Working Papers
2023
March 17, 2023
Capital Controls in Times of Crisis – Do They Work?
Description: This paper provides an analysis of the use and effects of capital controls in 27 AEs and EMDEs which experienced at least one financial crisis between 1995 and 2017. Countries often turn to using capital controls in crisis: some ease inflow controls while others tighten controls on outflows. A key finding is that countries with pervasive controls before the start of the crisis are shielded compared to countries with more open capital accounts, which see a significant decline in capital flows during crises. In contrast, the effectiveness of capital controls introduced during crises appears to be weak and difficult to identify. There is also some evidence that the introduction of outflow controls during crises is negatively associated with sovereign debt ratings, but that investors may actually forgive with time.
March 17, 2023
Determinants and Social Dividends of Digital Adoption
Description: We identify key drivers of digital adoption, estimate fiscal costs to provide internet subsidies to households, and calculate social dividends from digital adoption. Using cross-country panel regressions and machine learning, we find that digital infrastructure coverage, internet price, and usability are the most statistically robust predictors of internet use in the short run. Based on estimates from a model of demand for internet, we find that demand is most price responsive in low-income developing countries and almost unresponsive in advanced economies. We estimate that moving low-income developing and emerging market economies to the levels of digital adoption in emerging and advanced economies, respectively, will require annual targeted subsidies of 1.8 and 0.05 percent of GDP, respectively. To aid with subsidy targeting, we use microdata from over 150 countries and document a digital divide by gender, socio-economic status, and demographics. Finally, we find substantial aggregate and distributional gains from digital adoption for education quality, time spent doing unpaid work, and labor force participation by gender.
March 17, 2023
Public-Private Wage Differentials and Interactions Across Countries and Time
Description: We compile a novel database on average public and private sector wages and public-private wage differentials, which we use to analyze how average public-private wage differentials vary according to gender and skill level as well as over time. We further examine the dynamic relationship between public and private wage levels and the implications for inflation. On average, public-sector workers earn around 10 percent more relative to comparable private sector workers, with the premium being higher for women, low-skilled workers, and in developing countries. The average public sector wage premium varies counter-cyclically, increasing during economic downturns, and increases prior to elections. Both private sector wages and inflation respond positively to changes in public wages, albeit with significant heterogeneity in the effects across countries reflecting differences in labor market characteristics and prevailing macroeconomic conditions.
March 17, 2023
Fiscal Consolidation: Taking Stock of Success Factors, Impact, and Design
Description: Surges in public debt in many countries since the COVID-19 pandemic have rekindled interest in fiscal consolidations, which often entail difficult policy choices in the face of economic and political constraints. This paper presents findings from a survey of the literature on fiscal consolidations, focusing on the pre-existing conditions, impact and design aspects of past consolidation episodes. These findings provide insight into factors that influence the chance of successful consolidations, their growth and distributional impact, the pace, phasing, duration and policy mix of reforms to mitigate the impact, and the role of fiscal institutions and capacity development in successful consolidations.
March 17, 2023
Derivative Margin Calls: A New Driver of MMF Flows
Description: During the March 2020 market turmoil, euro area money-market funds (MMFs) experienced significant outflows, reaching almost 8% of assets under management. This paper investigates whether the volatility in MMF flows was driven by investors’ liquidity needs related to derivative margin payments. We combine three highly granular unique data sources (EMIR data for derivatives, SHSS data for investor holdings of MMFs and Refinitiv Lipper data for daily MMF flows) to construct a daily fund-level panel dataset spanning from February to April 2020. We estimate the effects of variation margin paid and received by the largest holders of EURdenominated MMFs on flows of these MMFs. The main findings suggest that variation margin payments faced by some investors holding MMFs were an important driver of the flows of EUR-denominated MMFs domiciled in euro area.
