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Business and Economics > Economic Theory

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Cover IMF Working Papers
Inflation Dynamics in the Gulf Cooperation Council (GCC): What is the Role of External Factors?
Fozan Fareed, Abolfazl Rezghi, and Charlotte Sandoz
Inflationary pressures have intensified in the Gulf Cooperation Council (GCC) in 2021-2022, mainly driven by a pick-up in tradeable goods inflation. Despite this increase, inflation remained relatively contained as compared to regional comparators. This paper aims to provide a comprehensive analysis of inflation dynamics in the region, with a focus on external factors because of GCC’s high reliance on international trade. Using a Global Vector Autoregressive model with quarterly data from 1987 to 2022, we find that external factors such as the imported inflation from main trading partners, mainly driven by China, and nominal effective exchange rate (NEER) are the main drivers of inflation in the GCC region. Additionally, we find that the direct pass-through of international commodity price shocks such as oil and raw agricultural materials is somewhat limited, after controlling for trading partners’ inflation, which can be explained by the prevalence of subsidies and administered prices in the region. Overall, since external factors are the main drivers of domestic inflation in the GCC, an increased focus on diversification, promoting food security, and ensuring prudent central bank policies, including through effective liquidity management frameworks, can play a key role in managing this impact.
Keywords:
Inflation; external shocks; GCC; panel data; GVAR.; GCC inflation; inflation dynamics; GCC country; GCC economy; inflation in GCC; Nominal effective exchange rate; Oil prices; Supply shocks; Food prices; Global
Cover IMF Working Papers
China Spillovers: Aggregate and Firm-Level Evidence
Alexander Copestake, Melih Firat, Davide Furceri, and Chris Redl
We estimate the impact of distinct types of slowdowns in China on countries and firms globally. First, we combine a structural vector autoregression framework with a broad-based measure of domestic economic activity in China to distinguish supply versus demand components of Chinese growth. We then use local projection models to assess the responses to such shocks of GDP growth (revenue) in other countries (firms). We find that: (i) both supply and demand slowdowns are associated with substantial declines in partner GDP and firm revenue; (ii) negative spillovers are larger in countries and firms with stronger trade links with China; and (iii) spillovers from Chinese supply shocks are stronger than spillovers from demand shocks, both at the aggregate- and firm-level.
Keywords:
Supply-Demand Decomposition; China Spillovers; China spillover; supply and demand slowdown; spillovers from demand shocks; supply and demand demand shock; Supply shocks; Spillovers; Consumption; Structural vector autoregression; Exports; Global
Cover IMF Working Papers
Demand vs. Supply Decomposition of Inflation: Cross-Country Evidence with Applications
Melih Firat and Otso Hao
What are the contributions of demand and supply factors to inflation? To address this question, we follow Shapiro (2022) and construct quarterly demand-driven and supply-driven inflation series for 32 countries utilizing sectoral Personal Consumption Expenditures (PCE) data. We highlight global trends and country-specific differences in inflation decompositions during critical periods such as the great financial crisis of 2008 and the recent inflation surge since 2021. Validating our inflation series, we find that supply-driven inflation is more reactive to oil shocks and supply chain pressures, while demand-driven inflation displays a more pronounced response to monetary policy shocks. Our results also suggest a steeper Phillips curve when inflation is demand-driven, holding significant implications for effective policy design.
