A. Monetary Policy, Inflation, & Electronic Money
Invisible Geniuses: Could the Knowledge Frontier Advance Faster? with Patrick Gaule
American Economic Review: Insights, December 2020 (Lead article)
A better understanding of the determinants of idea/knowledge production remains critical for long-run growth. Towards this end, this paper establishes two results using data from the International Mathematical Olympiad (IMO). First, individuals who excelled in teenage years are especially capable of advancing the knowledge frontier. Second, such talented individuals born in poorer countries are systematically less likely to engage in knowledge production. IMO participants from low-income countries produce 34% fewer publications and 56% fewer cites than equally talented rich-country counterparts. Policies to encourage talented youth to pursue scientific careers–especially those from poorer countries–could advance the knowledge frontier faster.
What Drives Innovation? Lessons from COVID-19 R&D with Patrick Gaule
Journal of Health Economics, March 2022
To examine the drivers of innovation, this paper studies the global R&D effort to fight the deadliest diseases and presents four results. We find: (1) global pharmaceutical R&D activity—measured by clinical trials—typically follows the 'law of diminishing effort': i.e. the elasticity of R\&D effort with respect to market size is about 0.5 in the cross-section of diseases; (2) the R&D response to COVID-19 has been a major exception to this law, with the number of COVID-19 trials being 7 to 20 times greater than that implied by its market size; (3) the aggregate short-term elasticity of science and innovation can be very large, as demonstrated by aggregate flow of clinical trials increasing by 38% in 2020, with limited crowding out of trials for non-COVID diseases; and (4) public institutions and government-led incentives were a key driver of the COVID-19 R&D effort---with public research institutions accounting for 70 percent of all COVID-19 clinical trials globally and being 10 percentage points more likely to conduct a COVID-19 trial relative to private firms. Overall, while economists are naturally in favor of market size as a driving force for innovation (i.e. "if the market size is sufficiently large then innovation will happen"), our work suggests that scaling up global innovation may require a broader perspective on the drivers of innovation---including early-stage incentives, non-monetary incentives, and public institutions.
Why U.S. Immigration Matters for the Global Advancement of Science with Ina Ganguli, Patrick Gaule, and Geoff Smith
Research Policy, 2023
This paper studies the impact of U.S. immigration barriers on global knowledge production. We present four key findings. First, among Nobel Prize winners and Fields Medalists, migrants to the U.S. play a central role in the global knowledge network— representing 20-33% of the frontier knowledge producers. Second, using novel survey data and hand-curated life-histories of International Math Olympiad (IMO) medalists, we show that migrants to the U.S. are up to six times more productive than migrants to other countries— even after accounting for talent during one’s teenage years. Third, financing costs are a key factor preventing foreign talent from migrating abroad to pursue their dream careers, particularly talent from developing countries. Fourth, certain ‘push’ incentives that reduce immigration barriers – by addressing financing constraints for top foreign talent – could increase the global scientific output of future cohorts by 42%. We conclude by discussing policy options for the U.S. and the global scientific community.
MACRO / FINANCE
Breaking Through the Zero Lower Bound with Miles Kimball
IMF Working Paper 2015/224. October 2015
There has been much discussion about eliminating the “zero lower bound” by eliminating paper currency. But such a radical and difficult approach as eliminating paper currency is not necessary. Much as during the Great Depression—when countries were able to revive their economies by going off the gold standard—all that is needed to empower monetary policy to cut interest rates as much as needed for economic stimulus now is to change from a paper standard to an electronic money standard, and to be willing to have paper currency go away from par. This paper develops the idea further and shows how such a mechanism can be implemented in a minimalist way by using a time‑varying paper currency deposit fee between private banks and the central bank. This allows the central bank to create a crawling-peg exchange rate between paper currency and electronic money; the paper currency interest rate can be either lowered below zero or raised above zero. Such an ability to vary the paper currency interest rate along with other key interest rates, makes it possible to stimulate investment and net exports as much as needed to revive the economy, even when inflation, interest rates, and economic activity are quite low, as they are currently in many countries. The paper also examines different options available to the central bank to return to par when negative interest rates are no longer needed, and the associated implications for the financial sector and debt contracts. Finally, the paper discusses various legal, political, and economic challenges of putting in place such a framework and how policymakers could address them.
