Working Papers
2019
September 20, 2019
State-Owned Enterprises in Bosnia and Herzegovina: Assessing Performance and Oversight
Description: Based on a new database of State-Owned Enterprise (SOE) financial statements, we find that SOEs in Bosnia and Herzegovina are mostly in poor financial shape. We estimate the overall size and composition of the SOE sector, and identify individual companies that affect fiscal and macroeconomic performance. Financial analysis suggests that SOEs are not contributing enough to the economy. We also review the SOE governance framework and find that governments do not exercise their ownership function in line with WB/OECD guidelines. Reforms to the governance frameworks are necessary to foster transparency and improve accountability. More fundamental reform of the SOE sector might increase overall GDP by 3 percent per year.
September 20, 2019
How Informative Are Real Time Output Gap Estimates in Europe?
Description: We study the properties of the IMF-WEO estimates of real-time output gaps for countries in the euro area as well as the determinants of their revisions over 1994-2017. The analysis shows that staff typically saw economies as operating below their potential. In real time, output gaps tend to have large and negative averages that are largely revised away in later vintages. Most of the mis-measurement in real time can be explained by the difficulty in predicting recessions and by overestimation of the economy’s potential capacity. We also find, in line with earlier literature, that real-time output gaps are not useful for predicting inflation. In addition, countries where slack (and potential growth) is overestimated to a larger extent primary fiscal balances tend to be lower and public debt ratios are higher and increase faster than projected. Previous research suggests that national authorities’ real-time output gaps suffer from a similar bias. To the extent these estimates play a role in calibrating fiscal policy, over-optimism about long-term growth could contribute to excessive deficits and debt buildup.
September 20, 2019
US vs. Euro Area: Who Drives Cross-Border Bank Lending to EMs?
Description: This paper analyzes the drivers of cross-border bank lending to 49 Emerging Markets (EMs) during the period 1990Q1-2014Q4, by assessing the impact of monetary, financial and real sector shocks in both the US and the euro area. The literature has traditionally highlighted the influence of US monetary policy on driving cross-border bank flows, and more recently the importance of both US and Euro Area (EA) financial/banking sectors’ related variables. Our contribution is the simultaneous analysis of the role of these US and EA drivers, as well as their interactions with real sector shocks. We corroborate the negative impact of US monetary policy tightening on cross-border lending to EMs, but we find that EA monetary policy seems to have an impact mostly on Emerging Europe, reflecting the fact that cross-border lending to most other EM regions is dollar denominated. We also find that real sector shocks in both the US and EA trigger an increase in cross-border lending, but less in EA when modeling the financial sector. Finally, for financial sector shocks, such as those associated with a decrease in bank leverage, our results indicate a broad-based overall contraction of cross-border lending if the shock originates in the US, and heterogenous effects across borrowing regions if the shock originates in the EA.
September 20, 2019
Trinity Strikes Back: Monetary Independence and Inflation in the Caribbean
Description: Monetary independence is at the core of the macroeconomic policy trilemma stating that an independent monetary policy, a fixed exchange rate and free movement of capital cannot exist at the same time. This study examines the relationship between monetary autonomy and inflation dynamics in a panel of Caribbean countries over the period 1980–2017. The empirical results show that monetary independence is a significant factor in determining inflation, even after controlling for macroeconomic developments. In other words, greater monetary policy independence, measured as a country’s ability to conduct its own monetary policy for domestic purposes independent of external monetary influences, leads to lower consumer price inflation. This relationship—robust to alternative specifications and estimation methodologies—has clear policy implications, especially for countries that maintain pegged exchange rates relative to the U.S. dollar with a critical bearing on monetary autonomy.
September 13, 2019
A Guide to Sovereign Debt Data
Description: The last decade or so has seen a mushrooming of new sovereign debt databases covering long time spans for several countries. This represents an important breakthrough for economists who have long sought to, but been unable to tackle, first-order questions such as why countries have differential debt tolerance, and how debt levels affect the scope for countercyclical policy in recessions and financial crises. This paper backdrops these recent data efforts, identifying both the key innovations, as well as caveats that users should be aware of. A Directory of existing publicly-available sovereign debt databases, featuring compilations by institutions and individual researchers, is also included.
