The Unassuming Economist

From a paper by Jérémie Cohen-Setton and Peter Montiel:

“The Fund deserves credit for adapting its fiscal policy advice promptly and pragmatically to an extraordinary macroeconomic environment. In the aftermath of the Global Financial Crisis, exceptional economic slack, disinflationary pressures, and historically low interest rates led the Fund to reassess its long-standing emphasis on fiscal prudence. Without abandoning its focus on sustainability, it became a strong advocate of countercyclical fiscal support—promoting expansionary measures anchored in credible medium-term consolidation plans and underpinned by strong fiscal institutions. The Fund also showed greater willingness to relax medium-term spending plans to accommodate priority investments in infrastructure, social protection, and climate transition, especially when such measures could both sustain demand and strengthen the foundations for future growth. This reorientation reflected new research findings and strong intellectual leadership, which helped challenge entrenched views. As output gaps closed, inflation returned, and interest rates rose, the Fund appropriately re-emphasized the underlying trade-offs among fiscal objectives.

Over time, bilateral surveillance became more attuned to fiscal trade-offs, with advice increasingly differentiated across countries according to fiscal space and cyclical conditions. Analytical work on the costs of consolidation improved realism, but the operational use of diagnostic tools remain uneven. Greater and more systematic use of these tools—alongside stronger analysis of automatic stabilizers and clearer justification of fiscal package size—would further enhance the quality of advice.

The Fund’s coverage of fiscal risks, institutions, and distributional issues has expanded, but mitigation advice is often generic. Engagement on fiscal rules has also tended to be reactive, limiting influence at the design stage. While the Fund rightly focuses on protecting the poorest—who are least represented in the policy process—it could gain traction by also considering effects on middle-income groups, whose perceptions of fairness shape reform acceptance. Similarly, although advice on the composition of fiscal adjustment has become more nuanced, staff often converge on a narrow set of preferred measures rather than presenting alternative policy options. Offering such menus, outlining the main pros and cons of each, would strengthen policy debate and help authorities select measures consistent with their social preferences and political realities.

Finally, the integration of long-term policy objectives into fiscal advice remains incomplete, weakening both the articulation of trade-offs and the rationale for medium-term debt targets. Staff increasingly acknowledge that there may be valid reasons to temporarily relax medium-term spending plans to accommodate essential public goods—such as climate mitigation, defense, or social spending—but these considerations are treated unevenly across reports. Strengthening the analytical basis for these recommendations—by grounding fiscal advice in transparent assessments of costs and benefits and by applying a clearer framework for choosing among feasible medium-term debt anchors—would enhance the coherence and evenhandedness of the Fund’s fiscal advice.”

From a paper by Karan Bhasin, Kajal Lahiri and Prakash Loungani:

“This paper estimates uncertainty shocks using density forecasts from the Reserve Bank of India’s Survey of Professional Forecasters (2008–2023). These forecasts enable a direct measurement of unobservable uncertainty in real-time, as the first difference in the second moment of the densities. In addition, we propose a forecast calibration test based on the predictive sequential principle. We report five key findings: (i) macroeconomic uncertainty in India has been on a decline since 2008; (ii) shocks to uncertainty derived from density forecasts compare favorably with other popular measures, viz. Economic Policy Uncertainty and VIX; (iii) prequential tests indicate forecasts to be calibrated; (iv) uncertainty is affected primarily by negative news and is variance rational, and (v) it captures demand shocks even after controlling for global uncertainty shocks, in contrast to EPU and VIX, which are primarily driven by supply shocks. Distinguishing these shocks is crucial for optimal monetary policy.”

From a paper by Ebrahim Merza, Mohammad Alawin, and Muna Husain:

“Inflation volatility remains one of the most important challenges for policymakers, households, and businesses alike. When prices fluctuate unpredictably, people lose confidence in their ability to plan ahead. Households struggle to budget and save, firms hesitate to invest and hire, and policymakers face higher pressure to act without clear guidance. Recent global crises—whether energy shocks, food price surges, or supply chain disruptions—have shown how quickly instability spreads across borders. This raises a central question: why are some countries more vulnerable to inflation volatility than others? Following Aisen and Veiga (2006), this study addresses that question by examining the determinants of inflation volatility across three income-based groups: lower-middle-income, upper-middle-income, and high-income economies, using panel data covering the period 1996-2024. Using both fixed and random-effects models, we find that inflation persistence and high inflation levels are the strongest drivers of volatility, while higher income levels and stronger governance support price stability. External shocks—such as trade openness, oil price fluctuations, and exchange-rate misalignments—show varied effects across income groups, emphasizing the importance of context-specific responses. The findings suggest that when countries invest in credible institutions and reliable policies, they can transform external shocks from being destabilizing forces into manageable challenges.”

From a paper by Franziska Ohnsorge, Richard Rogerson, and Zoe Leiyu Xiea:

“Analyses of GDP per capita differences across countries focus almost exclusively on differences in productivity. This paper shows that there are also large differences in medium-run dynamics in the employment-to-population ratio. The paper finds a general tendency for productivity growth to be negatively correlated with changes in the employment to population ratio for a large sample of EMDEs—a phenomenon described using the term jobless development in this paper. The paper also shows that there are large differences in the steady state levels of the employment to population ratios that countries are converging to. There are also countries that experience substantial increases in their employment-to-population ratio during the development process. Using a two-stage procedure, the paper studies this issue in a large sample of EMDEs. In the first stage, the paper estimates differences in steady-state employment ratios across countries. In the second stage, it documents which institutional and policy factors are correlated with steady-state employment ratios. The paper finds particularly large differences across countries in steady-state employment ratios for women. Fewer legal protections of women’s rights are associated with lower steady-state employment ratios for women, without an offsetting positive effect for men.

From a paper by Pradyumna Dash, Ankit Kumar, and Chetan Subramanian:

“This study investigates the effects of U.S. monetary policy on income inequality in open economies from 1970 to 2016. We find that a 100-basis-point increase in the federal funds rate leads to a cumulative reduction of about 0.15% in income inequality over three years. Interestingly, we show that the effect of US monetary policy on inequality varies over time. The impact also varies by exchange rate regime: in flexible regimes, the reduction can reach nearly 0.3%, while in pegged regimes, it diminishes to around 0.13%. This impact in pegged regimes is influenced by wage rigidity and labor market regulations in the economy. To explain these results, we develop a two-agent small open economy model that incorporates rigid wages, highlighting the link between monetary policy and inequality dynamics.”