Working Papers

July 23, 2021

Can Financial Soundness Indicators Help Predict Financial Sector Distress?

Description: This paper shows how the role of Financial Soundness Indicators (FSIs) in financial surveillance can be usefully enhanced. Drawing from different statistical techniques, the paper illustrates that FSIs generate signals that can accurately detect, with 4 to 12 quarters lead, emerging financial distress—as measured by tight financial conditions.

July 23, 2021

Mitigating Climate Change: Growth-Friendly Policies to Achieve Net Zero Emissions by 2050

Description: Background paper prepared for the October 2020 IMF World Economic Outlook. This paper provides a detailed presentation of the simulation results from the October 2020 IMF World Economic Outlook chapter 3 and an additional scenario with carbon pricing only for comparison with the comprehensive policy package where green investments were also included. This paper has greatly benefitted from continuous discussions with Oya Celasun and Benjamin Carton on the design of simulations; contributions from Philip Barrett for part of the simulations; and research support from Jaden Kim. We also received helpful comments from other IMF staff. All remaining errors are ours. McKibbin and Liu acknowledge financial support from the Australian Research Council Centre of Excellence in Population Ageing Research (CE170100005).

July 16, 2021

Pooling Fiscal Risk in the ECCU: Quantifying Savings of a Regional Fund for Stabilization and Investment

Description: This paper quantifies the savings obtained from risk pooling with a Regional Stabilization Fund (RSF) for the Eastern Caribbean Currency Union. A Monte Carlo experiment is used to estimate the size of a RSF conditional on probabilities of depletion under specific saving-withdrawal rules. Results indicate that regional risk pooling requires about half of the saving amount relative to the sum of individual-country savings. In addition to reducing the amount of saving requirements for stabilization, the RSF can improve welfare by realocating government consumption savings during booms towards public investment during recessions, resulting in an increase of public investment in the range of 0.5-1.5 percent of GDP per year depending on the country, with positive growth dividends. Moreover, the RSF also reduces the dispersion of public debt outcomes in light of the cross-country cyclical synchronicity of output and revenue, thereby strengthening the stability of the regional currency board.

July 16, 2021

A Simple Macrofiscal Model for Policy Analysis: An Application to Morocco

Description: The paper describes a semistructural macrofiscal approach to simulating and forecasting macroeconomic policies. The model focuses on only a few variables that are consistent with the New Keynesian framework. Thanks to its simplicity, it facilitates an initial and intuitive understanding of monetary and fiscal policy transmission channels, and their main impact on economic activity. The model is adapted to Morocco and we demonstrate its application with an illustrative scenario of policy responses to a slower-than-expected recovery from the Covid-19 pandemic, under different monetary policy and exchange rate regimes.

July 16, 2021

Health Care Reform in Greece: Progress and Reform Priorities

Description: We review Greek public sector healthcare policies and health-related outcomes since 2010.We find that excess spending was successfully curtailed, elements of the institutional framework were modernized, and health outcomes have been relatively favorable. However, especially prior to Covid-19, public healthcare spending had been compressed to potentially unsustainable levels, with widening inequalities and large unmet needs, especially among the poor. Higher public spending and advancing structural healthcare reforms are needed to improve the efficiency and equity of the Greek healthcare system, including strengthening primary healthcare, reducing out-of-pocket payments, and eliminating remaining insurance gaps.

July 16, 2021

Reforming the Greek Pension System

Description: The Greek pension system has been costly, complex, and distortive, which has contributed to Greece’s fiscal problems and discouraged labor force participation. Several attempts to reform the system faltered due to lack of implementation, pushback by vested interests, and court rulings leading to reversals. A series of reforms introduced throughout 2015–17 unified benefit and contribution rules, removed several distortions and reduced fragmentation and costs. If fully implemented throughout the long-term, these reforms can go a long way towards enhancing the pension system affordability. However, reforms faced setbacks and fell short of creating stronger incentives to build long contribution histories, to deliver sustainable growth by improving the fiscal policy mix, and to ensure fairness and equitable burden sharing across generations and interest groups. Policy priorities should aim towards fully implementing the 2015–17 reforms and complementing them with additional reforms to address these remaining objectives.

