Working Papers
2019
July 17, 2019
New Insights into ECCU's Tourism Sector Competitiveness
Description: Tourism has become the main driver of economic growth and employment and the most important source of income in the ECCU. Preserving and, possibly, enhancing the competitiveness of the tourism product is key for these countries. Unfortunately, the evidence shows that tourism arrivals to the ECCU have been declining slightly while global demand for tourism is on the rise. The objective of this paper is to study the structural determinants of competitiveness for the ECCU, defined as the relative cost advantage over other touristic regions (Di Bella, Lewis, and Martin 2007). Using a gravity model, we show that proximity to North American and European markets is indeed an important competitive advantage for the ECCU. However, despite this advantage, and, in some cases, specialization in high-end tourism, regression analysis shows that arrivals to the ECCU are sensitive to relative prices. Our simulations show that mitigating supply-side constraints would improve the ECCU’s competitiveness and allow the region to regain global market shares.
July 12, 2019
Decomposing the Inflation Dynamics in the Philippines
Description: Inflation rates rose sharply in the Philippines during 2018. Understanding the demand and supply sources of inflation pressures is key to monetary policy response. Qualitatively, indicators have pointed to evidence of inflation pressures from both sides in 2018, with the supply factors, by and large, associated with commodity-price shocks and demand factors deduced from gleaning at the wider non-oil trade deficits seen in the Philippines. Quantitatively, we deploy a semi-structural model to decompose the contributions of various shocks to inflation. Our main findings are (1) supply factors (mainly global commodity prices) played a prominent role in explaining the rise in inflation in 2018; (2) demand factors also contributed to inflation in a non-negligible way, justifying the need for tighter monetary policy in 2018; (3) the size of the estimated output gap (an important indicator of demand pressures) could be larger, when considering the widening trade deficits in 2018; and (4) a delayed monetary policy tightening can be costly in terms of higher inflation rates, requiring larger and more aggressive interest rate hikes to bring inflation under control, based on a counterfactual exercise.
July 12, 2019
Fiscal Buffers for Natural Disasters in Pacific Island Countries
Description: Pacific island countries (PICs) are vulnerable severe natural disasters, especially cyclones, inflicting large losses on their economies. In the aftermath of disasters, PIC governments face revenue losses and spending pressures to address post-disaster relief and recovery efforts. This paper estimates the effects of severe natural disasters on fiscal revenues and expenditure in PICs. These are combined with information on the frequency of large disasters to calculate the rate of budgetary savings needed to build appropriate fiscal buffers. Fiscal buffers provide self-insurance against natural disaster shocks and facilitate quick disbursement for recovery and relief efforts, and protection of spending on essential services and infrastructure. The estimates can provide a benchmark for policymakers, and should be adjusted to take into account other sources of financing, as well as budget risks from less severe as well as more frequent disasters.
July 12, 2019
Public Investment in Bolivia: Prospects and Implications
Description: Bolivia’s “Patriotic Agenda 2025” sets targets for social and economic development propelled by state-led industrialization under a five-year development plan (2016–2020). Large-scale public investment has aimed to fill infrastructure gaps and raise productivity to ensure sustained medium-term growth. Pursuit of these goals in a period of lower hydrocarbon revenues has, however, contributed to widening fiscal and external current account deficits. The paper uses a structural model to outline different scenarios for the level of public investment in the face of declining hydrocarbon revenues. It finds that if public investment is sustained at current levels as a share of GDP while hydrocarbon revenues continue to decline, the sustainability of the public debt could be called into question.
July 12, 2019
International Fiscal-financial Spillovers: The Effect of Fiscal Shocks on Cross-border Bank Lending
Description: This paper sheds new light on the degree of international fiscal-financial spillovers by investigating the effect of domestic fiscal policies on cross-border bank lending. By estimating the dynamic response of U.S. cross-border bank lending towards the 45 recipient countries to exogenous domestic fiscal shocks (both measured by spending and revenue) between 1990Q1 and 2012Q4, we find that expansionary domestic fiscal shocks lead to a statistically significant increase in cross-border bank lending. The magnitude of the effect is also economically significant: the effect of 1 percent of GDP increase (decrease) in spending (revenue) is comparable to an exogenous decline in the federal funds rate. We also find that fiscal shocks tend to have larger effects during periods of recessions than expansions in the source country, and that the adverse effect of a fiscal consolidation is larger than the positive effect of the same size of a fiscal expansion. In contrast, we do not find systematic and statistically significant differences in the spillover effects across recipient countries depending on their exchange rate regime, although capital controls seem to play some moderating role. The extension of the analysis to a panel of 16 small open economies confirms the finding from the U.S. economy.
