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Do Fiscal Rules Cause Better Fiscal Balances? A New Instrumental Variable Strategy
This paper estimates the causal effect of fiscal rules on fiscal balances in a panel of 142 countries over the period 1985-2015. Our instrumental variable strategy exploits the geographical diffusion of fiscal rules across countries. The intuition is that reforms in neighboring countries may affect the adoption of domestic reforms through peer pressure and imitational effects. We find that fiscal rules correlate with lower deficits, but the positive link disappears when endogeneity is correctly addressed. However, when considering an index of fiscal rules’ design, we show that well-designed rules have a statistically significant impact on fiscal balances. We conduct several robustness tests and show that our results are not affected by weak instrument problems.
Expectations' Anchoring and Inflation Persistence
Understanding the sources of inflation persistence is crucial for monetary policy. This paper provides an empirical assessment of the influence of inflation expectations' anchoring on the persistence of inflation. We construct a novel index of inflation expectations' anchoring using survey-based inflation forecasts for 45 economies starting in 1989. We then study the response of consumer prices to terms-of-trade shocks for countries with flexible exchange rates. We find that these shocks have a significant and persistent effect on consumer price inflation when expectations are poorly anchored. By contrast, inflation reacts by less and returns quickly to its pre-shock level when expectations are strongly anchored.
Macroeconomic Policy in Fragile States
Setting macroeconomic policy is especially difficult in fragile states. Macroeconomic Policy in Fragile States addresses the many issues involved and considers ways to improve the effectiveness of macroeconomic management in the face of these constraints.
Predictive Density Aggregation: A Model for Global GDP Growth
In this paper we propose a novel approach to obtain the predictive density of global GDP growth. It hinges upon a bottom-up probabilistic model that estimates and combines single countries’ predictive GDP growth densities, taking into account cross-country interdependencies. Speci?cally, we model non-parametrically the contemporaneous interdependencies across the United States, the euro area, and China via a conditional kernel density estimation of a joint distribution. Then, we characterize the potential ampli?cation e?ects stemming from other large economies in each region—also with kernel density estimations—and the reaction of all other economies with para-metric assumptions. Importantly, each economy’s predictive density also depends on a set of observable country-speci?c factors. Finally, the use of sampling techniques allows us to aggregate individual countries’ densities into a world aggregate while preserving the non-i.i.d. nature of the global GDP growth distribution. Out-of-sample metrics con?rm the accuracy of our approach.
Macroeconomic Policy in Fragile States
Setting macroeconomic policy is especially difficult in fragile states. Political legitimacy concerns are heightened, raising issues such as who the policymakers are, what incentives they face, and how the process of policymaking is likely to work under limited legitimacy and high uncertainty both about the macroeconomic environment as well as policy effectiveness. In addition, fragility expands the range of policy objectives in ways that may constrain the attainment of standard macroeconomic objectives. Specifically, in the context of fragility policymakers also need to focus on measures to mitigate fragility itself - i.e., they need to address issues such as regional and ethnic economic di...
On the Benefits of Repaying
This paper studies whether countries benefit from servicing their debts during times of widespread sovereign defaults. Colombia is typically regarded as the only large Latin American country that did not default in the 1980s. Using archival research and formal econometric estimates of Colombia's probability of default, we show that in the early 1980s Colombia's fundamentals were not significantly different from those of the Latin American countries that defaulted on their debts. We also document that the different path chosen by Colombia was due to the authorities' belief that maintaining a good reputation in the international capital market would have substantial long-term payoffs. We show ...
World Economic Outlook, October 2021
The global recovery continues but the momentum has weakened, hobbled by the pandemic. Fueled by the highly transmissible Delta variant, the recorded global COVID-19 death toll has risen close to 5 million and health risks abound, holding back a full return to normalcy. Pandemic outbreaks in critical links of global supply chains have resulted in longer-than-expected supply disruptions, further feeding inflation in many countries. Overall, risks to economic prospects have increased, and policy trade-offs have become more complex.
Macroeconomic Effects of Tax Rate and Base Changes: Evidence from Fiscal Consolidations
This paper examines the macroeconomic effects of tax changes during fiscal consolidations. We build a new narrative dataset of tax changes during fiscal consolidation years, containing detailed information on the expected revenue impact, motivation, and announcement and implementation dates of nearly 2,500 tax measures across 10 OECD countries. We analyze the macroeconomic impact of tax changes, distinguishing between tax rate and tax base changes, and further separating between changes in personal income, corporate income, and value added tax. Our results suggest that base broadening during fiscal consolidations leads to smaller output and employment declines compared to rate hikes, even when distinguishing between tax types.
Pouring Oil on Fire: Interest Deductibility and Corporate Debt
This paper investigates the role of tax incentives towards debt finance in the buildup of leverage in the nonfinancial corporate (NFC) sector, using a large firm-level dataset. We find that so-called debt bias is a significant driver of leverage, for both small and medium-sized enterprises and larger firms, with its effect accounting for about a quarter of leverage. The strength of this effect differs with firm size, the availability of collateral, income and income volatility, cash flow, and capital intensity. We conclude that leveling the playing field between debt and equity finance through tax policy reform would decrease NFC leverage, reducing economic risks posited by leverage.
Czech Republic
A favorable external environment, high utilization of EU funds, and supportive macroeconomic policies have boosted economic growth. The authorities’ medium-term fiscal objective is appropriate, but fiscal framework legislation that would anchor policy is yet to be approved by parliament. The central bank’s use of an exchange rate floor to achieve its inflation target has helped stem deflationary pressures, but inflation is still well below target. The financial system is sound and resilient to shocks. Policy recommendations. Policies should aim at comprehensively addressing obstacles to strong and sustained growth, while safeguarding macroeconomic stability.
