Working Papers
2021
May 4, 2021
Balance Sheets and Debt Crises – Empirical Regularities for Modern Cases of Sovereign Distress
Description: Public and private sector balance sheets are an important component to any analysis of debt sustainability. A vulnerable and indebted private sector can become a sudden liability for the government; alternatively, resilient household and bank balance sheets may reveal potential sources of funding for the sovereign during times of fiscal distress. In this paper, we document empirical regularities in the behavior of macroeconomic variables during debt crises, and show how both macroeconomic fundamentals and sectoral net worth can affect the likelihood of undergoing default.
May 1, 2021
Will COVID-19 Have Long-Lasting Effects on Inequality? Evidence from Past Pandemics
Description: This paper provides evidence on the impact of major epidemics from the past two decades on income distribution. The pandemics in our sample, even though much smaller in scale than COVID-19, have led to increases in the Gini coefficient, raised the income share of higher-income deciles, and lowered the employment-to-population ratio for those with basic education compared to those with higher education. We provide some evidence that the distributional consequences from the current pandemic may be larger than those flowing from the historical pandemics in our sample, and larger than those following typical recessions and financial crises.
May 1, 2021
Impact of COVID-19: Nowcasting and Big Data to Track Economic Activity in Sub-Saharan Africa
Description: The COVID-19 pandemic underscores the critical need for detailed, timely information on its evolving economic impacts, particularly for Sub-Saharan Africa (SSA) where data availability and lack of generalizable nowcasting methodologies limit efforts for coordinated policy responses. This paper presents a suite of high frequency and granular country-level indicator tools that can be used to nowcast GDP and track changes in economic activity for countries in SSA. We make two main contributions: (1) demonstration of the predictive power of alternative data variables such as Google search trends and mobile payments, and (2) implementation of two types of modelling methodologies, machine learning and parametric factor models, that have flexibility to incorporate mixed-frequency data variables. We present nowcast results for 2019Q4 and 2020Q1 GDP for Kenya, Nigeria, South Africa, Uganda, and Ghana, and argue that our factor model methodology can be generalized to nowcast and forecast GDP for other SSA countries with limited data availability and shorter timeframes.
May 1, 2021
What Determines Social Distancing? Evidence from Advanced and Emerging Market Economies
Description: The health and economic consequences of COVID-19 are closely tied to individual compliance with recommended protective behaviors. We examine the determinants of this compliance using survey data from the COVID Behavior Tracker for 29 advanced and emerging market economies between March and December 2020. Social distancing behaviors vary significantly by age, gender, occupation, and individual beliefs about COVID-19. In addition, those who trust their government’s response to COVID-19 are significantly more likely to adopt recommended behaviors and to self-isolate if advised, highlighting the need for well-coordinated actions on the health and economic fronts. We also find that mobility restrictions, such as stay-at-home orders, and mask mandates are associated with reduced social interactions and persistent increases in compliance. Together, these drivers account for over two-thirds of the regional differences in compliance, confirming their important role in increasing social distancing and containing the pandemic.
April 30, 2021
The Morocco Policy Analysis Model: Theoretical Framework and Policy Scenarios
Description: The Morocco Policy Analysis model (MOPAM) was created in the Bank Al-Maghrib to simulate the impact of external developments, domestic macroeconomic policies, and structural reforms on key macroeconomic aggregates. We describe its structure and demonstrate its operation on two medium-term scenarios: (1) fiscal consolidation to stabilize the debt-to-GDP ratio and (2) the effects of the COVID-19 shock, including the endogenous fiscal and monetary policy response.
April 30, 2021
Austerity and Elections
Description: Conventional wisdom holds that voters punish governments that implement fiscal austerity. Yet, most empirical studies, which rely on ex-post yearly austerity measures, do not find supportive evidence. This paper revisits the issue using action-based, real-time, ex-ante measures of fiscal austerity as well as a new database of changes in vote shares of incumbent parties. The analysis emphasizes the importance of the ‘how’—whether austerity is done via tax hikes or expenditure cuts—and the ‘who’—whether it is carried out by left- vs. right-leaning governments. Our main finding is that tax-based austerity carries large electoral costs, while the effect of expenditure-based consolidations depends on the political-leaning of the government. An austerity package worth 1% of GDP, carried out mostly through tax hikes, reduces the vote share of the leader’s party by about 7%. In contrast, expenditure-based austerity is detrimental for left- but beneficial for right-leaning governments. We also find that the electoral cost of austerity—especially tax hikes—can be contained if it is implemented during good economic times.
