Working Papers
2025
January 17, 2025
Production Network Features of Industrial Policy
Description: Industrial policy has gained popularity in recent years and across all regions and income levels. Consequently, it is increasingly important to understand how governments choose the sectors they target. This analysis explores the role of domestic production networks in sector targeting, while controlling for other sector and global value chain characteristics. Combining datasets on industrial policy (Global Trade Alert) and input-output linkages (ICIO, OECD) provides novel insight into the network features of industrial policy. In particular, a sector’s ‘centrality’—i.e., its degree of connectedness - within the domestic production network is an important and significant predictor of sector intervention. The results indicate that industrial policy is used differently across regions, income groups, time periods, and types of policy tools. Notably, emerging economies tend to target more central sectors, while advanced economies target less central ones, on average. However, there has been a global shift toward more central sectors over time. Lastly, subsidies are deployed on more central sectors, while tariffs are used on less central ones.
January 17, 2025
Domestic Market Integration and Regional Growth: The Case of Mexico
Description: Per capita growth of the Mexican economy has lagged behind G20 peers in past decades with notable disparities between the north and south. In this paper, we build on the income convergence literature by examining the impact of domestic market integration on regional growth. To this end, we incorporate insights from the Law of One Price and construct a novel measure of the strength of domestic market integration from micro-level price data. We find that domestic market integration is strongly associated with regional growth and its spillovers, along with other structural factors such as human capital and infrastructure. Our result also indicates that neighboring states’ income level and their integration into the national economy is positively correlated with a state’s growth, suggesting cross-state spillover effects and regional clustering.
January 17, 2025
External Knowledge, R&D, and Innovation: Mapping the Market for Technology Across European Industries
Description: A well-functioning market for technology, or ideas, is an important determinant for the type, scope, and distribution of innovation activities. We use a panel of 20 industries across 24 European countries to study the key determinants driving the market for technology. We explore whether the expenditures on external knowledge depends on the sectoral pattern of innovation and an industry’s distance to the global technological frontier. Disseminating knowledge and technology within the industry, bringing it closer to the global technological frontier, tends to reduce the expenditures for external knowledge except in supplier-dominated industries. We also find important complementarity effects in the market for external knowledge. Industries with high R&D spending, with increasingly large firms, and with large investments in machinery and software foster growth of the market for technology. Our findings suggest tailoring innovation policies to help expand both the size of the market for technology and the use of these markets in specific industries.
January 17, 2025
A Debt Crisis with Strategic Investors: Changes in Demand and the Role of Market Power
Description: This paper documents changes in investors' demand for sovereign debt during a debt crisis. Using a dataset containing individual bids on Portuguese debt auctions, I document that bid functions become more inelastic during the crisis. That is, investors require bigger drops in price to buy additional units of debt, increasing the government’s marginal cost of issuing debt. I then decompose these changes in demand into two components: a fundamental component, due to changes in the valuation of the security, and a strategic component, that arises from investors' market power. I find that, although the role of market power is negligible in normal times, it gets more pronounced leading up to and during the crisis. The government is not able to extract the full surplus from strategic investors, and, as a result, the auction mechanism loses efficiency during that period. Finally, I discuss a possible mitigation strategy. Everything else constant, the use of shorter maturities could avoid higher inefficiency costs.
January 17, 2025
Competitiveness and Productivity in the Baltics: Common Shocks, Different Implications
Description: This paper examines competitiveness and productivity in the Baltics. Focusing on recent developments, it asks why Russia’s war in Ukraine led to a prolonged recession and strong decline in competitiveness in Estonia, while Latvia and Lithuania shielded their economies more effectively. The paper starts by documenting a deterioration in export performance across the region. Using a constant share decomposition, it finds that, unlike in Latvia and Lithuania, Estonia’s declining export share has been mainly linked to a reduction in the ‘intensive margin’—a sign of weakening external competitiveness and declining relative productivity. Multivariate filtering techniques and estimates of the real effective exchange rates based on historical productivity trends, consistent with Balassa-Samuelson, confirm that differences in long-term total factor productivity growth have affected external competitiveness. While Estonia’s post-GFC slowdown in productivity growth and real exchange rate appreciation have eroded its competitive edge, Latvia and Lithuania have shown greater resilience, aided by more balanced real effective exchange rates and, for Lithuania, stronger corporate balance sheets. A micro-econometric analysis further reveals that resource misallocation, particularly in the services sector, has been a key driver of declining productivity in the region. These findings underscore the need for targeted reforms to improve allocative efficiency, boost productivity, and restore competitiveness in the Baltic region.
