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Business and Economics > Public Finance

You are looking at 1 - 10 of 21 items for :

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Cover IMF Working Papers
A Debt Crisis with Strategic Investors: Changes in Demand and the Role of Market Power
Ricardo Alves Monteiro
This paper documents changes in investors' demand for sovereign debt during a debt crisis. Using a dataset containing individual bids on Portuguese debt auctions, I document that bid functions become more inelastic during the crisis. That is, investors require bigger drops in price to buy additional units of debt, increasing the government’s marginal cost of issuing debt. I then decompose these changes in demand into two components: a fundamental component, due to changes in the valuation of the security, and a strategic component, that arises from investors' market power. I find that, although the role of market power is negligible in normal times, it gets more pronounced leading up to and during the crisis. The government is not able to extract the full surplus from strategic investors, and, as a result, the auction mechanism loses efficiency during that period. Finally, I discuss a possible mitigation strategy. Everything else constant, the use of shorter maturities could avoid higher inefficiency costs.
Keywords:
Debt auctions; default risk; demand elasticity; market power; debt auction; auction mechanism; investors' market power; mitigation strategy; bid function; Treasury bills and bonds; Debt default; Europe
Cover IMF Working Papers
Output Gap Uncertainty and Fiscal Policy Adjustment in Real-Time in Emerging Economies
Giacomo Cattelan
and
Boaz Nandwa
Uncertainty around the real-time output gap has important implications for fiscal policy. This study uses successive vintages of the World Economic Outlook for emerging markets (EMs) during 1998-2022 to examine the reaction of discretionary fiscal policy to uncertain economic cycle in real-time. The findings show that EMs tend to have persistently negative and significantly more volatile real-time output gap estimates compared to advanced economies (AEs) and are less responsive to the output gap shocks. We calibrate a New Keynesian DSGE model to match the behavior of an average EM. The results from the model suggest that when EM policy makers are equally concerned about uncertainty around the output gap estimates and about fiscal implementation, fiscal policy is less counter-cyclical than the benchmark case with no uncertainty, entailing an efficiency loss for the purpose of output gap stabilization. On the other hand, when the concern is only about output gap uncertainty, EM policy makers tend to react more counter-cyclically but at a cost of public debt spiking in the short term and stabilizing over the long term. This implies that it might be optimal for EM policy makers to act more aggressively to stabilize the economy. We show that by adjusting the relative importance of output gap vs debt stabilization in their objective function, EM policy makers can achieve a similar outcome as in the benchmark case with no uncertainty.
Keywords:
Fiscal policy; real-time output gap estimates; public debt; output gap uncertainty; output gap shock; output gap estimate; real-time output gap; fiscal policy adjustment; Output gap; Fiscal stance; Neoclassical theory
Cover IMF Working Papers
Sectoral Shocks and Spillovers: An Application to COVID-19
Miss Sonali Das
,
Giacomo Magistretti
,
Evgenia Pugacheva
, and
Mr. Philippe Wingender
This paper examines the role of sectoral spillovers in propagating sectoral shocks in the broader economy, both in the past and during the COVID-19 pandemic. In particular, we study how shocks that occur within a sector itself and spillovers from shocks to other sectors affect sectoral activity, for a large sample of countries from 1995 to 2014. We find that both supply and demand shocks—measured as changes in, respectively, productivity and government purchases at the sector level—have large spillover effects on sector-level gross value added and on a sector’s share of the economy. We then use these historical estimates, together with the network structure of global production, to quantify the spillovers from the economic shock associated with the pandemic. We find spillover effects to be sizeable, making up a significant fraction of the overall decline in activity in 2020.Our results have implications for the design of policies with a sectoral dimension.
Keywords:
spillover effect; appendix C. Construction; supply and demand demand shock; spillovers from shock; sector recovery; Spillovers; COVID-19; Supply shocks; Total factor productivity; Global
Cover IMF Working Papers
Uncertainty Premia, Sovereign Default Risk, and State-Contingent Debt
Mr. Francisco Roch
and
Francisco Roldán
We analyze how concerns for model misspecification on the part of international lenders affect the desirability of issuing state-contingent debt instruments in a standard sovereign default model à la Eaton and Gersovitz (1981). We show that for the commonly used threshold state-contingent bond structure (e.g., the GDP-linked bond issued by Argentina in 2005), the model with robustness generates ambiguity premia in bond spreads that can explain most of what the literature has labeled as novelty premium. While the government would be better off with this bond when facing rational expectations lenders, this additional source of premia leads to welfare losses when facing robust lenders. Finally, we characterize the optimal design of the state-contingent bond and show how it varies with the level of robustness. Our findings rationalize the little use of these instruments in practice and shed light on their optimal design.
