Working Papers
2023
May 5, 2023
ECB Euro Liquidity Lines
Description: Central bank liquidity lines have gained momentum since the global financial crisis as a crosscurrency liquidity management tool. We provide a complete timeline of the ECB liquidity line announcements and study their signalling and spillback effects. The announcement of an ECB euro liquidity line decreases the premium paid by foreign agents to borrow euros in FX markets relative to currencies not covered by these facilities by 51 basis points. Consistent with a stylized model, bank equity prices increase by around 1.75% in euro area countries highly exposed via banking linkages to countries whose currencies are targeted by liquidity lines.
May 5, 2023
Firm-level Digitalization and Resilience to Shocks: Role of Fiscal Policy
Description: Would digitalization at firm level strengthen firms’ resilience to shocks? And if so, could fiscal policy play any role to promote firm-level digitalization? This paper empirically explores answers to these questions. Based on a local projection method (using the Orbis data covering 1.8 million non-financial firms from 53 countries), we estimate the impacts of aggregate uncertainty shocks on firms’ sales, profit margin, and employment. The findings suggest that uncertainty shocks affect digitalized and less-digitalized firms very differently. Digitalized firms weather shocks better, with smaller drops in sales and profits, while less-digitalized ones are worse off, with long-lasting scars. Then we examine the impact of fiscal interventions to promote firms’ digitalization, using cross-country panel data (covering 64 countries). The result suggests that aligning the tax regime on digital services with general taxation principles and competitive procurement rules on digital products could effectively support the promotion of firm-level digitalization. Overall, our findings point that firm-level digitalization would help strengthen firms’ resilience to a shock, and fiscal interventions can play an important role to promote firm-level digitalization.
May 5, 2023
The Effects of Inflation on Public Finances
Description: Does inflation help improve public finances? This paper documents the dynamic responses of fiscal variables to an inflation shock, using both quarterly and annual panel data for a broad set of economies. Inflation shocks are estimated to improve fiscal balances temporarily, as nominal revenues track inflation closely, while nominal primary expenditures take longer to catch up. Inflation spikes also lead to a persistent reduction in debt to GDP ratios, both due to the primary balance improvement and the nominal GDP denominator channel. However, debt only falls with inflation surprises—rises in inflation expectations do not improve debt dynamics, suggesting limits to debt debasement strategies. The results are robust to using various inflation measures and instrumental variables.
May 5, 2023
The Right Tool for the Job? Mortgage Distress and Personal Insolvency during the European Debt Crisis
Description: The European debt crisis in the early to mid 2010s brought to the fore the issue of household debt distress: in the countries affected, widespread over-indebdtedness resulted in serious financial and social challenges. The crisis was primarily a mortgage debt crisis, but in several cases, the legal response was based on the introduction of personal insolvency procedures. This paper examines the challenges in designing and implementing legal reforms in this area to promote a better understanding of the main considerations in resolving personal insolvency and distressed mortgage debt in the context of crises. Lessons from the European crisis may prove valuable when dealing with the aftermath of the COVID-19 pandemic and the war in Ukraine on household debt distress.
May 5, 2023
Who are Central Banks? Gender, Human Resources, and Central Banking
Description: Central banks, as the epitome of the economics profession and the main paragon of public institutions, can reveal key insights into gender patterns. We create a novel multidimensional survey directed at eight central banks in advanced economies (G7 national central banks and the European Central Bank), covering several aspects of gender, such as women’s participation at different seniority levels, employment trends, and human resources practices. These elements are summarized in a new comprehensive index of gender equality—Human Resources Gender Index (HRGI). We show that these central banks have room for improvement in the inclusion of women in economics professions, managerial positions, and with full time contracts. Women in central banking also face a gender pay gap. In comparison, International Financial Institutions (the International Monetary Fund, the World Bank Group, and the Organization for Economic Co-operation and Development) perform better in terms of gender equality. The HRGI index, hiring and promotion of women, and their contract types are associated with output and credit gaps, thus being of macro-critical importance. In return, some country characteristics can be related to gender equality, such as women in high-level positions, government effectiveness, and corruption.
