Working Papers

May 9, 2025

Leveraging Digital Technologies in Boosting Tax Collection

Description: This paper explores how digitalization in the corporate sector can boost tax revenue collection,. finding that stronger firm digitalization is associated with higher tax revenues across countries and also higher tax paid across firms. The cross-country estimates illustrate that a one-standard-deviation increase in firm digitalization is associated with an increase in tax revenues-to-GDP by up to 3 percentage points, conditional upon the level of digitalization of tax administration (GovTech). A firm-level analsis reveals that firm digitalization significantly improves tax compliance among high-risk taxpayers, such as small and informal enterprises, particularly in the service sector. This indicates that digitalization not only broadens the corporate tax base but also plays a crucial role in improving tax compliance. Moreover, both country and firm-level analyses reveal a significant synergy between firm digitalization and GovTech, undescoring the importance of promoting both to enhance tax collection. These analyses also suggest that, in developing countries, it is essential to create enabling environments for firm digitalization and GovTech and address any constraints to achieve their synergy effects.

May 5, 2025

Debt-at-Risk

Description: This paper proposes a novel framework for analyzing the risks surrounding the public debt outlook, the “Debt-at-Risk.” It employs a quantile panel regression framework to assess how current macrofinancial and political conditions impact the entire spectrum of possible future debt outcomes. Many of these factors—including financial conditions and economic variables such as initial debt and GDP growth—predict both the expected level and the uncertainty of future debt, implying pronounced variations in risks, especially in the upper tail of the distribution. By combining the roles of these factors, we find that in a severely adverse scenario—the 95th percentile of the future debt distribution, or debt-at-risk—global public debt could be approximately 20 percentage points higher than currently projected. The magnitudes and sources of debt risks vary over time and across countries, with high initial debt amplifying the effects of economic and financial conditions on debt-at-risk. Furthermore, empirical estimates indicate that debt-at-risk is a key variable for predicting fiscal crises.

Notes:

Replication code can be downloaded here.

May 2, 2025

Using Simulations for Cyber Stress Testing Exercises

Description: We demonstrate how computer-based simulations could support cyber stress testing exercises through a three-step framework. First, cyber-attack scenarios are designed to target the systemic nodes of a payment network at different times, disrupting a major bank, critical service provider, large-value payment system, and a foreign exchange settlement system. Second, the stress resulting from the scenarios is simulated using transaction-level data, and its impact is measured through a range of risk metrics. And third, cyber preparedness is discussed to identify effective practices that could strengthen the cyber resilience of the financial sector. The exercise provides insights into the main vulnerabilities of the financial sector and key transmission channels under plausible scenarios that necessitate preemptive action and recovery and response measures. For example, simulation results for Finnish data suggest that end-of-day liquidity risk is most severe when a cyber-attack hits a major bank or several banks simultaneously through dependence on a common critical service provider, compared to an attack on a centralized payment system where effective queuing and liquidity-saving mechanisms can better support recovery. Outcomes could be aggravated under more severe and prolonged scenarios.

May 2, 2025

Impact Dynamics of Natural Disasters and the Case of Pacific Island Countries

Description: This paper investigates the short- and medium-term economic impacts of natural disasters, focusing on Pacific Island Countries (PICs) and using global high-frequency nightlight data in addition to macroeconomic data. In this paper, we identify significant short-term effects on growth following natural disasters, which are exacerbated by high public debt and heightened climate vulnerability. Although the negative impacts generally diminish within a year for most countries, PICs face disproportionately larger and rising short-term disruptions (-1.4 percent of annual potential growth) and persistent medium-term consequences. Further analysis of PICs' fiscal, external, and real sectors following severe disasters using annual economic data reveals that weaker fiscal positions, partly driven by reduced output, may lead to an upward trend in public debt, and increased imports may deteriorate current account balances over the medium term. These findings underscore the need for robust counter-cyclical policies and proactive investments in climate resilience to mitigate the adverse effects of climate shocks and promote long-term economic stability

May 2, 2025

Fiscal Financing and Investment Irreversibility: The Role of Dividend Taxation

Description: We examine the macroeconomic, asset pricing, and public debt consequences of deficit financing dividend taxation in a dynamic general equilibrium model featuring partial investment irreversibility. Dividend taxes interact directly with the occasionally-binding irreversibility constraint, generating tax-augmented user-cost and hangover channels that both shape investment and debt-to-output fluctuations and account for a sizeable share of their long-run volatilities. Our analysis further reveals that debt-offsetting dividend tax hikes initially trigger investment inactivity through higher user-costs, followed by a surge driven by intertemporal tax arbitrage and hangover effects. Finally, debt-driven dividend tax rules amplify asset price fluctuations while delivering only modest fiscal revenue changes.

