Mr. Romain A Duval, Davide Furceri, and João Tovar Jalles
We explore the impact of major labor and product market reforms on current account dynamics using a new “narrative” database of major changes in employment protection for regular workers and product market regulation for non-manufacturing industries covering 26 advanced economies over the past four decades. Our main finding is that product market deregulation is associated with a weakening of the current account, while labor market deregulation is associated with an improvement. These effects are transitory and driven by both saving and investment responses. Labor and product market reforms both have a more positive impact on the current account balance when implemented under weak macroeconomic conditions. Our results are broadly consistent with predictions from recent DSGE models with endogenous producer entry and labor market frictions.
Katharina Bergant, Mr. Francesco Grigoli, Mr. Niels-Jakob H Hansen, and Mr. Damiano Sandri
We show that macroprudential regulation can considerably dampen the impact of global
financial shocks on emerging markets. More specifically, a tighter level of regulation reduces
the sensitivity of GDP growth to VIX movements and capital flow shocks. A broad set of
macroprudential tools contribute to this result, including measures targeting bank capital and
liquidity, foreign currency mismatches, and risky forms of credit. We also find that tighter
macroprudential regulation allows monetary policy to respond more countercyclically to
global financial shocks. This could be an important channel through which macroprudential
regulation enhances macroeconomic stability. These findings on the benefits of
macroprudential regulation are particularly notable since we do not find evidence that stricter
capital controls provide similar gains.
Davide Furceri, Jun Ge, Mr. Jonathan David Ostry, Mr. Chris Papageorgiou, and Gabriele Ciminelli
Many countries are experiencing persistent, weak medium-term growth and limited fiscal space. Against this background, economic policy agendas—in both advanced and developing economies—are focusing increasingly on structural reforms. While there is broad agreement on the economic benefits of structural reforms, the political-economy of reform is less settled. This is because reforms may generate gains only in the longer term while distributional effects may be sizable in the short run, and because governments may lack political capital to confront vocal interest groups. In these circumstances, politicians may hold back on reforms, fearing they will be penalized at the ballot box. The aim of this Staff Discussion Note is to examine whether the fear of a political cost associated with structural reforms is justified by the available evidence, and whether there are lessons from the data about how reform strategies might be designed to mitigate potential political costs. It provides a major addition to recent IMF analysis examining the output and employment effect of reforms
Superficial examination of aggregate gross cross-border capital inflow data suggests that there
was no substitution between portfolio inflows and bank loans in recent years. However, our
novel analysis of disaggregate inflows (both by types of instrument and borrower) shows
interesting heterogeneity. There has been substitution of bank loans for portfolio debt securities
not only in the case of corporate and sovereign borrowers in advanced countries, but also
sovereign borrowers in emerging countries. In the case of corporate borrowers in emerging
markets, the relationship corresponds to complementarity across types of gross capital inflows,
especially during periods of positive capital gross inflows after the global financial crisis. A
large part of these patterns does not seem to be driven by a common phenomenon across
countries associated with the global financial cycle, but rather by country-specific factors.
Ms. Era Dabla-Norris, Pietro Dallari, and Mr. Tigran Poghosyan
We estimate a panel VAR model that captures cross-country, dynamic interlinkages for 10 euro area countries using quarterly data for the period 1999-2016. Our analysis suggests that fiscal spillovers are significant and tend to be larger for countries with close trade and financial links as well, as for fiscal shocks originating from larger countries. The current account appears to be the main channel of transmission, although strong trade integration among countries in the euro area and spillback effects tend to zero-out the net trade impact in some cases. A subsample analysis shows that the effects of fiscal policy have changed over time, with larger estimated domestic multipliers and spillovers between 2011 and 2014.
This paper defines financial market spillovers as the comovement between two countries’ financial markets and analyzes financial market spillovers over the period 2001-12 through four channels: bilateral portfolio investment, bilateral trade, home bias, and country concentration. The paper finds that, if a country has a large amount of bilateral portfolio exposure in another country, these two countries’ comovement of bond yields are large. Also, countries’ geographical preferences impact financial spillovers; if a country has a stronger home bias, the country could have less spillovers from foreign financial markets. A policy implication from this result is that, if countries become less home-biased and have a greater amount of portfolio investment assets, they should strengthen prudential regulations to mitigate against rising risks of financial spillovers (or risk greater volatility owing to comovement with foreign markets).