The Unassuming Economist

A new IMF working paper by Romain A Duval Davide Furceri, and Jakob Miethe find “widespread support for the crisis-induces-reform hypothesis. Reforms are also more likely to happen when other countries undertake them or there is formal pressure to implement them. Other robust correlates are more specific to certain areas—for example, political factors are most relevant for job protection reforms.”

“High unemployment, recession and/or an open economic crisis tend to be associated with a greater likelihood of reform. The effect is economically significant. For example, an increase of 10 percentage points in unemployment (as seen in several European economies in the aftermath of the Great Recession) is associated with an increase in the probability to undertake a major EPL reform for regular contract of about 5 percentage points — that is, about twice the average probability in the sample.”

“[…] outside pressure increases the likelihood of reform in certain areas. Reforms are more likely when other countries also undertake them and when there is formal pressure: many product market reforms in EU countries have occurred during their accession process, and competition-relevant EU directives have also been an important factor behind deregulation.”

From the new IMF Regional Economic Outlook for Asia Pacific:

“The main findings are as follows:

• Recent low inflation has been driven mainly by temporary forces, including imported inflation. Phillips curve estimation indicates that weaker import prices, including low commodity prices, contributed to half of the undershooting of inflation targets in advanced Asia and most of the undershooting in emerging Asia in recent years. In addition, China seems to have played an important role in driving both global and regional inflation. More generally, an analysis looking at temporary and trend components suggests that temporary shocks have accounted for the bulk of the recent reduction in inflation.
• The inflation process has become more backward-looking. While inflation expectations are generally relatively well anchored, especially in advanced Asia and in economies with inflation-targeting frameworks, the importance of expectations in driving inflation has declined in recent years with past inflation playing a larger role.
• The sensitivity of inflation to the unemployment gap has declined. There seems to be a flattening of the Phillips curve compared to the 1990s in advanced Asia and a similar but more continuous flattening in emerging Asia. Outside of Asia, the slope of the Phillips curve seems to have been more stable.”

“The main policy implications of the findings are:

• Central banks should be vigilant in responding to early signs of inflationary pressure, including from global factors. A sudden increase in inflation may then persist, and disinflating may be costly if sensitivity of inflation to the unemployment gap has declined.
• It will be important to strengthen monetary policy frameworks and improve central bank communications in order both to increase the role of expectations in driving inflation and to maintain expectations anchored to targets.
• To mitigate the role of imported inflation, exchange rates should be allowed to adjust more flexibly.
• In principle, the monetary policy response to commodity price shocks should be to accommodate first- round effects but not the second-round effects.”

From a presentation by Surjit S Bhalla:

“Some facts to consider about CPI inflation:

• Inflation in the US averaged 1.9 % between 1996 and 2009; and 70 basis points lower over the next eight years.
• A little appreciated inflation fact is that the mean inflation rate in 21 Advanced Economies (AE) excluding the US, averaged some 25 bp less than the US.
• Charts 1 and 2 document median inflation in the Advanced, and the Rest, economies from 1979 to 2017, and 1996 to 2017.
• Note that inflation decline set in prior to 2007 , and in reality started somewhere in the mid-1990s.”

“Explanations for the inflation slowdown:

• Fiscal deficit trends provide zero clues about this slowdown in inflation.
• World GDP growth [IMF weights] was the highest 1996-2007.
• World growth has moved inversely to world inflation.
• Output gap, or considerations thereof, do not explain, inflation slowdown.
• Demography (changes in dependency ratio) does explain some of the decline in inflation.
• However, the most consistent explanation for the decline in inflation is the large increase in college graduates in the Rest of the world compared to such supply in the West (Advanced Economies)”

“What explains Indian inflation? – Procurement prices and rural wage growth:

• Procurement prices and rural wage growth matters for Indian inflation, not much else.
• Further, the impact of procurement prices is diminishing over time, especially over the last three years.
• Each 1% increase in (lagged) procurement prices leads to a 12 bp increase in inflation.
• Each 1 % increase in rural wages leads to a 28 bp increase in inflation.
• The model is able to explain 89 % of the variation in log inflation, 1996-2017.”

