Staff Discussion Notes
2020
July 20, 2020
Dominant Currencies and External Adjustment
Description: The extensive use of the US dollar when firms set prices for international trade (dubbed dominant currency pricing) and in their funding (dominant currency financing) has come to the forefront of policy debate, raising questions about how exchange rates work and the benefits of exchange rate flexibility. This Staff Discussion Note documents these features of international trade and finance and explores their implications for how exchange rates can help external rebalancing and buffer macroeconomic shocks.
May 13, 2020
The African Continental Free Trade Area: Potential Economic Impact and Challenges
Description: Political momentum towards Africa-wide free trade has been intensifying. In March 2018, over 40 countries signed the African Continental Free Trade Area (AfCFTA) agreement. Once fully implemented, the AfCFTA is expected to cover all 55 African countries, with a combined GDP of about US$2.2 trillion. This SDN takes stock of recent trade developments in Sub-Saharan Africa and assesses the potential benefits and costs of the AfCFTA, as well as challenges to its successful implementation. In addition to increased trade flows both in existing and new products, the AfCFTA has the potential to generate substantial economic benefits for African countries. These benefits include higher income arising from increased efficiency and productivity from improved resource allocation, higher cross-border investment flows, and technology transfers. Besides lowering import tariffs, to ensure these benefits, African countries will need reduce other trade barriers by making more efficient their customs procedures, reducing their wide infrastructure gaps, and improving their business climates. At the same time, policy measures should be taken to mitigate the differential impact of trade liberalization on certain groups as resources are reallocated in the economy and activities migrate to locations with comparatively lower costs.
February 16, 2020
Women in the Labor Force: The Role of Fiscal Policies
Description: Despite the increase in female labor force participation over the past three decades, women still do not have the same opportunities as men to participate in economic activities in most countries. The average female labor force participation rate across countries is still 20 percentage points lower than the male rate, and gender gaps in wages and access to education persist. As shown by earlier work, including by the IMF, greater gender equality boosts economic growth and leads to better development and social outcomes. Gender equality is also one of the 17 United Nations Sustainable Development Goals that 193 countries committed to achieve by 2030.
February 12, 2020
Discerning Good from Bad Credit Booms: The Role of Construction
Description: Credit booms are a focal point for policymakers and scholars of financial crises. Yet our understanding of how the real sector behaves during booms, and why some booms may go bad, is limited. Despite a large and growing body of literature, most of the work has focused on aggregate economic activity, and relatively little is known about which industries benefit and which suffer during these episodes. This note aims to fill this gap by analyzing disaggregated output and employment data in a large sample of advanced and emerging market economies between 1970 and 2014.
January 17, 2020
Finance and Inequality
Description: The study examines empirical relationships between income inequality and three features of finance: depth (financial sector size relative to the economy), inclusion (access to and use of financial services by individuals and firms), and stability (absence of financial distress). Using new data covering a wide range of countries, the analysis finds that the financial sector can play a role in reducing inequality, complementing redistributive fiscal policy. By expanding the provision of financial services to low-income households and small businesses, it can serve as a powerful lever in helping create a more inclusive society but—if not well managed—it can amplify inequalities.
2019
October 18, 2019
The Political Costs of Reforms: Fear or Reality?
Description: Many countries are experiencing persistent, weak medium-term growth and limited fiscal space. Against this background, economic policy agendas—in both advanced and developing economies—are focusing increasingly on structural reforms. While there is broad agreement on the economic benefits of structural reforms, the political-economy of reform is less settled. This is because reforms may generate gains only in the longer term while distributional effects may be sizable in the short run, and because governments may lack political capital to confront vocal interest groups. In these circumstances, politicians may hold back on reforms, fearing they will be penalized at the ballot box. The aim of this Staff Discussion Note is to examine whether the fear of a political cost associated with structural reforms is justified by the available evidence, and whether there are lessons from the data about how reform strategies might be designed to mitigate potential political costs. It provides a major addition to recent IMF analysis examining the output and employment effect of reforms
September 10, 2019
A Capital Market Union for Europe
Description: This note weighs the merits of a capital market union (CMU) for Europe, identifies major obstacles in its path, and recommends a set of carefully targeted policy actions. European capital markets are relatively small, resulting in strong bank-dependence, and are split sharply along national lines. Results include an uneven playing field in terms of corporate funding costs, the rationing out of collateral-constrained firms, and limited shock absorption. The benefits of integration center on expanding financial choice, ultimately to support capital formation and resilience. Capital market development and integration would support a healthy diversity in European finance. Proceeding methodically, the note identifies three key barriers to greater capital market integration in Europe: transparency, regulatory quality, and insolvency practices. Based on these findings, the note urges three policy priorities, focused on the three barriers. There is no roadblock—such steps should prove feasible without a new grand bargain.
August 26, 2019
A Monitoring Framework for Global Financial Stability
Description: This paper describes the conceptual framework that guides assessments of financial stability risks for multilateral surveillance, as currently presented in the Global Financial Stability Report (GFSR). The framework emphasizes consistency in measuring financial vulnerabilities across countries and over time and offers a summary statistic to quantify aggregate financial stability risks. The two parts of the empirical approach—a matrix of specific vulnerabilities and a summary measure of financial stability risks—are distinct but highly complementary for monitoring and policymaking.
June 17, 2019
Strengthening the Euro Area: The Role of National Structural Reforms in Building Resilience
Description: Cross-country differences in economic resilience—in an economy’s ability to withstand and adjust to shocks—remain significant in the euro area. In part, the differences reflect the lack of a national nominal exchange rate as a mechanism to adjust to shocks. The IMF staff has argued that union-wide architectural changes such as the banking union, the capital markets union, and a central fiscal capacity can help foster greater international risk sharing. Yet even these changes cannot insure against all shocks. National policies thus have a vital role to play. This IMF staff discussion note analyzes how national structural policies can help euro area countries better deal with economic shocks. Using a mix of empirical and modeling approaches, the note finds that growth-enhancing reforms to labor and product market regulations, tailored to country-specific circumstances, would help individual euro area economies weather adverse shocks. Higher-quality insolvency regimes are associated with more efficient factor reallocation following a shock. The note also finds that structural and cyclical policies interact. Greater rigidities make economies more fragile, putting a higher burden on fiscal policy. This is especially true for members of a monetary union. Countries should build fiscal space in good times and tackle rigidities, reducing their need for countercyclical policies in bad times while making countercyclical policies more effective when deployed.
May 21, 2019
Designing Labor Market Institutions in Emerging and Developing Economies: Evidence and Policy Options
Description: This paper discusses theoretical aspects and evidences related to designing labor market institutions in emerging market and developing economies. This note reviews the state of theory and evidence on the design of labor market institutions in a developing economy context and then reviews its consistency with actual labor market advice in a selected set of emerging and developing economies. The focus is mainly on three broad sets of institutions that matter for both workers’ protection and labor market efficiency: employment protection, unemployment insurance and social assistance, minimum wages and collective bargaining. Text mining techniques are used to identify IMF recommendations in these areas in Article IV Reports for 30 emerging and frontier economies over 2005–2016. This note has provided a critical review of the literature on the design of labor market institutions in emerging and developing market economies, and benchmarked the advice featured in IMF recommendations for 30 emerging market and frontier economies against the tentative conclusions from the literature.