Working Papers

Page: 7 of 888 2 3 4 5 6 7 8 9 10 11

2024

March 8, 2024

Understanding Inflation Dynamics: The Role of Global Shocks in CEMAC

Description: As in the rest of the world, inflation in CEMAC surged more quickly and persistently than expected during the 2021–23 period. This paper examines the drivers of inflation dynamics and the contribution of global shocks to inflation persistence in CEMAC. We use a Phillips curve framework combined with the local projections method. Our results confirm the prominent role of global factors in driving inflation dynamics. Global commodity food and oil price fluctuations, and shipping costs are the main factors explaining the large variability in headline inflation. Further, we find that global price shocks have sizable and persistent effects on domestic headline inflation, with differences in the magnitude and speed of pass-through. The pass-through from commodity food price fluctuations to headline inflation is higher and more persistent than that of other global price shocks, reflecting the large share of food in the consumption baskets, which makes inflation more vulnerable to direct effects of international food shocks, but also larger second-round effects.

March 8, 2024

Monetary Policy with Uncertain Inflation Persistence

Description: When uncertain about inflation persistence, central banks are well-advised to adopt a robust strategy when setting interest rates. This robust approach, characterized by a "better safe than sorry" philosophy, entails incurring a modest cost to safeguard against a protracted period of deviating inflation. Applied to the post-pandemic period of exceptional uncertainty and elevated inflation, this strategy would have called for a tightening bias. Specifically, a high level of uncertainty surrounding wage, profit, and price dynamics requires a more front-loaded increase in interest rates compared to a baseline scenario which the policymaker fully understands how shocks to those variables are transmitted to inflation and output. This paper provides empirical evidence of such uncertainty and estimates a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model for the euro area to derive a robust interest rate path for the ECB which serves to illustrate the case for insuring against inflation turning out to have greater persistence.

March 1, 2024

Climate Policies as a Catalyst for Green FDI

Description: This paper assesses the role of climate policies as a catalyst of low carbon technologies deployment through foreign direct investment (FDI). Leveraging detailed cross-border project-level information, it identifies “green” FDI and finds that a higher number of active climate policies is associated with higher levels of green FDI inflows. Importantly, climate policies do not appear to be linked to lower levels of non-green projects, suggesting relatively small overall costs from the green transition. The paper also finds heterogeneity across sectors and policy instruments. The association between climate policies and green projects is particularly strong in energy and manufacturing, and when the composition of the recipient's climate portfolio is tilted towards binding policies (e.g., taxes and regulation) and expenditure measures. Finally, results point to policy spillovers, whereby larger climate policy portfolios in the source country are linked to higher green FDI outflows, but green subsidies can discourage them. This, in turn, implies that subsidies could hamper efforts to deploy low-carbon technologies across countries.

March 1, 2024

Fiscal Implications of Global Decarbonization

Description: Internationally coordinated climate mitigation policies can effectively put the world on a path toward achieving the agreed Paris temperature goals. Such coordination could be initiated by large players, such as China, the US, India, the African Union, and the European Union. We find that the implications for fiscal revenues over time will be shaped by a combination of rising carbon prices, the gradual erosion of existing fuel tax bases, and possible revenue sharing arrangements. Public spending rises during the transition to build green public infrastructure, promote innovation, and support clean technology deployment. Countries will also need financing for compensating vulnerable households and industries, and to transfer funds to poor countries. With well-designed climate-fiscal policy relying on carbon pricing, global decarbonization will have anything from moderately positive to moderately negative impacts on fiscal balances in high-income countries. For middle and low-income countries, net fiscal impacts are generally positive and can be significant. Revenue sharing at the global level would make an historical contribution to breaching the financial divide between rich and poor countries.

March 1, 2024

Do Capital Inflows Spur Technology Diffusion? Evidence from a New Technology Adoption Index

Description: We construct a novel measure of technology adoption, the Embodied Technology Imports Indicator (ETI), available for 181 countries over the period 1970-2020. The ETI measures the technological intensity of imports of each country by leveraging patent data from PATSTAT and product-level trade data from COMTRADE. We use this index to assess the link between capital flows and the diffusion of new technologies across emerging economies and low-income countries. Through a local projection difference-in-differences approach, we establish that variations in statutory capital flow regulations increase technological intensity by 7-9 percentage points over 5 to 10 years. This increase is accompanied by a significant 28-33 pp rise in the volume of gross capital inflows, driven primarily by foreign direct investment (21 pp increase), and a 9 to 12 percentage points shift in the level of Real GDP per capita in PPP terms.

