## March 2025 — Macroeconomic Research for Development highlights

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### DIGNAD application to the Democratic Republic of Congo (Resilience and Sustainability Facility)
- Framework used: Debt-Investment-Growth and Natural Disasters (DIGNAD) model as featured in The Benefit of Investment in Adaptation: Results from DIGNAD Simulations (Box 2) in the IMF Country Report for the Democratic Republic of Congo.
- Core simulation finding:
  - Greater investment in resilient infrastructure produces a similar trajectory for real GDP and public debt during the RSF program years, but leads to better outcomes after an exogenous natural disaster.
  - Adaptation capital reduces the disaster’s impact on output, lowering the decline by 0.8 percentage points of steady-state GDP through more contained damage to physical assets.
  - Ex-ante adaptation investments support a sustained long-term increase in GDP by maintaining a higher level of capital.

### Technical assistance — Bank of Ghana Forecasting and Policy Analysis System (FPAS)
- Project scope and timeline:
  - Multi-year TA project conducted between late 2019 and mid-2024 over a total of seven missions.
  - Four virtual sessions and three in-person missions.
- Objectives and outcomes:
  - Enhance and build institutional capacity for model-based policy analysis and macroeconomic forecasting.
  - Integrate model-based capabilities into monetary policy processes and external communications.
  - Contributed to strong analytical capabilities among Bank of Ghana staff; model-based analysis is an important input in internal deliberations and forward-looking monetary policy formulation.
- Remaining recommendations:
  - Ensure the sustainability of the FPAS framework.
  - Further streamline external communications.

### Course delivery — Climate in Macroeconomic Frameworks and DIGNAD toolkit training
- Delivery details:
  - Trainer: Azar Sultanov.
  - Date and location: February 6, 2025, at IMF headquarters in Washington, D.C.
  - Format: First pilot blended format combining a two-week self-paced virtual component and a one-week in-person session.
  - Participation: 38 participants from 36 countries.
- Toolkit and pedagogical focus:
  - DIGNAD toolkit (FCDO-financed) assesses debt sustainability risks after natural disasters and the macro-fiscal implications of rebuilding public infrastructure in a general equilibrium framework.
  - Facilitates analysis of ex-ante policies: investing in climate adaptation infrastructure, enhancing fiscal buffers, improving public investment efficiency.
- Participant feedback:
  - Positive, with emphasis on high quality of course content.

### Working papers — summaries of key findings and policy implications
- Quarterly Projection Model for the Bank of Ghana: Extensions and Applications (IMF WP, co-authored with Bank of Ghana)
  - Model extensions: GDP decomposition separating agriculture and oil sectors from non-agriculture, non-oil activities; explicit accounting for inter-sectoral price spillovers affecting inflation expectations.
  - Applications: impulse response functions, simulations of shocks affecting agricultural production (such as climate disruptions), counterfactual simulations to evaluate recent policy choices.
  - Policy relevance: enhances forecast coverage, broadens narrative, and strengthens Bank of Ghana forward-looking policy framework.

- The Macroeconomic and Welfare Benefits of Building Resilience in Disaster-Prone Developing Countries (IMF WP)
  - Model: multi-sector DSGE incorporating a large, low-productivity rural sector, an incomplete credit market, and a substantial informal sector.
  - Finding: Investing in resilience capital entails high economic costs but ultimately enhances welfare; the choice of fiscal instrument mobilizing revenue crucially shapes outcomes.

- Transport Frictions and the Pass-Through of Global Price Shocks in a Spatial Model of Low-Income Countries (IMF WP)
  - Model: spatial dynamic general equilibrium model of a small open agricultural economy.
  - Finding: Strong spatial heterogeneity in response to global food, fuel, and fertilizer price shocks; urban households more affected by global food price shocks, remote rural households more vulnerable to supply-side disruptions from fuel and fertilizer shocks.
  - Policy implication: fiscal responses (direct price subsidies, household transfers) have differing welfare implications across regions.

- Shocks and Shields: Macroeconomic Institutions During Commodity Price Swings (IMF WP, Rabah Arezki et al.)
  - Data: panel covering 182 economies from 1970 to 2021.
  - Findings:
    - Positive net export price shocks increase the likelihood of adopting fiscal rules but coincide with capital account closures.
    - Effect is asymmetric: high-income countries lead in fiscal rule adoption; low-income countries remain more exposed to volatility.
  - Policy implication: institutional responses to commodity shocks vary and prioritize stability in some cases over openness.

