Working Papers
2020
July 17, 2020
Public Sector Balance Sheet Database: Overview and Guide for Compilers and Users
Description: This paper provides an overview of the Public Sector Balance Sheet (PSBS) Database, a dataset developed in the context of the October 2018 Fiscal Monitor. The dataset provides a comprehensive picture of public wealth for 38 countries, and a narrower picture for further 37 countries and territories. Comprehensive PSBSs bring together all the accumulated assets and liabilities that governments control, including public corporations, natural resources, and pension liabilities. They therefore account for the entirety of what the state owns and owes, offering a broader fiscal picture beyond debt and deficits. This is particularly relevant in the current context of record and still rising debts and heightened risks to the balance sheet of the public sector. PSBSs bring about greater transparency and allow closer scrutiny of government’s financial position. They also allow better balance sheet management, thereby potentially increasing return on assets, reducing risks and the costs of borrowing, and improving fiscal policymaking. The paper also elaborates on the conceptual framework and methodology used in compiling the data, and provides some practical guidelines on the compilation, validation, and dissemination of such data.
July 17, 2020
Measuring Social Unrest Using Media Reports
Description: We present a new index of social unrest based on counts of relevant media reports. The index consists of individual monthly time series for 130 countries, available with almost no lag, and can be easily and transparently replicated. Spikes in the index identify major events, which correspond very closely to event timelines from external sources for four major regional waves of social unrest. We show that the cross-sectional distribution of the index can be simply and precisely characterized, and that social unrest is associated with a 3 percentage point increase in the frequency of social unrest domestically and a 1 percent increase in neighbors in the next six months. Despite this, social unrest is not a better predictor of future social unrest than the country average rate.
July 10, 2020
Tracking the Economic Impact of COVID-19 and Mitigation Policies in Europe and the United States
Description: We use high-frequency indicators to analyze the economic impact of COVID-19 in Europe and the United States during the early phase of the pandemic. We document that European countries and U.S. states that experienced larger outbreaks also suffered larger economic losses. We also find that the heterogeneous impact of COVID-19 is mostly captured by observed changes in people’s mobility, while, so far, there is no robust evidence supporting additional impact from the adoption of non-pharmaceutical interventions. The deterioration of economic conditions preceded the introduction of these policies and a gradual recovery also started before formal reopening, highlighting the importance of voluntary social distancing, communication, and trust-building measures.
July 10, 2020
Reexamining the National Savings-Investment Nexus Across Time and Countries
Description: Domestic savings and investment are positively correlated across countries and through time, as Feldstein-Horioka (FH) unveiled 40 years ago. We argue that an interpretation of this correlation based on market failures is more consistent with data patterns than alternative hypotheses. Moreover, resorting to instrumental variables techniques, we conclude that the relationship is causal: an exogenous rise in savings increases investment. This result holds in the full sample of countries and for emerging and developing economies, but there is evidence that the positive association in advanced economies is due to endogeneity bias. The core of our identification strategy relies on the idea that population age structure influences savings, but not total investment directly. Specifically, we use the share of adults in the [35-49] years of age bracket as an instrument for savings. Our estimates pass weak-instruments robust inference.
July 7, 2020
Leaning Against the Wind: A Cost-Benefit Analysis for an Integrated Policy Framework
Description: This paper takes a new approach to assess the costs and benefits of using different policy tools—macroprudential, monetary, foreign exchange interventions, and capital flow management—in response to changes in financial conditions. The approach evaluates net benefits of policies using quadratic loss functions, estimating policy effects on the full distribution of future output growth and inflation with quantile regressions. Tightening macroprudential policy dampens downside risks to growth stemming from loose financial conditions, and is beneficial in net terms. By contrast, tightening monetary policy entails net losses, calling for caution in the use of monetary policy to “lean against the wind.” These findings hold when policies are used in response to easing global financial conditions. Buying foreign-exchange or tightening capital controls has small net benefits.
July 7, 2020
A Quantitative Model for the Integrated Policy Framework
Description: Many central banks have relied on a range of policy tools, including foreign exchange intervention (FXI) and capital flow management tools (CFMs), to mitigate the effects of volatile capital flows on their economies. We develop an empirically-oriented New Keynesian model to evaluate and quantify how using multiple policy tools can potentially improve monetary policy tradeoffs. Our model embeds nonlinear balance sheet channels and includes a range of empirically-relevant frictions. We show that FXI and CFMs may improve policy tradeoffs under certain conditions, especially for economies with less well-anchored inflation expectations, substantial foreign currency mismatch, and that are more vulnerable to shocks likely to induce capital outflows and exchange rate pressures.
July 7, 2020
A Conceptual Model for the Integrated Policy Framework
Description: In the Mundell-Fleming framework, standard monetary policy and exchange rate flexibility fully insulate economies from shocks. However, that framework abstracts from many real world imperfections, and countries often resort to unconventional policies to cope with shocks, such as COVID-19. This paper develops a model of optimal monetary policy, capital controls, foreign exchange intervention, and macroprudential policy. It incorporates many shocks and allows countries to differ across the currency of trade invoicing, degree of currency mismatches, tightness of external and domestic borrowing constraints, and depth of foreign exchange markets. The analysis maps these shocks and country characteristics to optimal policies, and yields several principles. If an additional instrument becomes available, it should not necessarily be deployed because it may not be the right tool to address the imperfection at hand. The use of a new instrument can lead to more or less use of others as instruments interact in non-trivial ways.
July 3, 2020
Global Banks’ Dollar Funding: A Source of Financial Vulnerability
Description: Leading up to the global financial crisis, US dollar activity by global banks headquartered outside the United States played a crucial role in transmitting shocks originating in funding markets. Although post-crisis regulation has improved banking systems’ resilience, US dollar funding remains a global vulnerability, as evidenced by strains that reemerged in March 2020 in the midst of the COVID-19 crisis. We show that shocks to US dollar funding costs lead to financial stress in the home economies of these global non-US banks, and to spillovers to borrowers, especially emerging economies. US dollar funding vulnerability amplifies these negative effects, while some policy-related factors act as mitigators, such as swap line arrangements between central banks and international reserve holdings. Thus, these vulnerabilities should be monitored and, to the extent possible, controlled.
July 3, 2020
Going Viral: A Gravity Model of Infectious Diseases and Tourism Flows
Description: This paper develops a gravity model framework to estimate the impact of infectious diseases on bilateral tourism flows among 38,184 pairs of countries over the period 1995–2017. The results confirm that international tourism is adversely affected by disease risk, and the magnitude of this negative effect is statistically and economically significant. In the case of SARS, for example, a 10 percent rise in confirmed cases leads to a reduction of as much as 9 percent in tourist arrivals. Furthermore, while infectious diseases appear to have a smaller and statistically insignificant negative effect on tourism flows to advanced economies, the magnitude and statistical significance of the impact of infectious diseases are much greater in developing countries, where such diseases tend to be more prevalent and health infrastructure lags behind.
July 3, 2020
Expected Credit Loss Modeling from a Top-Down Stress Testing Perspective
Description: The objective of this paper is to present an integrated tool suite for IFRS 9- and CECL-compatible estimation in top-down solvency stress tests. The tool suite serves as an illustration for institutions wishing to include accounting-based approaches for credit risk modeling in top-down stress tests. The tool suite is made available online along with this paper.