March 1, 2024

Is Inflation Good for Business? The Firm-Level Impact of Inflation Shocks in the Baltics, 1997-2021

Description: Using a large panel of firm-level data, this paper provides an analysis of how inflation shocks in the Baltics between 1997 and 2021 affected total factor productivity (TFP), gross profitability, and net fixed investment in nonfinancial sectors. First, we find that inflation and inflation volatility had mixed effects on TFP growth, profitability and net fixed investment in the first year as well as over the medium term, albeit at a dissipating rate. Second, focusing on subsamples, we find that inflation shocks had differential effects on large versus small firms. Third, we explore sectoral heterogeneity in how firms responded to inflation shocks and observe significant variation across tradable and non-tradable sectors. Finally, estimates from a state-dependent model suggest that firms’ response to inflation shocks varied with the state of the economy. The results suggest that nonfinancial firms in the Baltics have been agile in adjusting to inflation shocks, possibly by either transferring higher production costs to consumers or substituting inputs. Given the differences in the level and nature of the recent inflation shock and the sample period on which our analysis is based, empirical findings presented in this paper might not necessarily apply to the latest bout of inflation in the Baltics.

March 1, 2024

The Consequences of Falling Behind the Curve: Inflation Shocks and Policy Delays Under Rational and Behavioral Expectations

Description: Central banks in major industrialized economies were slow to react to the surge in inflation that began in early 2021. The proximate causes of this surge were the supply chain disruptions associated with the easing of COVID restrictions, fiscal policies designed to cushion the economic impact of COVID, and the impact on commodity prices and supply chains of the war in Ukraine. We investigate the consequences of policy delay in responding to inflation shocks. First, using a simple three-period model, we show how policy delay worsens inflation outcomes, but can mitigate or even reverse the output decline that occurs when policy responds without delay. Then, using a calibrated new Keynesian framework and two measures of loss that incorporate a “balanced approach” to weigh inflation and the output gap, we find that loss is monotonically increasing in the length of the delay. Loss is reduced if policy, when it does react, is more aggressive. To investigate whether these results are sensitive to the assumption of rational expectations, we consider cognitive discounting as an alternative assumption about expectations. With cognitive discounting, forward guidance is less powerful and results in a reduction in the costs of delay. Under either assumption about expectations, the costs of a short delay can be eliminated by adopting a less inertial policy rule and a more aggressive response to inflation.

March 1, 2024

Trade Spillovers of Domestic Subsidies

Description: As governments resort to industrial policies to achieve economic and non-economic objectives, the number of subsidies implemented each year has more than tripled in the last decade. Using detailed data across a large number of advanced and emerging economies, we empirically investigate the effects of domestic subsidies on international trade flows. Estimates from a difference-in-difference specification show that on average subsidies promote both exports and imports. These effects are partly driven by selection into subsidies, as governments target export-oriented and import-competing products. The results however mask significant differences across countries. Specifically, exports of subsidized products from G20 emerging markets increase 8 percent more than exports of other products, with no evidence of selection. The gravity estimates confirm that subsidies promote international relative to domestic trade. These spillover effects are concentrated in some industries, such as electrical machinery, and are stronger when subsidies are given through tax breaks than other policy instruments. The subsidy-led rise in trade calls for international cooperation to manage risks of retaliatory actions and possible drifts towards a subsidy war.

March 1, 2024

Inflated Concerns: Exposure to Past Inflationary Episodes and Preferences for Price Stability

Description: Using individual-level survey data for both advanced economies and emerging markets spanning over 45 years for 42 countries, we show that cohorts who have had higher exposure to past inflationary episodes (levels, as well as to more persistent or to more volatile inflation), systematically express higher concerns over rising prices. The link between past high inflation exposure and expressed concerns over price stability is particularly strong when an individual’s exposure occurs in the latter part of her working-age (as in lifecycle theory). The impact of past exposure to high inflation on contemporaneous preferences over price stability increases when surveyed in the midst of high ongoing inflation and with macroeconomic instability (as measured by GDP growth volatility), but diminishes with the quality of institutions.

March 1, 2024

Medium-term Macroeconomic Effects of Russia’s War in Ukraine and How it Affects Energy Security and Global Emission Targets

Description: Russia’s war in Ukraine has disrupted the supply of natural gas for many European countries, triggering an energy crisis and affecting energy security. We simulate the medium-term effects of these trade disruptions and find that most European countries have limited GDP losses but those more dependent on Russian natural gas face moderate losses. European fossil fuel consumption and emissions are reduced and after accounting for the war impacts, achieving Europe’s emission targets becomes slightly less costly. In terms of energy security, the war eliminates European energy dependency from Russian imports, but most of the natural gas and oil imports will be substituted by other suppliers. We also find that constructing a new Russian pipeline to China does not provide significant macroeconomic benefits to either country.

Page: 7 of 888 2 3 4 5 6 7 8 9 10 11