Working Papers
2024
May 10, 2024
Forecasting Tail Risk via Neural Networks with Asymptotic Expansions
Description: We propose a new machine-learning-based approach for forecasting Value-at-Risk (VaR) named CoFiE-NN where a neural network (NN) is combined with Cornish-Fisher expansions (CoFiE). CoFiE-NN can capture non-linear dynamics of high-order statistical moments thanks to the flexibility of a NN while maintaining interpretability of the outputs by using CoFiE which is a well-known statistical formula. First, we explain CoFiE-NN. Second, we compare the forecasting performance of CoFiE-NN with three conventional models using both Monte Carlo simulation and real data. To do so, we employ Long Short-Term Memory (LSTM) as our main specification of the NN. We then apply the CoFiE-NN for different asset classes, with a focus on foreign exchange markets. We report that CoFiE-NN outperfoms the conventional EGARCH-t model and the Extreme Value Theory model in several statistical criteria for both the simulated data and the real data. Finally, we introduce a new empirical proxy for tail risk named tail risk ratio under CoFiE-NN. We discover that the only 20 percent of tail risk dynamics across 22 currencies is explained by one common factor. This is contrasting to the fact that 60 percent of volatility dynamics across the same currencies is explained by one common factor.
May 10, 2024
Conflicts and Growth: The R&D Channel
Description: Violent conflicts are typically associated with a long-lasting drag on economic output, yet establishing causality based on macro-data remains as a challenge. This study attempts to build causality in the conflict-growth nexus by exploiting within-country variation across industries’ technological intensity. It identifies a channel through which conflicts can impact growth, i.e., by hindering R&D activities. The analysis is based on industry-level data from two-digit manufacturing industries for a large sample of countries over the last four decades. The results show that conflicts lead to a decline in labor productivity growth, particularly in industries with higher technological intensity. The estimated magnitude of the differential effect of conflicts on labor productivity growth in high-tech industries is large. Moreover, the additional labor productivity loss in those industries in the years of conflicts does not seem to be offset in the post-conflict period neither. The findings offer insight into the observed patterns of durable declines in income in the aftermath of conflicts, considering the role of technological progress and innovation in long-term economic growth.
May 10, 2024
Intra-African Migration: Exploring the Role of Human Development, Institutions, and Climate Shocks
Description: We examine push and pull factors, including demographic, geography, culture, economic and human development, politics and climate, and uncover the key determinants shaping migration patterns within Africa. Our findings emphasize the significance of political (instability, ethnic tensions) and socio-demographic (human development, common language, population size and structure) factors, climate shocks, along with economic motivations, in driving intra-African migration. Understanding these multifaceted factors is vital for policymakers in formulating effective strategies to leverage human capital mobility to promote sustainable development in the region.
May 3, 2024
Challenges Facing SSNs in Emerging and Developing Economies:
Description: We show how the standard social welfare framework can be used to assess the performance of social safety nets (SSNs) in terms of targeting efficiency and budget effort. We apply this framework to the World Bank’s ASPIRE database and find that the variation in poverty alleviation achieved by SSNs in emerging markets and developing economies (EMDEs) is driven mainly by variation in budget effort. Increasing transfer spending is therefore key to strengthening SSNs in EMDEs. However, the inability of many EMDEs to finely target transfers to poor households means the required spending increases are prohibitive over the short term, especially in low-income countries. This emphasizes the importance of enhancing targeting efficiency and we discuss how the use of proxy-means testing can contribute to this emphasizing the importance of careful design to manage the horizontal inequity inherent in such an approach to targeting.
May 3, 2024
Strengthening Social Protection to Pave the Way for Technological Innovation: Evidence from the U.S.
