Working Papers
2020
September 25, 2020
US Housing Market during COVID-19: Aggregate and Distributional Evidence
Description: Using zip code-level data and nonparametric estimation, I present eight stylized facts on the US housing market in the COVID-19 era. Some aggregate results are: (1) growth rate of median housing price during the four months (April-August 2020) since the Federal Reserve’s unprecedented monetary easing has accelerated faster than any four-month period in the lead-up to the 2007-09 global financial crisis; (2) the increase in housing demand in response to lower mortgage interest rates displays a structural break since March 2020 (housing demand has increased by much more than before). These results indicate either the existence of “fear of missing out” or COVID-induced fundamental changes in household behavior. In terms of distributional evidence, I find that the increase of housing demand seems more pronounced among the two ends of the income distribution, possibly reflecting relaxed liquidity constraints at the lower end and speculative demand at the higher end. I also find that the developments in housing price, demand, and supply since April 2020 are similar across urban, suburban, and rural areas. The paper highlights some potential unintended consequences of COVID-fighting policies and calls for further studies of the driving forces of the empirical findings.
September 25, 2020
Financial Frictions and Firm Informality: A General Equilibrium Perspective
Description: In this paper we build a model of occupational choice with informal production and progressive income taxation. We calibrate the model to the Brazilian economy to evaluate the impact of removing financial frictions on informality. We find that financial deepening leads to a drop in the size of the informal sector (from 37 percent to 22 percent of official GDP), to an increase in measured TFP (by 4 percent), to an increase in official GDP (by 27 percent), to a decrease in tax evasion (by 17 percent) and to an increase in fiscal revenues (by 15 percent). When assessing the response of this policy at different levels of financial development, we find a non-linear relationship between the credit-to-GDP ratio on the one hand, and either the size of the informal economy, or GDP per capita on the other hand. We test these features with cross-country data and find evidence in favor of both types of non-linearity. We also investigate changes in the income tax progressitivity as an alternative policy and find it to be more effective in countries with a medium to high level of financial markets development.
September 25, 2020
Are Bilateral Trade Balances Irrelevant?
Description: Based on an empirical gravity model of sectoral bilateral trade, we uncover three features of bilateral trade balances. First, the difficulty of gravity models in fitting the observed level of bilateral balances is likely due to the presence of unobservable bilateral trade costs. Second, the model fit improves drastically when we focus on changes over time of the balances. Third, using a log linear approximation we show that changes in bilateral trade balances over the past two decades were driven almost entirely by changes in the same macro factors that determine countries’ aggregate balances – changes in bilateral trade costs, including tariffs, played therefore only a negligible role. This conclusion provides new support for the view that bilateral balances are, for practical purposes, not relevant to the conduct of macroeconomic policy.
September 25, 2020
The Monetary Policy Credibility Channel and the Amplification Effects in a Semi-structural Model
Description: The paper extends a standard semi-structural model to account for nonlinear and asymmetric effects of monetary policy credibility. In our setting, central bank credibility is proportional to the deviation of inflation expectations from the announced inflation target, with positive deviations being more costly compared to negative ones. A loss in policy credibility as a result of shocks leads to a more persistent, backward-looking inflation process, and is associated with lower output. We find that the extended model with credibility effects matches well the key macroeconomic data over specific past episodes for Indonesia and Philippines and consider its adaptation to integrated policy frameworks as an area for further exploration.
September 25, 2020
Demographics and the Housing Market: Japan’s Disappearing Cities
Description: How does a shrinking population affect the housing market? In this study, drawing on Japan’s experience, we find that there exists an asymmetric relationship between housing prices and population change. Due to the durability of housing structures, the decline in housing prices associated with population losses is estimated to be larger than the rise in prices associated with population increases. Given that population losses have been and are projected to be more acute in rural areas than urban areas in Japan, the on-going demographic transition in Japan could worsen regional disparities, as falling house prices in rural areas could intensify population outflows. Policy measures to promote more even population growth across regions, and avoid the over-supply of houses, are critical to stabilize house prices with a shrinking population.
