Demand and Supply Shocks: Evidence from Corporate Earning Calls (February 2022)
This paper quantifies global demand, supply, and uncertainty shocks and compares two major global recessions: the 2008–09 Great Recession and the COVID-19 pandemic. Two alternative approaches are used to decompose economic shocks: text mining techniques on earning call transcripts and a structural Bayesian vector autoregression model. The results highlight sharp contrast in the size of supply and demand shocks over time and across sectors. While the Great Recession was characterized by demand shocks, COVID-19 caused sizable disruptions to both demand and supply. These shocks were broad-based with varying relative importance across major sectors. Furthermore, certain sub-sectors, such as professional and business services, internet retail, and grocery/department stores, fared better than others during the pandemic. The results imply that both targeted policies and conventional countercyclical fiscal and monetary policy can accelerate the economic recovery. Large demand shocks highlight an environment of deficient demand with countercyclical policy calibrated to the size of these shocks.
This paper presents a comprehensive analysis of the impact of COVID-19 on debt, puts recent debt developments and prospects in historical context, and analyzes new policy challenges associated with debt resolution. The paper reports three main results. First, even before the pandemic, a rapid buildup of debt in emerging market and developing economies—dubbed the “fourth wave” of debt—had been underway. Because of the sharp increase in debt during the pandemic-induced global recession of 2020, the fourth wave of debt has turned into a tsunami and become even more dangerous. Second, five years after past global recessions, global government debt continued to increase. In light of this historical record, and given large financing gaps and significant investment needs in many countries, debt levels will likely continue to rise in the near future. Third, debt resolution has become more complicated because of a highly fragmented creditor base, a lack of transparency in debt reporting, and a legacy stock of government debt without collective action clauses. National policy makers and the global community need to act rapidly and forcefully ensure that the fourth wave does not end with a string of debt crises in emerging market and developing economies as earlier debt waves did.
Cross-border capital flows are expected to lead to increased international risk sharing by facilitating borrowing and lending in global financial markets. This paper examines risk-sharing outcomes of various types of capital flows (foreign direct investment, portfolio equity, debt, remittance, and aid flows) in a large sample of emerging market and developing economies. The results suggest that remittances and aid flows are associated with increased international risk sharing. Other types of capital flows are not consistently correlated with better risk-sharing outcomes. These findings are robust to the use of different econometric specifications, country-specific characteristics, and other controls.
A Mountain of Debt: Navigating the Legacy of the Pandemic (October 2021)
The COVID-19 pandemic has triggered a massive increase in global debt levels and exacerbated the trade-offs between the benefits and costs of accumulating government debt. This paper examines these trade-offs by putting the recent debt boom into a historical context. It reports three major findings. First, during the 2020 global recession, both global government and private debt levels rose to record highs, and at their fastest single-year pace, in five decades. Second, the debt-financed, massive fiscal support programs implemented during the pandemic supported activity and illustrated the benefits of accumulating debt. However, as the recovery gains traction, the balance of benefits and costs of debt accumulation could increasingly tilt toward costs. Third, more than two-thirds of emerging market and developing economies are currently in government debt booms. On average, the current booms have already lasted three years longer, and are accompanied by a considerably larger fiscal deterioration, than earlier booms. About half of the earlier debt booms were associated with financial crises in emerging market and developing economies.
The Aftermath of Debt Surges (September 2021)
Debt in emerging market and developing economies (EMDEs) is at its highest level in half a century. In about nine out of 10 EMDEs, debt is higher now than it was in 2010 and, in half of the EMDEs, debt is more than 30 percentage points of gross domestic product higher. Historically, elevated debt levels increased the incidence of debt distress, particularly in EMDEs and particularly when financial market conditions turned less benign. This paper reviews an encompassing menu of options that have, in the past, helped lower debt burdens. Specifically, it examines orthodox options (enhancing growth, fiscal consolidation, privatization, and wealth taxation) and heterodox options (inflation, financial repression, debt default and restructuring). The mix of feasible options depends on country characteristics and the type of debt. However, none of these options comes without political, economic, and social costs. Some options may ultimately be ineffective unless vigorously implemented. Policy reversals in difficult times have been common. The challenges associated with debt reduction raise questions of global governance, including to what extent advanced economies can cast their net wider to cushion prospective shocks to EMDEs.
