Global eradication of extreme poverty requires absolute convergence of poverty rates worldwide towards zero. Empirical analysis of poverty data for 100 emerging and developing countries over four decades reveals that such a goal is likely to remain elusive. Rather than absolute convergence, we find club convergence: countries' long-run poverty rates cluster into several distinct clubs, whose number depends on the specific poverty dimension considered. Only the lowest-poverty club exhibits poverty rates approaching zero by the end of the sample. In contrast, the highest-poverty club, which accounts for nearly half the world's poor, evokes a poverty trap: its average poverty barely budged over the entire period examined. Overall, income-its initial level and, especially, its growth rate-matters more than inequality for shaping countries' club membership, particularly for the highest-poverty club. Nevertheless, inequality plays a substantive role for membership in the intermediate-poverty clubs, which achieved the greatest poverty reduction.

This chapter provides an empirical assessment of the effects of infrastructure provision on structural change and aggregate productivity using industrylevel data for a set of developed and developing countries over 1995–2010. A distinctive feature of the empirical strategy followed is that it allows the measurement of the resource reallocation directly attributable to infrastructure provision. To achieve this, a two-level top-down decomposition of aggregate productivity that combines and extends several strands of the literature is proposed. The empirical application reveals significant production losses attributable to misallocation of inputs across firms, especially among African countries. Also, the results show that infrastructure provision has stimulated aggregate total factor productivity growth through both within and between industry productivity gains.

We construct a new quarterly data set of international capital flows broken down by sector-banks, corporates, and sovereigns-and demonstrate the importance of distinguishing capital flows by the sector of domestic borrowers and lenders. We document four new sets of facts. First, banks account for the largest part of the external debt (stocks and flows) in advanced economies, whereas in emerging markets, banks, corporates, and sovereigns have roughly equal shares. Second, the high correlation between total capital inflows and outflows documented in the literature is driven by banking sector flows; that is, domestic banks' borrowing from foreigners is highly correlated with domestic banks' lending to foreigners. Third, sovereign flows behave very differently from and often act as a countervailing force to private sector (banking and corporate) flows, especially in emerging markets. Fourth, different shocks (global financial cycles versus domestic business cycles; banking versus currency versus sovereign crises) generate very distinct patterns of capital inflows and outflows by sector. The stylized facts we document deepen our understanding of the dynamics and behavior of capital flows and have important implications for open economy models.

We show that the welfare of a country’s infinitely lived representative consumer is summarized, to a first order, by total factor productivity (TFP), appropriately defined, and by the capital stock per capita. The result holds for both closed and open economies, regardless of the type of production technology and the degree of product market competition. Welfare-relevant TFP needs to be constructed with prices and quantities as perceived by consumers, not firms. Thus, factor shares need to be calculated using after-tax wages and rental rates. We use these results to calculate welfare gaps and growth rates in a sample of developed countries with high-quality data on output, hours worked, and capital. We also present evidence for a broader sample that includes both developed and developing countries.

Growth fluctuations exhibit substantial synchronization across countries, which has been viewed as reflecting a global business cycle driven by shocks with worldwide reach, or spillovers resulting from local real and/or financial linkages between countries. This paper brings these two perspectives together by analyzing international growth fluctuations in a setting that allows for both global shocks and spatial dependence. Using annual data for 117 countries over 1970–2016, the paper finds that the cross-country dependence of aggregate growth is the combined result of global shocks summarized by a latent common factor and spatial effects accruing through the growth of nearby countries – with proximity measured by bilateral trade linkages or geographic distance. The latent global factor shows a strong positive correlation with worldwide TFP growth. Countries’ exposure to global shocks is positively related to their openness to trade and the degree of commodity specialization of their economies, and negatively to their financial depth. Despite its simplicity, the empirical model fits the data well. Ignoring the cross-country dependence of growth, by omitting spatial effects or common shocks (or both) from the analysis, leads to a marked deterioration of the empirical model’s in-sample explanatory power and out-of-sample forecasting performance.