Enabling Deep Negative Rates to Fight Recessions: A Guide with Miles Kimball
IMF Working Paper 2019/84. April 2019
The experience of the Great Recession and its aftermath revealed that a lower bound on interest rates can be a serious obstacle for fighting recessions. However, the zero lower bound is not a law of nature; it is a policy choice. The central message of this paper is that with readily available tools a central bank can enable deep negative rates whenever needed—thus maintaining the power of monetary policy in the future to end recessions within a short time. This paper demonstrates that a subset of these tools can have a big effect in enabling deep negative rates with administratively small actions on the part of the central bank. To that end, we (i) survey approaches to enable deep negative rates discussed in the literature and present new approaches; (ii) establish how a subset of these approaches allows enabling negative rates while remaining at a minimum distance from the current paper currency policy and minimizing the political costs; (iii) discuss why standard transmission mechanisms from interest rates to aggregate demand are likely to remain unchanged in deep negative rate territory; and (iv) present communication tools that central banks can use both now and in the event to facilitate broader political acceptance of negative interest rate policy at the onset of the next serious recession.
The Fear Economy: A Theory of Output, Interest, and Safe Assets
IMF Working Paper 2022/175. September 2022
This paper presents a fear-based theory of the economy. I build a tractable dynamic general equilibrium model, based on the interplay between fear of catastrophes and the interest rates on safe assets. The model (i) generates cross-correlations in output, labor, consumption, and investment consistent with the postwar US economy; and (ii) explains several asset pricing puzzles using a single fear factor, which generates time-varying variation in equity prices, bond prices, and the risk premium in line with the data. Six policy implications emerge from the model: (1) a common fear factor is the fundamental driver of business cycles and asset prices, which can be managed by regulating the safe interest rate; (2) recessions will be deeper and longer when central banks accept the zero lower bound and are unwilling to use negative rates; (3) a commitment to use negative rates in recessions—even if never implemented—raises both the short- and long-run real neutral rates, and moderates the business cycle (as seen during the Great Moderation); (4) counter-cyclical fiscal policy provides disaster insurance and is expansionary by reducing fear; (5) quantitative easing can be narrowly effective only when fear is high at the lower bound; and (6) at the lower bound or when fear is high, long-term growth policies also have stabilization benefits.
GLOBAL HEALTH / GLOBAL GOODS
How to End the COVID-19 Pandemic by March 2022 with Tristan Reed
World Bank Policy Working Research Paper, No. 9632. April 2021
How can the world reach herd immunity against COVID-19 before the second anniversary of the pandemic, or March 2022? To answer this question we study COVID-19 vaccine demand and supply and present three results. First, we show a target of vaccinating 60% of the population in each country by March 2022 is likely sufficient to achieve worldwide herd immunity under a baseline scenario with limited mutation. Achieving this target appears feasible given stated production targets of vaccine manufacturers and the pace of current and historical vaccination campaigns. Second, based on existing pre-purchase contracts for vaccines, we calculate that achieving this target requires addressing a procurement gap of just 350 million vaccine courses in low- and middle-income countries. Third, we show that immediate additional donor funding of about $4 billion or in-kind donations of excess orders by high-income countries would be sufficient to close this gap. We discuss other major threats along the path to achieving world-wide herd immunity—including supply chain issues, trade restrictions, vaccine delivery, and mutations. Overall, our analysis suggests multilateral action now can bring an end to the acute phase of the pandemic early next year.