Keywords:
Inflation decomposition; demand vs supply; Phillips curve; monetary policy; supply chain pressures; supply decomposition of inflation; demand-driven inflation; supply-driven inflation; decomposition analysis; inflation decomposition methodology; Inflation; Supply shocks; Oil production; Output gap; Oil prices; Global; Asia and Pacific; Europe
Cover IMF Working Papers
Monitoring Demand and Supply in Asia: An Industry Level Approach
Chris Redl
This paper provides a decomposition of GDP and its deflator into demand and supply driven components for 12 Asian countries, the US and Europe, following the forecast error-based methodology of Shapiro (2022). We extend that methodology by (1) considering a wide range of statistical forecasting models, using the optimal model for each country and (2) provide a measure idiosyncratic demand and supply movements. The latter provides, for example, a distinction between aggregate demand driven inflation and, inflation driven by large shocks in only a small number of sectors. We find that lockdowns in 2020 are explained by a mix of demand and supply shocks in Asia, but that idiosyncratic demand shocks played a significant role in some countries. Supply factors played an important role in the post-COVID recovery, primarily in 2021, with demand factors becoming more important in 2022. The mix of shocks during the sharp increase in inflation in 2021-22 differs by country, with large and advanced economies generally experiencing more supply shocks (China, Australia, Korea), while emerging markets saw significant demand pressures pushing up prices (Indonesia, Malaysia, Philippines, Vietnam, Thailand). We illustrate the usefulness of the industry level shocks in two applications. Firstly, we consider whether industry supply shocks have created demand-like movements in aggregate prices and quantities, so-called Keynesian supply shocks. We find evidence for this mechanism in a minority of countries in our Asia sample, as well for Europe and the USA, but that these results are driven by the COVID-19 event. Secondly, we use the granularity of the industry shocks to construct country-level GDP shocks, driven by idiosyncratic movements at the industry level, to study cross country growth spillovers for the three large economic units in our sample: China, Europe and the US.
Keywords:
Inflation; Demand; Supply; Machine Learning; Spillovers; inflation decomposition; demand and supply shock; GDP shock; demand and supply movement; growth spillover; Supply shocks; Deflation; COVID-19; Asia and Pacific; Europe; Global
Cover IMF Working Papers
Not All Energy Transitions Are Alike: Disentangling the Effects of Demand and Supply-Side Policies on Future Oil Prices
Lukas Boer, Mr. Andrea Pescatori, and Martin Stuermer
We use structural scenario analysis to show that the climate policy mix—supply-side versus demand-side policies—can lead to different oil price paths with diverging distributional consequences in a netzero emissions scenario. When emission reduction is driven by demand-side policies, prices would decline to around 25 USD per barrel in 2030, benefiting consuming countries. Vice versa, supply-side climate policies aimed at curbing oil production would push up prices to above 130 USD per barrel, benefiting those producing countries that take the political decision to keep on producing. Consequently, it is wrong to assume that oil prices will necessarily decline due to the clean energy transition. As policies are mostly formulated at the country level and hard to predict at the global level, the transition will raise uncertainty about the price outlook.
Keywords:
Conditional forecasts; structural vector autoregression; structural scenario analysis; energy transition; oil prices; climate change.; climate policy mix; supply-side climate policy; scenario price path; aggregate demand demand shock; Oil production; Oil consumption; Oil; Global
Cover Selected Issues Papers
Drivers of Corporate Cash Holdings in Japan: Japan
Seho Kim, Pablo Lopez Murphy, and Rui Xu
In Japan, corporate savings have risen since 2000 in line with profits. A large share of the additional savings was kept as cash holdings (i.e., cash and short-term investments) rather than used for investment. Building on a rich literature, this paper identifies two additional drivers of corporate cash holdings using financial data of public and private Japanese firms. First, a higher share of intangible capital is associated with more cash holdings. This indicates the presence of financial frictions as intangible capital is not easily collateralizable. Such financial friction could be alleviated by shifting towards cash flow-based lending that is prevalent in the United States (US). Second, corporate tax cuts are associated with more cash holdings while having no significant effect on investment. Given the significant fiscal cost, the efficiency of corporate tax cuts should be re-evaluated.
Keywords:
Corporate cash holdings; Investment; intangible assets; financial frictions; tax cuts; Japan; cash holding; corporate tax tax cut; drivers of Corporate Cash Holdings; firm sample; short-term investment; Intangible capital; Corporate income tax; Effective tax rate; Tax allowances; Global
Cover IMF Working Papers
Global Supply Chain Disruptions: Challenges for Inflation and Monetary Policy in Sub-Saharan Africa
Zo Andriantomanga, Marijn A. Bolhuis, and Shushanik Hakobyan
The Covid-19 pandemic has led to a large disruption of global supply chains. This paper studies the implications of supply chain disruptions for inflation and monetary policy in sub-Saharan Africa. Increases in supply chain pressures have had a sizeable impact on headline, food, and tradable inflation for a panel of 29 sub-Saharan African countries from 2000 to 2022. Our findings suggest that central banks can stabilize inflation and output more efficiently by monitoring global supply chains and adjusting the monetary policy stance before the disruptions have fully passed through into all inflation components. The gains from monitoring supply chain disruptions are particularly large for open economies which tend to experience outsized second-round effects on the prices of non-tradable goods and services.
