This paper develops a quarterly projection model for Korea with an integrated fiscal block, enabling analysis of monetary-fiscal interactions. The model is validated through historical decompositions and forecast evaluation. Scenario analysis comparing dynamics with and without debt-stabilizing fiscal rules reveals a fundamental trade-off: rules generate short-run procyclicality but prevent permanent debt drift. Without rules, temporary nominal GDP movements cause lasting debt-to-GDP changes. For Korea, facing age-related spending pressures, a medium-term fiscal framework could safeguard sustainability.
This paper analyzes a global map of dollar exposures and examines the relationship between net dollar exposures, defined as the difference between dollar assets and liabilities, and covered interest parity (CIP) deviations. We find that the cross-sectional relationship is significantly negative in advanced economies but positive in emerging markets. CIP deviations represent the hedging cost that foreign holders of dollar assets or liabilities incur to manage exchange rate risk. To explain, we develop a model in which the CIP deviations are determined by the demand and the supply side of hedging. The negative correlation in advanced economies can be explained by the variations in hedging demand. Larger net dollar exposures increase the hedging demand, raising hedging costs (reflected as more negative CIP deviations) and producing a negative correlation. In contrast, the positive correlation in emerging markets is explained by the supply side of the hedging market. Limited hedging supply leads to wider CIP deviations (more negative), encouraging firms to borrow in U.S. dollars rather than local currencies, thereby reducing net dollar exposures and generating a positive correlation.
This paper presents the IMF’s systemwide stress testing approaches, which cover multiple financial sub-sectors and their clients. Developing these tools is crucial for identifying cross-sector and cross border amplification channels and enhancing policy responses, as recognized by the international financial stability community. The paper reviews classic and modern theories and operational methods for analyzing systemic liquidity risks that impact numerous institutions simultaneously, illustrating how shocks can spread through banks, nonbank financial institutions (NBFIs), and market-based finance via runs, redemptions, margin and collateral calls, fire sales, price dynamics, and disruptions in core markets. It details two base IMF tools—an Excel-based flow-of-funds framework and investment fund liquidity analysis with fire sale and market-impact dynamics—and their application and enhancement within Financial Sector Assessment Programs (FSAPs) across various countries.
Will artificial intelligence (AI) help poorer countries catch up? This paper argues that the answer depends less on access to AI than on the capacity to use new knowledge productively. We show that countries have narrowed gaps in capital and schooling more readily than gaps in productivity. Technology can diffuse widely without producing productivity convergence. Measured human capital explains only a modest share of productivity differences in levels, but is associated with sharply different mobility regimes. The estimated transition processes imply an expected time to exit the lowest-productivity state of about 65 years for economies below the estimated human-capital threshold, compared with about 25 years for those above it. This reconciles development accounting with the view of human capital as absorptive capacity. If AI mainly augments skilled workers and capable firms, it may reinforce existing gaps. If it lowers the costs of learning, adaptation, and implementation in weaker-capability economies, it could instead promote convergence. The Intelligence Divide is therefore not simply about access to AI, but about the capacity to turn knowledge into productivity.
This paper studies the macroeconomic dynamics of conflicts and post-conflict recovery using a newly assembled global dataset covering 194 countries, including 170 conflict onsets and 158 conflict terminations, over the period 1946–2024. Using a local-projection difference-in-differences framework complemented by geocoded firm-level evidence, we trace the evolution of macroeconomic aggregates around conflict onset and termination. We make four contributions. First, output losses from conflicts typically exceed those associated with banking, currency, and sovereign debt crises, as well as severe natural disasters. Second, external-sector dynamics constitute a central mechanism through which wars amplify macroeconomic challenges, despite policymakers’ efforts to contain the war shock. Third, post-conflict recoveries are slow and uneven and depend critically on the durability of peace: conflict resumption stalls recovery prospects, while sustained peace produces only gradual recoveries relative to wartime losses. These recoveries are typically labor-led, while capital accumulation and productivity remain subdued. Fourth, firm-level evidence confirms this labor-led recovery and points to persistent financial constraints that hinder capital rebuilding during the postconflict period.