This paper assesses the international comovement of gross capital flows in a setting simultaneously encompassing aggregate inflows and outflows. It uses as empirical framework a multilevel latent factor model, implemented on flow data for a large sample of countries over more than three decades. On average, common shocks account for over 40 percent of the variance of both inflows and outflows, although with major differences between advanced countries and the rest. Among the former, global and group shocks dominate capital flows, and the same shocks drive gross inflows and outflows. Among the latter countries, idiosyncratic shocks tend to play the leading role, and gross inflows exhibit less commonality with outflows. The latent factors configure an international financial cycle that closely tracks the trends in a handful of globalpushvariables. Recursive estimation of the factor model reveals a rising trend in the exposure of countries'flows to the international cycle?especially for advanced economies?up to the global financial crisis. Exposure to the cycle is robustly related to countries'external financial openness and the (lack of) flexibility of their exchange rate regime.

This paper examines the extent of risk sharing for a group of 50 industrial and developing countries. The analysis is based on a model of partial consumption insurance whose parameters have the natural interpretation of coefficients of partial risk sharing even when the null hypothesis of perfect risk sharing is rejected. Results show that rich countries exhibit higher degrees of risk sharing than developing countries, and that the gap has widened over time. Other things equal, the degree of risk sharing is higher in smaller, more financially-open economies and in those possessing flexible exchange rate regimes.

The international comovement of equity returns has been viewed as reflecting either pervasive common shocks or local linkages between countries. This paper brings these perspectives together by assessing the comovement of equity returns in a dynamic model that allows for both common factors and spatial dependence, using quarterly data for 40 advanced and emerging countries over the past two decades, and including GDP growth, the real interest rate, and credit as fundamental variables. Estimation results employing a bias-corrected quasi-maximum likelihood approach provide strong indication that the cross-country dependence of equity returns results from both spatial effects and common shocks captured by a latent common factor -- weak and strong dependence, respectively. The factor exhibits a robust negative correlation with market measures of aggregate risk. Countries' exposure to the common factor rises with their extent of trade openness and the degree of rigidity of their exchange rate regime. Despite its simplicity, the empirical model fits the data well. All these results are robust to the use of alternative spatial weight matrices. The paper also shows that ignoring cross-country dependence leads to distorted parameter estimates and a marked deterioration of the explanatory power of the empirical model.

The consequences of poverty and inequality for growth have long preoccupied academics and policy-makers. This paper revisits the inequality-growth and poverty-growth links. Using a panel of 158 countries between 1960 and 2010, we find that the correlation of growth with poverty is consistently negative: A 10 p.p. decrease in the headcount poverty rate is associated with a subsequent increase in per capita GDP between 0.5 and 1.2% per year. In contrast, the correlation of growth with inequality is empirically fragile—it can be positive or negative, depending on the empirical specification and econometric approach employed. However, the indirect effect of inequality on growth through its correlation with poverty is robustly negative. Closer inspection shows that these results are driven by the sample observations featuring high poverty rates.

This paper assesses the international comovement of gross capital inflows and outflows using a two-level factor model. Among advanced and emerging countries, capital flows exhibit strong commonality: common (global and country group-specific) factors account, on average, for close to half of their variance. There is a contrast across groups: common factors dominate advanced-country capital flows, while idiosyncratic factors dominate emerging- country flows and, especially, developing-country flows. The reason is the much larger role of global factors among advanced countries. Importantly, these findings apply to both inflows and outflows: their respective common factors are very similar -- although global factors play a bigger role for outflows than for inflows. The commonality of flows reflects a global cycle, summarized by a small set of variables (the VIX, the U.S. real interest rate and real exchange rate, U.S. GDP growth, and world commodity prices) that explain much of the variance of the estimated factors -- especially the global factors. Over time, the quantitative role of the common factors exhibits a globalization stage up to 2007, during which they acquire growing importance, followed by a phase of deglobalization post-crisis. Greater financial openness, deeper financial systems, and more rigid exchange rate regimes amplify countries' exposure to the global financial cycle.

