Working Papers
2023
February 17, 2023
Crypto Assets and CBDCs in Latin America and the Caribbean: Opportunities and Risks
Description: After providing a general overview of the nature, pros, and cons of crypto assets and CBDCs, this paper focuses on documenting their recent experience in LAC. The region records a high interest in unbacked crypto assets and stablecoins and its authorities’ policy responses have varied substantially, ranging from the introduction of Bitcoin as legal tender in El Salvador to their prohibition in many other countries worried about their impact on financial stability, currency/asset substitution, tax evasion, corruption, and money laundering. This paper also describes briefly the results of a survey on CBDCs’ introduction plans and crypto assets regulation. Finally, this paper presents some general lessons and policy recommendations for the region on the regulation of cypto assets, digital currencies and cross-border payments, and on the potential introduction of CBDCs.
February 17, 2023
Willingness to Pay for Clean Air: Evidence from the UK
Description: This paper uses life satisfaction data to help the design of climate mitigation policies in the United Kingdom. We assess the effects of the exposure to ambient pollutants on long-term life satisfaction and short-term mental health in the UK. We estimate augmented Cobb-Douglas utility functions using pooled and random effects ordinal logit models. Results show that increases in NO2, PM10 and PM2.5 significantly decrease the odds of longterm happiness and short-term mental health in the UK. The willingness to pay for clean air is also significant and increases with level of education. These measurements derived can be used as benchmarks for pollution abatement subsidies or pollution taxes and can help in projecting a more comprehensive assessment of costs and benefits.
February 17, 2023
Personal Income Taxes in the Middle East and North Africa: Prospects and Possibilities
Description: Personal income taxes (PITs) play little or no role in the Middle East and North Africa, often yielding less than 2 percent of GDP in revenue—with the exception of few North African countries. This paper examines how PITs have evolved in recent decades, and what they might look like in the next 20 years. Top marginal tax rates on labor and business income of individuals have declined substantially, a trend that mirrors reductions in advanced and developing economies. Taxation of passive capital income has changed very little, and the revenue intake from this source remains low throughout the region (less than 1 percent of GDP on average and concentrated in oil-importing non-fragile states). Social security contributions (SSC) have increased in importance in nearly all MENA countries, and some countries have introduced additional payroll taxes. The combination of reduced marginal tax rates, light taxation of income from capital and business activities, and increase of SSC, have resulted in income tax systems that create disincentives to work and incentives for informality, and contribute little to government revenue and income redistribution. Given differences in economic and political structures, demographics, and starting points, the path to PIT/SSC reforms will vary across the region. Countries with relatively mature PIT/SSC systems, where revenue performance has improved in the past two decades, will increasingly need to balance the revenue and equity objectives against effciency objectives (in particular labor market incentives and infromality). Countries with no PITs will have to weigh whether a consumption tax/SSC system that mimic a flat tax on labor income is sufficient to diversify revenue away from oil and whether to adopt PITs to address rising income and wealth inequality. Finally, fragile states, who face more political volatility and weaker fiscal institutions, will have to focus on simplicity of tax design and collection to be able to raise revenue from PITs.
February 10, 2023
Production Technology, Market Power, and the Decline of the Labor Share
Description: The labor share has been declining in the United States, and especially so in manufacturing. This paper investigates the role of capital accumulation and market power in explaining this decline. I first estimate the production function of 21 manufacturing sectors along time series and including time-varying markups. The elasticities of substitution for most sectors are estimated below one, implying that capital deepening cannot explain the labor share decline. I then track the long-run evolution of the labor share using the estimated production technology parameters. I decompose aggregate labor share changes into sector re-weights, capital-labor substitution, and market power effects. I find that the increase in market power, as reported in recent studies, can account for, at least, 76 percent of the labor share decline in manufacturing. Absent the rise in market power, the labor share would have remained constant in the second half of the 20th century.
February 10, 2023
The Future of PPPs in the Western Balkans
Description: Public-Private Partnerships (PPPs) are increasingly an important vehicle for several Western Balkan countries to increase investment to reduce their infrastructure gaps. While there are benefits to well-designed and implemented PPPs, they also carry a potential for large fiscal risks and increased costs if not managed well. Countries with successful PPP programs typically benefit from a clear and well-designed PPP governance framework, which covers all stages of the PPP life cycle. Western Balkan countries need to address gaps in their PPP governance frameworks to fully reap the potential benefits from PPPs.
