Working Papers
2023
July 21, 2023
Household Savings in Selected Southern European Countries Evidence from Cross-Country Micro-Level Data
Description: The paper looks into the puzzle of low household savings in three Southern European (SE3) countries – Cyprus, Greece, and Portugal. Building on the household saving drivers literature, we employ cross-country micro-level data and investigate the key saving patterns, examining their heterogeneity across households in SE3 countries relative to the EA average. The results confirm the prominent role of income, along with interest rate, inflation, fiscal balance, and debt in shaping household savings in SE3 countries. Quantile regressions employed to analyze saving behavior across the distribution of households suggest that households with lower savings tend to see their savings dip (or dissavings rise) more-than-proportionately with shocks to income, interest rate, inflation, and government balance. Our policy simulations across the distribution of households suggest that targeted rather than universal policy intervention could improve household savings, especially of the most vulnerable ones.
July 14, 2023
Inequality and Poverty in India: Impact of COVID-19 Pandemic and Policy Response
Description: Using microdata from nationally representative household and labor force surveys, we study the impact and drivers of poverty and inequality in India during the pandemic. We have three main findings. First, India has made significant progress in reducing poverty in recent decades, but the economic downturn associated with the COVID-19 pandemic is estimated to have temporarily increased poverty and inequality. Second, education and employment status seem to be the main factors associated with poverty and income/consumption changes. Finally, the government’s expansion of food subsidies has likely played a significant role in mitigating the increase in poverty during the pandemic.
July 7, 2023
The Anatomy of Monetary Policy Transmission in an Emerging Market
Description: Monetary policy transmission in EMs has been found to be weak historically due to under-developed financial markets and heavy central bank intervention in FX markets that undermine the exchange rate channel. Against this background, this paper investigates the transmission of monetary policy, including the role of external factors, in Malaysia and highlight findings that could be relevant for other EMs. We find an important role for the credit and the exchange rate channels. Further, we also find a complementary role for policy tools including Foreign Exchange Intervention (FXI) and liquidity tools such as Statutory Reserve Requirement in shaping the transmission of monetary policy. We then explore the spillover effects of external global factors including global monetary policy and global commodity prices on monetary policy transmission in a small open economy such as Malaysia. The results show that while global commodity prices do not impair monetary policy transmission, global monetary policy tightening could complement domestic efforts to achieve price stability by inducing a global disinflation. Finally, monetary policy transmission is delayed and weakened in high inflationary environment, with the implication that more aggressive and preemptive policy actions may be needed in such cases.
July 7, 2023
Raising Rates with a Large Balance Sheet: The Eurosystem’s Net Income and its Fiscal Implications
Description: The Eurosystem, having purposefully expanded its footprint in recent years, confronts a period of loss-making as rising policy rates lift the remuneration of bank reserves while assets churn more slowly. This paper projects the net income of the Eurosystem and its “top-five” national central banks over a ten-year horizon, finding that losses, while large, will be temporary and recoupable. The policy conclusions are fourfold. First, the temporary and recoupable nature of the loss-making obviates any need for capital contributions or indemnities from the state, instead allowing losses to be offset against future net income. Second, it must nonetheless be communicated that fiscal impacts will be material, with annual taxes and transfers of 0.1−0.2 percent of GDP giving way to potentially long interruptions in some cases. Third, more-conservative profit distribution policies in the future steady state could help mitigate the on-off pattern of dividends. Finally and most vitally, loss-making must remain orthogonal to monetary policy decision-making, as indeed it is at the ECB. Ultimately, credibility will rest on performance in delivering on the price stability mandate.
July 5, 2023
Taxing Cryptocurrencies
Description: Policymakers are struggling to accommodate cryptocurrencies within tax systems not designed to handle them; this paper reviews the issues that arise. The greatest challenges are for implementation: crypto’s quasi-anonymity is an inherent obstacle to third-party reporting. Design problems arise from cryptocurrencies’ dual nature as investment assets and means of payment: more straightforward is a compelling case for corrective taxation of carbon-intensive mining. Ownership is highly concentrated at the top, but many crypto investors have only moderate incomes. The capital gains tax revenue at stake worldwide may be in the tens of billions of dollars, but the more profound risks may ultimately be for VAT/sales taxes.
