Working Papers
2018
March 5, 2018
Economic Fluctuations in Sub-Saharan Africa
Description: We compare business cycle fluctuations in Sub-Saharan African (SSA) countries vis-à-vis the rest of the world. Our main results are as follows: (i) African economies stand out by their macroeconomic volatility, which is is reflected in the volatility of output and other macro variables; (ii) inflation and output tend to be negatively correlated; (iii) unlike advanced economies and emerging markets (EMs), trade balances and current accounts are acyclical in SSA; (iv) the volatility of consumption and investment relative to GDP is larger than in other countries; (v) the cyclicality of consumption and investment is smaller than in advanced economies and EMs; (vi) there is little comovement between consumption and investment; (vii) consumption and investment are strongly positively correlated with imports.
March 5, 2018
How Well Do Economists Forecast Recessions?
Description: We describe the evolution of forecasts in the run-up to recessions. The GDP forecasts cover 63 countries for the years 1992 to 2014. The main finding is that, while forecasters are generally aware that recession years will be different from other years, they miss the magnitude of the recession by a wide margin until the year is almost over. Forecasts during non-recession years are revised slowly; in recession years, the pace of revision picks up but not sufficiently to avoid large forecast errors. Our second finding is that forecasts of the private sector and the official sector are virtually identical; thus, both are equally good at missing recessions. Strong booms are also missed, providing suggestive evidence for Nordhaus’ (1987) view that behavioral factors—the reluctance to absorb either good or bad news—play a role in the evolution of forecasts.
March 2, 2018
The Status of GDP Compilation Practices in 189 Economies and the Relevance for Policy Analysis
Description: This paper examines the status of GDP compilation in 189 economies against six key criteria that describe national accounts compilation practices: whether the benchmark year is up to date, the availability and timeliness of annual and quarterly GDP, whether GDP by production and expenditure approaches are compiled independently to allow for comparisons, whether estimates by the income approach are available, and the vintage of the System of National Accounts (SNA) applied. We used publicly available information including from the IMF’s Dissemination Standards Bulletin Board (DSBB), and, for 108 developing economies, information provided by the IMF’s real sector advisors stationed in the Fund’s 10 Regional Technical Assistance Centers (RTACs). The data were compared with the UNSD and World Bank databases. We find that 50 percent of economies have acceptable benchmark years, 72 percent report timely annual GDP data, while 55 percent of economies report timely data for quarterly GDP. The study presents some conclusions for priorities of capacity development.
March 2, 2018
Inflation Anchoring and Growth: Evidence from Sectoral Data
Description: Central bankers often assert that low inflation and anchoring of inflation expectations are good for economic growth (Bernanke 2007, Plosser 2007). We test this claim using panel data on sectoral growth for 22 manufacturing industries for 36 advanced and emerging market economies over the period 1990-2014. Inflation anchoring in each country is measured as the response of inflation expectations to inflation surprises (Levin et al., 2004). We find that credit constrained industries—those characterized by high external financial dependence and R&D intensity and low asset tangibility—tend to grow faster in countries with well-anchored inflation expectations. The results are robust to controlling for the interaction between these characteristics and a broad set of macroeconomic variables over the sample period, such as financial development, inflation, the size of government, overall economic growth, monetary policy counter-cyclicality and the level of inflation. Importantly, the results suggest that it is inflation anchoring and not the level of inflation per se that has a significant effect on average industry growth. Finally, the results are robust to IV techniques, using as instruments indicators of monetary policy transparency and independence.
March 2, 2018
Welfare Gains from Market Insurance: The Case of Mexican Oil Price Risk
Description: Over the past two decades, Mexico has hedged oil price risk through the purchase of put options. We examine the resulting welfare gains using a standard sovereign default model calibrated to Mexican data. We show that hedging increases welfare by reducing income volatility and reducing risk spreads on sovereign debt. We find welfare gains equivalent to a permanent increase in consumption of 0.44 percent with 90 percent of these gains stemming from lower risk spreads.