Keywords:
Inflation; global supply chains; sub-Saharan Africa; shipping costs; monetary policy; core inflation; food prices; oil price; monetary policy stance; inflation in sub-Saharan Africa; monetary policy in sub-Saharan Africa; inflation component; GSCPI shocks to inflation; Supply shocks; Oil prices; Central bank policy rate; Global
Cover IMF Working Papers
Assessing the Impact of Supply Disruptions on the Global Pandemic Recovery
Harri Kemp, Mr. Rafael A Portillo, and Marika Santoro
We estimate the role of (pre-Ukraine war) supply disruptions in constraining the Covid-19 pandemic recovery, for several advanced economies and emerging markets, and globally. We rely on two approaches. In the first approach, we use sign-restricted Vector Auto Regressions (SVAR) to identify supply and demand shocks in manufacturing, based on the co-movement of surveys on new orders and suppliers’ delivery times. The effects of these shocks on industrial production and GDP are recovered through a combination of local projection methods and the input-output framework in Acemoglu et al. (2016). In the second approach, we use the IMF’s G20 model to gauge the importance of supply shocks in jointly driving activity and inflation surprises. We find that supply disruptions subtracted between 0.5 and 1.2 percent from global value added during the global recovery in 2021, while also adding about 1 percent to global core inflation that same year.
Keywords:
Supply constraints; manufacturing; output; inflation; supply and demand demand shock; Ukraine war; supply disruption; supply-demand decomposition; inflation deviation; Supply shocks; Economic recovery; Industrial production; Global
Cover IMF Working Papers
AI and Macroeconomic Modeling: Deep Reinforcement Learning in an RBC model
Tohid Atashbar and Rui Aruhan Shi
This study seeks to construct a basic reinforcement learning-based AI-macroeconomic simulator. We use a deep RL (DRL) approach (DDPG) in an RBC macroeconomic model. We set up two learning scenarios, one of which is deterministic without the technological shock and the other is stochastic. The objective of the deterministic environment is to compare the learning agent's behavior to a deterministic steady-state scenario. We demonstrate that in both deterministic and stochastic scenarios, the agent's choices are close to their optimal value. We also present cases of unstable learning behaviours. This AI-macro model may be enhanced in future research by adding additional variables or sectors to the model or by incorporating different DRL algorithms.
Keywords:
Reinforcement learning; Deep reinforcement learning; Artificial intelligence; RL; DRL; Learning algorithms; Macro modeling; RBC; Real business cycles; DDPG; Deep deterministic policy gradient; Actor-critic algorithms; RBC model; AI-macroeconomic simulator; AI experiment; learning algorithm; Machine learning; Rational expectations; Debt relief; Global
Cover IMF Staff Country Reports
Algeria: Selected Issues
International Monetary Fund. Middle East and Central Asia Dept.
This Selected Issues paper discusses designing a rules-based fiscal framework for Algeria. Algeria’s government has set a number of fiscal reform priorities and aims to maintain prudent and sustainable policies. This paper discusses the design of a rules-based fiscal framework which could help rebuild buffers and support the government’s policy agenda. The proposed calibration, which relies on two separate pillars— a gross debt pillar and a savings pillar—is well suited to Algeria and to its long-term objectives. The paper finds that building a fiscal buffer of about 40 percent of gross domestic product, via the combination of a savings floor and a safe gross debt target, could preserve medium-term fiscal sustainability and insure public finances against hydrocarbon price shocks. The savings floor is calibrated based on a stochastic approach so as to protect Algerian public finances against hydrocarbon price shocks. The debt anchor, or medium-term gross debt target, is calibrated so as to prevent debt from reaching potentially unsustainable territory under a wide range of macro-fiscal scenarios. A multiyear transition period is needed to set the proposed rules-based framework in place.
Keywords:
savings buffer; inflation dynamics; food inflation; inflation distribution; consumer price inflation; Inflation; Oil prices; Fiscal governance; Fiscal rules; Global; Middle East and Central Asia