Working Papers
2025
January 17, 2025
State Capacity and Growth Regimes
Description: Can high levels of state capacity protect countries from slow growth and deepening output collapses? Using data for 108 developing countries, we classify five-year periods using a two- dimensional state space based on growth regimes and levels of state capacity. We model transitions between them using a finite state Markov chain, and then extend this to take political institutions into account. We find that high state capacity helps to sustain growth and limit output collapses, but these effects are sometimes less striking than the benefits of democracy.
January 17, 2025
The Macroeconomic and Welfare Benefits of Building Resilience in Disaster-Prone Developing Countries
Description: Natural disasters often have high economic costs, setting back years of investment in developing countries. This paper develops a multi-sector DSGE model to study the macroeconomic and welfare implications of financing resilience-building using different fiscal instruments. The model includes developing countries’ macroeconomic and distributional features, such as a large unproductive rural sector, an incomplete credit market, and an informal sector. The results indicate that investing in resilience capital in a disaster-prone country improves welfare despite its high economic cost, but the financial instrument used to mobilize revenue matters.
January 10, 2025
Drivers and Effects of Residence and Citizenship by Investment
Description: This paper discusses under what circumstances residence and citizenship by investment (RBI or CBI) schemes could be used by individuals engaging in tax avoidance or evasion. It describes the market for CBI and RBI and how features of the offered programs might reveal the underlying motivations of governments offering them. The paper then presents empirical evidence on the conditions under which such schemes are offered. Finally, the paper estimates the impact of such schemes on investment, house prices, and public revenues.
January 10, 2025
Shocked: Electricity Price Volatility Spillovers in Europe
Description: European electricity markets are in the midst of unprecedented changes—caused by Russia’s invasion of Ukraine and the rise of renewable sources of energy. Using high-frequency data, this paper investigates volatility spillovers across 24 countries in the European Union (EU) during the period 2014–2024 to provide a better understanding of the transmission of risks in an international context. We develop both a static and a dynamic assessment of spillover effects and directional decomposition between individual countries. Our main findings show that about 73 percent of the forecast error variation is explained by cross-variance shares, which means only 27 percent can be attributed to shocks within each country. In other words, cross-border volatility spillovers dominate the behavior in national electricity markets in Europe—and this effect has grown over time. We also implement an augmented gravity model of bilateral volatility spillovers across power markets in the EU. Altogether, these results provide important insights to policymakers and regulators with regards to greater integration of electricity markets and infrastructure improvements that would also help with the transition to low-carbon sources of power generation and strengthen energy security in Europe.
January 10, 2025
Foreign Aid and (Big) Shocks: Evidence from Natural Disasters
Description: We explore the effect of (big) shocks on the allocation of (bilateral) aid using natural disasters as natural experiments. We find that aid commitment statistically significantly increases following natural disasters, and that humanitarian aid precedes structural aid. While we find that the average effect is quantitatively significant, poorest countries or countries faced with most damaging natural disasters do not receive the most aid. We find no evidence that foreign aid commitment disburses faster following natural disasters. Further explorations into the mechanisms driving aid in disaster countries point to the importance of political alignment with (major) donors in recipient countries with low state capacity.
January 10, 2025
Immigration and Local Inflation
Description: We use a shift-share approach to estimate the impact of inward immigration on local inflation in the United States. We find that a higher rate of immigration reduces inflation, lowering it by about 0.1 to 0.2 percentage points following a doubling of immigration. Higher immigration flows also lower local goods inflation, increase local housing and utilities inflation, and have no statistically significant impact on inflation in other services. Effects are approximately two and three time larger for working age and low-education immigrants. We do not detect a statistically significant impact of more educated immigrants on overall inflation, but they do increase local housing inflation. Our results can be jointly rationalized by a simple general equilibrium model where the substitutability of capital and labor varies across industries but capital is fixed in the short run.
January 10, 2025
The Macroeconomic Impact of Droughts in Uruguay: A General Equilibrium Analysis Using the Soil Moisture Deficit Index
Description: Uruguay recently confronted the impact of a once-in-a-century severe drought, which affected key agricultural areas, and caused significant direct losses to the agricultural sector, especially for soybean production and cattle farming - important exports in Uruguay's trade matrix. From October 2022 to April 2023, rainfall was about 47 percent below historical averages, contributing to a decline in agricultural output and impacting overall GDP growth. The frequency of recent climate shocks witnessed in Uruguay combined with its rich climate data make it the ideal candidate to understand if weather shocks matter and through which transmission mechanisms. Using the empirical and theoretical framework outlined in Gallic and Vermandel (2020) we document that weather shocks play an important role in business cycle dynamics in Uruguay.
January 10, 2025
Drivers of Inflation in the Caucasus and Central Asia
Description: In parallel with global developments, inflation in the Central Asia and Caucasus (CCA) has exhibited large swings in recent years. This paper investigates inflation dynamics in the CCA and its main drivers and derives conclusions that can inform policymaking. The analysis is based on three empirical approaches. Inflation drivers and its dynamics are investigated through the estimation of a Phillips curve augmented with foreign factors and a panel vector autoregression. The paper also assesses the role of monetary policy in steering inflation outcomes by estimating a local projection model. The paper finds that external factors play a major role in determining CCA inflation dynamics, although domestic factors (e.g., demand conditions, expectations) also contribute. Monetary policy is found to have a statistically significant effect on inflation, including by moderating the impact of external drivers. The findings point to the need to continue strengthening policy frameworks to steer expectations and improve the effectiveness of monetary policy, while establishing adequate social safety nets to cushion the impact from global shocks.
January 10, 2025
The Scalability of Credit-Enhanced EM Climate Debt: What Role Can Guarantees, Collateralization, Securitizations, and Investment Funds Play?
Description: This paper reviews the main types of credit enhancement approaches used to support climate debt issuances by EMDE borrowers. Fragmentation on the part of the providers of credit enhancements was identified as a major factor impeding scalability of credit-enhanced debt. The acceptance of credit-enhanced debt is also hampered by the structural characteristics of the capital markets, especially the fragmentation of the investor base. To place significant amounts of credit-enhanced climate debt with private sector investors, MDBs, DFIs, and other stakeholders should focus on simple and replicable debt structures. Securitizations and investment funds could help fund private sector climate investments in EMDEs.
January 10, 2025
Market Power in the Middle East
Description: The Middle East (ME) is often perceived as region with rentier economies and uncompetitive markets. Evidence of market power in the region however is scant. In this paper, we ask the following three questions: Is the ME uniquely uncompetitive? Has the evolution of market power in the region traced the global rise in market power? What government policies and actions influenced the market power in the region and can taxes be a way to even the playing field? To answer these questions, we utilize comprehensive firm-level data from Compustat between 2004 and 2022 and employ two methods for estimating markups (production function and cost-share approach). We document that market power among listed firms in the ME is higher than in the US, but on a downward trend. We find that the value-added tax (VAT) reforms introduced by some Gulf states from 2018 to 2022 resulted in a reduction of market power, an additional benefit beyond increasing fiscal space. While policymakers should continue to use available regulatory levers to achieve economic efficiency and a level playing field, VAT could be considered as an alternative instrument.