Working Papers

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2024

June 7, 2024

Exposure to Artificial Intelligence and Occupational Mobility: A Cross-Country Analysis

Description: We document historical patterns of workers' transitions across occupations and over the life-cycle for different levels of exposure and complementarity to Artificial Intelligence (AI) in Brazil and the UK. In both countries, college-educated workers frequently move from high-exposure, low-complementarity occupations (those more likely to be negatively affected by AI) to high-exposure, high-complementarity ones (those more likely to be positively affected by AI). This transition is especially common for young college-educated workers and is associated with an increase in average salaries. Young highly educated workers thus represent the demographic group for which AI-driven structural change could most expand opportunities for career progression but also highly disrupt entry into the labor market by removing stepping-stone jobs. These patterns of “upward” labor market transitions for college-educated workers look broadly alike in the UK and Brazil, suggesting that the impact of AI adoption on the highly educated labor force could be similar across advanced economies and emerging markets. Meanwhile, non-college workers in Brazil face markedly higher chances of moving from better-paid high-exposure and low-complementarity occupations to low-exposure ones, suggesting a higher risk of income loss if AI were to reduce labor demand for the former type of jobs.

June 7, 2024

Reinforcement Learning from Experience Feedback: Application to Economic Policy

Description: Learning from the past is critical for shaping the future, especially when it comes to economic policymaking. Building upon the current methods in the application of Reinforcement Learning (RL) to the large language models (LLMs), this paper introduces Reinforcement Learning from Experience Feedback (RLXF), a procedure that tunes LLMs based on lessons from past experiences. RLXF integrates historical experiences into LLM training in two key ways - by training reward models on historical data, and by using that knowledge to fine-tune the LLMs. As a case study, we applied RLXF to tune an LLM using the IMF's MONA database to generate historically-grounded policy suggestions. The results demonstrate RLXF's potential to equip generative AI with a nuanced perspective informed by previous experiences. Overall, it seems RLXF could enable more informed applications of LLMs for economic policy, but this approach is not without the potential risks and limitations of relying heavily on historical data, as it may perpetuate biases and outdated assumptions.

May 31, 2024

Do Renewables Shield Inflation from Fossil Fuel-Price Fluctuations?

Description: This study investigates the relationship between the adoption of renewable energy and the sensitivity of inflation to changes in fossil energy prices across 69 countries over a 50-year period from 1973 to 2022. In the wake of recently increased oil and gas prices leading to a surge in inflation, the notion of a “divine coincidence” suggests that higher levels of renewable energy adoption, in addition to fighting climate change, could mitigate fossil fuel price-induced inflation volatility. Confirming the divine coincidence hypothesis could be an argument in favor of greening monetary policy. However, our empirical results are inconsistent with the hypothesis as we find no evidence that increased renewable energy adoption reduces the impact of fossil fuel price changes on energy inflation rates. This counter-intuitive result may be attributed to idiosyncratic national energy policies, potential threshold effects, or trade linkage spillovers. As the world continues transitioning towards a low-carbon economy, understanding the implications of this shift on inflation dynamics is crucial.

May 31, 2024

Unveiling the Informal Economy: An Augmented Factor Model Approach

Description: This paper develops a new approach to estimating the degree of informality in an economy. It combines direct yet infrequent measures of the informal economy in micro data with an augmented factor model that links macro indicators of the informal economy to its causes. We show that the prevailing model used in the literature, the multiple indicators multiple causes model, is a special case of the augmented factor model and depicts an incomplete picture of the informal economy. Using the augmented factor model approach, we show that the dynamics of the informal economy is shaped by the strength of overall economic activity as well as the interplay between the formal and informal economies. Contrary to previous work that typically finds declining informality for most countries, we find that the degree of informality has increased for low-income countries for the past two decades.

May 31, 2024

Weathering Tomorrow: Climate Analogues and Adaptation Gaps in Europe

Description: The European continent is warming at more than twice the global average. The human and economic costs of higher temperature and more frequent and extreme natural disasters—already substantial in Europe—are expected to increase further unless suitable adaptation strategies are implemented. This paper shows that while Europe's overall vulnerability to climate risks is lower than other regions’, the countries in Central and Eastern Europe face greater human and economic costs from climate disasters compared to their advanced European peers, which are likely to further increase in the future. We use an ensemble of climate models to project future climates for each country in Europe, and identify the country whose present climate best approximates this projection. We rely on this information on countries’ representative future exposure to climate risks to calibrate country-level macro analyses of natural disasters, and how investment in adaptative infrastructure can help mitigate these shocks. We find that adaptation infrastructure can significantly reduce output losses from natural disasters, mitigate medium-term economic scarring, and support sustainable long-term growth. However, we show that effective implementation of adaption strategies in EMEs/LICs is likely to be constrained by limited domestic financial resources, weaker institutional quality, and may create policy trade-offs, if not accompanied by external support.

