Working Papers
2022
May 6, 2022
Overcoming Data Sparsity: A Machine Learning Approach to Track the Real-Time Impact of COVID-19 in Sub-Saharan Africa
Description: The COVID-19 crisis has had a tremendous economic impact for all countries. Yet, assessing the full impact of the crisis has been frequently hampered by the delayed publication of official GDP statistics in several emerging market and developing economies. This paper outlines a machine-learning framework that helps track economic activity in real time for these economies. As illustrative examples, the framework is applied to selected sub-Saharan African economies. The framework is able to provide timely information on economic activity more swiftly than official statistics.
May 6, 2022
Trade and the COVID-19 Pandemic: Lessons from French Firms
Description: This paper uses granular customs data from France to investigate propagation of the COVID-19 shock along the supply chains in 2020. It quantifies the effect of the COVID-19 shock on trade adjustment and identifies mitigating and amplifying factors contributing to French firms’ heterogeneous adjustment paths. Early in the pandemic, firms mainly responded to global lockdowns and spread of the virus by reducing trade volumes (intensive margin) as opposed to exiting from import and export markets (ex-tensive margin). However, adjustment along the extensive margin played a more important role in trade with developing countries. It is shown that the impact of lockdowns was stronger for final consumer goods and the trade recovery was predominantly demand-driven. More automated, inventory-intensive, older, and medium-sized firms were more insulated from the shock, whereas firms’ reliance on air transportation for shipping goods amplified the shock. Trade bans and promotion measures implemented by governments in response to the pandemic had little impact on aggregate trade flows.
May 6, 2022
Sovereign Debt Repatriation During Crises
Description: We use a new, comprehensive data set on the sovereign debt investor base to document three novel empirical facts: (i) sovereign debt is repatriated - that is, shifted from external private to domestic investors - prior to sovereign defaults; (ii) not all crises are equal: evidence for repatriation during banking and currency crises is more limited; and (iii) the nature of defaults matters: external investors do not leave during preemptive debt restructurings. We further show that repatriation appears to be prevalent when defaults happen in large markets with low capital controls. The data set we use is uniquely suited to analyzing investor base dynamics during rare crises due to its large cross-section and time series, covering 180 countries from 1989 to 2020.
April 29, 2022
Sovereign Cocos
Description: We study a model of equilibrium sovereign default in which the government issues cocos (contingent convertible bonds) that stipulate a suspension of debt payments when the government faces liquidity shocks in the form of an increase of the bondholders' risk aversion. We find that in spite of reducing the frequency of defaults triggered by liquidity shocks, introducing cocos increases the overall default frequency. By mitigating concerns about liquidity, cocos make indebtedness and default risk more attractive for the government. In contrast, cocos that stipulate debt forgiveness when the government faces the shock, achieve larger welfare gains by reducing default risk.
April 29, 2022
Public Debt and Real GDP: Revisiting the Impact
Description: This paper provides new empirical evidence of the impact of an unanticipated change in public debt on real GDP. Using public debt forecast errors, we identify exogenous changes in public debt to assess the impact of a change in the debt to GDP ratio on real GDP. By analyzing data on gross public debt for 178 countries over 1995-2020, we find that the impact of an unanticipated increase in public debt on the real GDP level is generally negative and varies depending on other fundamental characteristics. Specifically, an unanticipated increase in the public debt to GDP ratio hurts real GDP level for countries that have (i) a high initial debt level or (ii) a rising debt trajectory over the five preceding years. On the contrary, an unanticipated increase in public debt boosts real GDP for countries that have (iii) a low-income level or (iv) completed the HIPC debt relief initiative.
April 29, 2022
High Performance Export Portfolio: Design Growth-Enhancing Export Structure with Machine Learning
Description: This paper studies the relationship between export structure and growth performance. We design an export recommendation system using a collaborative filtering algorithm based on countries' revealed comparative advantages. The system is used to produce export portfolio recommendations covering over 190 economies and over 30 years. We find that economies with their export structure more aligned with the recommended export structure achieve better growth performance, in terms of both higher GDP growth rate and lower growth volatility. These findings demonstrate that export structure matters for obtaining high and stable growth. Our recommendation system can serve as a practical tool for policymakers seeking actionable insights on their countries’ export potential and diversification strategies that may be complex and hard to quantify.
April 29, 2022
Monetary Policy Transmission and Policy Coordination in China
Description: We study the transmission of conventional monetary policy in China, focusing on the interaction between monetary and fiscal policy given the unique institutional set-up for macroeconomic policy making. Our results suggest some progress but also continued difficulties in the transmission of monetary policy. Similar to recent studies, we find evidence of monetary policy pass-through to interest rates. However, the impact of monetary policy measures that are not coordinated with fiscal policy is significantly weaker than that of coordinated measures. This suggests the need for further improvements to the interest-rate based framework.
April 29, 2022
India’s Banks: Lending to Productive Firms?
Description: Capital misallocation is widely thought to be an important factor underpinning productivity and income gaps between advanced and emerging economies. This paper studies how well Indian banks allocate capital across firms with varying levels of productivity. The analysis reveals that the link between productivity and bank credit growth is weaker for firms with significant ties to public sector banks, especially in years when public sector banks represent a large share of new credit. Large flows of credit to unproductive firms represent important missed growth opportunities for more productive firms. These results suggest that measures to improve governance of public sector banks, potentially including privatization, would help reduce capital misallocation.
April 29, 2022
Shocks to Inflation Expectations
Description: The consensus among central bankers is that higher inflation expectations can drive up inflation today, requiring tighter policy. We assess this by devising a novel method for identifying shocks to inflation expectations, estimating a semi-structural VAR where an expectation shock is identified as that which causes measured expectations to diverge from rationality. Using data for the United States, we find that a positive inflation expectations shock is deflationary and contractionary: inflation, output, and interest rates all fall. These results are inconsistent with the standard New Keynesian model, which predicts inflation and interest rate hikes. We discuss possible resolutions to this new puzzle.
April 29, 2022
Corporate Vulnerabilities in the Middle East, North Africa, and Pakistan in the Wake of COVID-19 Pandemic
Description: This paper analyzes corporate vulnerabilities in the Middle East, North Africa and Pakistan (MENAP hereafter) in the wake of the COVID-19 pandemic shock. Using a sample of nearly 700 firms from eleven countries in MENAP, we assess the non-financial corporate (NFC) sector’s liquidity and solvency risk and viability over the medium term under different stress test scenarios. Our findings suggest that the health crisis has exacerbated vulnerabilities in the corporate sector, though the effects are heterogenous across the region. Small firms, which entered the pandemic in a more vulnerable position, would remain under high liquidity stress over the medium term, putting a substantial share of these firms’ debt at risk of default. Similarly, liquidity needs of firms in contact-intensive sectors have also worsened and would remain elevated in 2022-23. We also show that an adverse scenario of subdued growth and premature withdrawal of policy support would impair the capacity to service interest expenses, especially among small firms, resulting in higher insolvency risk. Overall, our results indicate that some segments of the MENAP corporate sector could remain reliant on policy support during the recovery phase and that structural reforms are critical to save distressed but viable firms from bankruptcy and ensure an efficient liquidation of “zombie” firms.