The Unassuming Economist

A new IMF report says that “Accommodative monetary policy has contributed to the performance of the Luxembourg economy through some expansion of aggregate demand and through its impact on the financial system. Banks have remained profitable and interest margins stable, while fee and commission income from fund and other activity has been healthy. The investment fund industry has benefited from various factors such as portfolio rebalancing, search for yield, and other market developments leading to strong inflows into various classes of investment funds, and through strong valuation effects. Scenario analysis suggest that the fund industry could be adversely impacted by sharp interest rate increases and that, because of interconnections, the banking system would also be affected. Margins of some banks could also decline when interest rate normalize. Against this backdrop, it is important to implement all 2017 FSAP recommendations that will contribute to making the financial system more resilient to shocks, including those arising from faster-than-expected monetary policy normalization.”

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In my new paper with Nathalie Gonzalez Prieto and Saurabh Mishra, “We find that Okun’s Law holds quite well for most U.S. states but the Okun coefficient—the responsiveness of unemployment to output—varies substantially across states. We are able to explain a significant part of this cross-state heterogeneity on the basis of the state’s industrial structure. Our results have implications for the design of state and federal policies and may also be able to explain why Okun’s Lawat the national level has remained quite stable over time despite an enormous shift in the structure of the U.S. economy from manufacturing to services.”

Fig. 3 National-level employment elasticities

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From the Independent Evaluation Office report on the IMF and Fragile States:

Executive Summary

“This evaluation assesses the IMF’s engagement with countries in fragile and conflict-affected situations (FCS). Helping these countries has been deemed an international priority because of their own great needs and the dangerous implications of persistent fragility for regional and global stability. With its crisis response and prevention mandate, the IMF has a key role to play in these international efforts. In practice, its contribution has been subject to considerable debate, and critics have called on the Fund to increase its engagement.”

Key Findings

“The evaluation recognizes the important contributions that the IMF has made in fragile states, including helping to restore macroeconomic stability, build core macroeconomic policy institutions, and catalyze donor support. In these areas, the IMF has provided unique and essential services, playing a critical role in which no other institution can take its place. Though the progress made by many FCS to escape fragility has been disappointingly slow and subject to reversal, it must be recognized that work on fragile states is inherently challenging, given their generally limited capacity, weak governance, and often unstable political and security environment. Moreover, the outcome of any IMF intervention is critically influenced by political, military, and security decisions including by international actors outside the Fund’s control. Against these challenges, the IMF on balance has performed its various roles quite effectively, particularly in years soon after countries first emerged from periods of violence and isolation.”

“Despite this overall positive assessment, the IMF’s approach to fragile member states seems conflicted and its impact falls short of what could be achieved. Even though the IMF has declared in several pronouncements that work on FCS would receive priority, it has not consistently made the hard choices necessary to achieve full impact from its engagement. FCS typically require long-term, patient modes of engagement that do not fit well with the IMF’s standard business model. Efforts have been made in the past to adapt IMF policies and practices to FCS needs, but initiatives have not been sufficiently bold or adequately sustained, leaving questions about the credibility of the Fund’s commitment in this area.”

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From a new IMF report on Iran’s female labor force participation:

“Iran has made tremendous strides in eliminating gender gaps in education and health indicators. For about a decade now, there has been virtually no gap between male and female enrollment in primary and secondary education. The gender gap in tertiary education enrollment is small and, in some fields of studies such as engineering and science, women are now in the majority (IMF, 2016a). Years of schooling attained by women have expanded by 40 percent within in one generation (World Bank, 2016a) to reach an average of 9 years. The fertility rate in Iran has fallen sharply in the last 30 years and has been below two children per woman since the 2000s, and on par with the average of advanced economies. Life expectancy at birth for women is higher than men by 2 years (76.7 versus 74.5 years).

Despite these laudable achievements, female participation in the labor force is low. Female labor force participation (FLFP) was 16.2 percent in 2016, lower than countries with similar income per capita, including within the MENAP region. Some 83.8 percent of all females over the age of 10 are inactive and out of the labor force—the fourth highest rate in the world—3.2 percent of women were unemployed, and only 13 percent were working. Women represent 13.3 percent of legislators, senior officials and managers and hold 3.1 percent of seats in the parliament. Iran has two Vice Presidents who are women.

Once in the labor force, women in Iran are also more likely to be unemployed. In 2016, the female unemployment rate of 18.9 percent was twice as high as males. Although the average male and female unemployment rates are broadly in line with the MENAP region average, the female unemployment rate exceeds the emerging market average (EM) of 11 percent. Furthermore, a woman in Iran is likely to remain unemployed longer. While 30 percent of men remain unemployed for less than 3 months (versus only 11 percent of women), almost 48 percent of women remain unemployed for more than 19 months (versus only 28 percent of men).

Iran’s highly educated female population represents an untapped source growth and productivity gains. Increasing FLFP can significantly boost GDP, productivity, tax collections and alleviate the expected burden of aging (see IMF, 2016b). Section B presents several factors contributing to the low rate of FLFP in Iran. Section C analyzes the macroeconomic impact of reforms to reduce gender gaps in the labor market using an overlapping generations model. It examines the macroeconomic impact of three reforms: reducing the gender wage gap, reducing the obstacles for women to join the labor force, and subsidizing childcare costs to low- and mid-income female workers in the formal sector.”

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A new paper from the Bank of England finds that in UK, the impact of monetary policy on inequality depends on existing difference in income and wealth.“[…] younger households are estimated to have benefited most from higher income in cash terms, while older households gained more from higher wealth.”

The paper notes that “Furceri, Loungani, and Zdzienicka (2016) emphasise the importance of heterogeneity in the response of labour income to monetary policy as a key channel, noting evidence that those at the bottom of the income distribution are most affected by changes in economic activity.” Continue reading here.

See my previous post on monetary policy and inequality here. The Furceri, Loungani, and Zdzienicka (2016) paper is available here.