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Business and Economics > Finance: General

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Cover IMF Working Papers
Unpleasant Surprises? Elections and Tax News Shocks
Mr. Antonio David
and
Can Sever
Unanticipated changes in tax policy are likely to have different macroeconomic effects compared to anticipated changes due to several mechanisms, including fiscal foresight and policy uncertainty. It is therefore important to understand what drives such policy surprises. We explore the nature of unanticipated tax policy changes by focusing on a political economy determinant of those events, namely the timing of elections. Using monthly data for 22 advanced economies and emerging markets over the period 1990-2018, we show that implementation lags tend to be significantly longer for tax policy change announcements that are made during the pre-election periods, thereby leading to a lower likelihood of “tax news shocks”. We also find that implementation lags become much shorter for tax policy changes that are announced in the aftermath of elections, generating more frequent tax news shocks. This pattern remains similar for different tax measures or types of taxes. The findings are robust to a number of checks, including alternative definitions of tax news shocks, or to controlling for various economic and institutional factors.
Keywords:
Tax Shocks; Electoral Cycles; Political Economy; news shock; implementation lag; election period; change announcement; tax policy policy change; Probit models; Income tax systems; Consumption taxes; Corporate income tax; Global
Cover IMF Working Papers
The Heterogeneous Effects of U.S. Monetary Policy on Non-Bank Finance
Andrew Hodge
and
Miss Anke Weber
Using flow of funds and high frequency data from the Investment Company Institute, we study the effects of monetary policy shocks on the size of non-bank assets as well as on flows into long-term mutual funds and returns on their assets. Consolidating chains of non-bank intermediation to avoid double counting, we find that contractionary monetary policy shocks shrink the assets of non-banks reliant on long-term funding, while increasing those of nonbanks reliant on short-term funding. Contractionary shocks also cause sustained outflows from long-term mutual funds and reduce their returns. Using a Markov-Switching VAR, we find these effects to be more prevalent after the Global Financial Crisis, and show that monetary policy shocks had the opposite effects in some earlier periods. Policymakers will thus have to contend with a complex and heterogeneous transmission of monetary policy to financial and macroeconomic outcomes through the non-banks.
Keywords:
Non-bank market-based finance; mutual fund performance and flows; monetary policy shocks; monetary policy shock; bank finance; contractionary shock; bank sector; transmission of monetary policy; money market fund; Mutual funds; Commercial banks; Flow of funds; Money markets; Vector autoregression; Global; Europe
Cover IMF Working Papers
Electoral Cycles in Tax Reforms
Mr. Antonio David
and
Can Sever
We examine electoral cycles in tax reforms using monthly data over the period of 1990-2018 for 22 advanced economies and emerging markets. We show that governments tend to avoid announcing tax reforms during the months running up to elections. In addition, they become more likely to announce those reforms in the first few months following elections, indicating that “political capital” plays a role in the timing of reforms. These patterns are broad-based regarding the changes in tax base and rate, and for various types of taxes. We also find that the pre-election decrease in the likelihood of tax reform announcements is stronger in emerging markets, and weaker in the countries with relatively better institutional quality. Finally, our results indicate that neither fiscal rules nor IMF programs appear to have differential effects on electoral cycles in tax reforms.
Keywords:
Tax Reforms; Electoral Cycles; Political Economy; Institutional Quality; reform announcement; elections in the sample; announcements decrease; election dummy; election variable; Fiscal rules; Probit models; Personal income tax; Social security contributions; Emerging and frontier financial markets; Global
Cover IMF Working Papers
The Macroeconomic Impact of Social Unrest
Metodij Hadzi-Vaskov
,
Samuel Pienknagura
, and
Mr. Luca A Ricci
This paper explores the macroeconomic impact of social unrest, using a novel index based on news reports. The findings are threefold. First, unrest has an adverse effect on economic activity, with GDP remaining on average 0.2 percentage points below the pre-shock baseline six quarters after a one-standard deviation increase in the unrest index. This is driven by sharp contractions in manufacturing and services (sectoral dimension), and consumption (demand dimension). Second, unrest lowers confidence and raises uncertainty; however, its adverse effect on GDP can be mitigated by strong institutions and by a country’s policy space. Third, an unrest “event”, which is captured by a large change in the unrest index, is associated with a 1 percentage point reduction in GDP six quarters after the event. Impacts differ by type of event: episodes motivated by socio-economic reasons result in sharper GDP contractions compared to those associated with politics/elections, and events triggered by a combination of both factors lead to sharpest contractions. Results are not driven by countries with adverse growth trajectories prior to unrest events or by fiscal consolidations, and are robust to instrumenting via regional unrest.
