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The Shifting and Steepening of Phillips Curves During the Pandemic Recovery: International Evidence and Some Theory
We study the global inflation surge during the pandemic recovery and the implications for aggregate and sectoral Phillips curves. We provide evidence that Phillips curves shifted up and steepened across advanced economies, and that differences in the inflation response across sectors imply the relative price of goods has been pro-cyclical this time around rather than a-cyclical as during previous cycles. We show analytically that these three features emerge endogenously in a two-sector new-Keynesian model when we introduce unbalanced recoveries that run against a supply constraint in the goods sector. A calibrated exercise shows that the resulting changes to the output-inflation relation are quantitatively important and improve the model's ability to replicate the inflation surge during this period.
Whose Credit Line is it Anyway
The post-crisis financial sector framework reform remains incomplete. While capital and liquidity requirements have been strengthened, doubts remain over other aspects, including the fact that expectations of government support for systemically-important banks (SIBs) remain intact. In this paper, we use a jump diffusion option-pricing approach to provide estimates of implicit subsidies gained by these banks due to the expectation of protection to creditors provided by governments. While these subsidies have declined in the post-crisis era as volatility has declined and capital levels have increased, they remain non-trivial. Even conservative parameterizations of default and loss probabilities lead to macroeconomically significant figures.
Effective Fiscal-Monetary Interactions in Severe Recessions
The COVID-19 pandemic and the subsequent need for policy support have called the traditional separation between fiscal and monetary policies into question. Based on simulations of an open economy DSGE model calibrated to emerging and advance economies and case study evidence, the analysis shows when constraints are binding a more integrated approach of looking at policies can lead to a better policy mix and ultimately better macroeconomic outcomes under certain circumstances. Nonetheless, such an approach entails risks, necessitating a clear assessment of each country’s circumstances as well as safeguards to protect the credibility of the existing institutional framework.
A Capital Market Union for Europe
This note weighs the merits of a capital market union (CMU) for Europe, identifies major obstacles in its path, and recommends a set of carefully targeted policy actions. European capital markets are relatively small, resulting in strong bank-dependence, and are split sharply along national lines. Results include an uneven playing field in terms of corporate funding costs, the rationing out of collateral-constrained firms, and limited shock absorption. The benefits of integration center on expanding financial choice, ultimately to support capital formation and resilience. Capital market development and integration would support a healthy diversity in European finance. Proceeding methodically, the note identifies three key barriers to greater capital market integration in Europe: transparency, regulatory quality, and insolvency practices. Based on these findings, the note urges three policy priorities, focused on the three barriers. There is no roadblock—such steps should prove feasible without a new grand bargain.
Geo-Economic Fragmentation and the Future of Multilateralism
After several decades of increasing global economic integration, the world is facing the risk of policy-driven geoeconomic fragmentation (GEF). This note explores the ramifications. It identifies multiple channels through which the benefits of globalization were earlier transmitted, and along which, conversely, the costs of GEF are likely to fall, including trade, migration, capital flows, technology diffusion and the provision of global public goods. It explores the consequences of GEF for the international monetary system and the global financial safety net. Finally, it suggests a pragmatic path forward for preserving the benefits of global integration and multilateralism
Energy Security and The Green Transition
The current energy crisis has raised important policy questions on how to strengthen short-term energy security while remaining firmly committed to the green transition, a challenge amplified by the recent consensus at COP28 to transition away from fossil fuels. This paper examines the historical determinants of the security of energy supply and analyzes the green transition implications for energy security. Looking back, we find that the diversification of energy trade partners, or the lack thereof, was the main factor that underpinned energy security dynamics within and across countries over the last two decades. Looking ahead, the green transition is expected to have a net positive effect on energy security provided investments are aligned to address new challenges posed by the increased reliance on renewables.
Infrastructure Policy and Inequality
This book reframes the purpose of infrastructure from being an input to economic growth to becoming a major instrument in reducing socio-economic inequalities in both industrialized and developing countries. Drawing on global and national lessons of COVID-19 and extensive working experience in 55 countries, this book reviews infrastructure policies and performance over several decades and suggests that the “underperformance” of infrastructure could be improved by more attention to users and the demand side, and thereby contribute to overcoming many obstacles facing low-income communities around the world. This book argues that growth is not a necessary condition for sustainability or soc...
Agricultural Producer Subsidies
The objectives underlying agricultural output subsidies can have conflicting implications for the design of subsidy programs. As they tend to affect meaningful swaths of the electorate, subsidies can also be an attractive political instrument. By artificially lowering production costs or assuring higher output prices, direct support measures can result in resource misallocation in instances where they fail to address market failures, such as imperfect information about the returns to fertilizers. Subsidies can also contribute to fertilizer overuse, harming the environment and the agricultural sector in the long term. Furthermore, agricultural production subsidies are often fiscally costly and unfavorable compared to alternative uses of public funds—both within the agricultural sector and outside it—to achieve the same ends. Various design and implementation challenges amplify the shortcomings of producer subsidy programs.
Regional Economic Outlook, Asia and Pacific, April 2024
Growth in Asia and the Pacific outperformed expectations in late 2023, reaching 5.0 percent for the year. Inflation has continued to decline, albeit at varying speeds: some economies are still seeing sustained price pressures, while others are facing deflationary risks. In 2024, growth is projected to slow modestly to 4.5 percent. Near-term risks are now broadly balanced, as global disinflation and the prospect of monetary easing have increased the likelihood of a soft landing. Spillovers from a deeper property sector correction in China remain an important risk, however, while geoeconomic fragmentation clouds medium-term prospects. Given the diverse inflation landscape, central bank policies need to calibrate policies carefully to domestic needs. Fiscal consolidation should accelerate to contain debt burdens and debt service cost, in order to preserve budgetary space for addressing structural challenges, including population aging and climate change.
Kingdom of the Netherlands-Netherlands
This Selected Issues paper focuses on a steady increase in current account surpluses in ”Surplus 3” countries—Germany, the Netherlands, and Switzerland—since the mid-1990s. In Germany and the Netherlands, nonfinancial corporations seem to be behind the rising surpluses. In these countries, increasing corporate profits have not been converted into dividends, keeping a lid on consumption. In Switzerland, household savings seem to explain the bulk of the current account surplus: both mandatory and voluntary savings have been on an increasing trend since 2000. Trending net contributions to pension funds since 2000 and rising equity contribution for housing purchases are likely drivers.
