Working Papers

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2024

July 12, 2024

Greenflation or Greensulation? The Case of Fuel Excise Taxes and Oil Price Pass-through

Description: Can a carbon tax reduce inflation volatility? Focusing on fuel excise taxes, this paper provides systematic evidence on their role as a shock absorber that helps mitigating the impact of global oil price shocks on domestic inflation. Exploiting substantial variation in fuel tax rates across 28 OECD countries over the period from 2014 to 2021, a simple idea that a per-unit, specific tax takes up a portion of the product price immune to cost shocks goes a long way toward explaining heterogeneity in the degree of oil price pass-through into domestic inflation across countries. A back-of-the-envelope calculation from the estimation results supports its quantitative significance---differences in fuel tax rates could explain about 30% of the variation in annual headline CPI inflation rates observed between the U.S. and U.K. during the 2021 inflation surge.

July 12, 2024

Knowledge Diffusion Through FDI: Worldwide Firm-Level Evidence

Description: This paper examines the impact of Foreign Direct Investment (FDI) on knowledge diffusion by analyzing the effect of firm-level FDI activities on cross-border patent citations. We construct a novel firm-level panel dataset that combines worldwide utility patent and citations data with project-level greenfield FDI and crossborder mergers and acquisitions (M&A) data over the past two decades, covering firms across 60 countries. Applying a new local projection difference-indifferences methodology, our analysis reveals that FDI significantly enhances knowledge flows both from and to the investing firms. Citation flows between investing firms and host countries increase by up to around 10.6% to 13% in five years after the initial investment. These effects are stronger when host countries have higher innovation capacities or are technologically more similar to the investing firm. We also uncover knowledge spillovers beyond targeted firms and industries in host countries, which are particularly more pronounced for sectors closely connected in the technology space.

July 12, 2024

A Suggested Medium-Term Fiscal Framework for Guyana

Description: Guyana is growing rapidly, and fiscal policy plays a critical role in ensuring that the country’s wealth is managed effectively and equitably. The paper analyzes crucial elements of a comprehensive fiscal policy framework, anchored on a medium-term fiscal framework, that would help in balancing several, and sometimes competing, fiscal policy objectives common to natural resource rich developing countries.

July 12, 2024

Understanding Barriers to Financial Access: Insights from Bank Pricing Data

Description: Greater availability of financial access related data in recent years is increasingly enabling policymakers to better track and monitor financial access trends and developments. However, data on barriers to financial access, including costs associated with using financial services—a key factor of financial exclusion—remain scarce. To gain insight into the costs of financial access faced by the low-income segments of population, this paper presents an analysis of a novel dataset on bank pricing containing information on fees and charges associated with various banking services—collected as part of the United Nations Capital Development Fund’s (UNCDF) Making Access Possible (MAP) program—based on a market research approach for 34 low- and middle-income countries in the ASEAN, SADC, and WAEMU regions. The results of our affordability analysis reveal that the costs of maintaining a bank checking account and conducting a few basic transactions can exceed 5 percent of monthly income for consumers in more than 10 percent of the countries in the sample, mainly in the WAEMU and SADC regions. These findings underscore the considerable challenge of affordability as a significant barrier to access to financial services, especially for low-income households and SMEs. The analysis also highlights the need to collect more granular data on the affordability aspect of financial access to facilitate more effective policymaking.

July 12, 2024

Distributional Impacts of Heterogenous Carbon Prices in the EU

Description: We analyse the consequences of carbon price heterogeneity on households in The EU from 2010 to 2020. Accounting for both heterogeneity in carbon pricing across emission sources and the indirect effects from inter-industry linkages, we obtain two key findings. First, due to widespread carbon pricing exemptions, household burdens are lower than previously estimated. Second, lower-income groups are affected disproportionately, because they spend a smaller share of their expenditure on products that benefit from exemptions than their higher-income counterparts. Therefore, imposing uniform carbon prices both within and across countries would reduce carbon pricing regressivity on household expenditure in the EU. A global price would be most effective in this regard, as it would raise carbon prices embodied in EU imports. Further, because EU economies are open and apply higher average carbon prices than their trade partners, the domestic revenues exceed the costs embodied in EU household consumptions bundles. This increases the scope for reducing the burden of carbon pricing on lower-income households through revenue redistribution. Our results imply that the ongoing extension of carbon pricing to more sectors through the EU ETS II and the introduction of the EU’s CBAM should make carbon pricing less regressive, all else equal.

