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 IMF Economic ReviewJournal Prestige (SJR): 3.287 Citation Impact (citeScore): 2Number of Followers: 44      Hybrid journal (It can contain Open Access articles) ISSN (Print) 2041-4161 - ISSN (Online) 2041-417X Published by Springer-Verlag  [2467 journals]
• Regional Integration and Decoupling in the Asia Pacific: A Bayesian Panel
VAR Approach

Abstract: Abstract Policymakers have been debating for over a decade whether Asia is decoupling from the USA. Increasingly, deepening regional integration is cited as a possible driver of this decoupling. Using large Bayesian Panel Vector Autoregressions, estimated over different subperiods, we jointly examine bilateral macro-financial interdependencies between Asia Pacific countries and between each Asia Pacific country and the USA. We uncover no evidence of decoupling. Instead, we find that both global and regional interdependencies deepened following the Asian financial crisis, before receding after the Global financial crisis. We also show that while US shocks are important, attention should also be devoted to regional shocks which play a large role in Asia Pacific countries across all subperiods considered. Our results also suggest that there have been shifts in the relative importance of different transmission channels over time. Following the Asian financial crisis, as regional interdependencies deepened, US financial shocks began to play a larger role than US macroeconomic shocks. These results support the view that rising intra-regional trade contributed to a fall in the importance of US macroeconomic shocks. They are also consistent with research suggesting that strong, common global financial linkages increase the synchronization of Asian regional business cycles.
PubDate: 2022-12-01

• A Disaster Under-(Re)Insurance Puzzle: Home Bias in Disaster Risk-Bearing

Abstract: Abstract We examine disaster reinsurance from the perspective of international risk-sharing. We find that losses from disasters are shared internationally to a generally very limited extent, unlike what the theory of international risk-sharing suggests. We propose a new dataset of cross-border reinsurance payments for 93 disasters of 44 economies in 1982–2017. Combining these balance of payments data with industry data, we find that the lack of disaster risk-sharing through international reinsurance results from low participation in primary insurance as well as limited use of reinsurance. Regression analysis finds that countries with higher levels of economic or financial development tend to insure a larger share of disaster losses while proxies for disaster myopia are associated with less insurance. Regarding the share of insured losses that is internationally reinsured, small size and de facto financial integration tend to raise the reinsurance share, while high levels of external wealth and low foreign firm presence in insurance are associated with less reinsurance. Advanced economies with little fiscal space that provide ex-post government disaster insurance without international reinsurance could experience disaster risk morphing into financial risk.
PubDate: 2022-12-01

• Financial Crises, Macroprudential Policy and the Reliability of
Credit-to-GDP Gaps

Abstract: Abstract The Basel III regulation explicitly prescribes the use of Hodrick–Prescott filters to estimate credit cycles and calibrate countercyclical capital buffers. However, the filter has been found to suffer from large ex-post revisions, raising concerns on its fitness for policy use. To investigate this problem, we study credit cycles in a panel of 26 countries between 1971 and 2018. We reach two conclusions. The bad news is that the limitations of the one-side HP filter are serious and pervasive. The good news is that they can be easily mitigated. The filtering errors are persistent and hence predictable. This can be exploited to construct real-time estimates of the cycle that are less subject to ex-post revisions, forecast financial crises more reliably, and stimulate the build-up of bank capital before a crisis.
PubDate: 2022-12-01

• Measuring Financial Conditions using Equal Weights Combination

Abstract: Abstract In this paper, we assess the merits of financial condition indices (FCIs) constructed using equal weights averaging versus alternatives that use data reduction techniques, like principal components, or that allow for time-varying parameters. Our analysis is based on data for 18 advanced and emerging economies at the monthly frequency covering about 70% of the world’s GDP. We study the performance of these indicators based on their ability to capture tail risk for economic activity and to predict banking and currency crises. We find that averaging with equal weights produces FCIs that are not inferior to, and often perform better than, those constructed with more sophisticated statistical methods. For the USA and for the euro area, based on the same evaluation criteria, they also work better than two popular alternatives that receive wide attention in policy discussions, namely the Chicago Fed National Financial Conditions Index and the Composite Index of Systemic Stress.
PubDate: 2022-12-01

