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Business and Economics > Production and Operations Management

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Cover IMF Staff Country Reports
Euro Area Policies: 2024 Annual Consultation-Press Release; Staff Report; and Statement by the Executive Director for Member Countries
International Monetary Fund. European Dept.
The 2024 Article IV Consultation explains that the euro area is recovering gradually, with a modest acceleration of growth projected for 2024, gathering further speed in 2025. Increasing real wages together with some drawdown of household savings are contributing to consumption, while the projected easing of financing conditions is supporting a recovery in investment. A modest pickup in growth is projected for 2024, strengthening further in 2025. This primarily reflects expected stronger consumption on the back of rising real wages and higher investment supported by easing financing conditions. Inflation is projected to return to target in the second half of 2025. The economy is confronting important new challenges, layered on existing ones. Beyond returning inflation to target and ensuring credible fiscal consolidation in high-debt countries, the euro area must urgently focus on enhancing innovation and productivity. Higher growth is essential for creating policy space to tackle the fiscal challenges of aging, the green transition, energy security, and defense.
Keywords:
EU institution; EU industrial; headline inflation; EU climate; two-sided inflation risk; Inflation; Labor markets; Fiscal consolidation; Europe; Global
Cover Staff Discussion Notes
Digitalization During the COVID-19 Crisis: Implications for Productivity and Labor Markets in Advanced Economies
Ms. Florence Jaumotte
,
Longji Li
,
Andrea Medici
,
Myrto Oikonomou
,
Carlo Pizzinelli
,
Mr. Ippei Shibata
,
Jiaming Soh
, and
Ms. Marina Mendes Tavares
Digitalization induced by the pandemic was seen both as a possible silver-lining from the crisis that could increase longer-term productivity and a risk for further labor market inequality between digital and non-digital workers. The note shows that the pandemic accelerated digitalization and triggered a partial catch-up by less digitalized entities in advanced economies. Higher digitalization levels shielded substantially productivity and hours worked during the crisis. However, the extent to which the pandemic-induced digitalization led to structural change in the economy is less clear. Less digitalized sectors have rebounded more strongly, albeit after stronger declines, and while workers in digital occupations were more shielded from the crisis, there does not appear to be a structural change in the composition of labor demand. Meanwhile, shifts in labor supply are more likely to be permanent, driven by the increase in working from home.
Keywords:
Digitalization; COVID-19; labor market; productivity; productivity regression analysis; digitalization level; longer-term productivity; pandemic-induced digitalization; labor market tightness; Labor productivity; Labor markets; Total factor productivity; Europe
Cover IMF Staff Country Reports
Portugal: Selected Issues
International Monetary Fund. European Dept.
This Selected Issues paper on Portugal focuses on how could the coronavirus disease 2019 pandemic affect firm productivity and the speed of the recovery. The pandemic eroded equity positions of Portuguese firms with varying impacts across firms’ size and sectors. The authorities’ swift policy response went a long way in addressing immediate liquidity shortages. The pandemic, however, has left a large share of Portuguese corporates with a debt overhang and at risk of insolvency. Our estimates suggest that the share of zombie firms has risen from about 1 percent prior to the pandemic to 4 percent. The Banco Portuguese de Fomento managed recapitalization scheme—Strategic Recapitalization and Consolidar Programs—have many promising features but may need augmentation and enhanced incentive structures. Broad-based economic recovery underpinned by structural reforms would help spur firm dynamism, productivity growth, and strengthen financial health metrics. Continued strong growth would bolster the operational environment across the spectrum and help reduce balance sheets vulnerabilities. Nonetheless, past crisis recoveries reveal that zombie firms chip away at aggregate productivity, irrespective of the performance of non-zombie incumbents, thereby congesting reallocation. Strong restructuring and insolvency regimes would facilitate effective reorganization and exit of business and optimizing resource reallocation without overwhelming the financial system.