A Proposal to End the COVID-19 Pandemic with Gita Gopinath
IMF Staff Discussion Note 2021/04. May 2021. Site: imf.org/pandemicplan
Coverage: Washington Post, Financial Times, The Economist, New York Times, Multilateral Leaders Task Force, IMF Podcast
Urgent steps are needed to arrest the rising human toll and economic strain from the COVID-19 pandemic that are exacerbating already-diverging recoveries. Pandemic policy is also economic policy as there is no durable end to the economic crisis without an end to the health crisis. Building on existing initiatives, this paper proposes pragmatic actions at the national and multilateral level to expeditiously defeat the pandemic. The proposal targets: (1) vaccinating at least 40 percent of the population in all countries by the end of 2021 and at least 60 percent by the first half of 2022, (2) tracking and insuring against downside risks, and (3) ensuring widespread testing and tracing, maintaining adequate stocks of therapeutics, and enforcing public health measures in places where vaccine coverage is low. The benefits of such measures at about $9 trillion far outweigh the costs which are estimated to be around $50 billion—of which $35 billion should be paid by grants from donors and the residual by national governments potentially with the support of concessional financing from bilateral and multilateral agencies. The grant funding gap identified by the Access to COVID-19 Tools (ACT) Accelerator amounts to about $22 billion, which the G20 recognizes as important to address. This leaves an estimated $13 billion in additional grant contributions needed to finance our proposal. Importantly, the strategy requires global cooperation to secure upfront financing, upfront vaccine donations, and at-risk investment to insure against downside risks for the world.
A Global Strategy to Manage the Long-Term Risks of COVID-19 with Jeremy Farrar, Gita Gopinath, Richard Hatchett, Peter Sands
IMF Working Paper 2022/68. April 2022
The pandemic is not over, and the health and economic losses continue to grow. It is now evident that COVID-19 will be with us for the long term, and there are very different scenarios for how it could evolve, from a mild endemic scenario to a dangerous variant scenario. This realization calls for a new strategy that manages both the uncertainty and the long-term risks of COVID-19. There are four key policy implications of such as strategy. First, we need to achieve equitable access beyond vaccines to encompass a comprehensive toolkit. Second, we must monitor the evolving virus and dynamically upgrade the toolkit. Third, we must transition from the acute response to a sustainable strategy toward COVID-19, balanced and integrated with other health and social priorities. Fourth, we need a unified risk-mitigation approach to future infectious disease threats beyond COVID-19. Infectious diseases with pandemic potential are a threat to global economic and health security. The international community should recognize that its pandemic financing addresses a systemic risk to the global economy, not just the development need of a particular country. Accordingly, it should allocate additional funding to fight pandemics and strengthen health systems both domestically and overseas. This will require about $15 billion in grants this year and $10 billion annually after that.
Seven Finance and Trade Lessons from COVID-19 for Future Pandemics with Gita Gopinath
Oxford Review of Economic Policy, 2022
Pandemics and epidemics pose risks to lives, societies, and economies, and their frequency is expected to increase as rising trade and increased human interaction with animals leads to the emergence of new diseases. The COVID-19 pandemic teaches us that we can and must be better prepared, with scope for much greater global coordination to address the financing, supply-chain, and trade barriers that amplified the pandemic’s economic costs and contributed to the emergence of new variants. This paper draws seven early lessons from the COVID-19 pandemic that could inform future policy priorities and help shape a better global response to future crises.
Oxford Review of Economic Policy, 2022
A lack of timely financing for purchases of vaccines and other health products impeded the global response to the COVID-19 pandemic. Based on analysis of contract signature and delivery dates in COVID-19 vaccine advance purchase agreements, this paper finds that 60-75 percent of the delay in vaccine deliveries to low- and middle-income countries is attributable to their signing purchase agreements later than high-income countries, which placed them further behind in the delivery line. A pandemic Advance Commitment Facility with access to a credit line on day-zero of the next pandemic could allow low- and middle-income countries to secure orders earlier, ensuring a much faster and equitable global response than during COVD-19. The paper outlines four options for a financier to absorb some or all of the risk associated with the credit line and discusses how the credit would complement other proposals to strengthen the financing architecture for pandemic preparedness, prevention, and response.
