Working Papers
2015
August 3, 2015
Portfolio Rebalancing in Japan: Constraints and Implications for Quantitative Easing
Description: Portfolio rebalancing is a key transmission channel of quantitative easing in Japan. We construct a realistic rebalancing scenario, which suggests that the BoJ may need to taper its JGB purchases in 2017 or 2018, given collateral needs of banks, asset-liability management constraints of insurers, and announced asset allocation targets of major pension funds. Nonetheless, the BoJ could deliver continued monetary stimulus by extending the maturity of its JGB purchases or by scaling up private asset purchases. We quantify the impact of rebalancing on capital outflows and discuss JGB market signals that can be indicative of limits being within reach.
August 3, 2015
Sub-Saharan Employment Developments: The Important Role of Household Enterprises with an Application to Rwanda
Description: This paper documents the structural transformation in employment that has taken place in Sub-Saharan Africa (SSA) over the past 15 years. In contrast to Asian economies, where at least half of the labor flows out of agriculture have gone into industry, in SSA, most of the workers have ended up in the service sector, especially household enterprises. Rwanda has been one of the stellar performers in SSA in terms of structural transformation with the strongest movement of workers out of agriculture. Contrary to conventional wisdom, except for the very top of the distribution of consumption in Rwanda, families in household enterprises now consume as much as non-agricultural wage earners.
July 30, 2015
Production Offshoring and Investment by Japanese Firms
Description: We trace Japanese corporate investment across different types of firms over the past decades and estimate the main determinants of investment. We find that there are differences in investment behavior between firms expanding abroad and those operating mainly in domestic markets. On the back of a trend increase in production offshoring, investment by large companies, especially those in the transportation sector, is more positively associated with cash flow while responding less to Q ratio. These findings are consistent with the subdued recovery of private investment in recent years despite booming stock markets and the large build up of cash holdings by Japanese corporates.
July 30, 2015
Price Expectations and the U.S. Housing Boom
Description: Between 1996 and 2006 the U.S. has experienced an unprecedented boom in house prices. As it has proven to be difficult to explain the large price increase by observable fundamentals, many observers have emphasized the role of speculation, i.e. expectations about future price developments. The argument is, however, often indirect: speculation is treated as a deviation from a benchmark. The present paper aims to identify house price expectation shocks directly. To that purpose, we estimate a VAR model for the U.S. and use sign restrictions to identify house price expectation, housing supply, housing demand, and mortgage rate shocks. House price expectation shocks are the most important driver of the boom and account for about 30 percent of the real house price increase. We also construct a model-based measure of exogenous changes in price expectations and show that this measure leads a survey-based measure of changes in house price expectations. Our main identification scheme leaves open whether expectation shifts are realistic or unrealistic. In extensions, we provide evidence that price expectation shifts during the boom were primarily unrealistic and were only marginally affected by realistic expectations about future fundamentals.
July 30, 2015
Foreign Help Wanted: Easing Japan’s Labor Shortages
Description: Data and anecdotal evidence suggest that Japan is suffering from labor shortages, which are large in an international perspective, have a negative impact on potential growth, and reduce the effectiveness of monetary and fiscal stimulus. This paper focuses on policy options to ease Japan’s labor shortages. In particular, we focus on possible measures to increase reliance on foreign labor. Other policy recommendations to deal with shortages include policies aimed at increasing female labor participation, encouraging wage growth, increasing investment, as well as training and other active labor market policies.
July 29, 2015
Filling the Gap: Infrastructure Investment in Brazil
Description: Infrastructure bottlenecks have been identified as a key obstacle to growth affecting productivity and market efficiency, and hindering domestic integration and export performance. This paper assesses the state of Brazil’s infrastructure, in light of past investment trends and various quality and quantity indicators. Brazil’s infrastructure stock and its quality rank low in relation to that of comparator countries, chosen amongst main export competitors. We provide evidence that infrastructure affects domestic integration by analyzing price convergence of tradable goods across major cities. The government’s concession program will narrow part of the infrastructure gap, however, governance reforms will be crucial to improving investment efficiency.
July 29, 2015
Collateral Damage: Dollar Strength and Emerging Markets’ Growth
Description: We document that, historically, although stronger growth in the U.S. increases growth in emerging markets, U.S. dollar appreciation (depreciation) cycles—which are highly persistent—mitigate (amplify) the impact on real GDP growth in emerging markets. We argue that the main transmission channel of the latter is through an income effect: as the dollar appreciates, commodity prices fall; weaker commodity prices depress domestic demand via lower real income; real GDP in emerging markets decelerates; and vice versa. These effects hold despite any potential expenditure-switching effect resulting from the relative (to the U.S. dollar) currency depreciation of emerging market economies. We also show the negative effect on emerging markets’ growth of U.S. interest rates beyond the effects of the U.S. real exchange rate and real GDP growth. Therefore, at the time of writing, emerging markets’ growth is expected to remain subdued reflecting, intera alia, the expected persistence of the strong dollar and the anticipated increased in the U.S. interest rates.
July 28, 2015
Estimation of Drivers of Public Education Expenditure: Baumol’s Effect Revisited
Description: This paper analyzes drivers of rising per-pupil public education spending, including Baumol’s “cost disease” effect. Higher wages paid to teachers contributed significantly to the increase in per-pupil spending over the past decades. Empirical analyses using a large dataset of advanced and developing economies show that the contribution of Baumol’s effect was much smaller than impled by theory. Rather, the spending inccrease reflects rising wage premiums paid for teachers in excess of market wages, especially in middle-income countries. The strong wage premium effect suggests that institutional characteristics that govern teachers’ wage setting are key determinants of education expenditure.
July 28, 2015
Does A Regional Trade Agreement Lessen or Exacerbate Growth Volatility? An Empirical Investigation
Description: This paper assesses how regional trade agreements (RTAs) impact growth volatility on a worldwide sample of 170 countries with data spanning the period 1978-2012. Notwithstanding concerns that trade openness through RTAs can heighten exposure to shocks, in particular when it leads to increased product specialization, RTAs through enhanced policy credibility, improved policy coordination, and reduced risk of conflicts can ease growth volatility. Empirical estimations suggest the benefits outweigh the costs as RTAs are consistently associated with lower growth volatility, after controlling for trade openness and other determinants of growth volatility. Furthermore, regression results also suggest that countries that are more prone to shocks are more likely to join a RTA, in particular with countries with relatively less volatile growth, additionally enhancing the stabilization effect.
July 28, 2015
Deflation and Public Finances: Evidence from the Historical Records
Description: This paper examines the impact of deflation on fiscal aggregates. With deflation relatively rare in modern history, it relies mostly on the historical records, using a dataset panel covering 150 years and 21 advanced economies. Empirical evidence shows that deflation affects public finances mostly through increases in public debt ratios, reflecting a worsening in interest rate–growth differentials. On average, a mild rate of deflation increases public debt ratios by almost 2 percent of GDP a year, this impact being larger during recessionary deflations. Using a simulation model that accounts for composition effects and price expectations, we also find that, for European countries, a 2 percentage point deflationary shock in both 2015 and 2016 would lead to a deterioration in the primary balance of as much as 1 percent of GDP by 2019.