JOURNAL PUBLICATIONS
One Rule Fits All? Heterogeneous Fiscal Rules for Commodity Exporters When Price Shocks Can Be Persistent: Theory and Evidence with Steven Pennings Review of Economic Dynamics (January 2025) [Link to journal version] [Online appendix] Downloadable: July 2024 [Link] [Appendix]
Previous: World Bank Policy Research Working Paper 9400 (Sept. 2020) [Link to Working Paper] [Link to Appendix]
Commodity-exporting developing economies are often characterized as having needlessly procyclical fiscal policy: spending when commodity prices are high and cutting back when prices fall. Implicit in this criticism is that one best-practice acyclical fiscal rule fits all countries, regardless of their characteristics. In this paper, we reevaluate this characterization and policy prescription. We first estimate a new theoretically motivated measure of procyclicality of spending — the marginal propensity to spend (MPS) an extra dollar of commodity revenues — which we allow to vary with the country’s exchange rate (ER) regime and the persistence of the commodity price shocks it faces. Empirically, we find that, overall, countries tend to spend 25c of every extra dollar of commodity revenues (moderately procyclical), but that spending is significantly more procyclical in countries with a flexible ER than a fixed ER, and spending becomes more procyclical in flexible-ER countries with more persistent commodity price shocks. We then compare estimates with the same regressions run on simulated data generated by optimal policy in a parsimonious New Keynesian model. With transient shocks, optimal policy is always acyclical, as in conventional wisdom. But in the more realistic case of persistent shocks, optimal policy becomes procyclical in countries with flexible ERs (to smooth consumption, by the permanent income hypothesis), but is almost acyclical in countries with fixed ERs (to stabilize the business cycle). We conclude that the model is able to rationalize the heterogeneity in procyclicality observed in the data, but differs quantitatively in some dimensions.
ACADEMIC WORKING PAPERS
The Macroeconomic Effects of Cash Transfers: Evidence from Brazil with Thuy Lan Nguyen, Wataru Miyamoto, Steven Pennings and Leo Feler. World Bank Policy Research Working Paper 10652 (December 2023) [Link to Working Paper]. Media/blogs: Estadão, Fed San Francisco Economic Letter. Presented at NBER Summer Institute (2024), SED (2024), and SITE Frontiers in Macro Research (2024) [Slides].
This paper provides new evidence on the macroeconomic impact of cash transfers in developing countries. Using a Bartik-style identification strategy, the paper documents that Brazil’s Bolsa Familia transfer program leads to a large and persistent increase in relative state-level GDP, formal employment, and informal employment. A state receiving 1% of GDP in extra transfers grows 2.2% faster in the first year, with R$100,000 of extra transfers generating five formal-equivalent jobs, half of which are informal. Consistent with a demand-side mechanism, the effects are concentrated in non-tradable sectors. However, an open-economy New Keynesian model only partially captures the high multipliers estimated.
Quantitative Easing as a Commitment Device in a Liquidity Trap with Tiago Berriel and Felipe Camêlo Latest revision: October 2022: [Manuscript] [Appendix] [Slides] [Discussion]. Neve Resubmitted to Review of Economic Dynamics (2023). Presented at NYU (2022), Econometric Society (2015 and 2016), Central Bank of Brazil, USP, LuBraMacro, PUC-Rio, EPGE, and INSPER.
We show that when a central bank is not fully financially backed by the treasury and faces a solvency constraint, an increase in the size or a change in the composition of its balance sheet (quantitative easing - QE) can serve as a commitment device in a liquidity trap scenario. In particular, when the short-term interest rate is at the zero lower bound, open market operations by the central bank that involve purchases of long-term bonds can help mitigate deflation and recession under a discretionary policy equilibrium. Using a simple endowment-economy model we show that a change in the central bank balance sheet, which increases its size and duration, provides an incentive to the central bank to keep interest rates low in the future in order to avoid losses and satisfy its solvency constraints, approximating its full commitment policy. To test the validity of the novel mechanism, we incorporate a financially-independent central bank into a medium-scale DSGE model based on Smets and Wouters (2007) and calibrated it to replicate key features of the expansion of size and composition of the Federal Reserve’s balance sheet in the post-2008 period. Simulating the future path of the federal funds rate at the exit of the 2008 crisis, we find that the financial stability of the Fed is at risk if monetary policy is conducted in a discretionary fashion. Moreover, assuming the Fed cannot receive a positive transfer from the U.S. Treasury in present value, we find that the programs QE 2 and QE 3 generated positive effects on the dynamics of inflation but modest impact on the output gap.
Lives, Livelihoods, and Learning: A Global Perspective on the Well-Being Impacts of the COVID-19 Pandemic with Benoit Decerf, Jed Friedman, Steven Pennings, and Nishant Yonzan. World Bank Policy Research Working Paper 10728 (March 2024) [Link to WB Working Paper].