Keywords:
unrest data; policy space; GDP weight; RSUI-implied Unrest Events; E. addressing reverse causality; Fiscal consolidation; Estimation techniques; Consumption; Economic recession; Emerging and frontier financial markets; Global
Cover IMF Working Papers
Taming Financial Development to Reduce Crises
Samy Ben Naceur
,
Bertrand Candelon
, and
Quentin Lajaunie
This paper assesses whether and how financial development triggers the occurrence of banking crises. It builds on a database that includes financial development as well as financial access, depth and efficiency for almost 100 countries. Through estimation of a dynamic logit panel model, it appears that financial development, from an institutional dimension and to a lesser extent from a market dimension, triggers financial instability within a one- to two-year horizon. Additionally, whereas financial access is destabilizing for advanced countries, it is stabilizing for emerging and low income ones. Both results have important implications for macroprudential policies and financial regulations.
Keywords:
WP; banking crisis; banking; crisis; Financial Development; Banking crises; Regulation; banking instability; database of leaven; bank crisis predictor; banking crisis variable; banking crisis early warning indicator; banking crisis database; probability of a banking crisis; Financial sector development; Logit models; Systemic crises; Global
Cover IMF Working Papers
Bank Profitability and Financial Stability
Ms. TengTeng Xu
,
Kun Hu
, and
Mr. Udaibir S Das
We analyze how bank profitability impacts financial stability from both theoretical and empirical perspectives. We first develop a theoretical model of the relationship between bank profitability and financial stability by exploring the role of non-interest income and retail-oriented business models. We then conduct panel regression analysis to examine the empirical determinants of bank risks and profitability, and how the level and the source of bank profitability affect risks for 431 publicly traded banks (U.S., advanced Europe, and GSIBs) from 2004 to 2017. Results reveal that profitability is negatively associated with both a bank’s contribution to systemic risk and its idiosyncratic risk, and an over-reliance on non-interest income, wholesale funding and leverage is associated with higher risks. Low competition is associated with low idiosyncratic risk but a high contribution to systemic risk. Lastly, the problem loans ratio and the cost-to-income ratio are found to be key factors that influence bank profitability. The paper’s findings suggest that policy makers should strive to better understand the source of bank profitability, especially where there is an over-reliance on market-based non-interest income, leverage, and wholesale funding.
Keywords:
WP; bank profitability; price-to-book ratio; math display; Finanical stability; systemic risk; non-interest income; business model; panel regression; NII activity; idiosyncratic risk; problem loan ratio; default probability; charter value; objective function; Bank soundness; Financial sector stability; Vector autoregression; Global
Cover IMF Working Papers
Is the Cycle the Trend? Evidence From the Views of International Forecasters
Mr. John C Bluedorn
and
Mr. Daniel Leigh
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.
Keywords:
WP; real GDP; standard deviation; output persistence; business cycles; output fluctuations; ouput forecast; advanced and emerging markets; emerging market sample; current-period output; output fluctuation; point estimate; shock proxy; output level; estimation sample; Emerging and frontier financial markets; Supply shocks; Vector autoregression; Global
Cover IMF Working Papers
Can Countries Manage Their Financial Conditions Amid Globalization?