from Europe

Abstract: Abstract We analyze whether financial integration leads to converging or diverging business cycles using a dynamic spatial model. Our model allows for contemporaneous spillovers of shocks to GDP growth between countries that are financially integrated and delivers a scalar measure of the spillover intensity at each point in time. For a financial network of ten European countries from 1996 to 2017, we find that the spillover effects are positive on average and much larger during periods of financial stress, pointing towards stronger business cycle synchronization. Dismantling GDP growth into value added growth of ten major industries, we observe that spillover intensities vary significantly. The findings are robust to a variety of alternative model specifications.
PubDate: 2022-12-01

• Too Big to Fail and Moral Hazard: Evidence from an Epoch of Unregulated
Commercial Banking

Abstract: Abstract We analyze the link between “too big to fail” (TBTF) and moral hazard using a natural experiment from an epoch of unregulated commercial banking in Denmark. In 1908 the country faced a large banking shock where the creditors of distressed commercial banks received a bailout by the government for the first time in Danish history. Due to a fortuitous combination of circumstances, banks continued to operate in an unregulated environment for more than a decade after the bailout. By considering a sample from a pre-regulation epoch, we isolate the TBTF effect. Our empirical analysis shows that TBTF banks significantly reduced post-bailout capital ratios compared to other banks.
PubDate: 2022-12-01

• Capital Controls Checkup: Cases, Customs, Consequences

Abstract: Abstract This paper examines the effect of administrative restrictions on cross-border capital transactions. Using highly disaggregated data from the German balance of payments statistics for the period from 1999 through 2017, we document several stylized facts about the effectiveness of such capital control policies introduced by other countries. Capital controls are associated with economically and statistically significant declines in capital flows; they affect bilateral financial relationships along both the extensive and the intensive margin.
PubDate: 2022-11-22

• A Macroeconomic Model of Healthcare Saturation, Inequality and the

Abstract: Abstract COVID-19 became a global health emergency because it threatened the collapse of health systems as demand for health goods and services and their relative prices surged. Governments responded with lockdowns and transfers. Empirical evidence shows that lockdowns and healthcare saturation contribute to explain the cross-country variation in GDP drops even after controlling for COVID-19 cases and mortality. We explain this output–pandemia trade-off as resulting from a shock to subsistence health demand that increases with capital utilization and economic activity in a model with entrepreneurs and workers. The health system saturates as the gap between supply and subsistence narrows, which worsens consumption and income inequality. An externality distorts utilization, because firms do not internalize that lower utilization reduces healthcare saturation. Lockdowns and transfers to workers are the optimal policy response. Quantitatively, strict lockdowns and large transfers yield sizable welfare gains because they neutralize the utilization externality and prevent a sharp rise in inequality. Welfare and output costs vary in response to small parameter changes or deviations from optimal policies. Weak lockdowns coupled with weak transfers programs are the worst alternative and yet are in line with what several emerging and least developed countries implemented.
PubDate: 2022-11-14

• Correction: Profit Shifting, Returns on Foreign Direct Investments and
Investment Income Imbalances

PubDate: 2022-11-09

• Do Monetary Policy Frameworks Matter in Low-Income Countries'

Abstract: Abstract In recent years, most low-income countries (LICs) have been remarkably successful in reducing inflation to single-digit levels, and many LICS are engaged in reforms to make their monetary policy frameworks more systematic, transparent, and forward-looking, often with technical support from the International Monetary Fund (IMF). To inform those initiatives, our paper provides new empirical evidence about how the characteristics of the monetary policy framework affects the propagation of shocks in LICS. First, we analyze a cross-country panel dataset of 79 LICs over the period 1990 to 2015 to assess the impact of external shocks on real GDP growth, and we find highly significant differences between LICs where the central bank targets monetary aggregates or inflation compared to LICs that use the nominal exchange rates as the main nominal anchor. Second, we use difference-in-difference methods to assess the evolution of economic growth in sub-Saharan Africa (SSA) over the period from 1986 to 1994, and we find highly significant differences between 9 countries in the Central African Franc (CFA) zone compared to a control group of 12 other SSA countries. Our findings show that central banks in LICs can face policy tradeoffs similar to those which have been highlighted for more advanced economies, and our analysis underscores the key role of the monetary policy framework in fostering price stability and sustained economic growth in LICs.
PubDate: 2022-10-26