This study compares the magnitude of national level losses that the COVID-19 pandemic inflicted across three critical dimensions: loss of life, loss of income, and loss of learning. The well-being consequences of excess mortality are expressed in years of life lost, while those of income losses and school closures are expressed in additional years spent in poverty (as measured by national poverty lines), either currently or in the future. While 2020–21 witnessed a global drop in life expectancy and the largest one-year increase in global poverty in many decades, widespread school closures may cause almost twice as large an increase in future poverty. The estimates of well-being loss for the average global citizen include a loss of almost three weeks of life (19 days), an additional two and half weeks spent in poverty in 2020 and 2021 (17 days), and the possibility of an additional month of life in poverty in the future due to school closures (31 days). Well-being losses are not equitably distributed across countries. The typical high-income country suffered more total years of life lost than additional years in poverty, while the opposite holds for the typical low- or middle-income country. Aggregating total losses requires the valuation of a year of life lost vis-à-vis an additional year spent in poverty. If a year of life lost is valued at five or fewer additional years spent in poverty, low-income countries suffered greater total well-being loss than high-income countries. For a wide range of valuations, the greatest well-being losses fell on upper-middle-income countries and countries in the Latin America region. This set of countries suffered the largest mortality costs as well as large losses in learning and sharp increases in poverty.
WORK IN PROGRESS
The Multi-Sector Long-Term Growth Model with Steven Pennings, Norman Loayza, and Constantino Hevia.
Evaluating Macroeconomic Effects of Cash Transfers through the lens of the New Keynesian and Financial Stress Models (with Pennings, Miyamoto and Nguyen)
PUBLISHED POLICY WORK
The Contribution of Human Capital to Current and Future Growth: an Extension of the Long-Term Growth Model (LTGM) with Steven Pennings. World Bank Policy Research Working Paper 11276 (December 2025). [Link to Working Paper] [World Bank Blog Let's Talk Development] [Link to Spreadsheet Tool]
This paper presents the Long-Term Growth Model–Human Capital Extension (LTGM-HC), a spreadsheet-based toolkit that projects the human capital of the workforce from 2025 to 2100 for 153 countries. The LTGM-HC simulates pre-tertiary years of schooling, education quality, and health across age cohorts and how they affect current and future workforce productivity. The paper also produces three sets of general results. First, it provides new estimates of the current rate of human capital growth, which differ substantially from those in the Penn World Tables. Global average human capital growth is almost 1 percent and is surprisingly similar across income groups, as greater historical gains in years of schooling in poorer countries are offset by lower initial school quality. Second, it provides new estimates of the pace of future human capital growth. Without future reforms, average human capital growth will slow by around 0.15-0.2 percentage points per decade, hitting zero by 2080 when today’s children begin to retire. In contrast, a scenario with a typical pace of reform almost halves the rate of decline. Finally, it provides new estimates of the contribution of human capital to current and future economic growth. In a typical reform scenario, human capital growth is projected to raise annual GDP per capita growth by around half a percentage point over the next 75 years, leaving GDP per capita 45 percent higher by 2100. However, about two-thirds of these gains reflect reforms that have already been enacted. An extension to include tertiary education raises human capital growth, and its contribution to GDP growth, by around 0.1-0.2 percentage points.
Assessing the Effects of Natural Resources on Growth: An Extension of the World Bank Long-term Growth Model with Norman Loayza, Fabian Mendez, and Steven Pennings World Bank Policy Research Working Paper 9965 (March 2022) [Link to Working Paper] [Link to LTGM website]
This paper extends the World Bank's Long-Term Growth Model (LTGM) with the addition of a natural resource sector to analyze how long-run growth evolves in resource-rich countries and the growth impacts of price shocks and resource discoveries. In the LTGM-Natural Resource Extension (LTGM-NR), commodity price shocks affect long-term economic growth through physical investment rates. As a large share of resource income typically accrues to the government, the size of the boost to investment in a price boom depends on the government’s fiscal rule. Fiscal rules that prioritize public investment, like a Hartwick Rule, generally lead to the largest increases in long-term growth. However, structural surplus rules, which save commodity revenues, can also boost growth if they free up savings for private investment. The response of growth to discoveries of natural resources is similar to the response to price shocks, although discoveries also produce a direct effect on real GDP, in addition to an indirect effect through investment. The LTGM-NR also captures the effect of other (non-resource) growth fundamentals in resource-rich economies, and it is better suited to general growth analysis in these countries than the standard LTGM. However, the LTGM-NR is a supply-side model, and so does not capture the short-run effects of price and discovery shocks that operate through aggregate demand.