January 17, 2025
Foreign Aid and Conflicts: The Effects of 9/11 on Donor Behavior
Description: We explore the changing relationship between armed conflicts and non-military foreign aid. We find that the sign of the relationship linking (bilateral) aid commitments to the onset of armed conflicts in aid recipient countries is statistically significant and goes from negative to positive after the year 2001. We also find that our results are driven by grants rather than loans and by aid for health and humanitarian purposes. The results are robust to a myriad of checks including substituting armed conflicts with terror attacks, accounting for debt relief initiatives and using different estimators. We interpret our results as stemming from a shift in donors’ preferences induced by 9/11 attacks toward supporting conflict affected countries, confirming the primacy of donors’ interests over recipient needs.
January 17, 2025
Frayed Societies: Decoding the Interplay between Conflicts and Gender Inequality
Description: This paper explores the relationship between violent conflicts and gender inequality in a global sample since the 1990s. Based on a composite index, it shows that conflicts, including both interstate and intrastate events, predict a higher gender inequality in outcomes. Focusing on specific gender outcomes, school enrollment rate by females in primary education and share of seats in parliament held by women tend to decrease in the aftermath of those episodes, whereas maternal mortality rate increases. Moreover, conflicts tend to widen cross-country gaps in gender inequality in outcomes. Focusing on gender inequality in opportunities, conflicts are associated with lower economic rights for women in legislation. Considering the role of women’s empowerment in economic growth and development, these associations between conflicts and gender inequality provide a channel for the observed, long-lasting drag on economic performance following those episodes. The ongoing political and security-related challenges across the globe make the implications of the findings even more crucial for sustainable and inclusive economic growth in the post-Covid-19 era.
January 17, 2025
Portfolio Inertia and Expected Excess Returns in Currency Markets: Evidence from Advanced Economies
Description: The economic literature has long attributed non-zero expected excess returns in currency markets to time-varying risk premiums demanded by risk-averse investors. This paper, building on Bacchetta and van Wincoop's (2021) portfolio balance framework, shows that such returns can also arise when investors are risk-neutral but face portfolio adjustment costs. Models with adjustment costs but no risk aversion predict a negative correlation between exchange rate levels and expected excess returns, while models with risk aversion but no adjustment costs predict a positive one. Using data from nine inflation targeting economies with floating exchange rates (2000–2024), we find strong empirical support for the adjustment costs framework. The negative correlation persists even during periods of low market stress, further evidence that portfolio adjustment costs, not risk premium shocks, drive the link between exchange rates and excess returns. Our model predicts that one-year expected excess returns should have predictive power for multi-year returns, with longer-term expected returns as increasing multiples of short-term expectations, and the predictive power strengthening with the horizon. We confirm these findings empirically. We also examine scenarios combining risk aversion and adjustment costs, showing that sufficiently high adjustment costs are essential to generate the observed negative relationship.These findings provide a simpler, testable alternative to literature relying on assumptions about unobservable factors like time-varying risk premiums, intermediary constraints, or noise trader activity.
January 17, 2025
Is Tax Policy Costly Industrial Policy in Mozambique?
Description: This paper analyzes the use of tax policy as industrial policy in Mozambique. Despite significant foregone tax revenue due to industrial policy in the form of tax incentives, the effectiveness of Mozambique's tax policy remains questionable due to insufficient data and unclear public policy strategy. Through an examination of macro data, tax reports, and data from World Bank Enterprise Surveys, the note underscores the need for a thorough reassessment of existing tax measures. It advocates for a more strategic, targeted and evidence-based design of tax incentives that deliver on industrial policy goals.
January 17, 2025
Understanding Agricultural Output in Mozambique: Using remote sensing to initiate a discussion on development
Description: This paper presents a comprehensive analysis of the agricultural land coverage in Mozambique by harnessing advanced remote sensing technologies and draws on successful agricultural development examples to propose strategic pathways for Mozambique. The study leverages Sentinel-2 satellite imagery coupled with a machine learning algorithm to accurately map and assess the country's agricultural land, revealing that agriculture accounts for only 12 percent of Mozambique's land area. By examining the agricultural transformation or “green revolution” that some countries have experienced, it is possible to distill regularities and necessary conditions, which can then be compared to the state-of-affairs in Mozambique. This study not only offers a model of how emerging technologies like remote sensing can inform agricultural state of affairs, it also provides important insights into which concrete bottlenecks are likely to be holding back Mozambique’s agricultural development.