Description: This paper investigates the impact of automation on the U.S. labor market from 2000 to 2007, specifically examining whether more generous social protection programs can mitigate negative effects. Following Acemoglu and Restrepo (2020), the study finds that areas with higher robot adoption reduced employment and wages, in particular for workers without collegue degree. Notably, the paper exploits differences in social protection generosity across states and finds that areas with more generous unemployment insurance (UI) alleviated the negative effects on wages, especially for less-skilled workers. The results suggest that UI allowed displaced workers to find better matches The findings emphasize the importance of robust social protection policies in addressing the challenges posed by automation, contributing valuable insights for policymakers.
May 3, 2024
The Impact of Reduced Commuting on Labor Supply and Household Welfare: A Post-Pandemic Analysis
Description: This paper examines the impact of changes in commuting time on welfare and labor supply in the aftermath of the COVID-19 pandemic. Utilizing data from the American Time Use Survey, we observe a shift in commuting time and working hours across occupations with varying ability of telework after the pandemic. We develop a household model of labor supply that accounts for commuting time, and we characterize how changes in commuting time impact individuals' and spouses' labor supply. We calibrate the model to the data. Our findings reveal that the observed post-pandemic decline in commuting time yields significant welfare gains: between 1.5 to 4.5 percent of consumption equivalents for households where at least one spouse experiences reduced commuting.
May 3, 2024
Monetary Policy Transmission in Emerging Markets: Proverbial Concerns, Novel Evidence
Description: Doubts persist about the effectiveness of monetary transmission in emerging markets, but the empirical evidence is scarce due to challenges in identifying monetary policy shocks. In this paper, we construct new monetary policy shocks using novel analysts’ forecasts of policy rate decisions. Crucial for identification, analysts can update forecasts up to the policy meeting, allowing them to incorporate any relevant data release. Using these shocks, we show that monetary transmission in emerging markets operates similarly to advanced economies. Monetary tightening leads to a persistent increase in bond yields, a contraction in real activity, and a delayed reduction in inflation. Furthermore, monetary policy impacts leveraged firms more strongly.
April 26, 2024
At the Threshold: The Increasing Relevance of the Middle-Income Trap
Description: We investigate the existence of a middle-income trap using finite state Markov chains, constant growth thresholds, and mean passage times. As well as studying output per head, we examine the dynamics of its proximate determinants: TFP, the capital-output ratio, and human capital. We find upwards mobility for the capital-output ratio and human capital, but not for relative TFP. The lack of upwards mobility in relative TFP, at least from an intermediate level, suggests that escaping the middle-income category can take many years, and such traps may become increasingly apparent in the years to come.
April 26, 2024
The Nexus of Climate and Monetary Policy: Evidence from the Middle East and Central Asia
Description: This paper investigates the effects of climate shocks on inflation and monetary policy in the Middle East and Central Asia (ME&CA) region. We first introduce a theoretical model to understand the impact of climate risks on headline and food inflation. In particular, the model shows how climate shocks could affect the path of policy rates through food prices. We then use local projections to estimate the impact of climate shocks on headline and food inflation. The results show that price stability is more easily achievable under positive climate conditions. Overall, our findings shed new light on the importance of considering climate-related supply shocks when designing monetary policy, particularly in countries where food makes up a significant part of the CPI-basket.
April 26, 2024
Public Debt Dynamics and the Impact of Fiscal Policy
Description: Public debt-to-GDP ratios have undergone substantial fluctuations over both the short and long term. Most recently, global debt-to-GDP ratios peaked at 100% on average in 2020 due to COVID-19, retracting substantially by 2022. To understand what drives these movements, we propose a structural approach to debt decompositions based on a SVAR identified with narrative sign restrictions. We find that GDP growth shocks and the corresponding comovements of macroeconomic variables are the key drivers of debt to GDP, accounting for 40% of the observed yearly variation in 17 advanced economies since the 1980s. Discretionary fiscal policy changes, in turn, account for less than 20% of the observed changes. The analysis also finds the primary balance multiplier on GDP to be very small. We reconcile our results with the literature, underscoring the importance of accurate shock identification and accounting for cross-country heterogeneity.