May 2, 2025

Labor Market Matching Efficiency and Koreas Low Post-Pandemic Unemployment

Description: Following the COVID-19 pandemic, Korea’s unemployment rate has remained significantly lower than pre-pandemic levels. This paper examines the dynamics of unemployment through a framework of labor market flows incorporating a matching function and identifies a sustained increase in labor market matching efficiency as the primary driver of persistently low post-pandemic unemployment. The framework further suggests that, barring an unlikely reversal of these efficiency gains, the unemployment rate is likely to remain below 3 percent in the medium term. Notably, despite heightened labor market tightness, post-pandemic wage growth in Korea has been modest. The paper develops a variant of the Diamond-Mortensen-Pissarides model, demonstrating that increased labor market matching efficiency helps account for this apparent paradox.

April 22, 2025

Power Hungry: How AI Will Drive Energy Demand

Description: The development and deployment of large language models like ChatGPT across the world requires expanding data centers that consume vast amounts of electricity. Using descriptive statistics and a multi-country computable general equilibrium model (IMF-ENV), we examine how AI-driven data center growth affects electricity consumption, electricity prices, and carbon emissions. Our analysis of national accounts reveals AI-producing sectors in the U.S. have grown nearly triple the rate of the private non-farm business sector, with firm-level evidence showing electricity costs for vertically integrated AI companies nearly doubled between 2019-2023. Simulating AI scenarios in the IMF-ENV model based on projected data center power consumption up to 2030, we find the AI boom will cause manageable but varying increases in energy prices and emissions depending on policies and infrastructure constraints. Under scenarios with constrained growth in renewable energy capacity and limited expansion of transmission infrastructure, U.S. electricity prices could increase by 8.6%, while U.S. and global carbon emissions would rise by 5.5% and 1.2% respectively under current policies. Our findings highlight the importance of aligning energy policies with AI development to support this technological revolution, while mitigating environmental impacts.

April 11, 2025

K Wasn’t Built in a Day

Description: Physical capital takes time to build. Yet, the measurement of time to build and of its response to firm behavior remain scant. We fill this gap using project-level data from India. We document new facts on cross-sectional heterogeneity in time to build; and exploit quasi-experimental variation in credit supply to establish that firms accelerate ongoing projects and start fewer new projects when credit dries up. We rationalize our findings with a novel model of endogenous time to build. A credit crunch increases firm appetite for immediate relative to delayed cash flows. Firms then accelerate projects closer to completion and postpone unbegun projects. Such a mechanism is borne out in the data: projects proxied to be more mature are sped up the most. We quantify our model to match our causal estimates, and the joint distribution of project costs and gestation lags. Endogenous time to build generates endogenous amplification and state-dependence of investment on the distribution of projects along completion stages. Endogenous time to build is policy relevant. Contractionary monetary policy faces headwinds when the distribution of projects skews towards mature projects. Tax policy, in turn, can flexibly reshuffle investment expenditures over time with tax credits.

April 11, 2025

IMF-ENV: Integrating Climate, Energy, and Trade Policies in a General Equilibrium Framework

Description: IMF-ENV is a global dynamic computable general equilibrium (CGE) model developed by the IMF's Research Department. The model features a database of 160 countries and regions, along with 76 sectors, and can be calibrated to a wide range of country-sector combinations. The model's general equilibrium structure, combined with its high level of detail, enables it to assess both direct and indirect domestic structural changes and cross-border spillover effects of policies. This makes it suitable for examining the medium- and long-term macroeconomic effects as well as structural shifts arising from national and/or global climate mitigation, energy, fiscal and trade policies. The model reports impact on macroeconomic variables, sectoral outcomes, employment and bilateral trade flows, along with detailed information for energy demand and supply, electricity generation and GHG emissions.

April 11, 2025

Firm Financing During Sudden Stops: Can Governments Substitute Markets?

Description: We analyze whether central bank credit lines and government-backed guarantees helped mitigate the impact of the pandemic's sudden stop, marked by the abrupt withdrawal of international capital, using administrative data on the universe of Chilean firms. Our regression discontinuity design reveals that eligible firms increased domestic borrowing at lower costs. These policies reduced the cost of domestic debt compared to foreign debt, easing access to capital. An open economy model explains the complementarity of both interventions--credit lines and guarantees--in relaxing collateral constraints, reducing financial intermediaries' risk aversion and boosting domestic credit supply amidst shrinking international flows.