Working Papers
2023
June 23, 2023
Euro Area Inflation after the Pandemic and Energy Shock: Import Prices, Profits and Wages
Description: We document the importance of import prices and domestic profits as a counterpart to the recent increase in euro area inflation. Through a novel consumption deflator decomposition, we show that import prices account for 40 percent of the average change in the consumption deflator over 2022Q1 – 2023Q1, while domestic profits account for 45 percent. The increase in nominal profits was largest in sectors benefiting from increasing international commodity prices and those exposed to recent supply-demand mismatches. While the results show that firms have passed on more than the nominal cost shock, and have fared relatively better than workers, the limited available data does not point to a widespread increase in markups. Looking ahead, assuming nominal wage growth of around 4.5 percent over 2023-24 – slightly below the level seen in Q1 2023 – and broadly unchanged productivity, a normalization of the profit share to the average level over 2015-19 will be necessary to achieve a convergence of inflation to target over the next two years. Monetary policy will thus need to remain restrictive to anchor expectations and maintain subdued demand such that workers and firms settle on relative price setting that is consistent with disinflation.
June 23, 2023
Sub-Saharan Africa’s Risk Perception Premium: In the Search of Missing Factors
Description: Policymakers from the sub-Saharan Africa (SSA) region often flag a mispricing of their sovereign debt presumably originating from a perception risk by international investors that lead to "unjustifiably" high borrowing costs. Against this background, this paper explores the extent to which a potential SSA premium exists in the financial markets following a broader two-fold approach. Firstly, using a sample of 1592 international primary sovereign fixed coupon bonds issued between 2003-2021 from Bond Radar by 89 countries, we find that SSA countries pay significantly higher coupon at issuance compared to their peers from other regions. Secondly, we assess whether there is any bias against SSA countries in the secondary market that would result in higher refinancing cost. Based on an unbalanced panel of quarterly data covering 107 countries over 1990 – 2022, we find that SSA countries pay higher refinancing costs in the secondary market. The paper further explores whether there are other factors overlooked by the literature that matter for the risk pricing by international investors. In that respect, we explore the sensitivity of spreads to some structural dimensions where SSA countries face acute challenges―the transparency of budget process, the importance of the informal sector, the level of financial development, and the quality of public institutions. The results show that the excess premium estimated for SSA countries vanishes when these structural factors are accounted for in the regressions.
June 23, 2023
External Shocks, Policies, and Tail-Shifts in Real Exchange Rates
Description: We use panel quantile regressions to study extreme (rather than average) movements in the distribution of the real effective exchange rate (REER) of small open economies. We document that global uncertainty (VIX) and global financial conditions (U.S. monetary policy) shocks have a strong impact on the distribution of the REER changes, with larger impacts in the tails of the distribution, and especially in economies with shallower FX markets, lower central bank credibility, and higher credit risk (i.e., weaker macro fundamentals). Foreign exchange intervention (FXI) partially offsets the impact of these shocks, especially in the left tail (large depreciations) and particularly in economies with weaker fundamentals but, more importantly, when FXI is used sporadically. Thus, our results highlight the importance of deepening FX markets, improving central bank credibility, and strengthening macro fundamentals against the potential dynamic trade-offs of overreliance on a policy that would exacerbate the previously mentioned frictions. While our results point to low effectiveness of capital flow management in preventing large REER movements, they seem to enable more impactful foreign exchange intervention in the immediate aftermath of shocks.
June 16, 2023
Central Bank Digital Currency Adoption: A Two-Sided Model
Description: For central bank digital currencies (CBDCs) to accomplish their intended objectives, it is necessary for both consumers to use them and for merchants to accept them. This paper develops a dynamic two-sided payments model with both heterogeneous households and merchants/firms to study: (1) The adoption of CBDC by households and firms, and (2) The impact of CBDC issuance on financial inclusion, informality, and disintermediation. Our model shows that there is a feedback loop where more households will adopt CBDC if more firms accept CBDC and vice versa -- incentivizing both households and firms will result in greater levels of take-up. Households are more likely to adopt CBDC if it is low cost, provides an attractive savings vehicle, reduces the cost of remittances, improves the efficiency of government payments, and (if accepted by merchants) offers a valuable means of payment. Firms are more likely to accept CBDC if fees are low, if there are tax exemptions or subsidies for transactions made in CBDC, and if households who prefer to make payments with CBDC make up a large share of revenue. Upon CBDC issuance, an economy can get stuck at a steady state with low CBDC adoption and small welfare gains if the features of CBDC which do not rely on merchant acceptance (remuneration, efficiency of cross border and government payments) are not sufficiently attractive, or if the households benefiting from these features make up a small share of merchant revenue. Temporary subsidies and using CBDC for government payments can spur initial take-up to transition an economy to a welfare improving steady state with high(er) CBDC usage. Greater adoption of CBDC will result in greater financial inclusion and formalization, but potentially the disintermediation of banks and card payments. Thus, there is a trade-off in designing CBDC for greater adoption. However, the gains are more likely to outweigh the risks in lower income economies with larger unbanked populations and informal sectors.
