The Unassuming Economist

My new paper with Sangyup Choi and Davide Furceri has been featured the Central Banking:

“A working paper published by the International Monetary Fund has concluded anchoring inflation expectations – rather than the level of inflation – is what has a statistical effect on growth.

In their paper, Sangyup Choi, Davide Furceri, and Prakash Loungani explore whether low inflation and the anchoring of inflation expectations are positive for economic growth, as central bankers often assert.

While they find inflation anchoring fosters growth in industries that are more credit-constrained, the authors also attempt to “disentangle” the effect of inflation anchoring from the effect of the level of inflation.

Using data on sectoral growth for 36 advanced and emerging market economies from 1990–2014, the authors “explicitly” control for interactions between “the level of inflation and industry-specific measures of credit constraints”.

“While these two channels tend to be correlated, since low inflation is often achieved by better inflation anchoring … the results of the analysis suggest that it is inflation anchoring and not the level of inflation per se that has a statistical effect on growth,” they say.”

From a new IMF Working Paper:

“We compare business cycle fluctuations in Sub-Saharan African (SSA) countries vis-à-vis the rest of the world. Our main results are as follows: (i) African economies stand out by their macroeconomic volatility, which is is reflected in the volatility of output and other macro variables; (ii) inflation and output tend to be negatively correlated; (iii) unlike advanced economies and emerging markets (EMs), trade balances and current accounts are acyclical in SSA; (iv) the volatility of consumption and investment relative to GDP is larger than in other countries; (v) the cyclicality of consumption and investment is smaller than in advanced economies and EMs; (vi) there is little comovement between consumption and investment; (vii) consumption and investment are strongly positively correlated with imports.”

Continue reading here.

From a new IMF working paper:

“Over the past two decades, Mexico has hedged oil price risk through the purchase of put options. We examine the resulting welfare gains using a standard sovereign default model calibrated to Mexican data. We show that hedging increases welfare by reducing income volatility and reducing risk spreads on sovereign debt. We find welfare gains equivalent to a permanent increase in consumption of 0.44 percent with 90 percent of these gains stemming from lower risk spreads.”

From my latest IMF working paper with Sangyup Choi and Davide Furceri:

“Central bankers often assert that low inflation and anchoring of inflation expectations are good for economic growth (Bernanke 2007, Plosser 2007). We test this claim using panel data on sectoral growth for 22 manufacturing industries for 36 advanced and emerging market economies over the period 1990-2014. Inflation anchoring in each country is measured as the response of inflation expectations to inflation surprises (Levin et al., 2004). We find that credit constrained industries—those characterized by high external financial dependence and R&D intensity and low asset tangibility—tend to grow faster in countries with well-anchored inflation expectations. The results are robust to controlling for the interaction between these characteristics and a broad set of macroeconomic variables over the sample period, such as financial development, inflation, the size of government, overall economic growth, monetary policy counter-cyclicality and the level of inflation. Importantly, the results suggest that it is inflation anchoring and not the level of inflation per se that has a significant effect on average industry growth. Finally, the results are robust to IV techniques, using as instruments indicators of monetary policy transparency and independence.”

From the latest IMF report on Korea’s minimum wage:

“The 2018 minimum wage hike is by far the largest increase in real terms since the minimum wage system was established in late 1980s. […] This hike will bring Korea’s minimum wage close to the OECD average.

A hike in the minimum wage could have an impact on multiple fronts. In general, it effects employment, especially youth employment, the overall wage levels in the economy, income distribution, and competitiveness of the firms. These in turn affect economic growth and inflation.” Continue reading here.