Working Papers
2022
December 16, 2022
Equity and Efficiency Effects of Land Value Taxation
Description: It is a well-known result in economics that land value taxation is efficient since it does not distort the supply of the tax base. Considering only efficiency, land value should thus be fully taxed. Using optimal taxation theory with heterogeneous households, we show that it may be optimal not to tax land value fully for distributional reasons. The decisive variable is the covariance of land value held by households and their social welfare weight. Empirical data from the US and France, however, indicates that ownership of land value (in absolute terms) is negatively correlated to the social welfare weight. Middle income households would pay relatively more land value taxes than high income households, but less in absolute terms. With reasonable revenue recycling, land value taxation would thus reduce the net tax burden of low and middle income earners, because they would benefit more from the recycling than they pay in additional taxes.
December 16, 2022
A Bottom-Up Reduced Form Phillips Curve for the Euro Area
Description: We develop a bottom-up model of inflation in the euro area based on a set of augmented Phillips curves for seven sub-components of core inflation, and auxiliary regressions for non-core items. The disaggregated structure of the model improves on the forecasting performance of a standard one-equation Phillips curve, especially since the onset of the Covid-19 pandemic in early-2020 and the following energy shocks. We find a key role for international energy and food prices in explaining the recent surge in inflation – as of Q2 2022, they account for 75 percent of the increase in headline inflation and 30 percent of the increase in core. Economic slack and inflation expectations explain another 10 percent of headline and 20 percent of core inflation. Around one-third of the increase in core inflation remains unexplained by the model. Out of sample projections show high uncertainty around the inflation path while suggesting that inflation pressures are unlikely to dissipate quickly. We argue that the bottom-up approach offers a useful complement to the forecaster’s toolbox–especially in the current environment of sectoral shocks - by improving forecast accuracy, shedding additional light on the drivers of inflation, and providing a framework in which to apply ex-post judgement in a structured way.
December 16, 2022
Deep Reinforcement Learning: Emerging Trends in Macroeconomics and Future Prospects
Description: The application of Deep Reinforcement Learning (DRL) in economics has been an area of active research in recent years. A number of recent works have shown how deep reinforcement learning can be used to study a variety of economic problems, including optimal policy-making, game theory, and bounded rationality. In this paper, after a theoretical introduction to deep reinforcement learning and various DRL algorithms, we provide an overview of the literature on deep reinforcement learning in economics, with a focus on the main applications of deep reinforcement learning in macromodeling. Then, we analyze the potentials and limitations of deep reinforcement learning in macroeconomics and identify a number of issues that need to be addressed in order for deep reinforcement learning to be more widely used in macro modeling.
December 16, 2022
Macroeconomic Effects of Climate Change in an Aging World
Description: Climate and demographic changes are two major long-term trends that are evolving simultaneously. The global population is aging, while climate change is increasing the frequency and severity of weather-related disasters and lowering productivity. This paper examines the macroeconomic effects of these three changes in a common framework. Simulation results suggest that while aging drags down the real interest rate, climate change puts upward pressure on the real interest rate and inflation. As climate change intensifies, it will be the dominant factor shaping the macroeconomic variables. This results in higher inflation and a higher debt-to-GDP ratio, requiring tighter fiscal and monetary policies. The results further suggest that economic uncertainty induced by climate change amplifies these effects of climate change.
December 16, 2022
Equitable Access to Vaccines: Myth or Reality?
Description: Fighting the COVID-19 pandemic required vaccinations; however, ending it requires vaccination equality. The progress in vaccinations varies greatly across countries, with low- and middle-income countries having much lower vaccination rates than advanced countries. Initially, the limited vaccine supply was in part to blame for slow pace of vaccinations in low-income countries. But as the supply constraints eased toward the end of 2021, the focus has shifted to in-country distribution challenges and vaccine hesitancy. This paper quantifies the importance of various factors in driving vaccination rates across countries, including vaccine deliveries, demographic structure, health and transport infrastructure and development level. It then estimates the contribution of these factors to vaccination inequality. We show that much of the vaccination inequality in 2021-22 was driven by the lack of access to vaccines which is beyond countries’ control. And although vaccination inequality declined over time, access to vaccines remains the dominant driver of vaccination inequality.