Keywords:
Sovereign debt; default; state-contingent debt instruments; robust control; ambiguity premia; probability distortion; robust lender; State-contingent debt; ambiguity aversion; debt structure; threshold bond; Bonds; Debt default; Rational expectations; Asset prices
Cover IMF Working Papers
Markups, Quality, and Trade Costs
Natalie Chen
and
Luciana Juvenal
We investigate theoretically and empirically how exporters adjust their markups across destinations depending on bilateral distance, tariffs, and the quality of their exports. Under the assumption that trade costs are both ad valorem and per unit, our model predicts that markups rise with distance and fall with tariffs, but these effects are heterogeneous and are smaller in magnitude for higher quality exports. We find strong support for the predictions of the model using a unique data set of Argentinean firm-level wine exports combined with experts wine ratings as a measure of quality.
Keywords:
WP; trade cost; FOB price; free on board; unit value; export price; wine export; Tariffs; Exports; Public expenditure review; Export prices; Demand elasticity; North America; Distance; export unit values; heterogeneity; markups; quality; trade costs; exports data
Cover IMF Working Papers
An Analysis of OPEC’s Strategic Actions, US Shale Growth and the 2014 Oil Price Crash
Mr. Alberto Behar
and
Robert A Ritz
In November 2014, OPEC announced a new strategy geared towards improving its market share. Oil-market analysts interpreted this as an attempt to squeeze higher-cost producers including US shale oil out of the market. Over the next year, crude oil prices crashed, with large repercussions for the global economy. We present a simple equilibrium model that explains the fundamental market factors that can rationalize such a "regime switch" by OPEC. These include: (i) the growth of US shale oil production; (ii) the slowdown of global oil demand; (iii) reduced cohesiveness of the OPEC cartel; (iv) production ramp-ups in other non-OPEC countries. We show that these qualitative predictions are broadly consistent with oil market developments during 2014-15. The model is calibrated to oil market data; it predicts accommodation up to 2014 and a market-share strategy thereafter, and explains large oil-price swings as well as realistically high levels of OPEC output.
Keywords:
WP; market share; OPEC supply; production capacity; market power; Crude oil; OPEC; price crash; shale oil; limit pricing; regime switch; OPEC producer; OPEC capacity; OPEC statistics; Oil prices; Oil; Demand elasticity; Futures; Public expenditure review; Global; oil price crash; shale growth; calibration approach; oil supply and demand growth; strategic action; Oil consumption; Oil production
Cover IMF Research Bulletin
IMF Research Bulletin, December 2014
International Monetary Fund
The December 2015 IMF Research Bulletin features a sampling of key research from the IMF. The Research Summaries in this issue look at “The Impact of Deflation and Lowflation on Fiscal Aggregates (Nicolas End, Sampawende J.-A. Tapsoba, Gilbert Terrier, and Renaud Duplay); and “Oil Exporters at the Crossroads: It Is High Time to Diversify” (Reda Cherif and Fuad Hasanov). Mahvash Saeed Qureshi provides an overview of the fifth Lindau Meeting in Economics in “Meeting the Nobel Giants.” In the Q&A column on “Seven Questions on Financial Frictions and the Sources of the Business Cycle, Marzie Taheri Sanjani looks at the driving forces of the business cycle and macroeconomic models. The top-viewed articles in 2014 from the IMF Economic Review are highlighted, along with recent IMF Working Papers, Staff Discussion Notes, and IMF publications.
Keywords:
IRB; IMF Team; IMF research bulletin; emerging market volatility; monetary policy interaction; IMF department; IMF research; Deflation; Oil prices; Financial frictions; Oil; Income inequality; Global
Cover IMF Working Papers
Cashing in for Growth: Corporate Cash Holdings as an Opportunity for Investment in Japan
Galen Sher
Over the last two decades, cash holdings in nonfinancial firms around the world have increased. This phenomenon is particularly concerning in Japan, where the success of Abenomics depends on a transition from stimulus-driven to self-sustaining growth based on private consumption and investment. This paper finds that Japanese nonfinancial firms have accumulated cash at the expense of investment and dividends, hampering this transition. The evidence suggests that cash accumulation is due to financial imperfections combined with rising corporate profitability and uncertainty, while corporate governance plays only a limited role. These firms have cash holdings available for investment of about 5 percent of GDP. Policy options for encouraging the use of these cash holdings include improving firms’ access to market-based financing and discouraging CEO duality.
Keywords:
WP; cash-to-asset ratio; cash holding; nonfinancial firm; Japan; Abenomics; cash holdings; investment; growth; transaction cost; precautionary demand; agency cost; corporate governance; CEO duality; operating cash flow; financing constraint; demand outlook; Currencies; Capital spending; Auditing; Global
Cover Managing Economic Volatility in Latin America
Managing Economic Volatility in Latin America
Mr. R. G Gelos

