Mrs. Sarwat Jahan, Ahmed Saber Mahmud, and Mr. Chris Papageorgiou
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Julia Bersch, Mr. Steven A Barnett, and Mr. Yasuhisa Ojima
Inflation in Mongolia resembles a roller coaster ride with sharp rises and steep drops. Understanding why is critical for formulating and assessing monetary policy. Food prices are found to be a key driver of inflation, and, not surprising given Mongolia’s geography, are determined primarily by local supply conditions, highly seasonal, and subject to large but short-lived shocks (usually weather related). Nonetheless, demand factors are also found to be significant in explaining price movements and empirical evidence suggests that a 10 percent increase in government wages, for example, would push up underlying inflation by 1 percentage point. So, while inflation will remain volatile due to agricultural shocks, there is space for macroeconomic stabilization policy to help reduce inflation volatility.
In the United States and a few European countries, inventory behavior is mainly the outcome of demand shocks: a standard buffer-stock model best characterizes these economies. But most European countries are described by a modified buffer-stock model where supply shocks dominate. In contrast to the United States, inventories boost growth with a one-year lag in Europe. Moreover, inventories provide limited information to improve growth forecasts particularly when a modified buffer-stock model characterizes inventory behavior.
This paper compares business cycles in Asia and in Latin America using structural vector autoregression analysis with panel data. The evidence for countries in these regions suggests that (i) the main source of output fluctuations is supply shocks, even in the short run; (ii) the real exchange rate is driven mostly by fiscal shocks; and (iii) terms of trade shocks are important for trade balance fluctuations but not for output or real exchange rate fluctuations. However, in Latin America, as opposed to Asia, output is affected more by external and domestic demand shocks.
This paper studies private investment in India against the backdrop of a significant investment
decline over the past decade. We analyze the potential causes of weaker investment at the firm
level, using both firm-level financial statements and a novel dataset on firms’ investment project
decisions, and find that financial frictions have played a role in the slowdown. Firms with higher
financial leverage invest less, as do firms with lower earnings relative to their interest expenses.
Consistent with the notion of credit constraints leading to pro-cyclical investment, we also find
that firms with higher leverage are (i) less likely to undertake new investment projects, (ii) less
likely to complete investment projects once begun, and (iii) undertake shorter-term investment
This paper examines the comovement of prices with the cyclical component of output. It argues that determining the cyclical behavior of prices by applying the same stationarity-inducing transformation to the levels of both output and prices, and examining the correlations of the resulting series, can be misleading. A more appropriate procedure is to examine the correlations between the rate of inflation and the level of the cyclical component of output. In post-war U.S. data the correlations between similarly transformed price and output data are consistently and often strongly negative, as reported recently by a number of authors as evidence of countercyclical price behavior. The rate of inflation, however, is consistently and usually strongly positively correlated with various measures of the cyclical component of output.
Mr. Helge Berger, Mr. Thomas Dowling, Mr. Sergi Lanau, Mr. Mico Mrkaic, Mr. Pau Rabanal, and Marzie Taheri Sanjani
Potential output—in the sense of the GDP level or path an economy can sustain over the
medium term—is a crucial benchmark for policymakers. However, it is difficult to estimate
when financial “booms and busts” are driving the real economy. This paper uses a simple
multivariate filtering approach to illustrate the role financial variables play in driving
potential or sustainable output. The results suggest that it moves more steadily during
financial “boom and bust” periods than implied by conventional HP filter estimates, which
tend to more closely follow actual GDP. A two-region, multisector New Keynesian DSGE
model with financial frictions sheds light on the economic forces that could be behind the
results obtained from the filter. This has important implications for policymakers.
The effect that the recent decline in the price of oil has had on growth is far from clear, with
many observers at odds to explain why it does not seem to have provided a significant boost
to the world economy. This paper aims to address this puzzle by providing a systematic
analysis of the effect of oil price shocks on growth for 72 countries comprising 92.8% of world
GDP. We find that, on net, shocks driving the oil price in 2015 shaved off 0.2 percentage points
of growth for the median country in our sample, and 0.17 percentage points in GDP-weighted
terms. While increases in oil supply and shocks to oil-specific demand actually boosted growth
in 2015 (by about 0.2 and 0.4 percentage points, respectively), weak global demand more than
offset these gains, reducing growth by 0.8 percentage points. Counterfactual simulations for
the 72 countries in our sample underscore the importance of diversification, rather than low
levels of openness, in shielding against negative shocks to the world economy.
This paper develops a new empirical framework for analyzing the dynamics of the trade balance in response to different types of macroeconomic shocks. The model provides a synthetic perspective on the conditional correlations between the business cycle and the trade balance that are generated by different shocks and attempts to reconcile these results with unconditional correlations found in the data. The results suggest that, in the post-Bretton Woods period, nominal shocks have been an important determinant of the forecast error variance for fluctuations in the trade balances of the Group of Seven countries.
We revisit the conventional view that output fluctuates around a stable trend by analyzing professional long-term forecasts for 38 advanced and emerging market economies. If transitory deviations around a trend dominate output fluctuations, then forecasters should not change their long-term output level forecasts following an unexpected change in current period output. By contrast, an analysis of Consensus Economics forecasts since 1989 suggest that output forecasts are super-persistent—an unexpected 1 percent upward revision in current period output typically translates into a revision of ten year-ahead forecasted output by about 2 percent in both advanced and emerging markets. Drawing upon evidence from the behavior of forecast errors, the persistence of actual output is typically weaker than forecasters expect, but still consistent with output shocks normally having large and permanent level effects.