One-Stop Source: A Global Database of Inflation (July 2021)
This paper introduces a global database that contains inflation series: (i) for a wide range of inflation measures (headline, food, energy, and core consumer price inflation; producer price inflation; and gross domestic product deflator changes); (ii) at multiple frequencies (monthly, quarterly and annual) for an extended period (1970–2021); and (iii) for a large number (up to 196) of countries. As it doubles the number of observations over the next-largest publicly available sources, the database constitutes a comprehensive, single source for inflation series. The paper illustrates the potential use of the database with three applications. First, it studies the evolution of inflation since 1970 and document the broad-based disinflation around the world over the past half-century, with global consumer price inflation down from a peak of roughly 17 percent in 1974 to 2.5 percent in 2020. Second, it examines the behavior of inflation during global recessions. Global inflation fell sharply (on average by 0.9 percentage points) in the year to the trough of global recessions and continued to decline even as recoveries got underway. In 2020, inflation declined less, and more briefly, than in any of the previous four global recessions over the past 50 years. Third, the paper analyzes the role of common factors in explaining movements in different measures of inflation. While, across all inflation measures, inflation synchronization has risen since the early 2000s, it has been much higher for inflation measures that involve a larger share of tradable goods.
With close to 30 emerging market and developing economies (EMDEs) using inflation targeting to determine monetary policy, and many of them for over 15 years, it is possible to create a meaningful measure of neutral real interest rates in these economies. The neutral real interest rate provides policymakers with a benchmark for the interest rate at which economic activity reaches its full potential and inflation will stabilize. The deviation of policy rates from this neutral rate determines whether monetary policy is accommodative or restrictive. This paper provides aggregate estimates of the neutral rate in 20 of these economies. EMDEs have seen a decline in the neutral rate of 4 percentage points, from over 6 percent in 2000 to closer to 2 percent at the end of 2019; advanced economies saw an above 2 percentage point decline over this period. The decline of neutral real interest rates in EMDEs can only partially be related to domestic drivers of desired savings and investment. The secular decline in the neutral rate of interest is limiting the ability of EMDEs to stimulate economies in the face of large shocks. The neutral real interest rate is unobservable and subject to a high degree of uncertainty, double the size of that for advanced economies. With such high uncertainty determining the stance of monetary policy in these economies is a challenge.
Projecting the Economic Consequences of the COVID-19 Pandemic (March 2021)
The highly uncertain evolution of the COVID-19 pandemic, influenced in part by government actions, social behavior, and vaccine-related developments, will play a critical role in shaping the global recovery’s strength and durability. This paper develops a modeling approach to embed pandemic scenarios and the rollout of a vaccine in a macroeconometric model and illustrates the impact of different pandemic- and vaccine-related assumptions on growth outcomes. The pandemic and the measures to contain it, including vaccine deployment, are assumed to be represented by consumption shocks in a macroeconometric model. In the baseline scenario, social distancing and a gradual vaccination process allow policy makers to make significant inroads in containing the pandemic. In a downside scenario, insufficient pandemic control efforts accompanied by delayed vaccination leads to persistently higher infection levels and a materially worse growth outcome. In contrast, in an upside scenario, effective management of the pandemic combined with rapid vaccine deployment would set the stage for stronger growth outcomes.
New technologies can both substitute for and complement labor. Evidence from structural vector autoregressions using a large global sample of economies suggests that the substitution effect dominates in the short-run for over three-quarters of economies. A typical 10 percent technology-driven improvement in labor productivity reduces employment by 2 percent in advanced economies in the first year and 1 percent in emerging market and developing economies (EMDEs). Advanced economies have been more affected by employment-displacing technological change in recent decades but the disruption to the labor market in EMDEs has been more persistent. The negative employment effect is larger and more persistent in economies that have experienced a larger increase, or smaller fall, in industrial employment shares since 1990. In contrast, economies where workers have been better able to transition to other sectors have benefited more in the medium run from the positive "income effect'' of new technologies. This corresponds with existing evidence that industrial jobs are most at risk of automation and reduced-form evidence that more industrially-focused economies have tended to create fewer jobs in recent decades. EMDEs are likely to face increasing challenges from automation as their share of global industry and production complexity increases.
Frequently, factors other than structural developments in technology and production efficiency drive changes in labor productivity in advanced and emerging market and developing economies (EMDEs). This paper uses a new method to extract technology shocks that excludes these influences, resulting in lasting improvements in labor productivity. The same methodology in turn is used to identify a stylized example of the effects of a demand shock on productivity. Technology innovations are accompanied by higher and more rapidly increasing rates of investment in EMDEs relative to advanced economies, suggesting that positive technological developments are often capital-embodied in the former economies. Employment falls in both advanced economies and EMDEs following positive technology developments, with the effect smaller but more persistent in EMDEs. Uncorrelated technological developments across economies suggest that global synchronization of labor productivity growth is due to cyclical (demand) influences. Demand drivers of labor productivity are found to have highly persistent effects in EMDEs and some advanced economies. Unlike technology shocks, however, demand shocks influence labor productivity only through the capital deepening channel, particularly in economies with low capacity for counter-cyclical fiscal policy. Overall, non-technological factors accounted for most of the fall in labor productivity growth during 2007-08 and around one-third of the longer-term productivity decline after the global financial crisis.
Last Updated: Mar 28, 2022