Working Papers
2023
April 21, 2023
Low for (Very) Long? A Long-Run Perspective on r* across Advanced Economies
Description: We provide a long-run perspective on neutral interest rates with new estimates for 16 advanced economies since the 1870s using the Laubach and Williams approach. Our estimates differ substantially from commonly used proxies. We find that, while cross-country heterogeneity was significant in the past, since the 1980s the decline has been common to many countries. Traditional determinants such as population aging and productivity growth are strongly correlated with the changes in neutral rates, while others like the relative price of capital and inequality exhibit weak relationships with r*. We also find that neutral rates co-vary negatively with public debt-to-GDP ratios.
April 21, 2023
Inflation and Monetary Policy in a Low-Income and Fragile State: The Case of Guinea
Description: Inflation in low-income countries is often high and volatile, driven by external shocks. In addition, inflation in fragile states is affected by highly volatile domestic factors that complicate monetary policy’s ability to deliver price stability. We estimate the drivers of inflation in Guinea since the early 2000s, a period in which the country suffered major shocks from pandemics, commodity price movements, and multiple military coups, and during which inflation averaged 12 percent. Results confirm that global commodity and transport prices account for a large share of the variation in inflation. The contribution of monetary policy shocks to inflation is moderate, reflecting its broadly neutral stance throughout most of the last two decades. However, monetary policy has occasionally made larger contributions to inflation, and recently helped contain price pressures from high commodity prices. The effectiveness of monetary policy reflects a strong relationship between monetary aggregates and the exchange rate.
April 21, 2023
Leveraging Anti-money Laundering Measures to Improve Tax Compliance and Help Mobilize Domestic Revenues
Description: The paper advocates leveraging anti-money laundering (AML) measures to enhance tax compliance, tackle tax crimes, and, in turn, help mobilize domestic revenues. While AML measures have already been deployed to improve tax compliance, including during the European debt crisis, the benefits that such measures could bring to the integrity of the tax system are yet to be fully realized. In recent years, the relevance of AML measures for tax purposes resurfaced in public discourse in light of numerous data leaks that provided ample evidence of the closely intertwined nature of tax crimes and money laundering. There might now be the right political momentum for greater utilization of AML measures given post-pandemic calls for a more progressive tax system, elevated sovereign debt burdens, a challenging global economic outlook, and widespread cost-of-living crisis. In this context, the IMF has stressed the importance of rebuilding fiscal buffers, as countries with more fiscal room are better placed to weather the economic slowdown and protect households and businesses.
April 21, 2023
Unleashing India’s Growth Potential
Description: This paper analyzes the drivers of India’s growth in the past five decades and considers baseline and upside scenarios of India’s medium-term potential growth. Using a production function approach, the paper assesses the impact of the pandemic on the key factors of production and therefore its impact on medium-term growth. Successful implementation of wide-ranging structural reforms could help support productivity and potential growth over the medium term.
April 21, 2023
Far More Than a Shot in the Arm: Vaccines and Consumer Spending
Description: The spread of the COVID-19 pandemic and government interventions have reshaped economic activity with abrupt changes in household consumption behavior across the world. This paper provides an empirical investigation of how the COVID-19 vaccine rollout has affected consumer spending at daily frequency using debit and credit card transactions in three European countries. Empirical results show that COVID-19 vaccinations, along with other policy interventions, have mitigated the severe negative impact of the pandemic and boosted consumer spending. First, the vaccination deployment has a statistically and economically significant positive effect on private consumption. Second, other policy responses to the pandemic—designed to contain the spread of the virus and provide support to businesses and households—have significant effects on the amount and composition of debit and credit card transactions. Third, the impact of COVID-19 vaccinations in terms of stimulating consumer spending appears to be more pronounced on contact-intensive sectors such as services than goods.
April 7, 2023
How Large is the Sovereign Greenium?