This paper shows that real exchange rate undervaluation through the accumulation of foreign reserves may improve welfare in economies with learning-by-investing externalities that arise disproportionately from the tradable sector. In the presence of targeting problems or when policy choices are restricted by multilateral agreements, first-best policies such as subsidies to capital accumulation, or subsidies to tradable production are not feasible. A neo-mercantilist policy of foreign reserve accumulation outsources the targeting problem or overcomes the multilateral restrictions by providing loans to foreigners that can only be used to buy up domestic tradable goods. This raises the relative price of tradable versus non-tradable goods (i.e. undervalues the real exchange rate) at the static cost of temporarily reducing tradable absorption in the domestic economy. However, since the tradable sector generates greater learning-by-investing externalities, it leads to dynamic gains in the form of higher growth. The net welfare effects of reserve accumulation depend on the balance between the static losses from lower tradable absorption versus the dynamic gains from higher growth.

This paper reassesses the sources of macroeconomic fluctuations across a large sample of developing countries. It employs sign restrictions to identify four external structural shocks – demand, supply, monetary and commodity shocks, and relates their impact to countries' policy and structural framework. External shocks account for a small share of the variance of GDP, especially at short horizons. However, their relative contribution has risen in recent decades, as the incidence of domestic shocks has declined. Global monetary shocks have become the leading external source of GDP volatility in developing countries. At short horizons, real and financial openness raise the share of volatility attributable to external shocks. At longer horizons, financial openness helps reduce the volatility contribution of global real shocks, but not that of global monetary shocks, thus augmenting the relative role of the latter. Commodity-intensive countries exhibit higher vulnerability to all types of external shocks, not just commodity shocks.

For reasons of empirical tractability, analysis of cointegrated economic time series is often developed in a partial setting, in which a subset of variables is explictly modeled conditional on the rest. This approach yields valid inference only if the conditioning variables are weakly exogenous for the parameters of interest. This paper proposes a new test of weak exogeneity in panel cointegration models. The test has a limiting Gumbel distribution that is obtained by first letting T → ∞ and then letting N → ∞. We evaluate the accuracy of the asymptotic approximation in finite samples via simulation experiments. Finally, as an empirical illustration, we test weak exogeneity of disposable income and wealth in aggregate consumption.

The recent global financial crisis has highlighted the need for a policy framework to manage the financial cycle and particularly to contain the buildup of systemic risk in its expansionary phase. A comparative analysis of financial cycles reveals that they should be a bigger policy concern in Latin America and the Caribbean than elsewhere: they are more pronounced and more likely to end in crashes, and these are costlier when they do occur. The evidence also suggests that policy makers might view credit growth as a rough proxy for the buildup of systemic risk over the cycle. The primary objective of macroprudential policy is the management of systemic risk. It should not aim to eliminate the financial cycle but to counter the procyclicality induced by inadequate financial regulation and unaddressed externalities across private agents. Macroprudential regulation of the financial system is the key resource available to policy makers for this purpose. A variety of regulatory tools have been proposed, and some have been deployed in emerging markets; but their effectiveness in containing systemic risk-and the costs incurred-is largely unknown. Furthermore, there is increasing evidence that monetary policy and fiscal policy also have significant effects on financial stability. This opens the possibility of a two-handed approach that combines regulatory and macroeconomic policy tools for macroprudential purposes.

Academics and policy makers have long considered an adequate supply of infrastructure services to be essential for economic development. This paper reviews recent theoretical and empirical literature on the effects of infrastructure development on growth and income distribution. The theoretical literature has employed a variety of analytical settings regarding the drivers of income growth, the degree to which infrastructure represents a public or a private good, and the extent of market distortions, notably in capital markets. In turn, the empirical literature has used various econometric methodologies on time-series and cross-section macro and microeconomic data to test for the effects of infrastructure development. However, these empirical tests face challenging issues of measurement, identification, and heterogeneity. Overall, the literature finds positive effects of infrastructure development on income growth and, more tentatively, on distributive equity. Still, the precise mechanisms through which these effects accrue, and their full impact on welfare, remain relatively unexplored.