- Foreign Aid and (Big) Shocks: Evidence from Natural Disasters (IMF WP, Rabah Arezki et al.)
  - Data: bilateral aid flows 1995 to 2021; disaster data from EM-DAT and OECD-DAC.
  - Findings:
    - Aid commitments rise after disasters but do not necessarily go where devastation is greatest.
    - Humanitarian aid increases in the aftermath, while structural aid remains stagnant.
    - Donor-recipient political alignment influences aid allocation more than economic need or state capacity.
    - Low-income countries do not receive proportionally more aid despite heightened vulnerability.
  - Policy recommendation: prioritize needs-based aid allocation and emphasize building resilience in low-income countries before disasters occur.

- State Capacity and Growth Regimes (IMF WP, Patrick A. Imam and Jonathan R.W. Temple)
  - Method: Markov chain model using data from 108 developing countries over five decades.
  - Findings:
    - High state capacity helps sustain growth and limit collapse risk, but does not guarantee immunity from crisis.
    - Democracies—even with relatively weaker state capacity—tend to avoid deep and prolonged declines due to leadership change enabling course correction.
    - State capacity evolves slowly but is not fixed; investing in institutions and democratic governance supports sustained growth, especially in low-income countries.

- Foreign Aid and Conflicts: The Effects of 9/11 on Donor Behavior (IMF WP, Rabah Arezki et al.)
  - Data: gravity model of bilateral aid flows 1980 to 2021.
  - Finding:
    - Before 2001, aid commitments declined when armed conflicts erupted; after 9/11, aid commitments increased.
    - Increase driven primarily by grants (humanitarian and health aid), not loans.
  - Policy implication: donor priorities and geopolitical considerations materially shape aid flows; aligning aid with long-term development needs is important for low-income, conflict-affected countries.

### Research presentations — external and internal dissemination
- Changing Global Linkages: Bridging Geopolitical Fragments
  - Authors: Gita Gopinath, Pierre-Olivier Gourinchas, Andrea Presbitero, Petia Topalova.
  - Presentation: American Economic Association Annual Meeting, San Francisco, January 2025.
  - Finding: Export restrictions lead countries to shift production to third countries with fewer import restrictions; FDI flows fragment along geopolitical lines but also relocate to countries that can act as producers and 'connectors'.

- Knowledge Diffusion Through FDI: Worldwide Firm-Level Evidence
  - Authors: Jaebin Ahn, Chan Kim, Nan Li, Andrea Manera.
  - Presentation: American Economic Association Annual Meeting, San Francisco, January 2025.
  - Finding: FDI significantly enhances knowledge flows to and from investing firms; spillovers concentrate in host countries with higher innovation capacity or technological similarity to investing firms, while lower-income countries with limited absorptive capacity capture fewer gains.

- Do Capital Inflows Spur Technology Diffusion? Evidence from a New Technology Adoption Index
  - Authors: Gabriela Cugat and Andrea Manera.
  - Presentations: RIDGE 2024 December Forum GDM/International Trade Workshop; American Economic Association Annual Meeting, January 2025.
  - Innovations and findings:
    - Introduces the Embodied Technology Imports Indicator (ETI) covering 181 countries from 1970-2020 using PATSTAT and COMTRADE.
    - Using a local projection difference-in-differences approach, changes in capital flow regulations lead to a 7-9 percentage point increase in technological intensity over 5-10 years.
    - Accompanying effects: 28-33 percentage point rise in gross capital inflows and a 9-12 percentage point increase in Real GDP per capita (in PPP terms).
  - Policy implication: capital flow regulations, particularly those encouraging FDI, play an important role in promoting technology adoption in developing countries.

- Internal presentation: Scaling Up Investment, Enhancing Growth, Debt Sustainability, and Climate Resilience in Senegal
  - Date: February 19, 2025.
  - Presenters: Samuele Rosa (Senegal Team), Azar Sultanov (Research Department), Chen Chen and Tolga Tiryaki (Institute for Capacity Development).
  - Methods and frameworks: applied DIGNAR and DIGNAD (FCDO-financed) to model sustained public investment and reforms.
  - Reform package modeled: improve public investment efficiency, increase tax revenues, reduce untargeted energy subsidies.
  - Findings and implications:
    - The modeled measures can promote economic growth while ensuring debt sustainability.
    - Climate adaptation investments further enhance resilience to climate change, support sustained economic growth, and reduce inequality in the face of extreme weather events.

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_Source: https://www.imf.org/-/media/files/topics/lics/macro-research-for-development/newsletters/mar2025.pdf_