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How do Economic Growth and Food Inflation Affect Food Insecurity?
September 6, 2024
During the global recession of 2020 food insecurity increased substantially in many countries around the world. Fortunately, the surge in food insecurity quickly came to a halt as the world economy returned to its positive growth path, despite double-digit domestic food inflation in most countries. To shed light on the relative importance of income growth and food inflation in driving food insecurity, we employ a heterogeneous-agent model with income inequality, complemented by novel cross-country data for the period 2001-2021. We use external instruments (changes in commodity terms-of-trade, external economic growth, and harvest shocks) to isolate exogenous variation in domestic income growth and ood inflation. Our findings suggest that income growth is the dominant driver of annual variations in food insecurity, while food price inflation plays a somewhat smaller role, aligning with our model predictions.
Regime-Switching Factor Models and Nowcasting with Big Data
September 6, 2024
This paper is concerned with nowcasting in a setting involving a large dataset with mixed frequencies, missing data problems, and regime-switching over time. I show that the Expectation-Maximization (EM) algorithm provides satisfactory performance relative to other estimation methods and delivers a good tradeoff between accuracy and speed, which makes it especially useful for real-time applications involving large dimensional data. The methodology solves the closed-form solutions to the parameter estimators instead of relying on numerical maximization routines. In an application to vintage US data, I show that the regime-switching modification promises improved forecasting performance. The regime-switching model demonstrates superior nowcasting performance, particularly when key economic indicators are released. In addition, the model is able to closely match the recession dating of the NBER despite having less information than actual committee meetings. In a backcasting exercise, I show that the fit between actual NBER recession dates and model recession estimates becomes more apparent with the additional available information. Finally, I discuss the policy implications of regime-switching nowcasting model, by allowing central bankers to evaluate whether the economy is subject to an upcoming recession or experiencing a persistent or transitory inflationary regime, gives the opportunity to act preemptively, more hawkish or dovish if necessary.
Managing Remittances Inflows with Foreign Exchange Intervention
September 6, 2024
In a 157 emerging markets and developing countries sample, remittances continue to grow fast, outpacing other financial inflows (as a share of GDP), particularly in Asia. Without alternative policy instruments, foreign exchange interventions (FXIs) have often been the authorities’ go-to tool to manage the short-term effects of these remittance inflows. However, this practice comes at a cost. This paper shows that FXIs are quick, temporary solutions that often may hinder the development of the recipient country’s financial sector and may not support financial stability over the medium term. The analysis suggests that FXIs act as an insurance tool that, by mitigating FX volatility, protect remittance recipients and tradable sectors from FX risks, encouraging less bank deposits (consistent with more spending) and lower buffers in the banking sector. These costs add to other direct FXI-related costs already identified in the literature. The development of private sector market risk management tools should support longer-term structural reforms required to increase the absorptive capacity of additional FX inflows.
Geopolitical Alignment and the Use of Global Currencies
September 6, 2024
After decades of increasing global economic integration, the world is facing a growing risk of geoeconomic fragmentation, with potentially far-reaching implications for the global economy and the international monetary system. Against this background, this paper studies how geopolitical proximity, along with other economic factors, affects the usage of five SDR currencies in cross-border transactions. Since World War II, the global currency landscape has remained relatively stable, with the U.S. dollar serving as the dominant currency. Using country-level SWIFT transaction data, our analysis confirms the importance of inertia, trade and financial linkages in shaping the currency landscape, consistent with existing studies. On geopolitical proximity, we find that closer proximity can boost the use of the euro and renminbi, notably among emerging market and developing economies, although the impact is rather muted in the full sample. The effect on RMB usage in the full sample is more pronounced during periods of heightened trade policy uncertainty. These findings suggest that in a more geoeconomically fragmented world, alternative currencies could play a greater role.
The Kingdom of Bahrain Implements the International Monetary Fund’s Enhanced General Data Dissemination System
September 5, 2024
Fed Rate Cuts May Help Revive Bond Flows to Emerging, Developing Economies
September 5, 2024
Some higher risk countries still face high costs for selling foreign-currency denominated debt to investors after major central banks raised interest rates
Republic of Latvia: Selected Issues
September 5, 2024
Selected Issues
Republic of Latvia: 2024 Article IV Consultation-Press Release; and Staff Report
September 5, 2024
The Latvian economy contracted with significant disinflation against the backdrop of geopolitical headwinds. Persistent services inflation, driven by strong nominal wage growth amid tight labor markets, keeps core inflation elevated. Productivity growth has failed to match real wage increases, weighing on competitiveness. The economic consequences of Russia’s war in Ukraine continue to depress private investment and productivity, thus compromising further Latvia’s lagging income convergence. The government needs to address long-term spending pressures related to its priorities and multiple transitions around climate change and energy, aging and skilled labor shortages, and rising defense costs. The coalition’s priorities include managing the fallout from the war in Ukraine, ensuring energy independence, addressing social issues, and pursuing tax reform.
IMF Executive Board Concludes Post Financing Assessment Discussions with South Africa
September 4, 2024
Sustained Economic Growth Hinges on Productivity Gains as Populations Age
September 4, 2024
A productivity slump is eroding living standards and imperiling financial and social stability