Working Papers
2020
August 21, 2020
Capital Flow Data – A Guide for Empirical Analysis and Real-time Tracking
Description:
This paper provides an analytical overview of the most widely used capital flow datasets. The paper is written as a guide for academics who embark on empirical research projects and for policymakers who need timely information on capital flow developments to inform their decisions. We address common misconceptions about capital flow data and discuss differences between high-frequency proxies for portfolio flows. In a nowcasting “horse race” we show that high-frequency proxies have significant predictive content for portfolio flows from the balance of payments (BoP). We also construct a new dataset for academic use, consisting of monthly portfolio flows broadly consistent with BoP data.
Starting in 2023, updates to the monthly portfolio flow dataset introduced in this paper are provided as part of the OECD’s Monthly Capital Flow Dataset (De Crescenzio and Lepers 2021), available here: https://www.oecd.org/daf/inv/investment-policy/oecd-monthly-capital-flow-dataset.xlsx
August 14, 2020
Investor Sentiment, Sovereign Debt Mispricing, and Economic Outcomes
Description: We find that countries which are able to borrow at spreads that seem low given fundamentals (for example because investors take a bullish view on a country's future), are more likely to develop economic difficulties later on. We obtain this result through a two-stage procedure, where a first regression links sovereign spreads to fundamentals, after which residuals from this regression are deployed in a second stage to assess their impact on future outcomes (real GDP growth and the occurrence of fiscal crises). We confirm the relevance of past sovereign debt mispricing in several out-of-sample exercises, where they reduce the RMSE of real GDP growth forecasts by as much as 15 percent. This provides strong support for theories of sentiment affecting the business cycle. Our findings also suggest that countries shouldn't solely rely on spread levels when determining their fiscal strategy; underlying fundamentals should inform policy as well, since historical relationships between spreads and fundamentals often continue to apply in the medium-to-long run.
August 14, 2020
Stress Testing and Calibration of Macroprudential Policy Tools
Description: We present a semi-structural model of default risk, which is a function of loan and borrower characteristics, economic conditions, and the regulatory environment. We use this model to simulate bank credit losses for stress-testing purposes and to calibrate borrower-based macroprudential tools. The proposed approach is very flexible and is particularly useful when there is limited history of crisis episodes, when crises bring unanticipated shocks where past tail events offer little guidance and when structural shocks or changes in financial regulations have altered the loan default process. We apply the model to quantify mortgage lending risk in two distinct mortgage markets. For each application, we show a range of modeling adjustments that can be made to capture country-specific institutional features. The model uses bank portfolio data broken down by risk bucket and vintage, which enables us to take explicit account of the loan life cycle and to incorporate the housing and economic cycles. This feature facilitates a timely assessment of banks’ loss-absorbing capacity and the buildup of systemic risk conditional on policy. It also enables counterfactual analysis and the evaluation of macroprudential policy interventions.
August 14, 2020
Measuring Income Inequality and Implications for Economic Transmission Channels
Description: We study the channels that theoretically transmit the effects of inequality to economic growth, unlike much of the existing literature that focuses on the direct linkage. The role of inequality in these transmission channels is difficult to pin down and varies with the particular inequality indicator chosen. We run our analyses with six methodologically distinct inequality measures (Gini coefficients and Top10 income shares). Methodological differences within the set of Gini coefficients and the Top10 income shares exert a first-order impact on the estimated relationships, which is generally larger than the effect of switching between Gini and Top10 income shares. For a given inequality indicator, we find that the transmission channels can react in opposite directions, with the net effect on growth difficult to determine. Finally, we emphasize two additional but so far underappreciated empirical complications: (i) estimated relationships change over time; and (ii) fragile countries create significant but counterintuitive empirical associations that may obscure structural relationships.
