Working Papers
2021
June 25, 2021
The Sectoral Trade Losses from Financial Crises
Description: The “Great Trade Collapse” triggered by the 2008-09 crisis calls for a careful assessment of the trade losses from financial crises. We adopt a more detailed perspective by looking at the response of different types of trade (i.e. agricultural, mining, and manufactured goods, and services) following various types of financial crises (i.e. debt, banking, and currency crises). Estimations performed on the 1980-2018 period using a combination of impact assessment and local projections to capture a causal dynamic effect running from financial crises to the trade activity show that the collapse of total trade is long-lasting and mainly driven by the fall of manufacturing and to some extent services trade. These causal effects are found to operate through three channels: a structural, a demand-side, and a supply-side channel. By contributing to the understanding of the trade effects of financial crises, our analysis provides insightful support for the design and implementation of policies aimed at coping with these effects.
June 25, 2021
Fintech Potential for Remittance Transfers: A Central America Perspective
Description: This paper analyzes the potential for fintech to facilitate cheaper and more efficient remittances, and to enhance financial inclusion in Central America. Digital remittances remain nascent in the region, primarily reflecting behavioral inertia, small cost advantages of digital over traditional channels, and inadequate financial literacy. Through expanded alliances between traditional and fintech operators, digital remittances can further reduce transaction costs and reach those remote, low-income households in a timely and secure manner. A meaningful expansion of fintech remittances necessitates an enabling regulatory environment for digital financial services, and KYC and AML/CFT requirements proportionate to the value of transfers.
June 25, 2021
Understanding Chile’s Social Unrest in an International Perspective
Description: We aim to provide a broad descriptive overview of Chile’s social issues, in comparison to other countries and over time, in order to place the recent social unrest in historical and international perspectives which can help prepare the ground for future policy priorities. We follow an eclectic approach, classifying a broad set of indicators along six dimensions—inequality across: i) income; ii) perception; iii) access; iv) opportunity; v) redistribution; and vi) location. The analysis puts forward a set of descriptive findings. First, income inequality declined substantially but remains high, also compared to countries with similar level and path of development. Second, Chile seems to be one of the few countries in Latin America with declining inequality where perceived inequality actually increased. Third, notwithstanding an increase in social spending, access to essential services appears limited, particularly for middle and lower income classes, amid fast growth of out-of-pocket health expenses, relatively faster growth of cost of living for the relatively poorer, and remaining weaknesses in the pension and education systems. Fourth, inequality of opportunity is high, with limited competition. Fifth, fiscal redistribution has improved markedly, but remains low by international standards. Finally, inter-regional inequality has declined substantially over the last two decades, reaching levels similar to the OECD median.
June 25, 2021
Can International Technological Diffusion Substitute for Coordinated Global Policies to Mitigate Climate Change?
Description: In short, yes. I use a multi-region integrated assessment model with fuel-specific endogenous technical change to examine the impact of Europe and China reducing emissions to zero by mid-century. Without international technological diffusion this is insufficient to avoid catastrophic climate change. But when innovation can diffuse overseas, long-run temperature increases are limited to 3 degrees. This occurs because policy not only encourages green innovations but also dissuades dirty innovations which would otherwise spread. The most effective policy package in emissions-reducing regions is a research subsidy funded by a carbon tax, driven in the short term by the direct effect of the carbon tax on the composition of energy, and later by innovation induced by research subsidies. Green production subsidies are ineffective because they undermine incentives for innovation.
June 25, 2021
The Poverty and Distributional Impacts of Carbon Pricing: Channels and Policy Implications
Description: Addressing the poverty and distributional impacts of carbon pricing reforms is critical for the success of ambitious actions in the fight against climate change. This paper uses a simple framework to systematically review the channels through which carbon pricing can potentially affect poverty and inequality. It finds that the channels differ in important ways along several dimensions. The paper also identifies several key gaps in the current literature and discusses some considerations on how policy designs could take into account the attributes of the channels in mitigating the impacts of carbon pricing reforms on households.
June 25, 2021
Fiscal Policies for Achieving Finland’s Emission Neutrality Target
Description: Finland has pledged to cut net greenhouse gas emissions to zero by 2035 and has sectoral targets for deploying electric vehicles, phasing out coal generation, and oil-based space heating. Fiscal policies at the national and sectoral level could play a critical role in achieving these objectives. Carbon dioxide emissions are already priced significantly in Finland but prices vary substantially across fuels and sectors. The paper discusses a reform to both scale up, and progressively harmonize, pricing while using revenues to address equity issues. It also discusses the potential use of revenue-neutral feebate schemes to strengthen mitigation incentives for the transportation, industry, building, forestry, and agricultural sectors.
June 25, 2021
Financial Crises, Investment Slumps, and Slow Recoveries
Description: One of the most puzzling facts in the wake of the Global Financial Crisis (GFC) is that output across advanced and emerging economies recovered at a much slower rate than anticipated by most forecasting agencies. This paper delves into the mechanics behind the observed slow recovery and the associated permanent output losses in the aftermath of the crisis, with a particular focus on the role played by financial frictions and investment dynamics. The paper provides two main contributions. First, we empirically document that lower investment during financial crises is the key factor leading to permanent loss of output and total factor productivity (TFP) in the wake of a crisis. Second, we develop a DSGE model with financial frictions and capital-embodied technological change capable of reproducing the empirical facts. We also evaluate the role of financial policies in stabilizing output and TFP in response to disruptions in financial markets.
June 18, 2021
Effects of COVID-19 on Regional and Gender Equality in Sub-Saharan Africa: Evidence from Nigeria and Ethiopia
Description: The labor structure in sub-Saharan Africa is characterized by a high share of informal employment in the rural agricultural sector. The impact of COVID-19 on female employment may not appear to be large as the share of such employment is particularly high among women. Nevertheless, widespread income reduction was observed both in rural and urban households. This could worsen the opportunities for women as husbands’ control over the household resource is the norm. The paper also finds that rural children struggled to continue learning during school closures. Gender-sensitive policies are needed to narrow the gap during and post-pandemic.
June 11, 2021
Finance, Growth, and Inequality
Description: Finance and growth emerged as a distinct field of economics during the last three decades as economists integrated the fields of finance and economic growth and then explored the ramifications of the functioning of financial systems on economic growth, income distribution, and poverty. In this paper, I review theoretical and empirical research on the connections between the operation of the financial system and economic growth and inequality. While subject to ample qualifications, the preponderance of evidence suggests that (1) financial development—both the development of banks and stock markets—spurs economic growth and (2) better functioning financial systems foster growth primarily by improving resource allocation and technological change, not by increasing saving rates. Some research also suggests that financial development expands economic opportunities and tightens income distribution, primarily by boosting the incomes of the poor. This work implies that financial development fosters growth by expanding opportunities. Finally, and more tentatively, financial innovation—improvements in the ability of financial systems to ameliorate information and transaction costs—may be necessary for sustaining growth.
June 11, 2021
Asymmetric Non-Commodity Output Responses to Commodity Price Shocks
Description: This paper focuses on identifying potential asymmetric responses of non-commodity output growth in times of positive and negative commodity terms-of-trade shocks. Using a sample of 27 oil-exporting countries and a panel VAR method, the study finds: 1) the short-and medium-run response of real non-commodity GDP growth is larger for negative shocks than positive shocks; 2) this asymmetry is more pronounced in countries with weak pre-existing fundamentals–high levels of public debt and low levels of international reserves–which also serve to amplify the volatility of the response; 3) the output response to positive shocks is stronger following a sustained period of CTOT increases, while the impact of negative shocks on output are more damaging when they occur after a period of CTOT decline.