February 10, 2023
The 2020-2022 Inflation Surge Across Europe: A Phillips-Curve-Based Dissection
Description: In 2021-22, inflation in Europe soared to multidecade highs, consistently exceeding policymakers’ forecasts and surprising with its wide cross-country dispersion. This paper analyzes the key drivers of the inflation surge in Europe and its variation across countries. The analysis highlights significant differences in Phillips curve parameters across Europe’s economies. Inflation is more sensitive to domestic slack and external price pressures in emerging European economies compared to their advanced counterparts, which contributed to a greater passthrough of global commodity price shocks into domestic prices, and, consequently, to larger increases in inflation rates. Across Europe, inflation also appears to have become increasingly backward looking and more sensitive to commodity price shocks since the onset of the COVID-19 pandemic. This finding helps explain why conventional (Phillips curve) inflation models consistently underpredicted the 2021-2022 inflation surge, although it remains too early to conclude there has been a structural break in the inflation process.
February 10, 2023
Getting into the Nitty-Gritty of Fiscal Multipliers: Small Details, Big Impacts
Description: The lack of a standardized framework to report fiscal multipliers limits comparisons across studies, budgetary items, or countries. Within a unified analytical framework (using a panel of 177 countries), we study how key methodological details affect the size and persistence of fiscal multipliers‘ estimates. Our baseline results are in line with the existing literature with average cumulative medium-term multipliers of -2.1 (-2.5) for taxes on personal income, 0.3 (1.7) for investment and, -0.5 (1.9) for consumption for advanced (emerging market) economies. However, we show that slight changes in the identification of shocks, based on forecast errors or in the definition of the fiscal multiplier, can artificially increase both the size and decrease the precision of estimates. We also emphasize the importance of accounting for the endogenous dynamic responses of fiscal variables to fiscal innovations by showing that multipliers calculated simply as the output response to fiscal shocks, as it is common in the literature, can potentially bias the results.
February 10, 2023
Uncovering CIP Deviations in Emerging Markets: Distinctions, Determinants and Disconnect
Description: We provide a systematic empirical treatment of short-term Covered Interest Parity (CIP) deviations for a large set of emerging market (EM) currencies. EM CIP deviations have much larger volatilities than most G10 currencies and move in an opposite direction during global risk-off episodes. While off-shore EM CIP deviations are sensitive to changes in FX dealers’ risk-bearing capacities and global risk aversion, on-shore EM CIP deviations are largely unresponsive in segmented FX markets. Moreover, the sensitivity of offshore EM CIP deviations to global risk factors for currencies with segmented FX markets is stronger compared to their counterparts with integrated FX markets. We find weak evidence of country default risk affecting EM CIP deviations after accounting for global factors.
February 10, 2023
Estimating Digital Infrastructure Investment Needs to Achieve Universal Broadband
Description: We develop a detailed model to evaluate the necessary investment requirements to achieve affordable universal broadband. The results indicate that approximately $418 billion needs to be mobilized to connect all unconnected citizens globally (targeting 40-50 GB/Month per user with 95 percent reliability). The bulk of additional investment is for emerging market economies (73 percent) and low-income developing countries (24 percent). We also find that if the data consumption level is lowered to 10-20 GB/Month per user, the total cost decreases by up to about half, whereas raising data consumption to 80-100 GB/Month per user leads to a cost increase of roughly 90 percent relative to the baseline. Moreover, a 40 percent cost decrease occurs when varying the peak hour quality of service level from the baseline 95 percent reliability, to only 50 percent reliability. To conclude, broadband policy assessments should be explicit about the quantity of data and the reliability of service provided to users. Failure to do so will lead to inaccurate estimates and, ultimately, to poor broadband policy decisions.
February 10, 2023
The Internationalization of China’s Equity Markets
Description: China’s equity markets internationalization process started in the early 2000s but accelerated after 2012, when Chinese firms’ shares listed in Shanghai and Shenzhen gradually became available to international investors. This paper studies the effects of the post-2012 internationalization events by comparing the evolution of equity financing and investment activities for: (i) domestic listed firms relative to firms that already had access to international investors and (ii) domestic listed firms that were directly connected to international markets relative to those that were not. The paper finds large increases in financial and investment activities for domestic listed and for connected firms, with significant aggregate effects. The evidence also suggests the rise in firms’ equity issuances was primarily and initially financed by domestic investors. International investors’ portfolio holdings in Chinese equity markets and ownership in firms increased markedly only once Chinese firms’ locally issued shares became part of the MSCI Emerging Markets Index.