Keywords:
carbon pricing reform; tourism sector; outlook implication; assessing impact; carbon pricing scheme; Greenhouse gas emissions; Carbon tax; Natural disasters; Climate change; Global; Europe; Southern Europe
Cover IMF Working Papers
Small and Vulnerable: Small Firm Productivity in the Great Productivity Slowdown
Sophia Chen
and
Dongyeol Lee
We provide broad-based evidence of a firm size premium of total factor productivity (TFP) growth in Europe after the Global Financial Crisis. The TFP growth of smaller firms was more adversely affected and diverged from their larger counterparts after the crisis. The impact was progressively larger for medium, small, and micro firms relative to large firms. It was also disproportionally larger for firms with limited credit market access. Moreover, smaller firms were less likely to have access to safer banks: those that were better capitalized banks and with a presence in the credit default swap market. Horseraces suggest that firm size may be a more important and robust vulnerability indicator than balance sheet characteristics. Our results imply that the tightening of credit market conditions during the crisis, coupled with limited credit market access especially among micro, small, and medium firms, may have contributed to the large and persistent drop in aggregate TFP.
Keywords:
Credit constraint; Financial crisis; Firm size; Intangibles; Producvitity; SMEs; WP; TFP growth; creditor bank; size premium; credit market access; micro firm; vulnerability indicator
Cover IMF Working Papers
What Do We Talk About When We Talk About Output Gaps?
Jelle Barkema
,
Tryggvi Gudmundsson
, and
Mr. Mico Mrkaic
Estimates of output gaps continue to play a key role in assessments of the stance of business cycles. This paper uses three approaches to examine the historical record of output gap measurements and their use in surveillance within the IMF. Firstly, the historical record of global output gap estimates shows a firm negative skew, in line with previous regional studies, as well as frequent historical revisions to output gap estimates. Secondly, when looking at the co-movement of output gap estimates and realized measures of slack, a positive, but limited, association is found between the two. Thirdly, text analysis techniques are deployed to assess how estimates of output gaps are used in Fund surveillance. The results reveal no strong bearing of output gap estimates on the coverage of the concept or direction of policy advice. The results suggest the need for continued caution in relying on output gaps for real-time policymaking and policy assessment.
Keywords:
Output gaps; monetary policy; fiscal policy; WP; output gap estimate; delta real-time output gap; output gap uncertainty; output gaps discussion; output gap coverage; output gap measurement error; overestimated output gap; business cycles; underestimated output gap; Output gap; Potential output; Inflation; Current account balance; Global
Cover IMF Working Papers
It is Only Natural: Europe’s Low Interest Rates
Mr. Marco Arena
,
Gabriel Di Bella
,
Mr. Alfredo Cuevas
,
Mr. Borja Gracia
,
Vina Nguyen
, and
Alex Pienkowski
Estimates of the natural interest rate are often useful in the analysis of monetary and other macroeconomic policies. The topic gathered much attention following the great financial crisis and the Euro Area debt crisis due to the uncertainty regarding the timing of monetary policy normalization and the future path of interest rates. Using a sample of European countries (including several members of the Euro Area), this paper provides estimates of country-specific natural interest rates and some of their drivers between 2000 and 2019. In line with the literature, our findings suggest that natural interest rates declined during this period, and despite a rebound in the last few years of it, they have not recovered to their pre-crisis levels. The paper also discusses the implications of the decline in natural interest rates for monetary conditions and debt sustainability.
Keywords:
WP; monetary policy; math display; fiscal policy; policy rate; country risk; risk premium; central bank; shadow rate; reserve currency; Real interest rates; Output gap; Global financial crisis of 2008-2009; Central bank policy rate; Europe; Global; Natural interest rate; Neutral interest rate; debt sustainability; Bayesian estimation; T-bill rate; market data; monetary policy stance
Cover IMF Working Papers
A Three-Country Macroeconomic Model for Portugal
Alex Pienkowski
This paper outlines a simple three-country macroeconomic model designed to focus on the transmission of external shocks to Portugal. Building on the framework developed by Berg et al (2006), this model differentiates between shocks originating from both inside and outside the euro area, as well as domestic shocks, each of which have different implications for Portugal. This framework is also used to consider the dynamics of the Portuguese economy over recent decades. The model, which is designed to guide forecasts and undertake simulations, can easily be modified for use in other small euro area countries.