April 29, 2023
Mining Revenues and Inclusive Development in Guinea
Description: What are the potential benefits of increasing the taxation of a foreign extractive sector? This paper applies this question to the case of Guinea by using a multi-sector macro-inequality model with heterogeneous agents. We quantify the long-run equilibrium impact of additional taxation when the proceeds are invested in human capital, inclusive infrastructure, and social transfers. Our analysis focuses on the response of GDP, labor formalization, poverty rates, Gini coefficients, rural/urban inequality and sectoral reallocation. The three forms of investment are complementary. Infrastructure investments favor formal production in the urban area while growth and government transfers boost the demand for food. These effects help support the rate of return to education, protecting job formalization through higher wages and prices of informal goods, as the education policy boosts labor supply in rural and urban areas.
April 29, 2023
Revisiting the Countercyclicality of Fiscal Policy
Description: This paper provides a novel dataset of time-varying measures on the degree of countercyclicality of fiscal policies for advanced and developing economies between 1980 and 2021. The use of time-varying measures of fiscal stabilization, with special attention to potential endogenity issues, overcomes the major limitation of previous studies and alllows the analysis to account for both country-specific as well as global factors. The paper also examines the key determinants of countercyclicality of fiscal policy with a focus on factors as severe crises, informality, financial development, and governance. Empirical results show that (i) fiscal policy tends to be more counter-cyclical during severe crises than typical recessions, especially for advanced economies; (ii) fiscal counter-cyclicality has increased over time for many economies over the last two decades; (iii) discretionary and automatic countercyclicality are both strong in advanced economies but acyclical (at times procyclical) in low-income countries, (iv) fiscal countercyclicality operates primarily through the expenditure channel, particularly for social benefits, (vi) better financial development, larger government size and stronger institutional quality are associated with larger countercyclical effects of fiscal policy. Our results are robust to various specifications and endogeneity checks.
April 29, 2023
Do Fiscal Rules Foster Fiscal Discipline in Resource-Rich Countries?
Description: This paper investigates the performance of fiscal rules in resource-rich countries (RRC). Using panel data for 57 commodity exporting countries from 1976 to 2021, we find that fiscal rules: (i) reduce the procyclicality of real public expenditures with terms of trade in oil exporting countries, and (ii) improve non-resource primary balances in all RRC, especially during terms of trade upturns. The rules’ design matters. Addressing the procyclicality of public expenditures with terms-of-trade can be achieved with expenditure rules, and, for oil-exporters, revenue rules (althoug limited data on the latter calls for taking the results cautiously). To improve non-resource fiscal balances, debt rules and fiscal balance rules are shown to have a positive impact, especially in oil exporting countries. We further investigate the effect of fiscal rules and other features of the fiscal framework through case studies (for Botswana, Mongolia, and Timor-Leste). These cases highlight that even when fiscal rules are not fully complied with, they lead to some degree of fiscal discipline. The case studies also highlight the importance of the quality of fiscal frameworks: frequent revisions, lack of compliance or low stringency of the rules can significantly hamper their effectiveness.
April 28, 2023
Eye of the Storm: The Impact of Climate Shocks on Inflation and Growth
Description: What is the impact of climate change on inflation and growth dynamics? This is not a simple question to answer as climate shocks tend to be ubiquitous, but with opposing effects simultaneously on demand and supply. The extent of which climate-related shocks affect inflation and economic growth also depends on long-run scarring in the economy and the country’s fiscal and institutional capacity to support recovery. In this paper, we use the local projection method to empirically investigate how climate shocks, as measured by climate-induced natural disasters, influence inflation and economic growth in a large panel of countries over the period 1970–2020. The results shows that both inflation and real GDP growth respond significantly but also differently in terms of direction and magnitude to different types of disasters caused by climate change. We split the full sample of countries into income groups—advanced economies and developing countries—and find a striking contrast in the impact of climate shocks on inflation and growth according to income level, state of the economy, and fiscal space when the shock hits.
April 28, 2023
State-Dependent Exchange Rate Pass-Through
Description: We estimate how the rate of pass-through from the exchange rate to domestic prices varies across states of the economy and depending on the shocks that drive fluctuations in the exchange rate. We confirm several results from the literature and uncover new facts. Drawing on the experience of a large sample of advanced and emerging market economies over the past 30 years, we document that exchange rate pass-through significantly larger during periods of high inflation and elevated uncertainty. Using a novel identification strategy, we also show that pass-through is higher when exchange rate fluctuations are driven by U.S. monetary policy.