December 16, 2022
IMF’s Precautionary Lending Instruments: Have They Worked?
Description: The paper documents the benefits provided by IMF’s precautionary instruments (FCL and PLL) to countries in accessing international financial markets. It builds on multiple methods to show that the announcement of new FCL or PLL generally leads to a significant decline in sovereign spreads. Next, it evaluates the role of the FCL and PLL in mitigating external financial pressures, focusing on the COVID-19 pandemic as a case study. Economies which had a PLL or FCL arrangement in place during the pandemic experienced a lower increase in spreads relative to other emerging markets, even after controlling for country-specific effects and other covariates, suggesting that these arrangements help cushion external shocks. Finally, the study asks whether FCL/PLL drawdowns have an impact on financial perceptions; the analysis finds—albeit on the basis of a very small sample— no evidence of downside effects from countries drawing down on these arrangements .
December 16, 2022
Natural Disasters and Scarring Effects
Description: This paper uses a novel empirical approach, following the literature on hysteresis, to explore medium-term scarring of natural disasters for countries vulnerable to climate change. By quantifying the dynamic effects of natural disasters on real GDP per capita for a large number of episodes using a synthetic control approach (SCA) and focusing on severe shocks, we demonstrate that a persistently large deviation of real GDP per capita from the counterfacutal trend exists five years after a severe shock in many countries. The findings highlight the importance and urgency of building ex-ante resilience to avoid scarring effects for countries prone to natural disasters, such as those in the Caribbean region.
December 16, 2022
Systemwide Liquidity Stress Testing Tool
Description: Developing a systemic liquidity stress testing tool is challenging due to data constraints and hard-to-model behavioral factors. There has yet to be a uniformly accepted model partly because the nature of systemic liquidity risks differs significantly across countries. This paper offers a simple Excel-based tool to assess the high-level impact of aggregate liquidity stress on the whole economy and gauge its spillover across banks, non-bank financial institutions (NBFIs), and non-financial economic sectors. It primarily uses the balance sheet approach (BSA) data—a sector-aggregate matrix of financial exposure by counterpart—that have become increasingly available for various economies with all income levels. The results can identify systemically important financial linkages to be analyzed further and help calibrate macroprudential measures and a liquidity support framework. When liquidity stress stems from capital outflows, the tool can enrich policy discussion based on integrated policy framework (IPF) and international reserve adequacy perspectives.
December 16, 2022
Macro-Financial Stability in the COVID-19 Crisis: Some Reflections
Description: The global financial system has shown remarkable resilience during the COVID-19 pandemic, despite a sharp decline in economic activity and the initial financial market upheaval in March 2020. This paper takes stock of the factors that contributed to this resilience, focusing on the role of monetary and financial policies. In response to the pandemic-induced crisis, major central banks acted swiftly and decisively, cutting policy rates, introducing new asset purchase programs, providing liquidity support for the banking system, and creating several emergency facilities to sustain the flow of credit to the real economy. Several emerging market central banks also deployed asset purchase programs for the first time. While the pandemic crisis has underscored the importance of policies in preventing calamitous financial outcomes, it has also brought to the fore some unintended consequences of policy actions—in particular, of providing prolonged monetary policy support and applying regulation to specific segments of the financial system rather than taking a broader approach—that could undermine financial stability in the future.
December 16, 2022
Climate Shocks and Domestic Conflicts in Africa
Description: This paper analyzes the interlinkages between climate shocks, domestic conflicts, and policy resilience in Africa. It builds on a Correlated Random Effect model to asess these interrelationships on a broad sample of 51 African countries over the 1990-2018 period. We find suggestive evidence that climate shocks, as captured through weather shocks, increase the likelihood of domestic conflicts, by as high as up to 38 percent. However, the effect holds only for intercommunal conflicts, not for government-involved conflicts. The effect is maginified in countries with more unequal income distribution and a stronger share of young male demographics. The results are robust to a wide set of sensitivity checks, including using various indicators of weather shocks and domestic conflicts, and alternative estimation techniques. The findings shed light on key policy resilience factors, including steadily improving domestic revenue mobilization, strengthening social protection and access to basic health care services, scaling up public investment in the agriculture sector, and stepping up anti-desertification efforts.