We propose a tractable small-open-economy model in which uncovered interest parity premia on foreign exchange (FX) markets arise from the endogenous lack of insurability of exchange rate risks. Asymmetric information about monetary policy can make the tails of the exchange rate distribution uninsurable in FX hedging markets, which in turn generates premia in FX spot markets because of the risk aversion of lenders holding the external debt. There is a role for government intervention because of an information sensitivity externality: agents do not internalize that their actions can reduce the insurability of exchange rates. The model predicts that premia may be amplified by weaknesses in monetary, fiscal, and financial policy frameworks, and can be reduced through reforms which reduce the sensitivity of exchange rates to private information. The constrained efficient policy depends on the composition of external lenders and may include delegation of monetary policy to an “aloof central banker”, constraints on fiscal policy, more active use of macroprudential tools, and institutions which limit asymmetric information.
Models of external balances rely on economic fundamentals, structural indicators, cyclical variables, and policy factors. However, existing models may not fully capture the effects of restrictions on trade payments and capital controls. In this paper, we include two new policy variables in a standard empirical model of the current account to address this gap: the Measure of Aggregate Trade Restrictions (MATR) and the FinOpen index. The results indicate that tighter restrictions on trade payments of one standard deviation are associated with increases in the current account balance of about one percentage point and an appreciation of the real effective exchange rate (REER). These effects primarily operate through suppressing import demand and reducing domestic absorption. Tightening capital inflow restrictions by one standard deviation increases the current account balance by about 1.4 percentage points and depreciates the REER. Outflow restrictions operate in the opposite direction. These effects are primarily due to a wedge between domestic and global real interest rates, which in turn affect saving and investment decisions. Updating these models to assess how trade payment and capital controls affect current account balances helps support more actionable policy recommendations.
We study the determinants of US dollar demand across market participants and traded instruments using survey-based exchange rate and macroeconomic expectations. To empirically establish the relevance of survey-based expectations for currency flows, we leverage granular foreign exchange trading data and present three main findings. First, end-user investors increase their dollar purchases when they expect the US dollar to appreciate. Investment funds and non-dealer banks adjust their synthetic dollar borrowing in the FX swap market in response to forecasted changes in synthetic dollar funding costs. Second, cross-sectionally, investors rebalance along the factor structure of currency risk into dollars following an expected dollar appreciation. Third, the predictive power of survey forecasts weakens when forecaster disagreement or uncertainty rises. Overall, our findings show that long-horizon expectations predict dollar demand across spot, forward, and swap currency markets.
We develop standardized time-series measures of shocks and uncertainty for output growth and inflation across 14 Asia-Pacific economies using data from Consensus Economics survey of professional economic forecasters. They are based on changes in mean forecasts and standard deviations, adjusted for intra-year patterns that arise from the annual-average percent changes basis of the data. As an example of how our shock measures may be used, we apply the vector autoregression method of sign restrictions to decompose output growth and inflation shocks into fundamental demand and supply shocks. Those shocks and our uncertainty measures align well with major economic events such as the Asian Financial Crisis, the COVID-19 pandemic, and geopolitical conflicts. We show that our uncertainty measures most closely reflect the concept of macroeconomic uncertainty, with apparent differences to established economic policy uncertainty measures across all comparable economies, but a close relationship with two well-known macroeconomic uncertainty measures produced only for the United States. Hence, extending the measures of macroeconomic uncertainty to all 14 economies in our analysis, along with the shocks for those economies, creates a valuable dataset for economic policy setting and empirical research.
We provide new evidence on the de facto seniority structure of sovereign debt. Using a measure of the Relative Percentage in Default (RPID) by creditor group for 119 low-income and emerging market countries over the period 1980–2022, we show that debt owed to the IMF and the World Bank is, on average, the most senior, followed by debt owed to official bilateral creditors. Private creditors, notably bondholders and commercial banks, are on average junior to official creditors, with commercial banks being the least prioritized group for repayments. Beyond characterizing the seniority hierarchy, our empirical analysis shows that creditor composition has economically meaningful implications for sovereign risk. Using an instrumental variable estimation, we show that IMF credit outstanding as a share of GNI is robustly and negatively associated with the probability of a debt crisis. This stabilizing effect weakens progressively as debt stocks rise, suggesting that the IMF's crisis-preventing role diminishes in situations of severe debt overhang. Turning to sovereign borrowing costs, we find that IMF lending is negatively associated with sovereign bond spreads.