Strategic Corporate Layoffs with Julian Kolev
IMF Working Paper 2016/225. December 2016. (Also appears in Academy of Management Proceedings, 2016)
Firms in the S&P 500 often announce layoffs within days of one another, despite the fact that the average S&P 500 constituent announces layoffs once every 5 years. By contrast, similar-sized privately-held firms do not behave in this way. This paper provides evidence that such clustering behavior is largely due to CEOs managing their reputation in financial markets. To interpret these results we develop a theoretical framework in which managers delay layoffs during good economic states to avoid damaging the markets perception of their ability. The model predicts clustering in the timing of layoff announcements, and illustrates a mechanism through which the cyclicality of firms layoff policies is amplified. The models predictions are tested using two novel datasets of layoff announcements and actual mass layoffs. We compare the layoff behavior of publicly-listed and privately-held firms to estimate the impact of reputation-based incentives on cyclicality of layoffs. Compared to observably similar matched private firms, public firms are 2.5-3.5 percentage points more likely to conduct mass layoffs in a recession month, indicating a doubling of layoff sensitivity to recessions. In addition, we find that the firms that cluster layoff announcements at high frequencies are also the ones that are more likely to engage in mass layoffs during recessions. These effects are not driven by leverage, lifecycle differences, or the criteria used to match public and private firms. Our findings suggest that reputation management is an important driver of layoff policies both at daily frequencies and over the business cycle, and can have significant macroeconomic consequences.
POLICY PAPERS, REPORTS, IDEAS
"Industrial Policy & The Growth Strategy Trilemma" Finance & Development, Spring 2023
"How to aid Turkey and Syria earthquake victims in the face of political conflict" Realtime Economics, Peterson Institute of International Economics, February 2023 (with Adnan Mazarei)
"The Future of Inflation Part I: Will Inflation Remain High?" Finance & Development, April 2022 (with Miles Kimball) (Podcast)
"The Future of Inflation Part II: How Costly is Inflation?" Finance & Development, April 2022 (with Miles Kimball)
"The Future of Inflation Part III: The Electronic Money Standard and the Possibility of a Zero Inflation Target" Finance & Development, April 2022 (with Miles Kimball)
Where Next: An interactive platform of district-level COVID risk projections for India (May 2021), Medium, A collaboration between Development Data Lab (Sam Asher, Toby Lunt, Paul Novosad, and Aditi Bhowmick), Anup Malani, Satej Soman, Sabareesh Ramachandran, and Ruchir Agarwal.
"A Proposal to End the COVID-19 Pandemic", IMF Blog, May 2021 (with Kristalina Georgieva and Gita Gopinath)
"A Green Recovery in South Asia: Can the Region Become a Leader in Global Efforts to Fight Climate Change?" published in Policy Advice to Asia in the COVID-19 Era, Spring 2021 (with P. Blagrave)
"Achieving Green and Inclusive Growth in Mongolia," Selected Issues, September 2019
"Cashing In: How to Make Negative Interest Rates Work," IMF Blog, February 2019 (with S. Krogstrup)
"Negative Interest Rate Policies—Initial Experiences and Assessments," IMF Policy Paper, August 2017 (contributor)
"The Potential of Human Capital in Lebanon," Selected Issues, January 2017
"Cyprus's Banking Sector: The Crisis and its Aftermath," Selected Issues, October 2014 (with O. Wuensch)
"Stylized Facts on Innovation and Growth," Selected Issues, May 2014
"Assessing Policies to Revive Credit Markets," Global Financial Stability Report, IMF, October 2013 (contributor)
"Nordic Regional Report," IMF Cluster Consultation, September 2013 (contributor)
"Vulnerabilities in the Nordic Banking System," Selected Issues, August 2013 (with A. Aslam)
"House Prices and Household Debt," Selected Issues, August 2013 (with E. Cerutti and K. Shirono)
"Contingent Liabilities and Optimal Size of Fiscal Buffers," Selected Issues, August 2013
"Has Sweden's Fiscal Policy Become Less Countercyclical," Selected Issues, August 2013 (with S. Dell'Erba)
"Covered Bonds and Financial Stability," Selected Issues, August 2013 (with E. Cerutti)
"Long-Term Investors and Their Asset Allocation," Global Financial Stability Report, IMF, September 2011 (contributor)