Working Papers
2021
March 5, 2021
Beautiful Cycles: A Theory and a Model Implying a Curious Role for Interest
Description: Where do economic cycles come from? This paper contemplates an utmost minimalistic model and underlying theory that rest on two assumptions for letting them emerge endogenously: (1) the presence of interest-bearing debt; and (2) a degree of downward nominal wage rigidity. Despite its parsimony, the model generates well-behaved, self-evolving limit cycles and replicates six essential empirical facts: (1) booms are long- while recessions short-lived; (2) leverage is procyclical; (3) firm profit and wage shares in GDP are counter- and procyclical, respectively; (4) Phillips curves are downward-sloping and convex, and Okun’s law relation is replicated; (5) default cascades arise endogenously at the turning points to recessions; (6) lending spreads are countercyclical. One can refer to the model as being of a Dynamic Stochastic General Disequilibrium (DSGD) kind.
March 5, 2021
The Short-Term Impact of COVID-19 on Labor Markets, Poverty and Inequality in Brazil
Description: We document the short-term impact of the COVID-19 pandemic on the Brazilian labor market focusing on employment, wages and hours worked using the nationally representative household surveys PNAD-Continua and PNAD COVID. Sectors most susceptible to the shock because they are more contact-intensive and less teleworkable, such as construction, domestic services and hospitality, suffered large job losses and reductions in hours. Given low income workers experienced the largest decline in earnings, extreme poverty and the Gini coefficient based on labor income increased by around 9.2 and 5 percentage points, respectively, due to the immediate shock. The government’s broad based, temporary Emergency Aid transfer program more than offset the labor income losses for the bottom four deciles, however, such that poverty relative to the pre-COVID baseline fell. At a cost of around 4 percent of GDP in 2020 such support is not fiscally sustainable beyond the short-term and ended in late 2020. The challenge will be to avoid a sharp increase in poverty and inequality if the labor market does not pick up sufficiently fast in 2021.
March 5, 2021
The Sooner (and the Smarter), the Better: COVID-19 Containment Measures and Fiscal Responses
Description: This paper finds empirical evidence that faster and smarter containment measures were associated with lower fiscal responses to the COVID-19 shock. We also find that initial conditions, such as fiscal space, income, health preparedness and budget transparency were important in shaping the amount and design of the COVID-19 fiscal response.
March 5, 2021
Proximity and Horizontal Policies: The Backbone of Export Diversification
Description: The lack of a clear link between general economic fundamentals and export diversification indicators in the literature has fueled the believe that industrial policies are an absolute requisite to diversify exports. This paper, however, does find a strong statistical connection between horizontal policies and diversification by making two novel changes to traditional methodologies: using export categories that lead to diversification (for example, manufactures) as dependent variables, and using a gravity-equation regression setting. Proximity to other economies explains about a third of cross-country heterogeneity in targeted exports, and four fifths together with horizontal policies. Australia, Chile, and New Zealand emerge as new role models for diversification policies.
March 5, 2021
Young Firms and Monetary Policy Transmission
Description: We investigate the role of business dynamism in the transmission of monetary policy by exploitingthe variation in firm demographics across U.S. states. Using local projections, we find that a larger fraction of young firms significantly mutes the effects of monetary policy on the labor market and personal income over the medium term. The firm entry rate and the employment share of young firms are key factors underpinning these results, which are robust to a battery of robustness tests. We develop a heterogeneous-firm model with age-dependent financial frictions that rationalizes the empirical evidence.
March 5, 2021
Meeting the Sustainable Development Goals in Small Developing States with Climate Vulnerabilities: Cost and Financing
Description: Small Developing States (SDS) face substantial challenges in achieving sustainable development. Many of these challenges relate to the small size and limited diversification of their economies. SDS are also among the most vulnerable countries to the impact of climate change and natural disasters. Meeting SDS sustainable development goals goes hand-in-hand with building their climate resilience. But the additional costs to meet development and resilience objectives are substantial and difficult to finance. This work adapts the IMF SDG Costing methodology to capture the unique characteristics and challenges of climate-vulnerable SDS. It also zooms into financing options, estimating domestic tax potential and discussing the possibility of accessing ‘climate funds.’
March 5, 2021
The Role of Market Structure and Timing in Determining VAT Pass-Through
Description: We examine the role of market characteristics and timing in explaining observed heterogeneity in VAT pass-through. We first extend existing theory to characterize the roles of imperfect competition and product differentiation, then investigate these relationships empirically using a panel of 14 Eurozone countries between 1999 and 2013. We find important roles for product market regulation and product quality, and little impact of advance announcement of reforms. Our findings have important implications for policy-makers considering VAT rate adjustments, by illuminating which of the consumers or the producers would experience the brunt of a reform across different settings.
March 5, 2021
Education and Health for Inclusiveness
Description: We discuss existing shortfalls and inequalities in the accumulation of human capital—knowledge, skills, and health. We analyze their immediate and systemic causes, and assess the scope for public intervention. The broad policy goals should be to improve: the quality, and not just the quantity, of education and health care; outcomes for disadvantaged groups; and lifelong outcomes. The means to achieve these goals, while maximizing value for money, include: focusing on results rather than just inputs; moving from piecemeal interventions to systemic reform; and adopting a “whole-of-society” approach. Reforms must be underpinned by a robust evidence base.
March 4, 2021
Gender Equality and Inclusive Growth
Description: This paper considers various dimensions and sources of gender inequality and presents policies and best practices to address these. With women accounting for fifty percent of the global population, inclusive growth can only be achieved if it promotes gender equality. Despite recent progress, gender gaps remain across all stages of life, including before birth, and negatively impact health, education, and economic outcomes for women. The roadmap to gender equality has to rely on legal framework reforms, policies to promote equal access, and efforts to tackle entrenched social norms. These need to be set in the context of arising new trends such as digitalization, climate change, as well as shocks such as pandemics.
March 4, 2021
COVID-19 She-Cession: The Employment Penalty of Taking Care of Young Children
Description: The COVID-19 outbreak and the measures to contain the virus have caused severe disruptions to labor supply and demand worldwide. Understanding who is bearing the burden of the crisis and what drives it is crucial for designing policies going forward. Using the U.S. monthly Current Population Survey data, this paper analyzes differences in employment responses between men and women. The main finding is that less educated women with young children were the most adversely affected during the first nine months of the crisis.The loss of employment of women with young children due to the burden of additional childcare is estimated to account for 45 percent of the increase in the employment gender gap, and to reduce total output by 0.36 percent between April and November 2020.