September 13, 2019
Financial Openness and Capital Inflows to Emerging Markets: In Search of Robust Evidence
Description: We reassess the connection between capital account openness and capital flows in an empirical framework that is grounded in theory and makes use of previously unexplored variation in the data. We demonstrate how our theory-consistent regressions may overcome some ubiquitous measurement problems in the literature by relying on interaction terms between financial openness and traditional push-pull factors. Within our proposed framework, we ask: what can be said robustly about the effect of capital account restrictions on capital flows? Our results warrant against over-interpreting the existing cross-country evidence as we find very few robust relationships between capital account restrictiveness and various types of capital inflows. Countries with a higher degree of financial openness are more susceptible to some, but by no means all, push and pull factors. Overall, the results are still consistent with a complex set of tradeoffs faced by policymakers, where the ability to shield the domestic economy from volatile capital flow cycles must be weighed against the sources of exogenous risks and potential long run growth effects.
September 13, 2019
The Inflexible Structure of Global Supply Chains
Description: The rise of global supply chains has had profound effects on individual economies and the global trading system, thereby complicating standard macroeconomic analyses. For many of the new and challenging questions brought about by this phenomenon, such as its impact on the global business cycle and measurements of competitiveness, the answer largely depends on one specific aspect of global value chains: how easily they can re-configure in response to changes in prices. We propose a parsimonious, generalized specification to test the degree of global-supply-chain flexibility. Our estimates show that, in the short run, the production structure is highly inflexible, and that this rigidity has, if anything, risen over time as supply chains have deepened over time. This finding is robust to alternative price measures, including those that account for the U.S. dollar’s outsized role in trade through invoicing. While in the long run all estimated elasticities rise, supply chains remain somewhat inflexible. Our results have implications for analyses of cross-country business-cycle dynamics, the propagation of sectoral shocks, and the measurement of international competitiveness.
September 13, 2019
The Level REER model in the External Balance Assessment (EBA) Methodology
Description: This paper offers an empirical model of the drivers of the level of the Real Effective Exchange Rate (REER) that is now part of the IMF’s methodology for the assessment of external positions, including exchange rates. It constructs a measure of the level of the REER and it offers a panel regression that considers a large number of cross-sectional and time varying factors, guided by the extensive literature. Its main contribution is to enhance our understanding of the cross-sectional determinants of the level of the REER, while taking into account the time-series drivers. The framework accounts for the much larger cross-sectional variation of the level REER, and can better explain the time series variation of level REER when these are based on GDP-deflators rather than on consumer price indices. The latter suggest there may be merits to broadening the assessments to include such measures, although further analysis is required.
September 13, 2019
Manufacturing Jobs and Inequality: Why is the U.S. Experience Different?
Description: We examine the extent to which declining manufacturing employment may have contributed to increasing inequality in advanced economies. This contribution is typically small, except in the United States. We explore two possible explanations: the high initial manufacturing wage premium and the high level of income inequality. The manufacturing wage premium declined between the 1980s and the 2000s in the United States, but it does not explain the contemporaneous rise in inequality. Instead, high income inequality played a large role. This is because manufacturing job loss typically implies a move to the service sector, for which the worker is not skilled at first and accepts a low-skill wage. On average, the associated wage cut increases with the overall level of income inequality in the country, conditional on moving down in the wage distribution. Based on a stylized scenario, we calculate that the movement of workers to low-skill service sector jobs can account for about a quarter of the increase in inequality between the 1980s and the 2000s in the United States. Had the U.S. income distribution been more equal, only about one tenth of the actual increase in inequality could have been attributed to the loss of manufacturing jobs, according to our simulations.
September 13, 2019
How to Improve Inflation Forecasting in Canada
Description: Against the backdrop of an ongoing review of the inflation-targeting framework, this paper examines the real-time inflation forecasts of the Bank of Canada with the aim of identifying potential areas for improvement. Not surprisingly, the results show that errors in forecasting non-core inflation (commodity prices etc.) are found to be the largest contributors to overall inflation forecast errors. Perhaps more importantly, relatively small core inflation forecast errors appear to mask large and offsetting errors related to the output gap and the policy interest rate, partly reflecting a tendency to overestimate the neutral nominal policy rate in real time. Faced with these uncertainties, the Governing Council’s gradual approach to changing its policy settings appears to have served it well.