• Foreign Exchange Intervention: A New Database

Abstract: Abstract We construct a novel database of monthly foreign exchange interventions for 49 countries over up to 22 years. We build on a text classification approach that extracts information about interventions from news articles and calibrate our procedure to data about actual interventions. This new dataset allows us to document stylized facts about the use of foreign exchange interventions for countries that neither publish their data nor make them available to researchers. Moreover, we provide evidence on how foreign exchange interventions are used in conjunction with capital controls and macroprudential policy.
PubDate: 2022-10-22

• The Dominant Role of Large Firms in Profit Shifting

Abstract: Abstract Globally, the largest 0.001 per cent of firms earn one-third of all corporate profits. Nonetheless, there is little understanding of how profit shifting differs across firm size. Using the universe of South African corporate tax returns and global financial accounts, we find that profit shifting is concentrated among a few very large firms and that previous micro studies underestimate profit shifting by failing to account for firm size. This aids to explain the notable gap between micro and macro estimates of profit shifting. We revisit OECD’s micro estimate and find that this may underestimate profit shifting by 40 per cent.
PubDate: 2022-10-21

• Exchange Rate Policy and Firm Heterogeneity

Abstract: Abstract This paper examines the exchange rate policy in a tractable framework with heterogeneous firms, incomplete financial markets and nominal rigidities. External demand shocks generate exchange rate movements leading to uncertainty in the labor demand of exporter firms. When exporter firms are homogeneous in terms of productivity, a monetary policy response to external demand shocks stabilizes the export market and improves welfare, thus providing a rationale for managed exchange rate policies.
PubDate: 2022-10-05

• Demographics and Current Account Imbalances: Accounting for the Full Age
Distribution

Abstract: Abstract This paper investigates the relationship between demographics and the current account (CA) employing a polynomial measure that considers the full age distribution. Using a panel of 49 countries over 30 years of data, the polynomial produces economically more intuitive and stable results than previously used demographics measures. We find strong and robust non-linear effects. Specifically, we find that a relatively larger share of young cohorts is correlated with a lower CA, while a larger share of working-age cohorts is correlated with a higher CA. Our results show that disregarding any age group may fail to account for the full demographic effect on the CA over time and across countries. Accounting for the full age distribution thus allows to explain a larger share of observed CA surpluses and deficits.
PubDate: 2022-09-20
DOI: 10.1057/s41308-022-00176-6

• When Does Monetary Policy Sway House Prices' A Meta-Analysis

Abstract: Abstract Several central banks have leaned against the wind in the housing market by increasing the policy rate preemptively to prevent a bubble. Yet the empirical literature provides mixed results on the impact of short-term interest rates on house prices: the estimated semi-elasticities range from $$-12$$ to positive values. To assign a pattern to these differences, we collect 1,555 estimates from 37 individual studies that cover 45 countries and 72 years. We then relate the estimates to 39 characteristics of the financial system, business cycle, and estimation approach. Our main results are threefold. First, the mean reported estimate is exaggerated by publication bias, because insignificant results are underreported. Second, inclusion of controls correlated with policy rates (credit or money supply) decreases the estimated effects of policy rates on house prices. Third, the effects are stronger in countries with more developed mortgage markets and generally later in the cycle when the yield curve is flat and house prices enter an upward spiral.
PubDate: 2022-09-07
DOI: 10.1057/s41308-022-00185-5

• Macrofinancial Causes of Optimism in Growth Forecasts

Abstract: Abstract We analyze the causes of the apparent bias toward optimism in growth forecasts underpinning the design of IMF-supported programs, which has been documented in the literature. We find that financial variables observable to forecasters are strong predictors of growth forecast errors. The greater the expansion of the credit-to-GDP gap in the years preceding a forecast, the greater its over-optimism about growth over the next two years. This result is strongest among forecasts that were most optimistic, where errors are also increasing in the economy’s degree of liability dollarization. We find that the inefficient use of financial information applies to growth forecasts more broadly, including the IMF’s forecasts in the World Economic Outlook and those produced by professional forecasters compiled by Consensus Economics. We conclude that improved macrofinancial analysis represents a promising avenue for reducing over-optimism in growth forecasts.
PubDate: 2022-09-03
DOI: 10.1057/s41308-022-00187-3