August 14, 2020
Trade, Productivity and (Mis)allocation
Description: We examine the gains from globalization in the presence of firm heterogeneity and potential resource misallocation. We show theoretically that without distortions, bilateral and export liberalizations increase aggregate welfare and productivity, while import liberalization has ambiguous effects. Resource misallocation can either amplify, dampen or reverse the gains from trade. Using model-consistent measures and unique new data on 14 European countries and 20 industries in 1998-2011, we empirically establish that exogenous shocks to export demand and import competition both generate large aggregate productivity gains. Guided by theory, we provide evidence consistent with these effects operating through reallocations across firms in the presence of distortions: (i) Both export and import expansion increase average firm productivity, but the former also shifts activity towards more productive firms, while the latter acts in reverse; (ii) Both export and import exposure raise the productivity threshold for survival, but this cut-off is not a sufficient statistic for aggregate productivity; (iii) Efficient institutions, factor and product markets amplify the gains from import competition but dampen those from export access.
August 7, 2020
Do Enhanced Collective Action Clauses Affect Sovereign Borrowing Costs?
Description: This paper analyzes the effects of including collective action clauses (CACs) and enhanced CACs in international (nondomestic law-governed) sovereign bonds on sovereigns’ borrowing costs, using secondary-market bond yield spreads. Our findings indicate that inclusion of enhanced CACs, introduced in August 2014, is associated with lower borrowing costs for both noninvestment-grade and investment-grade issuers. These results suggest that market participants do not associate the use of CACs and enhanced CACs with borrowers’ moral hazard, but instead consider their implied benefits of an orderly and efficient debt resolution process in case of restructuring.
August 7, 2020
Financial Intermediation and Technology: What’s Old, What’s New?
Description: We study the effects of technological change on financial intermediation, distinguishing between innovations in information (data collection and processing) and communication (relationships and distribution). Both follow historic trends towards an increased use of hard information and less in-person interaction, which are accelerating rapidly. We point to more recent innovations, such as the combination of data abundance and artificial intelligence, and the rise of digital platforms. We argue that in particular the rise of new communication channels can lead to the vertical and horizontal disintegration of the traditional bank business model. Specialized providers of financial services can chip away activities that do not rely on access to balance sheets, while platforms can interject themselves between banks and customers. We discuss limitations to these challenges, and the resulting policy implications.
August 7, 2020
Monetary Policy and Intangible Investment
Description: We contrast how monetary policy affects intangible relative to tangible investment. We document that the stock prices of firms with more intangible assets react less to monetary policy shocks, as identified from Fed Funds futures movements around FOMC announcements. Consistent with the stock price results, instrumental variable local projections confirm that the total investment in firms with more intangible assets responds less to monetary policy, and that intangible investment responds less to monetary policy compared to tangible investment. We identify two mechanisms behind these results. First, firms with intangible assets use less collateral, and therefore respond less to the credit channel of monetary policy. Second, intangible assets have higher depreciation rates, so interest rate changes affect their user cost of capital relatively less.
August 7, 2020
The Effect of Containment Measures on the COVID-19 Pandemic
Description: Countries have implemented several containment measures to halt the spread of the 2019 coronavirus disease, but it remains unclear the extent to which these unprecedented measures have been successful. We examine this question using daily data on the number of coronavirus disease cases as well as on real-time containment measures implemented by countries. Results suggest that these measures have been very effective in flattening the “pandemic curve”, but there is significant heterogeneity across countries. Effectiveness is enhanced when measures are implemented quickly, where de facto mobility is curtailed, in countries with lower temperatures and population density, as well as in countries with a larger share of the elderly in total population and stronger health systems. We also find that easing of containment measures has resulted in an increase in the number of cases, but the effect has been lower (in absolute value) than that from a tightening of measures.
August 7, 2020
Filling the Gap: Digital Credit and Financial Inclusion
Description: Can fintech credit fill the credit gap in the consumer and business segments? There are few cross-country studies that explore this question. Focusing on marketplace lending, an important part of fintech credit, we use data for 109 countries from 2015 to 2017 to study the relationship between fintech credit to businesses and consumers and various aspects of financial development. Marketplace lending to consumers grows in countries where financial depth declines highlighting the role of fintech credit in filling the credit gap by traditional lenders. This result is particularly strong in low-income countries. In the business segment, marketplace lending expands where financial efficiency declines. Our findings show that low-income countries take advantage of the fintech credit opportunity in the consumer segment but face important challenges in the business segment.