Working Papers
2024
March 8, 2024
Understanding Inflation Dynamics: The Role of Global Shocks in CEMAC
Description: As in the rest of the world, inflation in CEMAC surged more quickly and persistently than expected during the 2021–23 period. This paper examines the drivers of inflation dynamics and the contribution of global shocks to inflation persistence in CEMAC. We use a Phillips curve framework combined with the local projections method. Our results confirm the prominent role of global factors in driving inflation dynamics. Global commodity food and oil price fluctuations, and shipping costs are the main factors explaining the large variability in headline inflation. Further, we find that global price shocks have sizable and persistent effects on domestic headline inflation, with differences in the magnitude and speed of pass-through. The pass-through from commodity food price fluctuations to headline inflation is higher and more persistent than that of other global price shocks, reflecting the large share of food in the consumption baskets, which makes inflation more vulnerable to direct effects of international food shocks, but also larger second-round effects.
March 8, 2024
Predicting IMF-Supported Programs: A Machine Learning Approach
Description: This study applies state-of-the-art machine learning (ML) techniques to forecast IMF-supported programs, analyzes the ML prediction results relative to traditional econometric approaches, explores non-linear relationships among predictors indicative of IMF-supported programs, and evaluates model robustness with regard to different feature sets and time periods. ML models consistently outperform traditional methods in out-of-sample prediction of new IMF-supported arrangements with key predictors that align well with the literature and show consensus across different algorithms. The analysis underscores the importance of incorporating a variety of external, fiscal, real, and financial features as well as institutional factors like membership in regional financing arrangements. The findings also highlight the varying influence of data processing choices such as feature selection, sampling techniques, and missing data imputation on the performance of different ML models and therefore indicate the usefulness of a flexible, algorithm-tailored approach. Additionally, the results reveal that models that are most effective in near and medium-term predictions may tend to underperform over the long term, thus illustrating the need for regular updates or more stable – albeit potentially near-term suboptimal – models when frequent updates are impractical.
March 8, 2024
An Assessment of the 2019 and 2020 Pension Reforms in Mexico
Description: In recent years the Mexican pension system has changed significantly. In 2019 the existing means-tested social pension was made universal – covering everyone over the age of 65 – and the benefit level increased. In 2020, the main regime of the private sector was substantially reformed, increasing contribution rates for the funded defined contribution system, lowering the minimum years of contributions needed to receive an earnings-related pension, and increasing minimum pensions. This paper tries to assess the likely outcomes of those reforms, discusses design inefficiencies of the reforms and offers policy options to improve pension system design.
March 8, 2024
Strengthening Income Stabilization through Social Protection in Emerging and Developing Economies: The Brazilian Experience
Description: Social protection programs are crucial for stabilizing household income, especially during crises. Brazil's response to the pandemic, the Auxilio Emergencial (AE) program, demonstrated the value of a resilient social safety net and digital tools. This study assesses AE's effectiveness in income stabilization, poverty reduction, and inequality. Results show that the pre-pandemic social protection system would have only buffered about a quarter of income loss, with unemployment insurance more significant for higher-income households, and social safety net transfers crucial for lower-income households, especially those in informal employment. AE successfully supported lower-income households during the pandemic, but its generosity went beyond the stabilization of income, resulting in large fiscal costs.
March 8, 2024
Specialization, Market Access and Real Income
Description: This paper estimates the impact of external demand shocks on real income. We utilize a first order approximation to a wide class of small open economy models that feature sector-level gravity in trade flows, which allows us to measure foreign shocks and characterize their welfare impact in terms of reducedform elasticities. We use machine learning techniques to group 4-digit manufacturing sectors into a smaller number of clusters, and show that the cluster-level elasticities of income with respect to foreign shocks can be estimated using high-dimensional statistical techniques. Foreign demand shocks in complex intermediate and capital goods have large positive impacts on real income, whereas impacts in other sectors are negligible. We showthat the estimates imply that countries that specialize in these sectors enjoy greater gains from increased openness, and that (small) export subsidies to these sectors are welfare-improving. Finally, a calibrated multisector production and trade model with input-output linkages and external economies of scale can match the empirical estimates.
