Working Papers
2021
October 22, 2021
An Extended Quarterly Projection Model: Credit Cycle, Macrofinancial Linkages and Macroprudential Measures: The Case of the Philippines
Description: We extend a modern practical Quarterly Projection Model to study credit cycle dynamics and risks, focusing on macrofinancial linkages and the role of macroprudential policy in achieving economic and financial stability. We tailor the model to the Philippines and evaluate the model’s properties along several dimensions. The model produces plausible dynamics and sensible forecasts. This along with its simplicity makes it useful for policy analysis. In particular, it should help policymakers understand the quantitative implications of responding to changes in domestic financial conditions, along with other shocks, through the joint use of macroprudential and monetary policies.
October 22, 2021
A Balance-Sheet Analysis of the Dutch Economy
Description: The Dutch economy is characterized by substantial financial balance sheets in the private sector. Uncommonly large gross financial assets and liabilities are found in the financial sector, whereas households own significant net financial wealth. The large gross financial assets and liabilities reflect a dominant role of multinational corporations (MNCs). Despite their size, these financial positions have not brought significant financial stability risks to the country. On the other hand, Dutch households’ long balance sheets have been associated with depressed consumption and volatile real estate investment, which has probably exacerbated the cyclicality of the economy. The expected reform of the pension system is likely to change the way household balance sheets interact with private consumption.
October 22, 2021
Geopolitical Risk on Stock Returns: Evidence from Inter-Korea Geopolitics
Description: We investigate how corporate stock returns respond to geopolitical risk in the case of South Korea, which has experienced large and unpredictable geopolitical swings that originate from North Korea. To do so, a monthly index of geopolitical risk from North Korea (the GPRNK index) is constructed using automated keyword searches in South Korean media. The GPRNK index, designed to capture both upside and downside risk, corroborates that geopolitical risk sharply increases with the occurrence of nuclear tests, missile launches, or military confrontations, and decreases significantly around the times of summit meetings or multilateral talks. Using firm-level data, we find that heightened geopolitical risk reduces stock returns, and that the reductions in stock returns are greater especially for large firms, firms with a higher share of domestic investors, and for firms with a higher ratio of fixed assets to total assets. These results suggest that international portfolio diversification and investment irreversibility are important channels through which geopolitical risk affects stock returns.
October 22, 2021
Pareto-Improving Minimum Corporate Taxation
Description: The recent international agreement on a minimum effective corporate tax rate marks a profound change in global tax arrangements. The appropriate level of that minimum, however, has been, and remains, extremely contentious. This paper explores the strategic responses to a minimum tax, which—the policy objective being to change the rules of tax competition game--—are critical for assessing the design and welfare impact of, and prospects for, this fundamental policy innovation. Analysis and calibration plausibly suggest sizable scope for minima that are Pareto-improving, benefiting low as well as high tax countries, over the uncoordinated equilibrium.
October 21, 2021
Morocco’s Monetary Policy Transmission in the Wake of the COVID-19 Pandemic
Description: This paper finds that the neutral interest rate has been on a downward trajectory in Morocco since the global financial crisis and may have fallen in the wake of the pandemic. In that context, monetary policy transmission to output and prices appears relatively muted given limited exchange rate flexibility until recently. Also, monetary policy transmission to some market rates has somewhat weakened in the wake of the pandemic. A lower natural rate and low policy rates raise the question of whether further rate reductions would impair the banking system. We find that the sensitivity of cash demand to deposit rates is low, implying limited risks that banks would lose funding with further reductions. A reliance on checking and savings accounts for funding may impair monetary pass-through, however. If monetary policy reaches its effective lower bound, limited and credible recourse to an asset purchase program could usefully complement conventional measures and strengthen monetary policy transmission under an inflation-targeting regime with a flexible exchange rate.
