Working Papers
2021
February 5, 2021
Fair and Inclusive Markets: Why Dynamism Matters
Description: We show empirical evidence that there may not be a tradeoff between market income inequality and high sustained growth, which is key for poverty alleviation. We argue that the economies that achieved high sustained growth and low market income inequality are characterized by dynamism—a drive toward sophisticated export industries, innovation, and creative destruction and a high level of competition. What a country produces and how much it competes domestically and internationally are important for achieving fair and inclusive markets. We explore policy options to steer industrial and market structures toward providing growth opportunities for both workers and firms.
January 29, 2021
Social Repercussions of Pandemics
Description: Epidemics may have social scarring effects, increasing the likelihood of social unrest. They may also have mitigating effect, suppressing unrest by dissuading social activities. Using a new monthly panel on social unrest in 130 countries, we find a positive cross-sectional relationship between social unrest and epidemics. But the relationship reverses in the short run, implying that the mitigating effect dominates in the short run. Recent trends in social unrest immediately before and after the COVID-19 outbreak are consistent with this historic evidence. It is reasonable to expect that, as the pandemic fades, unrest may reemerge in locations where it previously existed.
January 29, 2021
External Financing Risks: How Important is the Composition of the International Investment Position?
Description: Building on the vast literature, this paper focuses on the role of the structure of the international investment position (IIP) in affecting countries’ external vulnerabilities. Using a sample of 73 advanced and emerging economies and new database on the IIP’s currency composition, we find that the size and structure of external liabilities and assets, especially with regards to currency denomination, matter in understanding balance-of-payments pressures. Specifically, and beyond the standard macroeconomic factors highlighted in other studies, higher levels of gross external debt increase the likelihood of an external crisis, while higher levels of foreign-currency-denominated external debt increase the likelihood of sudden stops. Foreign reserve assets play a mitigating role, although with diminishing returns, and the combination of flow and stock imbalances amplifies external risks, especially during periods of heightened global risk aversion. The results are especially strong for emerging economies, where the impact of flow and stock imbalances and foreign currency mismatches are larger and more robust across specifications.
January 29, 2021
Is Regional Trade Integration a Growth and Convergence Engine in Africa?
Description: The main objective of Regional Trade Agreements (RTAs) is to stimulate economic growth in participating countries through increased trade, economies of scale, knowledge and technology transfer. Using a panel data over the period 1979 to 2018, this paper examines the contribution of regional trade integration (RTI) to economic growth and income convergence in Africa and its major Regional Economic Communities (RECs). The results of the instrumental variable and panel fixed-effects estimation show that RTI promotes economic growth in Africa. However, it fosters income divergence, reflecting the distribution of the gains from regional integration in favor of the more developed economies of the continent. The results of this study show the importance to support the African Continental Free Trade Area (AfCFTA) project with policies aimed at reducing non-tariff barriers to trade and improving infrastructure in order to maximize the effects on growth in all participating countries.
January 29, 2021
Initial Output Losses from the Covid-19 Pandemic: Robust Determinants
Description: While the COVID-19 pandemic is affecting all countries, output losses vary considerably across countries. We provide a first analysis of robust determinants of observed initial output losses using model-averaging techniques—Weighted Average Least Squares and Bayesian Model Averaging. The results suggest that countries that experienced larger output losses are those with lower GDP per capita, more stringent containment measures, higher deaths per capita, higher tourism dependence, more liberalized financial markets, higher pre-crisis growth, lower fiscal stimulus, higher ethnic and religious fractionalization and more democratic regimes. With respect to the first factor, lower resilience of poorer countries reflects the higher economic costs of containment measures and deaths in such countries and less effective fiscal and monetary policy stimulus.
January 29, 2021
Fiscal Dominance in Sub-Saharan Africa Revisited
Description: This paper explores the causes and consequences of fiscal dominance over monetary policy in Sub-Saharan Africa (SSA). Fiscal dominance has always been a pressing problem as it can contribute to inflation and macroeconomic instability, and increasingly so as fiscal deficits and public debt are rising in many SSA countries. We find that legal limits and availability of alternative financing options play an important role in determining the extent to which government deficits tend to be financed by the central bank. We also find economically significant effects of central bank lending to government on the exchange rate and inflation.
January 29, 2021
Flattening the Insolvency Curve: Promoting Corporate Restructuring in Asia and the Pacific in the Post-C19 Recovery
Description: The Coronavirus disease (COVID-19) triggered a sharp contraction of economic activity across Asia and the Pacific. Policymakers adopted a “whatever it takes” approach in their initial response, relying mainly on liquidity support to help firms survive the shock. This paper discusses how the initial policy response should evolve as the region’s economies stabilize and enter the recovery phase. Many firms will need to repair their balance sheets and adjust their business models to the post-pandemic realities. The priority will be to support this process by facilitating the efficient restructuring of viable firms while allowing nonviable firms to exit. This requires action on three complementary fronts: reinforcing private debt resolution frameworks to flatten the insolvency curve, ensuring that adequate financing is available to support corporate restructuring, and facilitating access to equity to speed up the reallocation of jobs and capital into growth sectors.
January 29, 2021
Determinants of Pre-Pandemic Demand for the IMF’s Concessional Financing
Description: This study focuses on identifying the main factors that influenced country-specific and aggregate demand for IMF concessional financing between 1986 and 2018 and makes within-period and out-of-period forecasts. We find that the external debt level, inflation, and real effective exchange rate are the main economic variables influencing concessional borrowing for most eligible countries. Finally, our approach is able to provide quite accurate country-level and aggregate forecasts for historical financing events prior to the COVID-19 pandemic.
January 22, 2021
Unconventional Monetary Policies in Emerging Markets and Frontier Countries
Description: The COVID-19 crisis induced an unprecedented launch of unconventional monetary policy through asset purchase programs (APPs) by emerging market and developing economies. This paper presents a new dataset of APP announcements and implementation from March until August 2020 for 27 emerging markets and 8 small advanced economies. APPs’ effects on bond yields, exchange rates, equities, and debt spreads are estimated using different methodologies. The results confirm that APPs were successful in significantly reducing bond yields in EMDEs, and these effects were stronger than those of policy rate cuts, suggesting that such UMP could be important tools for EMDEs during financial market stress.
January 22, 2021
We Are All in the Same Boat: Cross-Border Spillovers of Climate Risk through International Trade and Supply Chain
Description: Are assets in a landlocked country subject to sea-level rise risk? In this paper, we study the cross-border spillovers of physical climate risks through international trade and supply chain linkages. As we base our findings on historical data between 1970 and 2018, we observe that globalization increased the similarity of countries’ global climate risk exposures. Exposures to foreign climatic disasters in major trade partner countries (both upstream and downstream) lower the home-country stock market valuation for the aggregate market and for the tradable sectors. We also find that exposures to foreign long-term climate change risks reduce the asset price valuations of the tradable sectors at home. Findings in this paper suggest that climate adaptation efforts in a country can have positive externalities on other countries’ macrofinancial performance and stability through international trade.