The Unassuming Economist

“A carbon or coal tax can effectively address domestic China’s environmental challenges,” according to an IMF report. “Given that sectors most dependent on coal and energy are heavy industries associated with the ‘old growth’ model, these taxes will support China’s effort to rebalance its economy towards high value-added services and consumption-led growth. Moreover, by contributing to coordinated efforts from the international community to slow global warming, these taxes will also reduce the negative impacts climate change will have in China, such as higher occurrence of natural disasters to which coastal areas are particularly vulnerable. Although the government is committed to introducing an Emissions Trading System in 2017, this should not preclude the simultaneous introduction of an upstream carbon or coal tax. This could be facilitated by providing some tax rebates for firms required to obtain emissions allowances to ensure all emitters pay the same unit price of carbon. Given the very large domestic benefits from these policies, China can move ahead unilaterally on its pledges for Paris and make itself better off, without waiting for others to act.”

Government fiscal forecasts invoke considerable skepticism: Frankel (2012), for instance, calls them “wishful thinking” and advocates the use of private forecasts as a reality check. This recommendation leads to an obvious question: how good are the private sector’s fiscal forecasts? We assess the quality of forecasts of the government budget balance made by the private sector for nine advanced economies between 1993 and 2013, with a special focus on the Great Recession period. Our main findings can be summarized as follows. First, we show that private sector budget balance forecasts typically display bias towards ‘optimism’ but the extent of the bias differs across countries. Second, we find that budget balance forecasts exhibit ‘information rigidity’; that is, revisions to forecasts tend to be smooth. This tendency proves costly around turning points in the economy, which we illustrate here using the forecast errors made during the Great Recession. To conclude, while it is a good idea to complement government fiscal forecasts with those from the private sector, there are steps that the private sector could also take to improve the quality of its own forecasts.

For details, see my paper published in the 21st Federal Forecasters Conference Proceedings.

A new IMF working paper analyzes Cabo Verde’s demographic transition from the perspective of gender equality. It concludes: “As the pace of the demographic transition slows, promoting gender equality and increasing women’s labor force participation will be progressively more important in enhancing otherwise slow-growth dynamics, reducing poverty, and improving the lives of all, women and men.”

A number of advanced economies carried out a sequence of extensive reforms of their labor and product markets in the 1990s and early 2000s. Using the Synthetic Control Method (SCM), this paper implements six case studies of well-known waves of reforms, those of New Zealand, Australia, Denmark, Ireland and Netherlands in the 1990s, and the labor market reforms in Germany in the early 2000s. In four of the six cases, GDP per capita was higher than in the control group as a result of the reforms. No difference between the treated country and its synthetic counterpart could be found in the cases of Denmark and New Zealand, which in the latter case may have partly reflected the implementation of reforms under particularly weak macroeconomic conditions. Overall, also factoring in the limitations of the SCM in this context, the results are suggestive of a positive but heterogeneous effect of reform waves on GDP per capita.

For details, see my new paper.

This edition includes: (1) our quarterly update of the Global House Price Index; (2) a discussion of some of the factors associated with the cross-country variation in house prices in recent years; and (3) housing sector developments described in IMF country documents over the past quarter.

The Global House Price Index

Our global house price index shows that, on average, prices are almost back up to where they were at the start of 2007 (Figure 1).

Figure 1

There is a fair bit of cross-country variation, as shown in Figure 2. While house prices have increased over the past year in most countries in our sample, the pace of increase varies quite a bit. And there are still a dozen or so countries where house prices have fallen over the past year, including Brazil, China and Russia.

Figure 2

The underlying data for these charts, as well as charts on credit growth and ratios of house prices to rents and incomes, are available from the IMF’s Global Housing Watch page: http://www.imf.org/external/research/housing/

Probing the Cross-Country Variation in House Prices

Both real house prices and real GDP growth in the 2007-2015 period were well below the boom experienced during 2000-2006. In the earlier period, global real GDP grew by over 4% per year while real house prices surged by about 9% on average. In the more recent period, these grew by just 2% and 1% per year, respectively. The simple correlation between real growth in house prices and GDP growth was very similar in the two periods at about 0.6. Continue reading here.