Keywords:
WP; demand shock; Portugal; euro area; macroeconomic modeling; Bayesian estimation; output gap dynamics; price level; transmission mechanism; inflation dynamics; inflation shock; reaction function; interest rate gap; accommodative monetary policy stance; higher-than-trend inflation; inflation expectation; Output gap; Exchange rates; Inflation; Real exchange rates; Real interest rates; Global
Cover IMF Working Papers
What is the Impact of Increased Business Competition?
Sónia Félix
and
Chiara Maggi
This paper studies the macroeconomic effect and underlying firm-level transmission channels of a reduction in business entry costs. We provide novel evidence on the response of firms' entry, exit, and employment decisions. To do so, we use as a natural experiment a reform in Portugal that reduced entry time and costs. Using the staggered implementation of the policy across the Portuguese municipalities, we find that the reform increased local entry and employment by, respectively, 25% and 4.8% per year in its first four years of implementation. Moreover, around 60% of the increase in employment came from incumbent firms expanding their size, with most of the rise occurring among the most productive firms. Standard models of firm dynamics, which assume a constant elasticity of substitution, are inconsistent with the expansionary and heterogeneous response across incumbent firms. We show that in a model with heterogeneous firms and variable markups the most productive firms face a lower demand elasticity and expand their employment in response to increased entry.
Keywords:
WP; price level; math display; productivity distribution; idiosyncratic productivity; firms drive; municipality Count firm; incumbents firm; pre-existing firm; Employment; Labor demand; Labor supply; Productivity; Demand elasticity; Europe
Cover IMF Working Papers
How Informative Are Real Time Output Gap Estimates in Europe?
Mr. Alvar Kangur
,
Koralai Kirabaeva
,
Jean-Marc Natal
, and
Simon Voigts
We study the properties of the IMF-WEO estimates of real-time output gaps for countries in the euro area as well as the determinants of their revisions over 1994-2017. The analysis shows that staff typically saw economies as operating below their potential. In real time, output gaps tend to have large and negative averages that are largely revised away in later vintages. Most of the mis-measurement in real time can be explained by the difficulty in predicting recessions and by overestimation of the economy’s potential capacity. We also find, in line with earlier literature, that real-time output gaps are not useful for predicting inflation. In addition, countries where slack (and potential growth) is overestimated to a larger extent primary fiscal balances tend to be lower and public debt ratios are higher and increase faster than projected. Previous research suggests that national authorities’ real-time output gaps suffer from a similar bias. To the extent these estimates play a role in calibrating fiscal policy, over-optimism about long-term growth could contribute to excessive deficits and debt buildup.
Keywords:
WP; output gap estimate; real-time output gaps; debt buildup; output gap bias; output gap revision; Business Cycles; Potential Output; Fiscal Policy; Monetary Policy; mean output gap property; real-time estimate; Output gap; Fiscal stance; Inflation; Europe
Cover IMF Staff Country Reports
Portugal: Selected Issues
International Monetary Fund. European Dept.
This Selected Issues paper describes financial conditions and growth at risk in Portugal. The macro-finance literature and recent experience provide compelling evidence that financial imbalances grow in good times, creating downside risks to economic growth. The analysis highlights the importance of the price of risk, leverage and credit growth as leading indicators of risks to gross domestic product growth. The price of risk appears to provide the most powerful signal in the short term, while credit aggregates are the most significant predictor in the medium term. This finding is consistent with the volatility paradox and is line with other empirical studies. The Growth-at-Risk (GaR) model suggests contained downside risks to Portugal’s growth projections at the current juncture based on financial conditions data, but credit growth should continue to be monitored given still high leverage. The moderate risk to growth identified by the GaR model reflects the impact of low credit spreads and volatility in the financial markets, in their turn reflecting the prevailing policy mix. Still, a repricing of risks and other shocks could be magnified by the still-high leverage, and lead to less favorable growth outcomes.
Keywords:
ISCR; CR; Portugal; capital stock; debt; IMF staff calculation; current account adjustment; investment ratio; PPPs investment; indicators of infrastructure quality; capital spending-to-GDP ratio; Current account; Public investment spending; Public investment and public-private partnerships (PPP); Real effective exchange rates; Solvency; Global; Europe