Abstract

How has Latin America coped with external shocks and economic vulnerabilities in the aftermath of the global financial crisis? Managing Economic Volatility in Latin America looks at how the region has fared in recent years in an environment of uncertainty. It presents a collection of novel contributions on capital flows, terms of trade, and macroeconomic policy in Latin America. The rigorous expert analysis offers an up-to-date guide to many of the key economic policy questions in the region. Chapters focus on important analytical issues, including assessing reserves adequacy and current account levels. The roles of macroeconomic policies and exchange rates regimes in coping with large capital inflows are examined, as well as the effectiveness of both monetary policy and fiscal policy in dealing with economic challenges in the region.

Keywords:
BOOK; dollarization; current account; current account balance; deposit dollarization; reserve-to-GDP ratio; exchange rate appreciation; dollarization ratio; primary expenditure; Central America; Caribbean; Global; Africa; East Asia; Real exchange rates; Dutch disease; Exchange rate flexibility; Current account balance; U.S. dollar; foreign currency; dollarized economy; policy question
Cover IMF Working Papers
Information Rigidities: Comparing Average and Individual Forecasts for a Large International Panel
Jonas Dovern
,
Mr. Ulrich Fritsche
,
Mr. Prakash Loungani
, and
Ms. Natalia T. Tamirisa
We study forecasts for real GDP growth using a large panel of individual forecasts from 36 advanced and emerging economies during 1989–2010. We show that the degree of information rigidity in average forecasts is substantially higher than that in individual forecasts. Individual level forecasts are updated quite frequently, a behavior more in line “noisy” information models (Woodford, 2002; Sims, 2003) than with the assumptions of the sticky information model (Mankiw and Reis, 2002). While there are cross-country variations in information rigidity, there is no systematic difference between advanced and emerging economies.
Keywords:
WP; data set; Rational inattention; aggregation bias; growth forecasts; information rigidity; forecast behaviour; forecast data; real-time data vintage; OLS estimator; rigidity coefficient; smoothing parameter; standard deviation; forecast revision; density estimate; Rational expectations; Estimation techniques; Public expenditure review