Low-Income Countries

Building foreign exchange reserves requires sound policies and takes time, but global efforts to lower the cost of holding them can help

There are few elegant, easy, or politically attractive ways to reduce debt

Diversification has become harder since 2020 as stocks and bonds tend to move in tandem during sharp selloffs, adding to financial stability concerns

But risks are rising, including from the concentration of tech investment and the negative effects of trade disruptions, which may build over time

Policy choices will determine whether workers and firms are adequately prepared for the AI revolution

Debt, Stablecoins, AI, and Global Economy’s New Era Drew Blog Readers

This paper studies the macroeconomic consequences of undermining central bank independence through politically motivated transitions of central bank governors. Leveraging a new panel dataset covering 132 central bank governor transitions in 28 advanced and emerging market economies since 2000, we document the timing, frequency, and political drivers of these leadership changes. Tenures of governors with politically motivated appointments are associated with higher and more volatile inflation, realized and expected. Professional forecasters also tend to expect such governors to be more dovish when responding to shifts in inflation. Using local projections in a difference-in[1]difference setting, we find that following the announcement of a politically motivated governor transition nominal and real short rates decline and expected and realized inflation rise. At the same time, GDP growth increases in the aftermath of such transitions, consistent with an expansionary short-run macroeconomic impulse. These effects are more pronounced when the incoming governor professes unorthodox views on monetary policy, suggesting that political interference in central bank leadership induces a temporary growth–inflation trade-off. Long-term inflation expectations only rise in the case of unorthodox governors with politically motivated appointments, suggesting costs to central bank credibility are much more pronounced in those cases.

This paper develops a theory of sovereign debt sustainability driven by the government’s motive for redistribution. It studies a heterogeneous-agent small open economy in which redistribution relies on distortionary labor taxation and the government lacks commitment in its fiscal policies. Access to international credit markets lowers the cost of redistribution, while default into financial autarky raises it, generating an endogenous cost of default. Quantitatively, the model accounts for the buildup of Italy’s external debt and the positive cross-country correlation between pre-tax income inequality and external debt. Optimal austerity is more gradual when distributional concerns are present.

The Resilience and Sustainability Facility (RSF), which was added to the IMF’s lending toolkit in 2022, provides affordable longer-term financing to support countries undertaking macrocritical reforms to reduce risks to prospective BoP stability emanating from extreme weather events and pandemics. This paper draws early lessons from RSF arrangements by exploring whether they have been able to meet one of their core objectives, namely catalyzing financing from other sources. A multipronged approach is used consisting of a survey of country teams, an econometric study, and analysis of non-traditional data. According to a survey of IMF country teams most countries with RSF arrangements received climate finance, mainly from synergies with public sources. The econometric analysis shows that approval of an RSF is associated with increased MDB climate finance and Official Development Assistance (ODA) in low-income countries, thus strengthening the RSF’s link to BoP stability. Non-traditional data drawing from news media and labor market developments point to potential higher financing in the future.

The small developing states (SDS) have unique economic characteristics and face specific constraints that shape their economic performance. We study a set of key challenges facing SDS using the case of Belize. The empirical analysis centers on (i) improving access to finance; (ii) exploring drivers of labor force participation with a view to increasing the labor force contribution to growth; and (iii) assessing the tourism sector’s capacity constraints, and arrives at the following findings. First, it shows that both demand and supply factors contribute to constraining private sector credit, primarily via the level of lending rates, complex collateral processes, legacy of high NPLs, and extent of regulatory capital above the regulatory minimum. Second, it delves into the relevance of tourism’s share in the services sector, youth’s educational attainment, disparity in labor market outcomes, and availability of childcare for explaining heterogeneity of labor force participation gaps between men and women. Third, it zooms into the critical role of hotel capacity, flight availability, and cost competitiveness in shaping the tourism sector’s prospects.

We build the first global quarterly narrative database of discretionary government spending actions by applying a fixed GPT–4.1 prompt to Economist Intelligence Unit (EIU) Country Reports. The resulting series identifies exogenous spending shocks—expansions and contractions—for an unbalanced panel of 64 countries from 1952:Q1 to 2023:Q4. We validate the database by (i) replicating expert narrative coding in Romer and Romer (2019), (ii) showing that the identified shocks predict subsequent movements in measured government spending, and (iii) establishing alignment with action-based consolidation measures in Adler et al. (2024). Using country-by-country proxy SVARs that treat the narrative indicator as an internal instrument, we estimate cumulative government spending multipliers. The median multiplier is about 0.7 at horizons up to two years, with substantial heterogeneity across countries and states. Multipliers are larger in countries that are less open to trade, under fixed exchangerate regimes, during downturns, and at the zero lower bound. Political conditions also matter: multipliers are smaller when broad economic policy uncertainty and fiscal policy-specific uncertainty is high, but weak political support is associated with larger conditional multipliers.

We develop novel measures of stablecoin shocks and use them to identify the causal effects of stablecoin adoption on U.S. financial markets. Combining a daily narrative dataset of stablecoin-specific news with changes in the combined market capitalization of USDC and USDT, we measure high-frequency movements in stablecoin market capitalization and implement heteroskedasticity-based identification within an event-study and SVAR-IV framework. Stablecoin demand shocks have triggered persistent declines in short-term Treasury yields, a depreciation of the U.S. dollar, and gradual spillovers into crypto and equity markets. We also document heterogeneous effects across firms: payment providers benefit from greater stablecoin adoption, whereas banks—including community and small banks—show no evidence of priced disintermediation risk. Our findings highlight stablecoin demand as a novel channel of asset-market transmission.