In my recent paper with Sangyup Choi, Davide Furceri, Saurabh Mishra, and Marcos Poplawski-Ribeiro, we study the dynamic impact of global oil price shocks on domestic inflation. We find that a 10 percent increase in global oil inflation increases domestic inflation by about 0.4 percentage point on impact, with the effect vanishing after two years and being similar between advanced and developing economies. My paper is available here. The working paper version is available here.

From a new post by Frank Vogl:

“The International Monetary Fund is awakening from a long sleep with regard to combating corruption. If the IMF’s new policy announcements are followed by tough action, then the global fight against corruption could make real headway.

The IMF and the world’s leading central banks as well as finance ministries across the globe have been laggards in that fight. They have too often ignored corruption, even when it has been a direct cause of national economic disaster.

For many years, the IMF argued that its charter precludes it from getting involved in politics and that it had to focus exclusively on economics. That was always a lame excuse.

Devoted as it officially is to promoting sustainable economic growth, it has come to the realization that massive income inequality is due in large measure to corruption, as well as direct plunder of state coffers by leading public officials and politicians. Letting that practice fester, however, runs directly counter to achieving sustainable economic growth.

A more intrusive IMF

That is why the IMF’s Board of Directors has now at long last approved an anti-corruption “framework” to guide the work of the Fund’s staff. IMF Managing Director Christine Lagarde has issued a clear warning to governments everywhere: “We are going to be more intrusive.”

The last time the Fund firmly challenged a government on the issue of corruption was in the late 1990s when the Asian financial crisis hit. As Indonesia’s economy fell off a cliff, the government of then-president Suharto and the nation’s rotten banking system were in the IMF’s crosshairs.

Thereafter, as Argentina and Greece sought IMF rescue packages, the Fund seemed to have forgotten about corruption. This was all the more perplexing as cheating the national tax collector was a leading popular sport in both countries.”

Continue reading here.

A new post by Brian Schaitkin says that “Economist Michael Mandel of the Progressive Policy Institute tells a reassuring story about what will happen to retail employment. Jobs behind retail counters and stocking store aisles will simply be replaced by jobs at warehouses, e-commerce facilities, and as delivery drivers.” How quickly will this happen? He provides forecasts under the “Apocalypse is an Exaggeration” and “Apocalypse is Ongoing” scenarios:

“[…] Under an “Apocalypse is an Exaggeration” scenario, e-commerce will grow at a modest pace as a share of total retail sales because many of the lowest hanging e-commerce fruit have already been plucked. Therefore, the transformation from in-store retail to e-commerce would take quite a long time. The logistical challenge of shipping books to individual customers is orders of magnitude less complicated than delivering groceries. The “in-store” experience also provides special value to some consumers, especially when the ability to touch and feel merchandise and consult with experts is part of the value proposition stores and their workers provide. Firms will learn how to adapt to the challenge of e-commerce in less easily adapted industries, but because of these challenges, growth in the e-commerce share may increase by only 6.8 percent every 13 years, as happened between 2005 and 2017.  Under this scenario, the share of e-commerce in retail sales would be 21 percent by the end of 2040, and the “old and new” retail sector will employ 16.8 million workers, compared to 17.6 million today.  A disappointing job trajectory to be sure, but hardly apocalyptic.”

“The 2005 to 2017 period though lights the way to a bolder, yet in my view more likely “Apocalypse is Ongoing” scenario. This scenario assumes that exponential growth of the e-commerce share will continue as it did from 2005 to 2017 meaning that the e-commerce share of retail will double every 6.5 years. Incentives for firms to adapt new sectors to e-commerce will be tremendous due to the convenience and efficiency commerce without stores can provide. Companies can apply the lessons from developing one form of e-commerce to new product areas with knowledge of the pitfalls they are likely to encounter. Under this scenario, e-commerce would represent 18 percent of retail sales by the middle of 2024, 36 percent by the end of 2030, and 100 percent by the middle of 2040.  Initially, job losses resulting from the shift to e-commerce would be small in “old and new” retail with 738,000 jobs disappearing between now and the end of 2025.  By 2040, however, only 12.1 million workers, all employed by “new” retail sectors, would be able to manage all retail sales activities, a loss of 5.5 million jobs.”

Continue reading here.