## March 2026

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**Canonical URL:** [March 2026](https://www.imf.org/-/media/files/topics/lics/macro-research-for-development/newsletters/mar2026.pdf)

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### Country application: Marshall Islands
- A Selected Issues Paper applies the Debt, Investment, Growth, and Natural Disasters (DIGNAD) model to assess macroeconomic impacts of climate shocks and resilience policies in the Marshall Islands.
- Key findings:
  - The country faces high exposure to climate-related risks including erosion, flooding, droughts, and infrastructure damage.
  - Resilient infrastructure investment combined with effective public investment management can significantly reduce GDP contraction following both rapid-onset and slow-moving natural disaster shocks.
  - A permanent increase in the VAT rate can facilitate infrastructure restoration in response to persistent sea level rise, support private investment and long-term growth, while dampening consumption.
  - Substantial financing needs for climate-resilient infrastructure require maximizing climate funding through improved domestic revenue collection and external support from the renewed Compact and development partners.
  - Strengthening institutional capacity to access climate finance effectively is critical given limited fiscal space.
- Policy implications:
  - Prioritize adaptation investments while maintaining fiscal sustainability.
  - Improve public investment management and domestic revenue mobilization to leverage external climate finance.

### Country application: Republic of Palau
- The Article IV consultation for Palau applies the DIGNAD model to evaluate fiscal strategies for strengthening economic resilience.
- Key findings:
  - Palau is vulnerable to tourism-related macroeconomic shocks and climate-related disasters.
  - Fiscal space from the renewed Compact Agreement with the United States and recent tax reforms can be used to enhance resilience.
  - Prioritizing resilience-enhancing public investment outperforms strategies focused on current spending.
  - Frontloading infrastructure investments can reduce future borrowing costs and mitigate the impact of shocks.

### Training: Climate in Macroeconomic Frameworks
- The IMF’s Institute for Capacity Development delivered DIGNAD training on February 26–27, 2026 at IMF headquarters, with instructors M. Khabbazan, T. Tiryaki, S. Agrawal and IMF staff.
- Course format and tools:
  - Blended format: virtual component January 12–23, 2026 and in-person week February 23–27, 2026.
  - Virtual module focused on financial programming and debt dynamics.
  - In-person sessions introduced the Natural Disasters Macroframework Toolkit (ND_MT), the Debt Dynamics Tool with Natural Disasters (ND_DDT), and the DIGNAD model.
  - Opening remarks delivered by B. Li.
- Participation:
  - 32 participants (including 21 women) selected through a competitive process from ministries of finance, central banks, and statistical offices.
  - Participants reported high quality and practical relevance.
- Toolkit purpose:
  - The DIGNAD toolkit assesses debt sustainability risks following natural disasters while incorporating public infrastructure rebuilding needs and supports analysis of ex-ante policies such as climate adaptation investment, stronger fiscal buffers, and improved public investment efficiency.

### Conference session: External Financing for Development
- Session “External Financing for Development: New Evidence and Policy Perspectives” at the 2026 American Economic Association Annual Meeting showcased IMF–FCDO Macro Research for Development (MRLIC) collaboration research.
- Two MRLIC projects examined:
  - Entry and persistence of cross border financial flows to low income countries (LICs).
  - How climate shocks reshape growth effects of FDI, official development assistance, and remittances.
- Session emphasis:
  - Academic–policy bridging to inform development finance, resilience, and macroeconomic policy design.

### Published research highlights
- Knowledge Diffusion through FDI: Worldwide Firm-Level Evidence (Journal of International Economics) by J. Ahn, C. Kim, N. Li, and A. Manera:
  - Uses firm-level FDI data across 60 countries and patent citations to trace knowledge flows.
  - FDI generates technology spillovers conditional on host absorptive capacity.
  - Host countries in the top decile of innovation capacity benefit up to eight times more than less innovative peers.
  - Where technological proximity is low, spillovers may be negligible.
  - Policy implication: complementary investments in education, R&D infrastructure, and institutions are essential for lower-income countries to capture FDI benefits.
- Playing with Blocs: Quantifying Decoupling (accepted, Journal of International Economics) by B. Bonadio et al.:
  - Measures trade decoupling over 2015-2023 classifying countries into three groups by changes in data-inferred trade costs with the US and China.
  - Cross-bloc trade costs have risen while within-bloc trade costs have declined, leaving average trade costs only marginally lower and consistent with global trade resilience.
  - Model simulations indicate real income in the median country globally, and the median country within each bloc, increased by about 0.4-0.6%.
  - Finds modest bloc misalignment; the median country could potentially be better off switching blocs.
- Growth Interrupted: How Crises Delay Global Convergence (Journal of International Money and Finance) by P. A. Imam and J. R. W. Temple:
  - Uses a Markov-chain framework across 119 countries to study income mobility when economies shift between normal growth and crisis regimes.
  - Crises significantly alter upward mobility probabilities; LICs experience crises more frequently and for longer, reducing catch-up prospects and contributing to “twin peaks” in global income distribution.
  - Policy implication: strengthening macroeconomic resilience, preventing debt distress, and reducing conflict risks are central to development.
- Dynamic Development Accounting and Relative Income Traps (Economic Inquiry) by P. A. Imam and J. R. W. Temple:
  - Uses a dynamic development accounting framework with Markov transition matrices to analyze mobility in relative income and total factor productivity.
  - Many countries converge in capital intensity and human capital, but mobility in relative income remains limited; escaping the lowest income category can take many decades.
  - Productivity growth is identified as the main barrier to convergence; policy focus on institutions, technological diffusion, and sustained productivity growth is essential.
- Social Unrest and Fuel Prices: The Role of Macroeconomic, Social, and Institutional Factors (The Energy Journal) by A. Drabo et al.:
  - Sample: 101 developing countries from 2001 to 2020.
  - Fuel price increases are more likely to trigger unrest during economic downturns, in highly unequal societies, and where institutions are weak and corruption is high.
  - Effect is less pronounced when governments invest in health and education.
  - Policy implication: well-timed energy subsidy reforms, stronger institutions, and higher social spending can mitigate social tensions.

