Working Papers
2024
June 14, 2024
A Tale of Two Margins: Monetary Policy and Capital Misallocation
Description: This paper investigates the impact of monetary policy on capital misallocation, focusing on its heterogeneous effects on firms. Using Spanish firm-level data spanning 1999 to 2019, we demonstrate that expansionary monetary policy leads to a reduction in capital misallocation, measured by the within-industry dispersion of firms’ marginal revenue product of capital (MRPK). To analyze the underlying mechanism, we first examine the intensive margin and find that high-MRPK firms exhibit a greater increase in investment and debt financing relative to low-MRPK firms following a monetary policy easing surprise. We also find that a firm’s MRPK serves as a stronger determinant of its investment sensitivity to monetary policy than factors such as age, leverage, or cash, suggesting that MRPK is a reliable proxy for financial frictions. Next, we explore the extensive margin and demonstrate that monetary policy easing stimulates entry and discourages exit, although the quantitative impact is small. Moreover, we find no significant changes in the composition of high- and low-MRPK entrants or exiters. Overall, our findings suggest that expansionary monetary policy primarily reduces capital misallocation by alleviating financial frictions among incumbent productive and constrained firms.
June 14, 2024
Sovereign Green Bonds: A Catalyst for Sustainable Debt Market Development?
Description: In traditional bond markets, sovereign bonds provide benchmarks and serve as catalysts for the corporate bond market development. Contrary to the usual sequence of bond market development, sovereign issuers are latecomers to sustainable bond markets. Yet, our empirical study finds that sovereign green bond issuance can have quantitative and qualitative benefits for the development of private sustainable bond markets. Our results suggest that both the number and the size of corporate green bond issuance increase more in a jurisdiction after the sovereign debut. The results are more pronounced in countries with stronger climate policies. Sovereign green bond issuance also improves the quality of green verification standards in the corporate bond market more generally, consistent with the aim of fostering third-party reviews and promoting best practice in green reporting and verification. Finally, our work provides evidence that the sovereign debut increases liquidity and diminishes yield spreads of corporate green bonds in the same jurisdiction.
June 7, 2024
Exposure to Artificial Intelligence and Occupational Mobility: A Cross-Country Analysis
Description: We document historical patterns of workers' transitions across occupations and over the life-cycle for different levels of exposure and complementarity to Artificial Intelligence (AI) in Brazil and the UK. In both countries, college-educated workers frequently move from high-exposure, low-complementarity occupations (those more likely to be negatively affected by AI) to high-exposure, high-complementarity ones (those more likely to be positively affected by AI). This transition is especially common for young college-educated workers and is associated with an increase in average salaries. Young highly educated workers thus represent the demographic group for which AI-driven structural change could most expand opportunities for career progression but also highly disrupt entry into the labor market by removing stepping-stone jobs. These patterns of “upward” labor market transitions for college-educated workers look broadly alike in the UK and Brazil, suggesting that the impact of AI adoption on the highly educated labor force could be similar across advanced economies and emerging markets. Meanwhile, non-college workers in Brazil face markedly higher chances of moving from better-paid high-exposure and low-complementarity occupations to low-exposure ones, suggesting a higher risk of income loss if AI were to reduce labor demand for the former type of jobs.
June 7, 2024
Monitoring Privately-held Firms' Default Risk in Real Time: A Signal-Knowledge Transfer Learning Model
Description: We develop a mixed-frequency, tree-based, gradient-boosting model designed to assess the default risk of privately held firms in real time. The model uses data from publicly-traded companies to construct a probability of default (PD) function. This function integrates high-frequency, market-based, aggregate distress signals with low-frequency, firm-level financial ratios, and macroeconomic indicators. When provided with private firms' financial ratios, the model, which we name signal-knowledge transfer learning model (SKTL), transfers insights gained from 35 thousand publicly-traded firms to more than 4 million private-held ones and performs well as an ordinal measure of privately-held firms' default risk.
June 7, 2024
Reinforcement Learning from Experience Feedback: Application to Economic Policy
Description: Learning from the past is critical for shaping the future, especially when it comes to economic policymaking. Building upon the current methods in the application of Reinforcement Learning (RL) to the large language models (LLMs), this paper introduces Reinforcement Learning from Experience Feedback (RLXF), a procedure that tunes LLMs based on lessons from past experiences. RLXF integrates historical experiences into LLM training in two key ways - by training reward models on historical data, and by using that knowledge to fine-tune the LLMs. As a case study, we applied RLXF to tune an LLM using the IMF's MONA database to generate historically-grounded policy suggestions. The results demonstrate RLXF's potential to equip generative AI with a nuanced perspective informed by previous experiences. Overall, it seems RLXF could enable more informed applications of LLMs for economic policy, but this approach is not without the potential risks and limitations of relying heavily on historical data, as it may perpetuate biases and outdated assumptions.
