WORKING PAPERS

 

Financial Stress and Economic Activity: Evidence from a New Worldwide Index, with Hites Ahir, Giovanni Dell’Ariccia, Davide Furceri and Hanbo Qi, February 2024. Download PDF file | Supplement | Data.

 

This paper uses text analysis to construct a continuous financial stress index (FSI) for 110 countries over each quarter during the period 1967-2018. It relies on a computer algorithm along with human expert check. The new indicator has a larger country and time coverage and higher frequency than similar measures focusing on advanced economies. And it complements existing binary chronologies in that it can assess the severity of financial crises. We use the indicator to assess the impact of financial stress on the economy using both country- and firm-level data. Our main findings are fivefold: i) consistent with existing literature, we show an economically significant and persistent relationship between financial stress and output; ii) the effect is larger in emerging markets and developing economies and (iii) for higher levels of financial stress; iv) we deal with simultaneous causality by constructing a novel instrument—financial stress originating from other countries—using information from the text analysis, and show that, while there is clear evidence that financial stress harms economic activities,  OLS estimates tend to overestimate the  magnitude of this effect; (iv)  we confirm the presence of an exogenous effect of financial stress through a difference-in-differences exercise and show that effects are larger for firms that are more financially constrained and less profitable.


Returns to Scale: Estimates from Administrative Firm-Level Data, with Peter McAdamPhilipp Meinen and Patrick Schulte, February 2024. Download PDF file.

 

This paper provides new micro-level evidence on firms’ returns to scale (RTS) to test the assumption of constant returns to scale, in view of emerging evidence of increasing RTS in some sectors. We employ the new iBACH database, which contains extensive high-quality annual balance sheet, financial, and demographic information on over two million non-financial manufacturing, trade and service corporations for five European countries over the period 2008-2018. Whereas on average, we find sectoral RTS to be close to one (0.98) and the majority of 4-digit industries (58 percent) to exhibit constant returns to scale (CRTS), a non-trivial share of industries does not exhibit CRTS. In our baseline specification, 32 percent of 4-digit industries exhibit decreasing returns to scale (DRTS) and 10 percent of industries exhibit increasing returns to scale (IRTS). Sectoral RTS estimates span a range from 0.74 to 1.18. Although the RTS values have remained relatively stable, there is evidence of some tendency for them to have increased over time. Finally, the paper makes a first effort at analyzing the relationship between industry characteristics and the RTS estimates obtained.


Lessons from 40 Years of Cross-country Convergence Empirics, with Paul A. Johnson, Maria Grazia Pittau and Roberto Zelli, January 2024. Download PDF file.

 

We survey the literature testing the absolute convergence hypothesis, the proposition that (the distributions of) countries' long-run per capita income levels are independent of their country-specific initial conditions. We conclude that the literature supports the view that the cross-country data is more consistent with the presence of several convergence clubs, groups of countries with similar initial conditions that tend to have similar long-run outcomes, than with absolute convergence, or a single convergence club. As some recent research has claimed that short-run absolute convergence has occurred during past 25 years or so, we revisit the data using a mixture model of the cross-country distribution of per capita income and find no support for that claim in preference to the multiple convergence club view. We close with a consideration of future prospects for reductions in the gap in per capita incomes between poor countries and rich countries in light of the challenges posed by the COVID-19 pandemic, inflation and the associated financial tightening, climate change, and artificial intelligence.


Retaliation through Temporary Trade Barriers, with Davide Furceri, Jonathan D. Ostry and Pauline Wibaux, January 2023. Download CEPR DP 17853.

 

Are Temporary Trade Barriers (TTBs) introduced for strategic reasons? To answer this question, we construct a novel sectoral measure of retaliation using daily bilateral data on TTB responses in 1220 subsectors across a panel of 25 advanced and emerging-market economies during the period 1989-2019. Stylized facts and econometric analysis suggest that within-year responses are more important in terms of intensity and frequency than commonly understood from the existing literature, which has tended to ignore them. We find that retaliation often consists of responses across many sectors and that same-sector retaliation is far from being the norm. In addition, we find that larger countries tend to retaliate more, and that retaliation is larger during periods of higher unemployment and when the trading partner targeted a domestic comparative advantage sector.


Income Convergence or Divergence in the Aftermath of the COVID-19 Shock? with Mariya Brussevich and Shihui Liu, May 2022. Download PDF file.

 

The paper extends the work of Deaton (2021) by exploring the period of post-crisis recovery in 2021-2024. The paper documents per-capita income divergence during the period of post-shock recovery, with countries at the bottom of the income distribution falling significantly behind. Findings suggest that higher COVID-19 vaccination rates and targeted virus containment measures are associated with faster recovery in per capita incomes in the medium term. Evidence on the effectiveness of economic support policies for reducing cross-country income inequality, including fiscal and monetary policies, is mixed especially in the case of developing countries.


