Working Papers
2013
May 22, 2013
Heterogeneous Bank Lending Responses to Monetary Policy: New Evidence from a Real-time Identification
Description: We present new evidence on how heterogeneity in banks interacts with monetary policy changes to impact bank lending. Using an exogenous policy measure identified from narratives on FOMC intentions and real-time economic forecasts, we find much greater heterogeneity in U.S. bank lending responses than that found in previous research based on realized federal funds rate changes. Our findings suggest that studies using realized monetary policy changes confound the monetary policy’s effects with those of changes in expected macrofundamentals. We also extend Romer and Romer (2004)’s identification scheme, and expand the time and balance sheet coverage of the U.S. banking sample.
May 22, 2013
Fiscal Multipliers in the ECCU
Description: The multipliers of taxes, and government consumption and investment expenditure for the Eastern Caribbean Currency Union (ECCU) are estimated using vector autoregression models with panel data. The impact and long-run multipliers are below unity, suggesting that a great extent of the intended impulse ends up expanding imported demand. The long-run multipliers of taxes and consumption expenditure are non-different from zero statistically, while public investment has a long-run multiplier of 0.6. The results suggest that countercyclical policies to stimulate growth should focus on public investment.
May 17, 2013
Inclusive Growth and the Incidence of Fiscal Policy in Mauritius: Much Progress, But More Could be Done
Description: Using data from three household surveys, we review whether growth in Mauritius was inclusive and discuss the incidence of public expenditures and taxes. Generally, Mauritius enjoys an even income distribution and low rates of poverty. Nevertheless, over the 2000s, despite overall progress, the benefits of growth appear to have become more skewed. Employment income is the main contributor to inequality in Mauritius. Social protection expenditures reduce poverty and inequality, but could be better targeted, particularly for pensions. Income taxes are progressive, though given their small relative weight they have a negligible impact on income distribution. The VAT appears relatively progressive compared to other developing countries, although its impact on the overall distribution is also small. With better targeting of the sizable social spending, significant further progress in poverty alleviation could be achieved.
May 17, 2013
Near-Coincident Indicators of Systemic Stress
Description: The G-20 Data Gaps Initiative has called for the IMF to develop standard measures of tail risk, which we identify in this paper with systemic risk. To understand the conditions under which tail risk is present, it is first necessary to develop a measure of what constitutes a systemic stress, or tail, event. We develop such a measure and uses it to assess the performance of eleven near-term systemic risk indicators as ‘early’ warning of distress among top financial institutions in the United States and the euro area. Two indicators perform particularly well in both regions, and a couple of other simple indicators do well across a number of criteria. We also find that the sizes of institutions do not necessarily correspond with their contribution to spillover risk. Some practical guidance for policies is provided.
May 17, 2013
World Food Prices, the Terms of Trade-Real Exchange Rate Nexus, and Monetary Policy
Description: How should monetary policy respond to large fluctuations in world food prices? We study this question in an open economy model in which imported food has a larger weight in domestic consumption than abroad and international risk sharing can be imperfect. A key novelty is that the real exchange rate and the terms of trade can move in opposite directions in response to world food price shocks. This exacerbates the policy trade-off between stabilizing output prices vis a vis the real exchange rate, to an extent that depends on risk sharing and the price elasticity of exports. Under perfect risk sharing, targeting the headline CPI welfare-dominates targeting the PPI if the variance of food price shocks is not too small and the export price elasticity is realistically high. In such a case, however, targeting forecast CPI is a superior choice. With incomplete risk sharing, PPI targeting is clearly a winner.
May 16, 2013
External Liabilities and Crises
Description: We examine the determinants of external crises, focusing on the role of foreign liabilities and their composition. Using a variety of statistical tools and comprehensive data spanning 1970-2011, we find that the ratio of net foreign liabilities (NFL) to GDP is a significant crisis predictor, and the more so when it exceeds 50 percent in absolute terms and 20 percent of the country-specific historical mean. This is primarily due to net external debt--the effect of net equity liabilities is weaker and net FDI liabilities seem if anything an offset factor. We also find that: i) breaking down net external debt into its gross asset and liability counterparts does not add significant explanatory power to crisis prediction; ii) the current account is a powerful predictor, either measured unconditionally or as deviations from conventionally estimated “norms” iii) foreign exchange reserves reduce the likelihood of crisis more than other foreign asset holdings; iv) a parsimonious probit containing those and a handful of other variables has good predictive performance in- and out-of-sample. The latter result stems largely from our focus on external crises stricto sensu.
May 16, 2013
Energy Subsidies and Energy Consumption: A Cross-Country Analysis
Description: The economic and environmental implications of energy subsidies have received renewed attention from policymakers and economists in recent years. Nevertheless there remains significant uncertainty regarding the magnitude of the impact of energy subsidies on energy consumption. In this paper we analyze a panel of cross-country data to explore the responsiveness of energy consumption to changes in energy prices and the implications of our findings for the debate on energy subsidy reform. Our findings indicate a long-term price elasticity of energy demand between -0.3 and -0.5, which suggests that countries can reap significant long-term benefits from the reform of energy subsidies. Our findings also indicate that short-term gains from subsidy reform are likely to be much smaller, which suggests the need for either a gradual approach to subsidy reform or for more generous safety nets in the short term.
May 16, 2013
The Anatomy of the VAT
Description: This paper sets out some tools for understanding the performance of the value added tax (VAT). Applying a decomposition of VAT revenues (as a share of GDP) to the universe of VATs over the last twenty years, it emerges that developments have been driven much less by changes in standard rates than by changes in ‘C-efficiency’ (an indicator of the departure of the VAT from a perfectly enforced tax levied at a uniform rate on all consumption). Decomposing C-efficiency into a ‘policy gap’ (in turn divided into effects of rate differentiation and exemption) and a ‘compliance’ gap (reflecting imperfect implementation), results pieced together for EU members suggest that the former are in almost all cases far larger than the latter, with rate differentiation and exemptions playing roles that differ quite widely across countries.
May 15, 2013
The Welfare Implications of Services Liberalization in a Developing Country: Evidence from Tunisia
Description: We propose an integrated method based on a two-sector small open economy dynamic and stochastic general equilibrium model to estimate non-tariff barriers and quantify the impact of services liberalization. The major component of trade barriers is explicitly modeled through the introduction of entry-sunk costs. Hence, liberalization is treated assuming a government's policy decision aimed at reducing those costs. Then, we estimate the model using Bayesian techniques for Tunisia and the Euro Area. The paper presents a precise quantitative evaluation of services trade barriers as the difference between entry-sunk costs in Tunisia versus the Euro Area. We find significant welfare benefits in addition to aggregate and sectoral growth gains the Tunisian economy could attain following services liberalization. Surprisingly, the goods sector is the one that benefits the most from services liberalization in the short- and long-term horizons.
May 15, 2013
Is the Growth Momentum in Latin America Sustainable?
Description: A favorable external environment coupled with prudent policies fostered output growth in most of Latin America during the last decade. But, what were the drivers of this strong growth performance from the supply side and will this momentum be sustainable in the years ahead? We address these questions by identifying the proximate causes of the recent high GDP growth and estimating potential growth rates for the period ahead for a large group of Latin American countries based on standard (Solow-style) growth accounting methodologies. We find that factor accumulation (especially labor), rather than growth in total factor productivity (TFP), remains the main driver of GDP growth. Moving forward, given the expected moderation of capital accumulation and some natural constraints on labor, the strong growth momentum is unlikely to be sustainable unless TFP performance improves significantly.