which is more pronounced for relatively larger FX sales and purchases. The “leaning against the wind” is asymmetric toward FX sales and largely reflects leaning against depreciation of domestic currency. We document a varying degree of de-facto exchange rate stability despite the de-jure floating exchange rate regime. During most of the sample, the exchange rate management index was relatively low in line with the floating exchange rate regime, with the exception of the period from 2018 Q4 until the COVID-19 shock, during which the exchange rate management index was relatively high.
October 21, 2020
Exiting from Lockdowns: Early Evidence from Reopenings in Europe
Description: European authorities introduced stringent lockdown measures in early 2020 to reduce the transmission of COVID-19. As the first wave of infection curves flattened and the outbreak appeared controlled, most countries started to reopen their economies albeit using diverse strategies. This paper introduces a novel daily database of sectoral reopening measures in Europe during the first-wave and documents that country plans differed significantly in terms of timing, pace, and sequencing of sectoral reopening measures. We then show that reopenings led to a recovery in mobility—a proxy for economic activity—but at the cost of somewhat higher infections. However, the experience with reopening reveals some original dimensions of this trade-off. First, the increase in COVID-19 infections after reopening appears less severe in fatality rates. Second, a given reopening step is associated with a worse reinfection outcome in countries that started reopening earlier on the infection curve or that opened all sectors at a fast pace in a relatively short time. Finally, while opening measures tend to have an amplification effect on subsequent cases when a large fraction of the economy is already open, this effect appears heterogenous across sectors.