Mr. Nicolas Arregui
,
Mr. Selim A Elekdag
,
Mr. R. G Gelos
,
Romain Lafarguette
, and
Dulani Seneviratne
This paper examines the evolving importance of common global components underlying domestic financial conditions. It develops financial conditions indices (FCIs) that make it possible to compare a large set of advanced and emerging market economies. It finds that a common component, “global financial conditions,” accounts for about 20 percent to 40 percent of the variation in countries’ domestic FCIs, with notable heterogeneity across countries. Its importance, however, does not seem to have increased markedly over the past two decades. Global financial conditions loom large, but evidence suggests that, on average, countries still appear to hold considerable sway over their own financial conditions—specifically, through monetary policy. Nevertheless, the rapid speed at which foreign shocks affect domestic financial conditions may also make it difficult to react in a timely and effective manner, if deemed necessary.
Keywords:
WP; global financial conditions; monetary policy shock; foreign direct investment; interest rate; Financial conditions; monetary policy; international policy transmission; U.S. FCI; tighter-than-average financial conditions; domestic financial conditions; financial condition shock; open economy; commodity price inflation; Financial sector development; Financial conditions index; Emerging and frontier financial markets; Exchange rate flexibility; Vector autoregression; Global
Cover IMF Working Papers
Settling the Inflation Targeting Debate: Lights from a Meta-Regression Analysis
Hippolyte W. Balima
,
Eric G. Kilama
, and
Rene Tapsoba
Inflation targeting (IT) has gained much traction over the past two decades, becoming a framework of reference for the conduct of monetary policy. However, the debate about its very merits and macroeconomic consequences remains inconclusive. This paper digs deeper into the issue through a meta-regression analysis (MRA) of the existing literature, making it the first application of a MRA to the macroeconomic effects of IT adoption. Building on 8,059 estimated coefficients from a very broad sample of 113 studies, the paper finds that the empirical literature suffers from two types of publication bias. First, authors, editors and reviewers prefer results featuring beneficial effects of IT adoption on inflation volatility, real GDP growth and fiscal performances; second, they promote results with estimated coefficients that are significantly different from zero. However, after filtering out the publication biases, we still find meaningful (genuine) effects of IT in reducing inflation and real GDP growth volatility, but no significant genuine effects on inflation volatility and the level of real GDP growth. Interestingly, the results indicate that the impact of IT varies systematically across studies, depending on the sample structure and composition, the time coverage, the estimation techniques, country-specific factors, IT implementation parameters, and publication characteristics.
Keywords:
WP; IT adoption; effect of IT; monetary policy; implementation form; inflation targeting debate; IT country; IT effect; Inflation targeting; Meta-regression analysis; IT-inflation volatility; adoption drive; disinflation cost; IT-growth literature; Inflation; Price stabilization; Central bank autonomy; Estimation techniques; Financial sector development; Global
Cover IMF Working Papers
How Important is the Global Financial Cycle? Evidence from Capital Flows
Mr. Eugenio M Cerutti
,
Mr. Stijn Claessens
, and
Mr. Andrew K. Rose
This study quantifies the importance of a Global Financial Cycle (GFCy) for capital flows. We use capital flow data dis-aggregated by direction and type between 1990Q1 and 2015Q5 for 85 countries, and conventional techniques, models and metrics. Since the GFCy is an unobservable concept, we use two methods to represent it: directly observable variables in center economies often linked to it, such as the VIX; and indirect manifestations, proxied by common dynamic factors extracted from actual capital flows. Our evidence seems mostly inconsistent with a significant and conspicuous GFCy; both methods combined rarely explain more than a quarter of the variation in capital flows. Succinctly, most variation in capital flows does not seem to be the result of common shocks nor stem from observables in a central country like the United States.
Keywords:
WP; capital flow; capital; flow factor; empirical; data; center; country; panel; fit; VIX; equity; bonds; FDI; credit; portfolio debt; capital flow type; capital flow episode; capital flow fluctuation; flow type; GFCy impact; variation in capital flow; capital flow equation; capital flow movement; capital flow model; Capital flows; Factor models; Emerging and frontier financial markets; Foreign direct investment; Financial cycles; Global