June 7, 2024
Policy Multipliers in Japan Under QQE
Description: This paper tests whether Japan's key macro policy multipliers have declined since 2013, the year that Japan introduced Qualitative and Quantitative Easing. We use the augmented Blanchard-Perotti structural VAR model introduced in Ouliaris and Rochon (2021) to study the dynamic effects of shocks in the central bank’s asset holdings, interest rates, and debt levels relative to GDP on economic activity in Japan. We find that both the expenditure and tax multipliers of Japan have fallen, implying that the effectiveness of fiscal policy in Japan declined following the change in monetary policy. Moreover, we find that the efficacy of quantitative easing is small, implying the need for huge interventions to have a significant effect on real GDP, and that the effectiveness of quantitative easing has declined since 2013. We argue that the reduction in policy multipliers can be attributed to the upward trend in the government debt level relative to GDP which, despite historically low interest rates, has increased Japan’s structural deficit, and the likelihood of reduced expenditures and higher taxes going forward.
June 7, 2024
Adding Fuel to the Fire: How Weather Shocks Intensify Conflict
Description: Do weather shocks worsen conflict around the world? To answer this question, this paper uses an innovative dataset created by using georeferencing to match weather and conflict data at the subregional level on a monthly frequency across 168 countries over 2013 to 2022.The empirical results show that higher temperature exacerbate conflict where it already exists. Estimations indicate that, in a high emissions scenario and all else equal, by 2060 conflict deaths as a share of the population for a median country facing conflict could increase by 12.3 percent due to rising temperatures. These findings underscore the importance of integrating climate resilience into peace and security efforts and designing climate adaptation policies that support conflict prevention and resolution.
May 31, 2024
Do Renewables Shield Inflation from Fossil Fuel-Price Fluctuations?
Description: This study investigates the relationship between the adoption of renewable energy and the sensitivity of inflation to changes in fossil energy prices across 69 countries over a 50-year period from 1973 to 2022. In the wake of recently increased oil and gas prices leading to a surge in inflation, the notion of a “divine coincidence” suggests that higher levels of renewable energy adoption, in addition to fighting climate change, could mitigate fossil fuel price-induced inflation volatility. Confirming the divine coincidence hypothesis could be an argument in favor of greening monetary policy. However, our empirical results are inconsistent with the hypothesis as we find no evidence that increased renewable energy adoption reduces the impact of fossil fuel price changes on energy inflation rates. This counter-intuitive result may be attributed to idiosyncratic national energy policies, potential threshold effects, or trade linkage spillovers. As the world continues transitioning towards a low-carbon economy, understanding the implications of this shift on inflation dynamics is crucial.
May 31, 2024
Unveiling the Informal Economy: An Augmented Factor Model Approach
Description: This paper develops a new approach to estimating the degree of informality in an economy. It combines direct yet infrequent measures of the informal economy in micro data with an augmented factor model that links macro indicators of the informal economy to its causes. We show that the prevailing model used in the literature, the multiple indicators multiple causes model, is a special case of the augmented factor model and depicts an incomplete picture of the informal economy. Using the augmented factor model approach, we show that the dynamics of the informal economy is shaped by the strength of overall economic activity as well as the interplay between the formal and informal economies. Contrary to previous work that typically finds declining informality for most countries, we find that the degree of informality has increased for low-income countries for the past two decades.
May 31, 2024
Weathering Tomorrow: Climate Analogues and Adaptation Gaps in Europe
Description: The European continent is warming at more than twice the global average. The human and economic costs of higher temperature and more frequent and extreme natural disasters—already substantial in Europe—are expected to increase further unless suitable adaptation strategies are implemented. This paper shows that while Europe's overall vulnerability to climate risks is lower than other regions’, the countries in Central and Eastern Europe face greater human and economic costs from climate disasters compared to their advanced European peers, which are likely to further increase in the future. We use an ensemble of climate models to project future climates for each country in Europe, and identify the country whose present climate best approximates this projection. We rely on this information on countries’ representative future exposure to climate risks to calibrate country-level macro analyses of natural disasters, and how investment in adaptative infrastructure can help mitigate these shocks. We find that adaptation infrastructure can significantly reduce output losses from natural disasters, mitigate medium-term economic scarring, and support sustainable long-term growth. However, we show that effective implementation of adaption strategies in EMEs/LICs is likely to be constrained by limited domestic financial resources, weaker institutional quality, and may create policy trade-offs, if not accompanied by external support.