July 16, 2021

For the Benefit of All: Fiscal Policies and Equity-Efficiency Trade-offs in the Age of Automation

Description: Many studies predict massive job losses and real wage decline as a result of the ongoing widespread automation of production, a trend that may be further aggravated by the COVID-19 crisis. Yet automation is also expected to raise productivity and output. How can we share the gains from automation more widely, for the benefit of all? And what are the attendant equity-efficiency trade-offs? We analyze this issue by considering the effects of fiscal policies that seek to redistribute the gains from automation and address income inequality. We use a dynamic general equilibrium model with monopolistic competition, including a novel specification linking corporate power to automation. While fiscal policy cannot eliminate the classic equity-efficiency trade-offs, it can help improve them, reducing inequality at small or no loss of output. This is particularly so when policy takes advantage of novel, less distortive transmission channels of fiscal policy created by the empirically observed link between corporate market power and automation.

Notes: Online Annex for WP/21/187

July 16, 2021

Defying the Odds: Remittances During the COVID-19 Pandemic

Description: This paper provides an early assessment of the dynamics and drivers of remittances during the COVID-19 pandemic, using a newly compiled monthly remittance dataset for a sample of 52 countries, of which 16 countries with bilateral remittance data. The paper documents a strong resilience in remittance flows, notwithstanding an unprecedent global recession triggered by the pandemic. Using the local projection approach to estimate the impulse response functions of remittance flows during Jan 2020-Dec 2020, the paper provides evidence that: (i) remittances responded positively to COVID-19 infection rates in migrant home countries, underscoring its role as an important automatic stabilizer; (ii) stricter containment measures have the unintended consequence of dampening remittances; and (iii) a shift from informal to formal remittance channels due to travel restrictions appears to have also played a role in the surge in formal remittances. Lastly, the size of the fiscal stimulus in host countries is positively associated with remittances as the fiscal response cushions the economic impact of the pandemic.

July 12, 2021

U.S. Dollar Currency Premium in Corporate Bonds

Description: We isolate a U.S. dollar currency premium by comparing corporate bonds issued in the dollar and the euro by firms o utside t he U .S. a nd e uro a rea. We make s everal empirical observations that dissect the perceived advantage of borrowing in the dollar. First, while the dollar dominates global debt issuance, borrowing costs in the dollar are more expensive without a currency hedge and about the same with a currency hedge when compared to the euro. This observed parity in currency-hedged corporate borrowing stands in contrast to the persistent deviation from covered interest parity in risk-free rates. Second, we observe a dollar safety premium in relative hedged borrowing costs, found in the subset of bonds with high credit ratings and short maturities, attributes similar to those of safe sovereigns. Finally, we find that firms flexibly adjust the currency mix of their debt issuance depending on the relative borrowing cost between dollar and euro debt. In sum, the disproportionate demand for U.S. dollar debt is reflected in higher issuance volumes that drive up the currency hedged dollar borrowing costs such that at the margin they equate to euro borrowing costs.

July 9, 2021

Addressing Spillovers from Prolonged U.S. Monetary Policy Easing

Description: There is growing recognition that prolonged monetary policy easing of major economies can have extraterritorial spillovers, driving up financial system leverage in other countries. When faced with such a rise of threats to financial stability, what can countries do? Specifically, is there a role for macroprudential tools, capital controls or foreign exchange intervention in safeguarding financial stability from risks arising externally? We examine the efficacy of these policy interventions by exploring whether preemptive or reactive policy interventions can mitigate such risks. Using a sample of 950 bank and nonbank financial firms across 28 non-U.S. economies over the past two decades, we show that if policymakers are able to implement policies prior to an additional consecutive decline in U.S. interest rates, financial institutions do not increase their leverage by as much as they otherwise would. By contrast, it is more difficult to counter the spillovers with reactive policy interventions. In practice, however, policymakers need to remain cautious about the timing of preventative tightening, especially when their economies face large negative shocks such as a pandemic.