### Working papers and datasets
- AI Meets Fiscal Policy: Mapping Government Spending Across 64 Countries (Working Paper) by S. Das, D. Furceri, N. Patel, and A. Peralta-Alva:
  - Builds the first global quarterly narrative database of discretionary government spending actions using a fixed GPT-4.1 prompt on Economist Intelligence Unit Country Reports.
  - Series covers an unbalanced panel of 64 countries from 1952:Q1 to 2023:Q4.
  - Database validated by replicating expert narrative coding and showing narrative shocks predict subsequent government spending movements.
  - Using country-by-country VARs with the narrative indicator as an internal instrument, the median government spending multiplier is about 0.7 over two years.
  - Multipliers are larger in less open economies and during downturns, smaller when uncertainty is high and larger when political support is greater.
  - Presented by A. Peralta-Alva at the 19th International Joint Conference CFE-CMStatistics on December 13–15, 2025.
- Weather Volatility and Food Price Dynamics in Uganda (working study) by C. S. Adam and P. Kaur Matta:
  - Uses granular earth-observation weather data and spatially disaggregated price data.
  - Finds weather variability affects short-run dynamics of staple crop prices, but estimated effects are relatively small and sensitive to specification.
  - Implication: omitting these effects from near-term inflation forecasting models is unlikely to cause significantly larger forecast errors.
- Patterns of Invoicing Currency in Global Trade in a Fragmenting World Economy (presented at JIE Stanford Conference on Geoeconomics) by E. Boz et al.:
  - Dataset covers 132 countries from 1990 to 2023, including new data on Chinese renminbi use.
  - U.S. dollar remains the dominant invoicing currency globally; renminbi use has expanded gradually beyond Asia but remains modest.
  - Since 2021 the correlation between invoicing currency use and geopolitical distance to its issuer has become increasingly negative, reflecting growing polarization.
  - No robust evidence that policy initiatives have reduced dollar reliance in oil exports.
- How do Climate Shocks Interact with FDI, ODA and Remittances in Their Effects on Economic Growth? (presented at 2026 AEA Annual Meeting) by A. Drabo:
  - Theoretical and empirical results across low- and middle-income countries show FDI, ODA, and remittances support growth with stronger effects where absorptive capacity is greater.
  - Climate shocks weaken these positive effects in developing countries.
  - Findings are robust to alternative measures of climate shocks, data structures, and sample periods.
- The Extensive Margin of Bilateral Financial Flows to Low-Income Countries (presented at 2026 AEA Annual Meeting) by P. Lastauskas et al.:
  - Uses data on FDI, portfolio flows, and aid for 2000–2023.
  - More than 85 percent of potential bilateral financial relationships never materialize; relationships that do materialize tend to persist.
  - Highlights heterogeneity across types of flows and policy environments; factors such as aid, trade agreements, and sanctions influence capital attraction and persistence.
- Bilateral Trade in Services: Insights from A New Research Dataset (BiTS) by R. Zymek and N. Li:
  - Compiles official statistics on bilateral services trade flows offering a comprehensive dataset suitable for empirical analysis.
  - Accompanied by a companion paper illustrating research applications and tailored analyses for Middle East and Central Asia Department economies.
- Internal presentation on datasets and toolkits for country surveillance (Development Macroeconomics Division) by N. Li:
  - Showcases DIG model series (including DIGNAD) for fiscal and growth tradeoffs under climate stress and governance reforms, ECLIPSSE trade model, and a nowcasting framework for real-time GDP estimation.
  - Highlights newly available datasets: Bilateral Trade in Services database, worldwide indices of uncertainty, sentiment, and financial distress, and estimates of gender occupational barriers.
  - Notes ongoing work on energy security and long-run structural transformation modeling.

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_Source: https://www.imf.org/-/media/files/topics/lics/macro-research-for-development/newsletters/mar2026.pdf_