June 30, 2023
Decomposing Climate Risks in Stock Markets
Description: Climate change poses an unprecedented challenge to the world economy and the global financial system. This paper sets out to understand and quantify the impact of climate mitigation, with a focus on climate-related news, which represents an important information source that investors use to revise their subjective assessments of climate risks. Using full-text data from Financial Times from January 2005 to March 2022, we develop machine learning-based indicators to measure risks from climate mitigation, and the direction of the risk is identified through manual labels. The documented risk premium indicates that climate mitigation news has been partially priced in the Canadian stock market. More specifically, stock prices react positively to market-wide climate-favorable news but they do not react negatively to climate-unfavorable news. The results are robust to different model specifications and across equity markets.
June 30, 2023
The Impact of Climate Policy on Oil and Gas Investment: Evidence from Firm-Level Data
Description: Using a text-based firm-level measure of climate policy exposure, we show that climate policies have led to a global decline of 6.5 percent in investment among publicly traded oil and gas companies between 2015 and 2019, with European companies experiencing the most significant impact. Similarly, climate policy uncertainty has also had a negative impact. Results support the Neoclassical investment model, which predicts a pre-emptive cut in investment in reaction to downward shifts in prospective demand, in contrast with the “green paradox” that predicts an increase in current investment to shift production toward the present.
June 30, 2023
Migration, Search and Skill Heterogeneity
Description: Cross-border migration can act as an important adjustment mechanism to country-specific shocks. Yet, depending on who moves, it can have unintended consequences for business cycle stability. This paper argues that the skill composition of migration plays a critical role. When migration flows become more concentrated in skilled labor an important trade-off arises. On the one hand, migration releases unemployment pressures for the origin countries. On the other hand, it generates negative compositional effects (the so-called “brain drain” effects) and skill imbalances, which reduce supply capacity in origin countries. This paper analyses quantitatively the impact of cyclical migration in an open-economy Dynamic Stochastic General Equilibrium (DSGE) model with endogenous migration flows, trade linkages, search and matching frictions, and skill heterogeneity. I apply this framework to the case of the Greek emigration wave following the European Debt Crisis. What I find is that emigration flows implied strong negative effects for capital formation, leading to more than a 15 percentage point drop in investment. Rather than stabilizing the Greek business cycle, labor mobility led to a deeper and more protracted recession.
June 30, 2023
An Estimated DSGE Model for Integrated Policy Analysis
Description: We estimate a New Keynesian small open economy model which allows for foreign exchange (FX) market frictions and a potential role for FX interventions for a large set of emerging market economies (EMEs) and some inflation targeting (IT) advanced economy (AE) countries serving as a control group. Next, we use the estimated model to examine the empirical support for the view that interest rate policy may not be sufficient to stabilize output and inflation following capital outflow shocks, and the extent to which FX interventions (FXI) can improve policy tradeoffs. Our results reveal significant structural differences between AEs and EMEs—in particular FX market depth—leading to different transmission of capital outflow shocks which justifies occasional use of FXI in some EMEs in certain situations. Our analysis also highlights the critical importance of accounting for the endogeneity of FXI behavior when assessing FX market depth and policy tradeoffs associated with volatile capital flows in past episodes.
June 30, 2023
Rising Child Poverty in Europe: Mitigating the Scarring from the COVID-19 Pandemic
Description: Child poverty increased dramatically during the COVID-19 pandemic. In 2020 alone, the number of children suffering from poverty in the EU increased by 19 percent, or close to 1 million. Left unaddressed, this would not only affect individuals’ life prospects and well-being but also have long-term economic implications. This paper argues that, to limit this potential scarring effect of the pandemic, policies should be deployed to reduce rapidly the number of children affected by poverty and mitigate the long-term impact of poverty. Reducing the number of children affected by poverty can be achieved by (i) labor policies and reforms that increase parental work and the labor income of poor parents and (ii) fiscal spending on family and children that can have a powerful and immediate impact. These policies need to be complemented by public investment in education and childcare, health, and housing to mitigate the long-term impact of child poverty.