Working Papers
2014
January 16, 2014
Reforming Tax Expenditures in Italy: What, Why, and How?
Description: The IMF has advised country authorities to roll back tax expenditures as a way to support fiscal consolidation efforts—urging them to evaluate tax expenditures according to clear criteria, and assessing their impact on public finances, economic efficiency, equity, and administrative and compliance costs. This paper analyzes tax expenditures in Italy, considering the extent to which tax expenditures can be considered part of an optimal tax system and possible reforms.
January 14, 2014
Resource Blessing, Revenue Curse? Domestic Revenue Effort in Resource-Rich Countries
Description: This paper uses a newly constructed revenue dataset of 35 resource-rich countries for the period 1992-2009 to analyze the impact of expanding resource revenues on different types of domestic (non resource) tax revenues. Overall, we find a statistically significant negative relationship between resource revenues and total domestic (non resource) revenues, including for the major tax components. For each additional percentage point of GDP in resource revenues, there is a reduction in domestic (non resource) revenues of about 0.3 percentage points of GDP. We find this primarily occurs through reduced effort on taxes on goods and services—in particular, the VAT— followed by a smaller negative impact on corporate income and trade taxes.
January 14, 2014
Fiscal Vulnerabilities and Risks from Local Government Finance in China
Description: China weathered the global financial crisis better than most, thanks to a large and timely stimulus. This stimulus, however, was mainly in the form of off-budget infrastructure spending and thus not visible in the headline fiscal data. We construct a time series for the augmented fiscal deficit and debt—augmented to include off-budget activity—that better illustrates the counter-cyclical role of fiscal policy. The results also show that the augmented fiscal deficit and debt are both considerably higher than the headline government data suggest. Nonetheless, at around 45 percent of GDP, the augmented debt is still at a manageable level.
January 13, 2014
Economic Growth and Government Spending in Saudi Arabia: an Empirical Investigation
Description: This paper empirically examines the effects of different types of government expenditures, on economic growth in Saudi Arabia. We use different econometric techniques to estimate the short- and long-run effects of these expenditures on growth and employ annual data over the period 1969-2010. Our findings indicate that while private domestic and public investments, as well as healthcare expenditure, stimulate growth in the long-run, openness to trade and spending in the housing sector can also boost short-run production. These findings draw some policy implications for Saudi policymakers on maximizing the returns of the government spending on economic growth.
January 13, 2014
Potential Growth in Emerging Asia
Description: Using three distinct approaches—statistical filtering, production function, and multivariate model— this paper estimates potential growth for China, India, and five ASEAN countries (Indonesia, Malaysia, the Philippines, Thailand, and Vietnam) during 1993–2013. The main findings include: (i) both China and India have recently exhibited a slowdown in potential growth, largely reflecting a decline of total factor productivity (TFP) growth; (ii) by contrast, trend growth for the five ASEAN countries has been rather stable and might even have increased marginally, with the notable exception of Vietnam;(iii) over the longer term, demographic factors will be much more supportive in India and some ASEAN economies than in China, where working-age population should start shrinking, with the overall dependency ratio climbing by the end of this decade. Improving or sustaining potential growth calls for broad structural reforms.
January 10, 2014
Real Exchange Rate Appreciation in Emerging Markets: Can Fiscal Policy Help?
Description: A number of emerging markets have experienced substantial real exchange rate appreciation in recent years, generating concerns about competitiveness and prompting policymakers to respond with a combination of mitigating policies. This paper shows that fiscal policy can play a role in alleviating these pressures. Using a sample of 28 emerging market economies over 1983-2011, we estimate a dynamic model of the real exchange rate and find that a permanent fiscal adjustment may reduce appreciation pressures over the long term. Furthermore, the composition of public spending matters, with reductions in current spending playing a key role. To illustrate the importance of these findings, the paper focuses on the case of Brazil. Our results suggest that maintaining fiscal discipline while increasing public investment in Brazil is likely to ease real appreciation pressures, highlighting the importance of tackling long-standing budget rigidities.
2013
December 31, 2013
IMF-Supported Programs in Low Income Countries: Economic Impact over the Short and Longer Term
Description: This paper studies the short and longer-term impact of IMF engagement in Low-Income Countries (LICs) over nearly three decades. In contrast to earlier studies, we focus on a sample composed exclusively of LICs and disentangle the different effects of IMF longer-term engagement and short-term financing using a propensity score matching approach to control for selection bias. Our results indicate that longer-term IMF support (at least five years of program engagement per decade) helped LICs sustain economic growth and boost resilience by building fiscal buffers. Interestingly, the size of IMF financing has no significant impact on economic growth, possibly pointing to the prominent role of IMF policy advice and institutional capacity building in the context of longer-term engagement. We also present evidence that the short-term IMF engagement through augmentations of existing programs or short-term and emergency facilities is positively associated with a wide range of macroeconomic outcomes. Notably, the IMF financial support has the greatest impact on short-term growth when LICs are faced with substantial macroeconomic imbalances or exogenous shocks.
December 31, 2013
The External Balance Assessment (EBA) Methodology
Description: The External Balance Assessment (EBA) methodology has been developed by the IMF’s Research Department as a successor to the CGER methodology for assessing current accounts and exchange rates in a multilaterally consistent manner. Compared to other approaches, EBA emphasizes distinguishing between the positive empirical analysis and the normative assessment of current accounts and exchange rates, and highlights the roles of policies and policy distortions. This paper provides a comprehensive description and discussion of the 2013 version (“2.0”) of the EBA methodology, including areas for its further development.
December 30, 2013
Macro-Financial Linkages in Egypt: A Panel Analysis of Economic Shocks and Loan Portfolio Quality
Description: This paper investigates macro-financial linkages in Egypt using two complementary methods, assessing the interaction between different macroeconomic aggregates and loan portfolio quality in a multivariate framework as well as through a panel vector autoregressive method that controls for bank-level characteristics. Using a panel of banks over 1993-2010, the authors find that a positive shock to capital inflows and growth in gross domestic product improves banks’ loan portfolio quality, and that the effect is fairly similar in magnitude using the multivariate and panel vector autoregressive frameworks. In contrast, higher lending rates may lead to adverse selection problems and hence to a drop in portfolio quality. The paper also reports that a larger market share of foreign banks in the industry improves loan quality.
December 27, 2013
Sovereign Debt Markets in Turbulent Times: Creditor Discrimination and Crowding-Out
Description: In 2007, countries in the Euro periphery were enjoying stable growth, low deficits, and low spreads. Then the financial crisis erupted and pushed them into deep recessions, raising their deficits and debt levels. By 2010, they were facing severe debt problems. Spreads increased and, surprisingly, so did the share of the debt held by domestic creditors. Credit was reallocated from the private to the public sectors, reducing investment and deepening the recessions even further. To account for these facts, we propose a simple model of sovereign risk in which debt can be traded in secondary markets. The model has two key ingredients: creditor discrimination and crowding-out effects. Creditor discrimination arises because, in turbulent times, sovereign debt offers a higher expected return to domestic creditors than to foreign ones. This provides incentives for domestic purchases of debt. Crowding-out effects arise because private borrowing is limited by financial frictions. This implies that domestic debt purchases displace productive investment. The model shows that these purchases reduce growth and welfare, and may lead to self-fulfilling crises. It also shows how crowding-out effects can be transmitted to other countries in the Eurozone, and how they may be addressed by policies at the European level.