March 2, 2018
Does Taxation Stifle Corporate Investment? Firm-Level Evidence from ASEAN Countries
Description: This paper conducts a firm-level analysis of the effect of taxation on corporate investment patterns in member states of the Association of Southeast Asian Nations (ASEAN). Using large-scale panel data on nonfinancial firms over the period 1990–2014, and controlling for macro-structural differences among countries, we find a significant degree of persistence in firms’ net fixed investments over time, which vary with firm characteristics, such as size, sales, profitability, leverage, and age. Our analysis brings up interesting empirical results, including nonlinear patterns of behavior in firms’ capital investment decisions acrosss ASEAN countries. Concerning the main variable of interest, we find that a moderate level of taxation does not hinder business investment, but this effect turns negative as higher tax burden raises the user cost of capital and distorts resource allocations.
February 23, 2018
Corporate Indebtedness and Low Productivity Growth of Italian Firms
Description: Productivity growth in Italy has been persistently anemic and has lagged that of the euro area over the period 1999-2015, while the indebtedness of its corporate sector has increased. Using the ORBIS firm-level database, this paper studies the long-term impact of persistent corporate-debt accumulation on the productivity growth of Italian firms and investigates whether total factor productivity growth varies with the level of corporate indebtedness. We employ a novel estimation technique proposed by Chudik, Mohaddes, Pesaran, and Raissi (2017) to account for dynamics, bi-directional feedback effects, cross-firm heterogeneity, and cross-sectional dependence arising from unobserved common factors (for example, oil price shocks, labor and product market frictions, and stance of global financial cycle). Filtering out the effects of unobserved common factors and controlling for firmspecific characteristics, we find significant negative effects of persistent corporate debt build-up on total factor productivity growth, and weak evidence of a threshold level of corporate debt, beyond which productivity growth drops off significantly. Our results have strong policy implications, for example the design of the tax system should discourage persistent corporate debt accumulation, and effective and timely frameworks to reduce corporate debt overhangs are essential.
February 21, 2018
A Multidimensional Approach to Trade Policy Indicators
Description: We present and discuss a set of indicators to help assess countries’ trade policies. The indicators relate to three policy areas – trade in goods, trade in services, and FDI. Given concerns about the direction of global trade policy, we also consider a set of more granular measures that reflect the evolution of countries’ policies since the 2008 financial crisis. We propose a simple approach to present the multidimensional aspects of trade policy that, by shedding light on relative openness across areas, can facilitate policy discussions. In the cross-section of countries, we find a diversity in the type of measures adopted, both between and (since the 2008 financial crisis) within policy areas, lending support to the approach based on multiple indicators. The indicators’ time series suggest that advanced and, especially, emerging economies are moving toward more open regimes over time, although recently progress has, with some exceptions, slowed across the board. Lastly, our findings also call for stronger efforts to objectively quantify the different aspects of countries’ trade regimes. More data, both across countries and in terms of policy areas that significantly affect trade, are needed for better-informed policy discussions.
February 16, 2018
Central Bank Reserve Management and International Financial Stability—Some Post-Crisis Reflections
Description: Motivated by the tension first revealed during the global financial crisis between the domestic and international financial stability obligations of central bank reserve managers, this paper offers some reflections along four main lines. First, the paper highlights how official reserve management has evolved to mirror important aspects of private institutional investor behavior over time, and addresses the policy relevance of this convergence. Second, evidence is documented of procyclical portfolio behavior by reserve managers during the crisis, which added to the stabilization burden shouldered by central banks in reserve currency-issuing countries. Third, in appraising the evolution of related vulnerabilities since the crisis, the paper finds grounds for both cautious optimism and lingering concern, the balance of which points to an uncertain future resolution. Fourth, some potential remedies are presented to help dampen the procyclical impulses of reserve managers in future periods of international financial turbulence.
February 16, 2018
Monetary Policy and Models of Currency Demand
Description: Two types of currency in circulation models are identified: (1) a first generation derived from the theory of money demand and (2) a second generation aimed at producing daily forecasts of currency in circulation. In this paper, we transform the currency demand function into a VAR to capture the dynamic link between interest rates and the demand for cash. We also apply ARIMA modeling to forecast the daily currency in circulation for Brazil, Kazakhstan, Morocco, New Zealand, and Sudan. Our empirical work shows that some of the conclusions in the economic literature on the impact of interest rates on the demand for currency do not necessarily hold, and that central banks would benefit from running both generations of currency in circulation models. The fundamental longer-run determinants of the demand for cash are distinct from its short-run determinants.