October 19, 2021
The Effects of COVID-19 Vaccines on Economic Activity
Description: This paper empirically examines the economic effects of COVID-19 vaccine rollouts using a cross-country daily database of vaccinations and high frequency indicators of economic activity—nitrogen dioxide (NO2) emissions, carbon monoxide (CO) emissions, and Google mobility indices—for a sample of 46 countries over the period December 16, 2020 to June 20, 2021. Using surprises in vaccines administered, we find that an unexpected increase in vaccination per capita is associated with a significant increase in economic activity. We also find evidence for non-linear effects of vaccines, with the marginal economic benefits being larger when vaccination rates are higher. Country-specific conditions play an important role, with lower economic gains if strict containment measures are in place or if the country is experiencing a severe outbreak. Finally, the results provide evidence of spillovers across borders, highlighting the importance of equitable access to vaccines across nations.
October 18, 2021
Determinants of COVID-19 Vaccine Rollouts and Their Effects on Health Outcomes
Description: This paper examines empirically the determinants of COVID-19 vaccine rollouts and their effects on health outcomes. We assemble a comprehensive and novel cross-country database at a daily frequency on vaccinations and various health outcomes (new COVID-19 cases, fatalities, intensive care unit (ICU) admissions) for the period December 16, 2020-June 20, 2021. Using this data, we find that: (i) early vaccine procurement, domestic production of vaccines, the severity of the pandemic, a country’s health infrastructure, and vaccine acceptance are significant determinants of the speed of vaccination rollouts; (ii) vaccine deployment significantly reduces new COVID-19 infections, Intensive Care Unit (ICU) admissions, and fatalities, and is more effective when coupled with stringent containment measures, or when a country is experiencing a large outbreak; and (iii) COVID-19 cases in neighboring countries can lead to an increase in a country’s domestic caseload, and hamper efforts in taming its own local outbreak.
October 18, 2021
A Comprehensive Climate Mitigation Strategy for Mexico
Description: This paper discusses a comprehensive strategy for implementing Mexico’s climate mitigation commitments. Progressively increasing carbon prices from current levels of US$3 per ton to US$75 per ton by 2030 would achieve Mexico’s mitigation pledges, while raising annual revenues of 1.8 percent of GDP and cumulatively averting 11,600 deaths from local air pollution. The carbon price would raise fossil fuel and electricity prices, imposing burdens of 2.7 percent of consumption on the average Mexican household. However, recycling carbon pricing revenues would offset most of this burden, and targeted transfers could make the reform pro-poor and pro-equity. Additionally, the economic efficiency costs of carbon pricing (0.3 percent of GDP in 2030) are more than offset by local air pollution and other domestic environmental benefits (before even counting climate benefits). Mexico would need a more ambitious 2030 target if it were to follow many other countries in adopting a midcentury ‘net-zero’ emissions target. To enhance the effectiveness of the mitigation strategy, carbon pricing can be reinforced with sectoral instruments, such as feebates in the transport, power, industry, building, forestry, extractive, and agricultural sectors. Complementary policies are also needed to support public investment in the clean energy transition.
October 18, 2021
Natural Resource Taxation in Mexico: Some Considerations
Description: Mexico has large extractive industries and it traditionally has raised sizable fiscal revenues from the oil and gas sector. A confluence of factors—elevated commodity prices, financial challenges of the state-owned oil company Pemex, and revenue needs for financing social and public investment spending over the medium term—suggest that a review of Mexico’s taxation regimes for natural resources would be opportune, against the backdrop of a comprehensive approach to tackling Mexico’s challenges. This paper identifies opportunities for redesigning mining taxation to increase somewhat the revenue intake while maintaining the favorable investment profile of the sector. It also discusses recent reforms to the oil and gas fiscal regime and future reform considerations, with attention to the attractiveness of investment on commercial terms—an issue that should be placed in the context of an overall reform of Pemex’s business strategy and possibly of the energy sector more generally.
October 18, 2021
Social Spending in Mexico: Needs, Priorities and Reforms
Description: Poverty in Mexico was high before the COVID-19 pandemic and has been exacerbated by the pandemic, with significant variation across states. Education losses from the pandemic are likely to be large and worsen pre-existing disparities; unless mitigated soon, they could contribute to heightened scarring over the medium term. Using state-level and cross-country comparisons, this paper reviews key social programs as well as priorities in education and health. It finds that higher spending and improved design of social programs (e.g., better targeting) would reduce socioeconomic gaps, mitigate scarring risks, and foster inclusive growth.