May 24, 2024

Exploring the Role of Public Expenditure in Advancing Female Economic Empowerment and Gender Equality

Description: This paper discusses connections between female economic empowerment and government spending. It is an abbreviated overview for non-gender-experts on how fiscal expenditure may support female economic empowerment as an interim step toward advancing gender equality. From this perspective, it offers a preliminary exploration of key factors and indicators associated with gender-differentiated impacts in each of five main categories of public spending (education, health, capital expenditure, government employment and compensation, and social protection and labor market programs). It examines and proposes indices within each category that can be used to identify and measure related gender gaps and suggests associations and connections between those indices, public spending, and other available proxy measurements with some benchmarking potential which is summarized at the end of each category in a Gender Lens Matrix for ease of reference. The paper draws on an extensive literature review and examination of publicly available datasets. It also highlights and discusses gaps in data which limit gender analysis. The purpose of the paper is to advance dialogue on the adoption of a gendered approach to government spending, by providing a gender lens that may assist country level assessments and discussions among IMF staff and member country authorites.

May 24, 2024

E-Commerce During COVID in Spain: One “Click” Does Not Fit All

Description: The share of e-commerce in total credit-card spending boomed during Covid in Spain. In particular, women, youth, and urban consumers used e-commerce proportionally more during the pandemic, especially for services. Using a unique proprietary dataset on credit card transactions, we test conjectures about consumers’ behavior (based on fear, hoarding, or learning) during Covid. Overall, e-commerce share reverted to its pre-Covid trend as the pandemic waned. However, some consumers with lower pre-Covid e-commerce usage tend to permanently use more e-commerce, supporting the conjecture of “learning by locking” for these individuals.

May 24, 2024

Hanging Out to Dry? Long-term Macroeconomic Effects of Drought in Fragile and Conflict-Affected States

Description: Using a comprehensive drought measure and a panel autoregressive distributed lag model, the paper finds that worsening drought conditions can result in long-term scarring of real GDP per capita growth and affect long-term price stability in Fragile and Conflict-Affected States (FCS), more so than in other countries, leaving them further behind. Lower crop productivity and slower investment are key channels through which drought impacts economic growth in FCS. In a high emissions scenario, drought conditions will cut 0.4 percentage points of FCS’ growth of real GDP per capita every year over the next 40 years and increase average inflation by 2 percentage points. Drought will also increase hunger in FCS, from alreay high levels. The confluence of lower food production and higher prices in a high emissions scenario would push 50 million more people in FCS into hunger. The macroeconomic effects of drought in FCS countries are amplified by their low copying capacity due to high public debt, low social spending, insufficient trade openness, high water insecurity, and weak governance.

May 24, 2024

Examining Price-Wage Dynamics in a Small Open Economy: The Case of Uruguay

Description: The recent increase of inflation globally has led to a renewed interest in understanding the link between inflation and wages. In Uruguay, the presence of centralized wage bargaining and indexation practices raises the question as to what extent wage growth dynamics can make the response of inflation to shocks more persistent. We use a medium-scale DSGE model which incorporates indexation in the wage setting equation to analyze the interactions between wage setting behavior and other macroeconomic variables, as well as the role of monetary policy. The analysis suggests that wage indexation increases the persistence of the response of inflation to domestic and foreign shocks, it also affects the monetary policy transmission mechanism and the severity of the trade-offs faced by the central bank.

May 17, 2024

New Perspectives on Quantitative Easing and Central Bank Capital Policies

Description: Central banks have come under increasing criticism for large balance sheet losses associated with quantitative easing (QE), and some observers have also argued that QE helped fuel the post-COVID-19 inflation boom. In this paper, we reconsider the conditions under which QE may be warranted considering the recent high inflation experience. We emphasize that the merits of QE should be evaluated based on the macroeconomic stimulus it provides and its effects on the consolidated fiscal position, and not simply on central bank profits or losses. Using an open economy DSGE model with segmented asset markets, we show how QE can provide a sizeable boost to output and inflation in a deep recession and improve the consolidated fiscal position—even if the central bank experiences considerable losses. However, the commitment-based features of QE and the possibility that upside inflation risks are bigger than recognized pre-pandemic call for more caution in using QE closer to full employment. We then consider how central banks might modify their policies for allocating profits to the government in light of large-scale losses. In short, we suggest that a more forward-looking and risk-based approach may be desirable in helping protect central bank financial autonomy and ultimately independence.

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