Trade and the COVID-19 Pandemic: Lessons from French Firms, with Mariya Brussevich and Pauline Wibaux, May 2022. PDF file.

 

This paper uses granular customs data from France to investigate propagation of the COVID-19 shock along the supply chains in 2020. It quantifies the effect of the COVID-19 shock on trade adjustment and identifies mitigating and amplifying factors contributing to French firms’ heterogeneous adjustment paths. Early in the pandemic, firms mainly responded to global lockdowns and spread of the virus by reducing trade volumes (intensive margin) as opposed to exiting from import and export markets (ex-tensive margin). However, adjustment along the extensive margin played a more important role in trade with developing countries. It is shown that the impact of lockdowns was stronger for final consumer goods and the trade recovery was predominantly demand-driven. More automated, inventory-intensive, older, and medium-sized firms were more insulated from the shock, whereas firms’ reliance on air transportation for shipping goods amplified the shock. Trade bans and promotion measures implemented by governments in response to the pandemic had little impact on aggregate trade flows.


Monetary Policy Frameworks: An Index and New Evidence, with Filiz Unsal and Hendre Garbers, January 2022. Download PDF file.

 

We provide a multidimensional characterization of monetary policy frameworks across three pillars: Independence and Accountability, Policy and Operational Strategy, and Communications (IAPOC). We construct the IAPOC index by analyzing central banks’ laws and websites for 50 advanced economies, emerging markets, and low-income developing countries, from 2007 to 2018. Due to its scope and granularity, our index provides a holistic view of monetary policy frameworks which goes beyond existing measures of transparency or independence, as well as monetary policy or exchange rate regime classifications. Comparing the IAPOC index across countries and over time, we find that monetary policymaking is varied, fast-changing, and eclectic across the Policy and Operational Strategy and Communications pillars, especially in emerging markets and low-income developing countries.


The S-Curve: Understanding the Dynamics of Worldwide Financial Liberalization, with Nan Li, Tong Xu and Tao Zha, July 2021. Download NBER WP 28994.

 

We assemble two unique databases. One is on reforms in domestic finance, external finance, trade, product markets and labor markets, which covers 90 advanced and developing economies from 1973 to 2014. The other is on electoral results and timing of elections. In the 66 democracies considered in the paper, we show that liberalizing reforms engender benefits for the economy, but they materialize only gradually over time. Partly because of this delayed effect, and possibly because voters are impatient or do not anticipate future benefits, liberalizing reforms are costly to incumbents when implemented close to elections. We also find that the electoral effects depend on the state of the economy at the time of reform: reforms are penalized during contractions; liberalizing reforms undertaken in expansions are often rewarded. Voters seem to attribute current economic conditions to the reforms without fully internalizing the delay that it takes for reforms to bear fruit.


Searching for Wage Growth: Policy Responses to the Robot Revolution, with Andrew Berg, Edward Buffie and Felipe Zanna, March 2021. Download PDF file.

 

The current wave of technological revolution is changing the way policies work. We examine the growth and distributional implications of three policies: cuts to the corporate tax rate, increases in education spending, and increases in infrastructure investment. “Robot” capital does indeed make a big difference: the trickle-down effects of corporate tax cuts on unskilled wages are attenuated, and the relative merits of investment in infrastructure and especially in education are higher. For plausible calibrations, infrastructure investment and corporate tax cuts tend to dominate investment in education in the traditional economy, but in the “Robot” economy infrastructure investment dominates corporate tax cuts, while investment in education tends to produce the highest welfare gains of all. General equilibrium effects are important: in our baseline calibration, partial equilibrium rates of return always give the wrong welfare rankings.


The Armistice of the Sexes: Gender Complementarities in the Production Function, with Raphael Espinoza and Jonathan D. Ostry, June 2019. Download CEPR DP 13792.

 

Macroeconomic models have largely ignored the importance of gender diversity by assuming that male and female workers are perfectly substitutable in the aggregate production function. Whether this assumption is valid is an empirical question that this paper aims to answer by estimating the elasticity of substitution (ES) between the two types of labor. We apply linear and non-linear techniques to cross-country data at the aggregate level, to cross-country data at the sectoral level, and to firm-level data for the manufacturing sector in China. We find that male and female labor are far from being perfect substitutes: the ES is below 1 for the aggregate sample, between 1-2 for the sectoral sample, and between 2-3 at firm-level. We discuss why the ES may vary at different levels of aggregation and conclude on the implications of these results for growth accounting.

 

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