April 30, 2021
The Rise in Inequality after Pandemics: Can Fiscal Support Play a Mitigating Role?
Description: Major epidemics of the last two decades (SARS, H1N1, MERS, Ebola and Zika) have been followed by increases in inequality (Furceri, Loungani, Ostry and Pizzuto, 2020). In this paper, we show that the extent of fiscal consolidation in the years following the onset of these pandemics has played an important role in determining the extent of the increase in inequality. Episodes marked by extreme austerity—measured using either the government’s fiscal balance, health expenditures or redistribution—have been associated with an increase in the Gini measure of inequality three times as large as in episodes where fiscal policy has been more supportive. We survey the evidence thus far on the distributional impacts of the COVID-19 pandemic, which suggests that inequality is likely to increase in the absence of strong policy actions. We review the case made by many observers (IMF 2020; Stiglitz 2020; Sandbu 2020b) that fiscal support should not be withdrawn prematurely despite understandable concerns about high public debt-to-GDP ratios.
April 30, 2021
Will the Economic Impact of COVID-19 Persist? Prognosis from 21st Century Pandemics
Description: COVID-19 has had a disruptive economic impact in 2020, but how long its impact will persist remains unclear. We offer a prognosis based on an analysis of the effects of five previous major epidemics in this century. We find that these pandemics led to significant and persistent reductions in disposable income, along with increases in unemployment, income inequality and public debt-to-GDP ratios. Energy use and CO2 emissions dropped, but mostly because of the persistent decline in the level of economic activity rather than structural changes in the energy sector. Applying our empirical estimates to project the impact of COVID-19, we foresee significant scarring in economic performance and income distribution through 2025, which be associated with an increase in poverty of about 75 million people. Policy responses more effective than those in the past would be required to forestall these outcomes.
April 30, 2021
The Fiscal Multiplier of European Structural Investment Funds: Aggregate and Sectoral Effects with an Application to Slovenia
Description: In this paper, we estimate the aggregate and sectoral fiscal multipliers of EU Structural Investment (ESI) Funds and of public investment at the EU level. We complement these results with a specific application to the case of Slovenia. We first analyze aggregate data and find large and significant multipliers and strong crowding-in of private investment. Our main findings show that positive shocks to ESI Funds are followed by an increase in output that ranges from 1.2 percent on impact, to 1.8 percent after 1 year, and by an increase in private investment between 0.7 and 0.8 percent of GDP. We address country heterogeneity by dividing countries according to key characteristics that have been known to affect multipliers. In particular, we find higher multipliers in a group of CEE countries that are important recipients of European funds and are characterized by fixed exchange rate regimes and sound public investment governance (e.g. Croatia and Slovenia). We also complement the aggregate analysis by estimating the effect of different types of public investment and the effect of public investment on different sectors of the economy.
April 30, 2021
Scaling Up Quality Infrastructure Investment
Description: South Asia needs large infrastructure investments to achieve its development goals, and public investment can also support the Covid-19 recovery. Regression estimates that account for the quantity and quality of investment suggest that public infrastructure was a key driver of productivity growth in South Asia. Going forward, higher public infrastructure spending can raise growth, but its benefits depend on how it is financed and managed. Model simulations show that tax financing, concessional lending, or private sector financing through public private partnerships (PPPs) are more advantageous than government borrowing through financial markets because they support growth while containing the impact on public debt. However, the optimal choice also depends on available fiscal space, taxation capacity, implementation risks, and public investment efficiency. To reap the most benefits from higher infrastructure investment, South Asian countries need to manage fiscal risks carefully, including from PPPs and state-owned enterprises, and improve public investment efficiency.