Description: This paper assembles a comprehensive sovereign green bond database and estimates the sovereign greenium. The development of green bond markets has been one of the most important financial breakthroughs in the domain of sustainable finance during the last 15 years. A central benefit associated with green bonds has been that they exhibit a positive green premium (greenium), i.e., a lower yield relative to a similar conventional bond. Yet, issuances at the sovereign level have been relatively recent and not well documented in the literature. We find that green bonds are issued at a relatively small premium (4 basis points on average) in Advanced Economies. Yet, importantly, the greenium is growing over time and is considerably larger (11 basis points on average) for Emerging Market Economies.
April 4, 2023
Are We Heading for Another Debt Crisis in Low-Income Countries? Debt Vulnerabilities: Today vs the pre-HIPC Era
Description: There are growing concerns that 25 years after the launch of the HIPC debt relief initiative, many low-income countries are again facing high debt vulnerabilities. This paper compares debt vulnerabilities in LICs today versus those on the eve of the HIPC Initiative and examines challenges to a similarly designed debt-relief framework. While solvency and liquidity indicators in most LICs have steadily worsened in recent years, they remain substantially better on average than they were on the eve of HIPC in the mid-1990s. This said, if current trends persist, debt vulnerabilities in LICs could (but would not necessarily) reach levels comparable to the pre-HIPC era over the medium- to long-term. Today’s more complex creditor landscape makes coordination challenging. It is therefore essential for countries to reduce today’s debt burdens promptly through economic reform, lowering the cost of financing, and debt restructuring on a case-by-case basis. The international community should also step up efforts to improve debt restructuring processes, including the G20 Common Framework, to ensure that debt relief is delivered in a timely and efficient manner where it is needed.
March 31, 2023
Stacking up the Benefits: Lessons from India’s Digital Journey
Description: Foundational digital public infrastructure (DPI), consisting of unique digital identification, payments system and data exchange layer has the potential to support the transformation of the economy and support inclusive growth. India’s foundational DPI, called India Stack, has been harnessed to foster innovation and competition, expand markets, close gaps in financial inclusion, boost government revenue collection and improve public expenditure efficiency. India’s journey in developing a world-class DPI highlights powerful lessons for other countries embarking on their own digital transformation, in particular a design approach that focuses on shared building blocks and supporting innovation across the ecosystem.
March 31, 2023
Renminbi Usage in Cross-Border Payments: Regional Patterns and the Role of Swaps Lines and Offshore Clearing Banks
Description: The paper examines the usage of the Renminbi (RMB) as an international payment currency. Globally, the use of RMB remains small, accounting for 2 percent of total cross-border transactions. Using country-level transaction data from Swift** for 2010–21, we find significant regional variations in the use of RMB for cross-border payments. While RMB is little used in some regions, it has gained traction in others, and these cross-country differences have widened over the years. Such differences can be partly explained by an economy’s geographic distance, political distance, and trade linkages with China. However, it also reflects the impact of policy measures by the People’s Bank of China, including establishing bilateral swap lines and offshore clearing banks. Both policy measures helped to address offshore RMB liquidity shortages given China’s overall capital account restrictions, with the offshore clearing banks having a quantitatively larger impact. Our analysis contributes to a better understanding of the growing importance of RMB within the international monetary system.
March 24, 2023
Currency Usage for Cross Border Payments
Description: While the global usage of currencies other than the U.S. dollar and the euro for cross-border payments remains limited, rapid technological (e.g. digital money) or geopolitical changes could accelerate a regime shift into a multipolar or more fragmented international monetary system. Using the rich Swift database of cross-border payments, we empirically estimate the importance of legal tender status, geopolitical distance, and other variables vis-à-vis the large inertia effects for currency usage, and perform several forecasting simulations to better understand the role of these variables in shaping the future payments landscape. While our results suggest a substantially more fragmented international monetary system would be unlikely in the short and medium term, the impact of new technologies remains highly uncertain, and much more rapid geopolitical developments than expected could accelerate the transformation of the international monetary system towards multipolarity.