July 12, 2024

A Monetary and Financial Policy Analysis and Forecasting Model for the Philippines (PAMPh2.0)

Description: The Bangko Sentral ng Pilipinas (BSP) has enhanced its macroeconomic modeling through the Forecasting and Policy Analysis System (FPAS), transitioning from a multi-equation econometric model to a modernized system centered on the Quarterly Projection Model (QPM). In its new version, the Policy Analysis Model for the Philippines (PAMPh2.0) integrates forward-looking projections, endogenous monetary policy, fiscal and macroprudential considerations, labor dynamics, and addresses complex shocks and policy trade-offs, facilitating effective policy mix determination and supporting real-time policy evaluation. The BSP’s modernization efforts also include refining forecast calendars and strengthening communication channels to accommodate the operationalization of PAMPh2.0. Detailed validation methods ensure empirical consistency. Finally, future refinements will align the model with evolving empirical findings and theoretical insights, ensuring its continued relevance.

July 12, 2024

Nowcasting and Near-Term Forecasting Cambodia’s Economy

Description: Assessing the current state of the economy and forecast the economic outlook in the next few quarters are important inputs for policymakers. This paper presents a suite of models with an integrated approach to forecast Cambodia’s economy in the current and next few quarters. First, we estimate historical quarterly GDP using information extracted from high-frequency indicators to construct quarterly nowcasting model. Second, we forecast current economic activities using a high-frequency data such as credit, export, tourist arrival, foreign reserves, and trading partner’s GDP. Third, we present inflation forecasting models for Cambodia. Fourth, the paper present a vector autoregression model to forecast Cambodia’s GDP in the next few quarters using global forecasts of China’s and US’s economy as well as oil and rice price. This paper showcase how high-frequency data set can be utilized in assessing current economic activities in countries with limited and lagged data.

July 12, 2024

Stepping Up Venture Capital to Finance Innovation in Europe

Description: Relative to the US, productivity growth and investment in R&D in lagging in the EU, where it is more difficult to finance and scale up promising, innovative startups. Many of the most successful EU startups move elsewhere for financing, causing the EU to lose out on both the direct growth benefits and positive spillovers from these innovative firms. The EU could nurture innovative startups by accelerating the development of its venture capital (VC) ecosystem. Reducing regulatory frictions, especially ones that deter pensions funds and insurers from investing in VC, combined with well-designed tax incentives for R&D investments could help accelerate the development of the VC sector. These and other key CMU initiatives, such as the consolidation of stock markets and reforming and harmonizing insolvency regimes, will take time. Given the urgency to boost innovation, giving public financial institutions like the European Investment Fund a more active and expanded role in kickstarting VC markets where needed and in familiarizing investors with the VC asset class can be a helpful interim step.

July 12, 2024

Balancing Environmental, Fiscal, and Welfare Impacts of Transportation Decarbonization in France

Description: France has taken a leadership role in global mitigation and made significant progress towards reducing greenhouse gas emissions, but further efforts will be needed to meet domestic mitigation targets. Accelerating emissions reductions from road transportation will be a key part of this strategy, as they account for nearly one-third of national emissions. At the same time, with the shift to more lightly taxed electric vehicles over the next decade, fiscal revenue from the sector is projected to decline and externalities, such as congestion, to worsen. Building on existing policies, a comprehensive reform that combines revenue-neutral continuous feebate schemes with a gradual introduction of road user and congestion charges could support mitigation targets, while maintaining revenue and regulating externalities. This paper discusses administratively feasible options to introduce such policies as well as key welfare and distributional considerations.

July 12, 2024

Climate Transition Risk and Financial Stability in France

Description: This study empirically investigates the impact of the climate transition on the French financial sector using a micro-macro approach to examine the long-term effects of climate mitigation and decarbonization policies on sectoral output and the effects on firm profitability and the likelihood of corporate defaults. We employ a recursive-dynamic, multi-regional, multi-sectoral computable general equilibrium (CGE) model to simulate the Fit-for-55 climate scenario and then integrate the sectoral output paths derived from the model into firm-level corporate balance sheets and risks. We then assess the extent of credit exposure of banks to energy-intensive sectors. Our findings indicate that, under the Fit-for-55 scenario, the mining, chemicals and manufacturing sectors might face notable increases in their probability of defaults, in turn creating pockets of vulnerabilities in some parts of the banking system depending on their exposure to these energy-intensive sectors. This highlights the importance for a timely and orderly transition, including integrating climate transition plans into the prudential framework.

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