July 11, 2019
Informality and the Challenge of Pension Adequacy: Outlook and Reform Options for Peru
Description: Past reforms have put the Peruvian pension system on a largely fiscally sustainable path, but the system faces important challenges in providing adequate pension levels for a large share of the population. Using administrative microdata at the affiliate level, we project replacement rates in the defined benefit (DB) and defined contribution (DC) pillars over the next 30 years and simulate the impact of various reform scenarios on the average level and distribution of pensions. In the DB pillar, the regressive minimum contribution period should be re-thought, while in the DC pillar a broadening of the contribution base and/or an increase in contribution rates would help increase replacement rates relative to the baseline forecast of 25-33 percent. A higher net real rate of return than assumed in the baseline would also have a significant positive impact. In the medium-term, labor market reform to tackle informality, and a broad pension reform to restructure the system and avoid competition between the DB and DC pillars should be a priority. Given low pension coverage, having a strong non-contributory pillar will remain important for the foreseeable future.
July 11, 2019
Income Inequality and Government Transfers in Mexico
Description: We analyze microdata from Mexico's survey on household income and expenditures (ENIGH) to study the evolution of income inequality in Mexico over 2004-16, identify its sources, and investigate how it was affected by government social policy. We find evidence of only a small decline in inequality over this period. The observed decline may be attributed to government transfers, notably targeted cash transfers (Prospera) and non-contributory pensions. In 2016, those two programs accounted for more than two thirds of the reduction in the Gini coefficient due to government transfers. Other transfer programs such as farmland subsidies (Proagro), government scholarships, and non-monetary transfers for medical expenditures have not been as effective.
July 11, 2019
Inflation Co-Movement in Emerging and Developing Asia: The Monsoon Effect
Description: Co-movement (synchronicity) in inflation rates among a set of 13 emerging and developing countries in Asia is shown to be strongest for the food component, partly due to common rainfall shocks—a result which the paper terms the ‘monsoon effect.’ Economies with higher trade integration and co-movement in nominal effective exchange rates also experience greater food-inflation co-movement. By contrast, cross-country co-movement in core inflation is weak and the aforementioned determinants have little explanatory power, suggesting a prominent role for idiosyncratic domestic factors in driving core inflation. In the context of the growing literature on the globalization of inflation, these results suggest that common weather patterns are partly responsible for any role played by a so-called ‘global factor’ among inflation rates in emerging and developing economies, in Asia at least.
July 11, 2019
Climate Disaster Risks – Empirics and a Multi-Phase Dynamic Model
Description: Recent research in financial economics has shown that rare large disasters have the potential to disrupt financial sectors via the destruction of capital stocks and jumps in risk premia. These disruptions often entail negative feedback e?ects on the macroecon-omy. Research on disaster risks has also actively been pursued in the macroeconomic models of climate change. Our paper uses insights from the former work to study disaster risks in the macroeconomics of climate change and to spell out policy needs. Empirically the link between carbon dioxide emission and the frequency of climate re-lated disaster is investigated using cross-sectional and panel data. The modeling part then uses a multi-phase dynamic macro model to explore this causal nexus and the e?ects of rare large disasters resulting in capital losses and rising risk premia. Our proposed multi-phase dynamic model, incorporating climate-related disaster shocks and their aftermath as one phase, is suitable for studying mitigation and adaptation policies.
July 11, 2019
Explaining High Unemployment in ECCU Countries
Description: In recent years, unemployment rates in some ECCU countries have been among the highest globally. This paper evaluates several factors that could explain them, finding that high unit labor costs, in a context of strong unionization, are significantly associated with high structural unemployment, while the global crisis added a cyclical component. Our analysis also suggests that high-paid jobs in the public and tourism sectors, which have been growing considerably in recent decades, could have increased the reservation wage and lowered labor force participation. We find no indication that high structural unemployment is related to the phase out of EU preferences on bananas/sugar exports or to a skills mismatch. As expected, unemployment has been substantially, but only temporarily fueled by large natural disasters.