September 25, 2020
The Fiscal Multiplier of Public Investment: The Role of Corporate Balance Sheet
Description: This paper explores whether public investment crowds out or crowds in private investment. To this aim, we build a database of about half a million firms from 49 countries. We find that the effect of public investment on corporate investment depends both on leverage and financial constraints. Public investment boosts private investment for firms with low leverage. However, for firms with high leverage, private investment does not react to an increase in public investment, in line with theory (Myers 1977). We also find that the effect of public investment on corporate investment is much weaker for firms that are financially constrained.
September 25, 2020
Should Inequality Factor into Central Banks' Decisions?
Description: Inequality is increasingly a concern. Fiscal and structural policies are well-understood mitigators. However, less is known about the potential role of monetary policy. This paper investigates how inequality matters for monetary policy within a tractable Two-Agent New Keynesian model that captures important dimensions of inequality. We find some support for making inequality an explicit target for monetary policy, particularly if central banks follow standard Taylor rules.
September 25, 2020
To Pass (or Not to Pass) Through International Fuel Price Changes to Domestic Fuel Prices in Developing Countries: What Are the Drivers?
Description: While many developing countries limit the international fuel price pass through to domestic fuel prices, others do not. Against this backdrop, we examine the factors that determine whether governments allow international fuel price changes to be passed through to domestic prices in developing countries using a dataset spanning 109 developing countries from 2000 to 2014. The paper finds that the pass-through is higher when changes in international prices are moderate and less volatile. In addition, the flexibility of the pricing mechanism allows for higher pass-through while exchange rate depreciation and lower retail fuel prices in neighboring countries inhibit it. The econometric results also underscore the fact that countries with inflation tend to experience lower pass-through, whereas those with high public debt exhibit larger pass-through. Finally, no evidence is found that political variables or environmental policies matter with regard to fuel price dynamics in the short-term. These findings, which are consistent across fuel products (gasoline, diesel and kerosene), allow us to draw important policy lessons for fuel subsidy reforms.
September 25, 2020
Fintech Credit Risk Assessment for SMEs: Evidence from China
Description: Promoting credit services to small and medium-size enterprises (SMEs) has been a perennial challenge for policy makers globally due to high information costs. Recent fintech developments may be able to mitigate this problem. By leveraging big data or digital footprints on existing platforms, some big technology (BigTech) firms have extended short-term loans to millions of small firms. By analyzing 1.8 million loan transactions of a leading Chinese online bank, this paper compares the fintech approach to assessing credit risk using big data and machine learning models with the bank approach using traditional financial data and scorecard models. The study shows that the fintech approach yields better prediction of loan defaults during normal times and periods of large exogenous shocks, reflecting information and modeling advantages. BigTech’s proprietary information can complement or, where necessary, substitute credit history in risk assessment, allowing unbanked firms to borrow. Furthermore, the fintech approach benefits SMEs that are smaller and in smaller cities, hence complementing the role of banks by reaching underserved customers. With more effective and balanced policy support, BigTech lenders could help promote financial inclusion worldwide.
September 25, 2020
Benchmark-Driven Investments in Emerging Market Bond Markets: Taking Stock
Description: This paper reviews the role of benchmark-driven investments in EM local bond markets. We provide an overview of how key EM bond benchmark indices are constructed, how they affect the behavior of investment funds, and what are the likely implications for capital flows and policy-making. Several methods are presented suggesting that the amount of assets benchmarked against widely followed EM local-currency bond indices have risen fivefold since the mid-2000s to around $300 billion. Our review suggests that the benefits of index membership may be tempered by portfolio outflow risks for some countries. This is because benchmark-driven investments may increase the importance of external factors at the expense of domestic factors, raising the risks of outflows unrelated to recipient country fundamentals. Some countries may be disproportionately exposed to these risks, reflecting the way the indices are constructed.