• Social Distancing, Vaccination and Evolution of COVID-19 Transmission
Rates in Europe

Abstract: Abstract This paper provides estimates of COVID-19 transmission rates and explains their evolution for selected European countries since the start of the pandemic taking account of changes in voluntary and government mandated social distancing, incentives to comply, vaccination and the emergence of new variants. Evidence based on panel data modeling indicates that the diversity of outcomes that we document may have resulted from the nonlinear interaction of mandated and voluntary social distancing and the economic incentives that governments provided to support isolation. The importance of these factors declined over time, with vaccine uptake driving heterogeneity in country experiences in 2021. Our approach also allows us to identify the basic reproduction number, $${\mathcal{R}}_{0}$$ , which is precisely estimated around 5, which is much larger than the values in the range of 2.4–3.9 assumed in the extant literature.
PubDate: 2022-09-02
DOI: 10.1057/s41308-022-00181-9

• Attention to the Tail(s): Global Financial Conditions and Exchange Rate
Risks

Abstract: Abstract We document how the entire distribution of exchange rate returns responds to changes in global financial conditions. We measure global financial conditions as the common component of country-specific financial condition indices, computed consistently across a large panel of developed and emerging economies. Using quantile regression, we provide a characterisation and ranking of the tail behaviour of a large sample of currencies in response to a tightening of global financial conditions, corroborating (and quantifying) some of the prevailing narratives about safe haven and risky currencies. Compared to most standard approaches, our methodology delivers a more nuanced picture of exchange rate behaviour, allowing for example to make probabilistic statements about the likelihood of observing large swings in returns given the prevailing global financial environment. We also identify macroeconomic fundamentals associated with different tail dynamics: currencies of countries with higher interest rates, low levels of international reserves and large fiscal deficits display more marked increases in the likelihood of large losses in response to a tightening of global financial conditions.
PubDate: 2022-09-01
DOI: 10.1057/s41308-022-00160-0

• For Whom the Levy Tolls: The Case of a Macroprudential Stability Levy in
South Korea

Abstract: Abstract Can capital flow management measures (CFMs) reduce external vulnerability of the economy' This paper studies the effectiveness of a macroprudential stability levy introduced in Korea, which was intended to curb foreign currency (FX) debt as well as to lengthen its maturity structure in the banking sector. Using the detailed bank-level balance sheet data, this study finds that the levy had limited effects on curbing non-core FX debt, while it substantially lengthened its maturity structure driven mainly by foreign bank branches’ interoffice account. The subsequent analysis employing the transaction-level loan rate data further suggests that it likely had unintended consequences favoring foreign bank branches that took advantage of regulatory arbitrage and therefore were able to take FX loan market share from domestic banks that could not avoid passing the levy onto their borrowers.
PubDate: 2022-09-01
DOI: 10.1057/s41308-022-00163-x

• Who Bears the Brunt of Lockdown Policies' Evidence from
Tele-workability Measures Across Countries

Abstract: Abstract Lockdowns imposed around the world to contain the spread of the COVID-19 virus and its variants had a differential impact on economic activity and jobs owing to differences in the ability to work remotely. This paper presents a new index of the feasibility to work from home to investigate which types of jobs are most at risk for 35 advanced and emerging market economies. Cross-country heterogeneity in the ability to work remotely reflects differential access to and use of technology, sectoral mix, and occupational selection. Workers least likely to work remotely tend to be young, without a college education, working for non-standard contracts, employed in smaller firms, and those at the bottom of the earnings distribution, suggesting that the pandemic has exacerbated inequality. Policies should account for demographic and distributional considerations both during the crisis and in its aftermath.
PubDate: 2022-06-07
DOI: 10.1057/s41308-022-00165-9

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