We study how commodity booms affect productivity using administrative microdata from Chile combining firm exports by product and destination, employer-employee records, and firm-to-firm production networks. Exploiting differential Chinese demand across Chilean commodity products, we measure firms’ exposure to the boom and trace its effects on productivity and resource allocation. We find three mechanisms. First, more exposed firms experience larger revenue increases but no differential productivity gains, channeling revenues into wages and materials. Second, among exposed firms, low-productivity firms expand employment while high-productivity firms do not, hiring workers from more productive employers. Third, domestic suppliers with greater indirect exposure show larger sales and productivity gains. We develop a model with heterogeneous export wedges and labor market frictions in which commodity booms can reduce sectoral productivity by exacerbating input misallocation, consistent with firm-level and aggregate evidence. Calibrated to Chile, this mechanism explains half of the mining TFP decline from 2005 to 2013.
This paper examines the divergent economic development paths of Mauritius, Seychelles, Madagascar, and Comoros since 1980. Despite operating in broadly similar regional and geographic settings, Mauritius and Seychelles achieved significantly higher levels of real GDP per capita, while Madagascar and Comoros saw more limited progress. Combining qualitative analysis with panel econometric methods (FMOLS and DOLS), the paper finds that institutional quality, human capital development, trade openness, and macroeconomic policies are associated with higher levels of real GDP per capita. The results suggest that stronger governance frameworks and investment in human capital are associated with higher income levels in Mauritius and Seychelles, while more persistent institutional and structural challenges are associated with lower income levels in Madagascar and Comoros. Overall, the findings suggest the importance of institutions, human capital, and external integration in economic performance across the four Indian Ocean island economies.
We study how policy expectations affect the estimated natural rate of interest (r*) for the United States and the euro area. To discipline policy expectations, we incorporate information on future policy rates and long-term yields in episodes when the Fed and ECB provided forward guidance. For the post-Covid period, we find that r* rises much more than in an otherwise standard specification that omits yield-curve observables. By implication, the post-Covid tightening of the monetary policy stance was not nearly as large as standard r* models imply, which helps explain why economic activity did not slow much when nominal policy rates were raised dramatically in 2022 to fight inflationary pressures. Yield-curve information pins down anticipated policy innovations and alters r* estimates and, thus, the monetary policy stance.
We explore the historical link between populist regimes, fiscal monetization, and inflation, and how these links affect monetary policy in the 21st century. Using data for a large set of advanced economies and emerging markets since 1960, we show that, historically, left-leaning populist regimes are linked to increases in central bank lending to the central government, a gauge of deficit monetization. In turn, central bank lending is associated with marked increases in inflation. We show that past exposure to populism that relied on deficit monetization affects the conduct of monetary policy today. Countries with a history of deficit monetization and left-wing populist regimes systematically respond more strongly to deviations of inflation expectations from target. This effect persists even after controlling for the direct effect of past inflation on monetary policy rules. In the context of the literature of experienced learning, this novel finding sheds light on the persistence of past populist policies---central banks operating under the shadow of past populist regimes that relied on inflation-prone deficit monetization continue today needing to send stronger signals of their independence and commitment to price stability to effectively anchor inflation expectations.