March 17, 2023
Monetary Policy Implications of Central Bank Digital Currencies: Perspectives on Jurisdictions with Conventional and Islamic Banking Systems
Description: Central bank digital currencies (CBDCs) promise many benefits but, if not well designed, they could have undesired consequences, including for monetary policy. Issuing an unremunerated CBDC or a wholesale CBDC does not change the objectives of monetary policy or the operational framework for monetary policy. CBDCs can, however, induce changes in the retail, wholesale and cross border payments that have negative spillover effects on monetary policy, through their effects on money velocity, bank deposit disintermediation, volatility of bank reserves, currency substitution, and capital flows. Countries most vulnerable are those with banking systems dominated by small retail deposits and demand deposits, low levels of digital payments and weak macro fundamentals. Proposed CBDC design features, such as caps on CBDC holdings and unremunerating the CBDC can moderate disintermediation risks, but they are not sufficient. Central banks will need to ensure that unintended macroeconomic risks are comprehensively identified and mitigated.
March 17, 2023
Debt Mutualization in the Euro Area: A Quantitative Exploration
Description: This paper explores the feasibility of an idea proposed first by the German Council of Economic Experts in 2011 and revisited by Italian and French authorities in 2021: the one-off mutualization of some European legacy debt through the creation of a European Debt Management Agency (EDMA). The paper does not argue in favor or against these proposals or make a proposal of its own. Rather it outlines a conceptual framework that can be used to quantify the contours of mutualization proposals and draws lessons from the debt assumption in the United States in 1790. The framework suggests that by capitalizing the convenience yield on European-wide safe assets, the EDMA could issue up to 15 percent of euro area GDP, helping to put national debts on a sounder trajectory. The analysis suggests that, without mutualization, some euro area countries are likely to experience decreasing debt-to-GDP ratios over the forecast period. This is not the case for Belgium, Finland, France, Italy, and Spain, where further fiscal consolidation would be needed. For these countries, we consider the effects of a debt mutualization equivalent to 26 percent of their GDP. For Italy, this operation alone is enough to ensure a decreasing debt-to-GDP path. For the others, the news is more mixed: while the additional fiscal consolidation is smaller, 1.3 to 2.3 percent of GDP are still required to reduce debt with 95 percent probability.
March 10, 2023
Public versus Private Cost of Capital with State-Contingent Terminal Value
Description: The economic debate underlines the reasons why discount rates of infrastructure projects should be similar, regardless the public or private source of financing, during the forecast period when flows are risky but predictable. In contrast, we show that the incompleteness of contracts between governments and private firms beyond the forecast period (i.e., when flows of net social benefits are state-contingent) entails expected terminal values that are systematically larger under government rather than private financing. This effect provides a new rationale for applying a lower discount rate in the assessment of projects under public financing as compared to private financing.
March 10, 2023
The Heterogeneous Effects of U.S. Monetary Policy on Non-Bank Finance
Description: Using flow of funds and high frequency data from the Investment Company Institute, we study the effects of monetary policy shocks on the size of non-bank assets as well as on flows into long-term mutual funds and returns on their assets. Consolidating chains of non-bank intermediation to avoid double counting, we find that contractionary monetary policy shocks shrink the assets of non-banks reliant on long-term funding, while increasing those of nonbanks reliant on short-term funding. Contractionary shocks also cause sustained outflows from long-term mutual funds and reduce their returns. Using a Markov-Switching VAR, we find these effects to be more prevalent after the Global Financial Crisis, and show that monetary policy shocks had the opposite effects in some earlier periods. Policymakers will thus have to contend with a complex and heterogeneous transmission of monetary policy to financial and macroeconomic outcomes through the non-banks.
March 10, 2023
Optimal Monetary and Macroprudential Policies under Fire-Sale Externalities
Description: I provide an integrated analysis of monetary and macroprudential policies in a model economy featuring a financial friction and a nominal wage rigidity. In this set-up, the monetary authority faces a trade-off between macroeconomic and financial stability: While expansionary counter-cyclical monetary policy prevents involuntary unemployment, it also amplifies an inefficient reallocation of capital across sectors. The main contribution of the analysis is threefold: First it highlights a novel channel through which monetary policy can impact financial stability. Second, it shows that, by itself, monetary policy can significantly mitigate the wedge between the constrained efficient and the competitive allocation. Third, regardless of the availability of macroprudential tools, stabilizing demand is usually not optimal for monetary policy.