This paper develops a dynamic infinite-horizon model with two layers of governments to study theoretically and quantitatively how fiscal decentralization affects local and central government debt accumulation and spending. In the model, the central government makes transfers to local governments to offset vertical and horizontal fiscal imbalances. But the anticipation of transfers lowers local governments' expected cost of borrowing and leads to overborrowing ex ante. Absent commitment, the central government over-transfers to reduce local governments' future need to borrow, and in the equilibrium both local and central debts are inefficiently high. Consistent with empirical evidence, when fiscal decentralization widens vertical fiscal imbalances, local governments become more reliant on transfers, and both local and central debts rise. Applied to Spain, the model explains 39 percent of the rise in total government debt when the vertical fiscal imbalances widened during 1988-1996, and 18 percent of the fall in debt when the imbalances narrowed during 1996-2006.(c) 2022 Published by Elsevier B.V.

This paper explores the impact of sovereign defaults on lending countries and evaluates government intervention policies in a dynamic infinite-horizon model. When banks in the lending country hold risky foreign bonds, the default risk in the foreign country has a spillover effect on the output volatility of the lending country. A macroprudential tax on the purchase of foreign bonds reduces the lending country's exposure to foreign sovereign risk and output volatility. Households gain in welfare as a result, but bankers lose because taxes lower banks' profitability. The effect on overall welfare is mixed, depending on which group dominates. It is beneficial ex post to implement bailout policies when the government redistributes resources from households to banks after default, but bailouts encourage banks to take on risk by holding more sovereign bonds ex ante, leading to greater output fluctuations in the lending country.

The paper looks at feasible concrete action that can be taken by correspondent and respondent banks, money transfer operators, the Pacific authorities, the Australian and New Zealand authorities, and international organizations.

Inflation rates rose sharply in the Philippines during 2018. Understanding the demand and supply sources of inflation pressures is key to monetary policy response. Qualitatively, indicators have pointed to evidence of inflation pressures from both sides in 2018, with the supply factors, by and large, associated with commodity-price shocks and demand factors deduced from gleaning at the wider non-oil trade deficits seen in the Philippines. Quantitatively, we deploy a semi-structural model to decompose the contributions of various shocks to inflation. Our main findings are (1) supply factors (mainly global commodity prices) played a prominent role in explaining the rise in inflation in 2018; (2) demand factors also contributed to inflation in a non-negligible way, justifying the need for tighter monetary policy in 2018; (3) the size of the estimated output gap (an important indicator of demand pressures) could be larger, when considering the widening trade deficits in 2018; and (4) a delayed monetary policy tightening can be costly in terms of higher inflation rates, requiring larger and more aggressive interest rate hikes to bring inflation under control, based on a counterfactual exercise.

Asia has made significant progress in financial inclusion, but both its across-country and intra-country disparities are among the highest in the world. The gaps between the rich and the poor, rural and urban populations, and men and women remain deep. Income is the main determinant of the level of financial inclusion; but other factors, such as geography, financial sector structure, and policies, also play important roles. While some countries in the Asia-Pacific region are leaders in fintech, on average the region lags behind others in several important areas such as online (internet) purchases, electronic payments, mobile money, and mobile government transfers. This Departmental Paper aims to take stock of the development and current state of financial inclusion and shed light on policies to advance financial inclusion in the region. The research focuses on the impact of financial inclusion on economic growth, poverty reduction, and inequality, linkages between financial inclusion and macroeconomic policies, as well as structural policies that are important for improving financial inclusion. Given the increasing importance of financial technologies (fintech), the paper also provides a snapshot of the fintech landscape in the Asia-Pacific.

In an infinite horizon dynamic equilibrium model we show how fiscal decentralization in a fiscal federation can affect aggregate government debt. We model borrowing-spending decisions by central and local governments. Distortionary transfers from central government create incentives for local governments to overborrow. Fiscal decentralization changes local government's shares of revenue and spending responsibility, and hence its fiscal gap. A larger local fiscal gap increases the central government's incentive to make transfers ex post, which worsens overborrowing ex ante. As a result, both local and central government debt levels rise. We perform quantitative analysis on Spain and find fiscal decentralization explains 19-40% of changes in general government debt during 1988-2006. We further show that a prudential debt tax can offset the distortion and implement the Pareto optimal allocation, with a 27% reduction in debt and 3.75% welfare gain in 1996.

We build an infinite horizon equilibrium model of fiscal federation, where anticipation of transfers from the central government creates incentives for local governments to overborrow. Absent commitment, the central government over-transfers, which distorts the central-local distribution of resources. Applying the model to fiscal decentralization, we find when decentralization widens local government’s fiscal gap, borrowings by both local and central governments rise. Quantitatively, fiscal decentralization accounts for 19–40% of changes in general government debt in Spain during 1988–2006. A macroprudential tax on local borrowing that implements Pareto optimal allocation would reduce debt by 27% and raise welfare by 3.75%.

Pacific island countries are exposed to significant risks from natural disasters. As adisaster relief measure, Fiji allowed pre-retirement pension withdrawls in the wake ofCyclone Winston in 2016. Motivated by this policy action, we provide a normativeanalysis of the use of early pension withdrawals after disasters, by setting up a life-cyclesaving model with myopic households facing large natural disaster shocks. The modeldemonstrates the key trade-off between building up sufficient retirement savings andensuring the access to savings against natural disaster shocks, and sheds light on welfareimplications of early pension withdrawals.

The paper assesses the price and wage flexibility in Hong Kong SAR. At the aggregate level, it compares Hong Kong SAR with the United States, the United Kingdom and Singapore by examining the three commonly used macroeconomic relationships among inflation, unemployment, wage growth, and output fluctuations. At the industry level, the paper compares the distributions of labor earnings and price growth in Hong Kong SAR and the United States. It further estimates a model of wage formation under downward nominal wage rigidity to compare the extent of wage rigidity in Hong Kong SAR and the United States. Overall, the comparisons show that broadly speaking, price and wage adjustments are more flexible in Hong Kong SAR than other economies.

Total factor productivity growth was stagnant or slowing in many advanced countries even prior to the crisis. This paper documents sector-level productivity patterns across advanced economies prior to the crisis and examines the role of product and labor market rigidities as well as innovation and investments in information technology and human capital in driving productivity differences across sectors and countries. Since productivity payoffs of reforms evolve over time, we also focus on large changes in the structural indicators examine their dynamic impact on productivity, employment, and output. Our results suggest that reform priorities depend on country-specific settings, including the scale of specific policy distortions and the distance from the technology frontier. Productivity gains from reforms are large and materialize predominantly in the medium term, with some important variations across industries and countries.