Global energy and materials are essential to the functioning of the economy and have significant implications for macroeconomics and the environment. At the same time, the world is not on track to meet Paris Agreement goals. This paper documents two stylized facts that connect these observations. First, the world economy is characterized by large embedded emissions and materials: different energies and materials are deeply entwined and interdependent. This has historically led to additive – rather than substitution – dynamics in energy and materials on a global scale. Second, historically there has been a strong positive correlation between efficiency in resource use and total resource use at a global scale. We synthesize these observations by introducing the Generalized Jevons Paradox (GJP). We argue that the GJP reflects the direct and indirect energy/material demand effects of long-term energy and material interdependencies, themselves shaped by market and geoeconomic power, trade arrangements, and financial factors. While future scenarios may diverge from historical data, including because of different population and growth trends, the GJP calls for caution in projecting energy and material flows within the energy transition framework, as it suggests that a declining share of fossil fuels in primary energy consumption can coexist with rising total fossil consumption, and thus rising global emissions – as observed since 2012. The GJP highlights the importance of policies to better allocate energy and material flows across sectors and countries and reduce supply chain vulnerabilities, but raises difficult distributional and political economy questions. Based on the GJP, the paper identifies three areas for research: the detailed analysis of the role of materials in supply chain vulnerabilities; the political economy of material flows; and multidimensional welfare analysis in decarbonization scenarios.
We develop novel measures of stablecoin shocks and use them to identify the causal effects of stablecoin adoption on U.S. financial markets. Combining a daily narrative dataset of stablecoin-specific news with changes in the combined market capitalization of USDC and USDT, we measure high-frequency movements in stablecoin market capitalization and implement heteroskedasticity-based identification within an event-study and SVAR-IV framework. Stablecoin demand shocks have triggered persistent declines in short-term Treasury yields, a depreciation of the U.S. dollar, and gradual spillovers into crypto and equity markets. We also document heterogeneous effects across firms: payment providers benefit from greater stablecoin adoption, whereas banks—including community and small banks—show no evidence of priced disintermediation risk. Our findings highlight stablecoin demand as a novel channel of asset-market transmission.
We examine whether financial market participants, in aggregate, expect stablecoins to play an important role in payments. Using high-frequency variation in stock prices, we estimate that U.S. legislation supporting the use of stablecoins in payments reduced the market value of listed incumbent payment firms by 18% or approximately $300 billion, consistent with stablecoins increasing competition in the payments sector. This impact is larger than that of other recent pro-competitive regulatory shocks and (i) proportionately larger for incumbents focused on cross-border payments, (ii) smaller for incumbents protected by network effects, and (iii) smaller for incumbents already offering crypto-related services.
In light of recent global shocks and rising external volatility, there is a growing need to effectively monitor short-term economic fluctuations, especially in countries with limited access to high-frequency growth data. This paper examines the application of the Bayesian Structural Time Series (BSTS) model to the case of nowcasting quarterly economic growth in Tanzania, leveraging a range of high-frequency economic indicators. The BSTS model provides a flexible framework that incorporates trends, seasonal variations, and regression effects, while its spike-and-slab variable selection helps identify relevant indicators. This paper outlines a framework for model selection and evaluation, including robustness checks and sensitivity analysis, and demonstrate the model’s relative performance. Additionally, the model’s capacity to adapt to longer forecast horizons and dynamic regressors enhances its utility for understanding growth trends in changing economic environments.
This paper estimates debt overhang thresholds separately for 105 countries using a Kalman Filter approach applied to a standard growth model. The results reveal pronounced heterogeneity in the estimated thresholds, both within and across country groups but limited time-variation. In a second step, we explore the structural factors underlying this heterogeneity. The empirical results underscore that a strong payment track record, high quality institutions and governance, public debt composition (currency, maturity, and creditor base), and financial market size and development are associated with higher pubic debt overhang thresholds.
The Resilience and Sustainability Facility (RSF), which was added to the IMF’s lending toolkit in 2022, provides affordable longer-term financing to support countries undertaking macrocritical reforms to reduce risks to prospective BoP stability emanating from extreme weather events and pandemics. This paper draws early lessons from RSF arrangements by exploring whether they have been able to meet one of their core objectives, namely catalyzing financing from other sources. A multipronged approach is used consisting of a survey of country teams, an econometric study, and analysis of non-traditional data. According to a survey of IMF country teams most countries with RSF arrangements received climate finance, mainly from synergies with public sources. The econometric analysis shows that approval of an RSF is associated with increased MDB climate finance and Official Development Assistance (ODA) in low-income countries, thus strengthening the RSF’s link to BoP stability. Non-traditional data drawing from news media and labor market developments point to potential higher financing in the future.