March 8, 2024
Debt Surges—Drivers, Consequences, and Policy Implications
Description: Many countries find themselves with elevated debt levels, increased debt vulnerabilities, and tight financing conditions, while also facing increased spending needs for development and transition to a greener economy. This paper aims to place the current debt landscape in a historical context and investigate the drivers of debt surges, to what degree they result in a crisis as well as examine post-surge debt trajectories and under what conditions debt follows a non-declining path. We find that fiscal policy and stock-flow adjustments play important roles in debt dynamics with the valuation effects arising from currency depreciation explaining more than half of stock flow adjustments in LICs. Debt surges are estimated to result in a financial crisis with a probability of 11–20 percent and spending-driven fiscal expansions during debt surges tend to result in a high probability of non-declining debt path.
March 8, 2024
Accounting for Climate Risks in Costing the Sustainable Development Goals
Description: This paper evaluates the additional spending needed to meet core targets of selected Sustainable Development Goals (SDGs) while accounting for the associated cost to address climate risks. The SDGs under study are those related to human and physical capital development. An additional 3.8 percent of global GDP, or US$3.4 trillion, of public and private spending will be required by 2030 to achieve a strong performance in the selected SDGs while addressing associated climate risks. This includes an increase of 0.4 percent of global GDP (US$358 billion) compared to estimates that do not account for mitigation and adaptation needs within these sectors. LIDCs and SSA experience the highest climate-related cost augmentation relative to GDP, while EMEs (driven by large Asian emerging economies) bear the largest cost in absolute terms.
March 8, 2024
Geoeconomic Fragmentation and International Diversification Benefits
Description: This paper applies the two-country open-economy model with trade in stocks and bonds of Coeurdacier et al. (2010) to quantify the loss of international diversification benefits for major advanced economies, which have a significant presence in international financial markets, under geoeconomic fragmentation. We perform counterfactual simulations under different hypothetical fragmentation scenarios in which these economies are unable to trade with geopolitically distant countries, as measured by voting disagreement on foreign policy issues at the United Nations General Assembly meetings during 2012-2021. The simulation results imply a potentially significant loss of international diversification benefits of financial openness for the considered advanced economies by limiting trading to partner countries that are geopolitical allies with highly synchronized business cycles.
March 1, 2024
Is Inflation Good for Business? The Firm-Level Impact of Inflation Shocks in the Baltics, 1997-2021
Description: Using a large panel of firm-level data, this paper provides an analysis of how inflation shocks in the Baltics between 1997 and 2021 affected total factor productivity (TFP), gross profitability, and net fixed investment in nonfinancial sectors. First, we find that inflation and inflation volatility had mixed effects on TFP growth, profitability and net fixed investment in the first year as well as over the medium term, albeit at a dissipating rate. Second, focusing on subsamples, we find that inflation shocks had differential effects on large versus small firms. Third, we explore sectoral heterogeneity in how firms responded to inflation shocks and observe significant variation across tradable and non-tradable sectors. Finally, estimates from a state-dependent model suggest that firms’ response to inflation shocks varied with the state of the economy. The results suggest that nonfinancial firms in the Baltics have been agile in adjusting to inflation shocks, possibly by either transferring higher production costs to consumers or substituting inputs. Given the differences in the level and nature of the recent inflation shock and the sample period on which our analysis is based, empirical findings presented in this paper might not necessarily apply to the latest bout of inflation in the Baltics.
March 1, 2024
The Consequences of Falling Behind the Curve: Inflation Shocks and Policy Delays Under Rational and Behavioral Expectations
Description: Central banks in major industrialized economies were slow to react to the surge in inflation that began in early 2021. The proximate causes of this surge were the supply chain disruptions associated with the easing of COVID restrictions, fiscal policies designed to cushion the economic impact of COVID, and the impact on commodity prices and supply chains of the war in Ukraine. We investigate the consequences of policy delay in responding to inflation shocks. First, using a simple three-period model, we show how policy delay worsens inflation outcomes, but can mitigate or even reverse the output decline that occurs when policy responds without delay. Then, using a calibrated new Keynesian framework and two measures of loss that incorporate a “balanced approach” to weigh inflation and the output gap, we find that loss is monotonically increasing in the length of the delay. Loss is reduced if policy, when it does react, is more aggressive. To investigate whether these results are sensitive to the assumption of rational expectations, we consider cognitive discounting as an alternative assumption about expectations. With cognitive discounting, forward guidance is less powerful and results in a reduction in the costs of delay. Under either assumption about expectations, the costs of a short delay can be eliminated by adopting a less inertial policy rule and a more aggressive response to inflation.