June 16, 2023
Firm Leverage and Boom-Bust Cycles
Description: This paper explores the dynamic relationship between firm debt and real outcomes using data from 24 European economies over the period of 2000-2018. Based on macro data, it shows that a rise in credit to firms is associated with an increase in employment growth in the short-term, but employment growth declines in the medium-term. This pattern remains similar, even when the changes in credit to households are accounted for. Next, using data from a large sample of firms, it shows that firm leverage buildups predict similar boom-bust growth cycles in firm employment: Firms with a larger increase in leverage experience a boost in employment growth in the short-term, but employment growth decreases in the medium-term. Relatedly, the volatility of employment growth increases in the aftermath of firm leverage buildups. Finally, this paper provides suggestive evidence on the role of a financial channel in the relationship between firm leverage buildups and employment growth. The results show that a rise in firm leverage is associated with a persistently higher debt service ratio, pointing the drag on finances. Consistently, boom-bust growth cycles in the aftermath of firm leverage buildups are not limited to employment growth, but are also pronounced for investment. Moreover, the medium-term decline in firm employment growth as predicted by leverage buildups becomes even larger if aggregate financial conditions tighten. The findings are in favor of “lean against the wind” approach in policy making.
June 16, 2023
The Rise of the Walking Dead: Zombie Firms Around the World
Description: We build a new dataset of listed and private nonfinancial zombie firms for a large set of Advanced Economies and Emerging Markets over the last two decades. We find that the share of these unproductive and unviable firms has been rising worldwide, especially since the GFC and the Covid-19 pandemic. We show that, perhaps surprisingly, the incidence of zombification is lower among private firms. Lower average survival rates of private firms may explain this phenomenon. We find important negative macrofinancial spillovers from zombie firms: nonzombies’ financial performance is persistently reduced in industries populated with a greater number of zombies. To mitigate these effects, we document that countries with stronger banks, and tighter macroprudential policies tend to have fewer zombies and stronger nonzombies. Strengthening the banking sector may, however, not be sufficient if insolvency frameworks are not well-prepared to deal with the restructuring or insolvency of firms.
June 16, 2023
Trading with Friends in Uncertain Times
Description: In this paper we seek to answer the question of how the patterns of bilateral trade are altered by rising trade policy uncertainty (TPU). Specifically, we investigate whether geopolitical alignments between country pairs determine how bilateral trade flows react during periods of greater uncertainty. Using a structural gravity framework augmented with a text-based TPU index and a geopolitical distance measure based on UN General Assembly voting records, we find a significant negative effect of the latter when TPU is elevated, indicating a shift to trading among “friends” in uncertain times.
June 9, 2023
Digitalization and Gender Equality in Political Leadership in Sub-Saharan Africa
Description: We examine the impact of digitalization on people’s perceptions of women as political leaders in 34 Sub-Saharan African countries. We find that being a social media or internet user is linked to a higher likelihood of people supporting gender equality in political leadership. However, the intensive margin of usage does not appear to be significant. Furthermore, women’s perceptions of gender equality in political leadership are more sensitive to internet and social media use than men’s. The paper recommends policies for improving ICT infrastructure and investing in technological education.
June 9, 2023
Bank Competition and Household Privacy in a Digital Payment Monopoly
Description: Lenders can exploit households' payment data to infer their creditworthiness. When households value privacy, they then face a tradeoff between protecting such privacy and credit conditions. We study how the introduction of an informationally more intrusive digital payment vehicle affects households' cash use, credit access, and welfare. A tech monopolist controls the intrusiveness of the new payment method and manipulates information asymmetries among households and oligopolistic banks to extract data contracts that are more lucrative than lending on its own. The laissez-faire equilibrium entails a digital payment vehicle that is more intrusive than socially optimal, providing a rationale for regulation.
June 9, 2023
Restructuring Reforms for Green Growth
Description: Policymakers across the world are striving to tackle the century-defining challenge of climate change without undermining potential growth. This paper examines the impact of structural reforms in the energy sector (electricity and gas) on enviromental outcomes and green growth indicators in a panel of 25 advanced economies during the period 1970-2020. We obtain striking results. First, while structural reforms so far failed in reducing greenhouse gas emissions per capita, there is some evidence for greater effectiveness in lowering emissions per unit of GDP. Second, although energy reforms are not associated with higher supply of renewable energy as a share of total energy supply, they appear to stimulate a sustained increase in environmental inventions and patents per capita over the medium term. We also find strong evidence of nonlinear effects, with market-friendly energy reforms leading to better environmental outcomes and green growth in countries with stronger environmental regulations. Looking forward, therefore, structural reforms should be designed not just for market efficiency but also for green growth.