Consumption Smoothing and Shock Persistence: Optimal Simple Fiscal Rules for Commodity Exporters with Steven Pennings World Bank Policy Research Working Paper 8035 (April 2017) [Link to Working Paper]
A common criticism of balanced budget fiscal rules is that they increase the consumption volatility of financially constrained households who are unable to smooth consumption. This paper evaluates the welfare consequences of simple fiscal rules in a model of a small commodity-exporting country with a share of financially constrained households, where fiscal policy takes the form of transfers. A main finding is that balanced budget rules for commodity revenues often outperform more sophisticated fiscal rules where commodity revenues are saved in a Sovereign Wealth Fund (SWF). Because commodity price shocks are typically highly persistent, the households' current income is close to their permanent income, making balanced budget rules close to optimal. For commodities like oil, where price shocks are highly persistent, it is optimal to spend more than two-thirds of windfall revenues in times of high prices, and in some cases even spend the entire windfall. But for commodities where price shocks are less persistent, like bananas or sugar, the optimal rule involves spending less than half of above-average commodity revenues (with the rest saved in a SWF). It is also best to respond counter-cyclically to non-resource GDP shocks, because those shocks are less persistent (and also affect households other income). The government does not have the ability to perfectly smooth constrained households’ consumption without adversely affecting unconstrained households.
Long-Term Growth Prospects in Peru: Leveraging the Global Green Transition and the Reforms Needed to Become a High-Income Country (with Barco, Celiku, Chávez, Pennings and Resk) World Bank Policy Research Working Paper 10900 (September 2024) [Link to Working Paper]
This paper uses the World Bank Long-Term Growth Model and extensions to study Peru’s long-term growth prospects and its potential to attain high-income economy status. Under a business-as-usual baseline, Peru’s potential GDP growth declines slowly from 2.1 to 1.7 percent over the next two decades, due mostly to demographic factors. In this baseline, it takes more than half a century to reach high income status. To accelerate growth, the paper considers moderate and ambitious reform scenarios for the non-resource sector through faster total factor productivity (TFP) growth, human capital growth, and higher investment rates. The ambitious reform path accelerates growth to an average of 4.3 percent in the simulation period (2024–50), allowing Peru to reach high-income status by 2045. The paper also considers a Global Green Transition scenario, where Peru takes advantage of higher global demand for copper from clean technologies. In that scenario, higher copper prices, greater exploration, improved mining technology, and reinvested copper windfalls increase baseline growth to 3.1 percent by 2035. If Peru were able to harness the global green transition and implement ambitious reforms in the non-resource sector, growth could accelerate to an average of 5 percent, and the country could reach high-income status by 2042.
The World Bank's Long-term Growth Model (LTGM) Project (Team member and co-author) LTGM Website
LTGM-Natural Resource Extension (with Norman Loayza, Fabian Mendez, and Steven Pennings) [Link to Working Paper]
LTGM extensions (work in progress): Human Capital, Agriculture, and Structural Transformation
World Bank Country Economic Memorandum
Kyrgyz Republic "Nurturing New Growth Drivers in the Kyrgyz Republic" Chapter 1 (forthcoming)
Liberia "Escaping the Natural Resource Trap: Pathways to Sustainable Growth and Economic Diversification in Liberia" Chapter 1 (forthcoming)
Democratic Republic of Congo: "Pathways to Economic Diversification and Regional Trade Integration" Chapter 1 (2023) Link to report
Croatia "Boosting productivity to ensure future prosperity" Chapter 2 (2022) Link to report
Niger "Pathways to sustainable growth" Chapters 2 and 4 (2022) Link to report
Poland "The Green Transformation–Opportunities for Economic Growth" Chapters 2 and 4 (2022) Link to report
Azerbaijan "From Crisis to Sustained Growth" Chapters 1 and 4 (2021) Link to report
Other World Bank Publications
Democratic Republic of Congo Country Climate and Development Report Chapter 4 (2023) Link to report
"Poverty and Shared Prosperity 2022: Correcting Course". Box 3.2. Washington DC: World Bank Link to report
"Fiscal Vulnerabilities in Commodity Exporting Countries and the Role of Fiscal Policy" ( 2019) WB MTI Discussion Paper 8035 Link
"Cabo Verde Macro Poverty Outlook" (2021); Washington, D.C.: World Bank Group. Link
BLOG POSTS:
"The Fading Dividend of Past Human Capital Reforms" World Bank's Let's Talk Development with Steven Pennings
"Understanding the global impact of the COVID-19 pandemic on well-being" World Bank's Let's Talk Development with Benoit Decerf, Jed Friedman, Steven Pennings, and Nishant Yonzan
"The Macroeconomic Impact of Cash Transfers in Brazil" FRB of San Francisco Economic Letter with Thuy Lan Nguyen, Wataru Miyamoto, Steven Pennings
"Will Procyclicality Override Ghana's New Fiscal Responsibility Law" with Michael Geiger (2018) World Bank's Let's Talk Development