Working Papers & Policy Documents 

 Alone not alone (Kristin Vastgard)

    Working Paper Publications and Blogs



Abstract. Fiscal policy has a crucial role in lessening the impact on the most vulnerable households. Governments must balance by ensuring access to energy and food, normalizing fiscal policy after unprecedented support in 2020, and promoting green transformation. 

Abstract. How do policy communications on future fiscal targets af fect market expectations and beliefs about the future conduct of f iscal policy? In this paper, we develop indicators of f iscal credibility that quantify the degree to which policy announcements anchor expectations, based on the deviation of private expectations f rom official targets, for 41 countries. We find that policy announcements partly re-anchor expectations and that f iscal rules and strong fiscal institutions, as well as a good policy track record, contribute to magnifying this effect, thereby improving fiscal credibility. Conversely, empirical analysis suggests that markets reward credibility with more favorable sovereign financing conditions. 

3. "Zombies on the Brink: Evidence from Japan on the Reversal of Monetary Policy Effectiveness," with Deniz Igan and Do Lee. IMF WP/21/44

Abstract. How does unconventional monetary policy affect corporate capital structure and investment decisions? We study the transmission channel of quantitative easing and its potential diminishing returns on investment from a corporate finance perspective. Using a rich bank-firm matched data of Japanese firms with information on corporate debt and investment, we study how firms adjust their capital structure in response to the changes in term premia. Investment responds positively to a reduction in the term premium on average. However, there is a significant degree of cross-sectional variation in firm response: healthier firms increase capital spending and cash holdings, while financially vulnerable firms take advantage of lower long-term yields to refinance without increasing investment.

4.  "Firm Exit Patterns and Post-COVID Cleansing Mechanism: Evidence from Japan," with Yukiko U. Saito. Vox EU

Abstract. Firm exits have been at the centre of policy discussions since the start of the Covid-19 pandemic. This column explores Japanese firm exit patterns during severe crises as well as during normal times. Using a dataset that distinguishes firm exit types, the authors find that Japanese firms mainly exit voluntarily, while bankruptcy rates are extremely low. Further, Japanese firms respond to economic shocks mainly through adjustments to output instead of exits – as was seen during the Covid-19 crisis. The ‘cleansing effects’ of firm exits vary by exit type, but appear stable during the current crisis.

5. "Demographics and the Housing Market: Japan's Disappearing Cities" with Yuko Hashimoto, Xiaoxiao Zhang. IMF WP/20/200

Abstract. How does a shrinking population affect the housing market? In this study, drawing on Japan’s experience, we find that there exists an asymmetric relationship between housing prices and population change. Due to the durability of housing structures, the decline in housing prices associated with population losses is estimated to be larger than the rise in prices associated with population increases. Given that population losses have been and are projected to be more acute in rural areas than urban areas in Japan, the on-going demographic transition in Japan could worsen regional disparities, as falling house prices in rural areas could intensify population outflows. Policy measures to promote more even population growth across regions, and avoid the over-supply of houses, are critical to stabilize house prices with a shrinking population. 

6. "Structural Changes in Japanese Firms: Business Dynamism in an Aging Society" with Arata Ito, Yukiko U. Saito, Anh Thi Ngoc Nguyen. IMF WP/20/182

Abstract. The COVID-19 pandemic has posed a serious threat to the survival of Japanese firms, highlighting the importance of understanding how and why firms exit. In this paper, we use a rich firm-level dataset of Japanese firms to document how firm exit patterns have evolved between 2007 and 2017. Firm exit patterns have been heavily influenced by Japan’s demographic trends, as a majority of exits in recent years were voluntary exits of firms (business closures) owned by CEOs aged 65 years or older without business successors. In contrast to this increase in voluntary exits, other “traditional” firm exits (such as bankruptcies), have declined. These findings underscore the importance of addressing business transition issues in a rapidly aging society.

7. "What are the Effects of the COVID-19 Crisis on Firm Exits in Japan?" (in Japanese), RIETI Column

Abstract. The COVID-19 shock has posed a significant threat to business survival of Japanese firms, especially small and medium-sized enterprises (SMEs) that are dominantly present in those sectors that are most vulnerable to reduced mobility due to containment measures. Using a unique firm-level data with information on firm exits of Japanese firms, we find that total number of firm exits from January to May this year rose by 16 percent relative to last year, driven by voluntary exits rather than bankruptcies. This suggests that at least in the initial phase of the pandemic, pre-existing structural issues of Japanese SMEs regarding the difficulties of business continuation—involving aging business owners without business successors exacerbated by the COVID-19 shock—triggered elderly business owners to quit their businesses, even, in some cases, exiting firms that were solvent.

8. "Shrinkonomics: Lessons from Japan" with Todd Schneider, Finance and Development, March 2020 (New York Times) 

9. "Structural Changes in Japanese SMEs: Business Dynamism in Aging Society and Inter-Firm Transaction Network" with Arata Ito, Yukiko Umeno Saito, Anh Thi-Ngoc Nguyen. RIETI Policy Discussion Paper 20-P-003

Abstract. Smooth business succession is vital not only to the survival of a firm, but also to aggregate growth, employment and productivity in Japan. In this paper, we use a rich dataset of Japanese firms to document the changing patterns of firm exits in the context of the aging population and assess the economic costs of business succession issues. We find that the overall health of Japanese firms improved in recent years, with bankruptcy rate and the ratio of zombie firms both decreasing. However, the voluntary exit rate of firms, including profitable ones, has increased in recent years as elderly CEOs cannot find business successors. This has resulted in a deterioration of resource allocation and productivity at the aggregate level. Furthermore, voluntary exits have spillover effects through inter-firm networks and increase the likelihood of exits of connected firms, even when these connected firms are healthy. These findings underscore the importance of addressing business transition issues in a rapidly aging society.

10. "Structural Changes in Firm Dynamics: From Inter-Firm Network and Geospatial Perspectives" with Yoshiaki Ogura, Yukiko Umeno Saito. RIETI Policy Discussion Paper 19-P-031.

Abstract. This paper examines how unprecedented population aging affects firm dynamics in Japan, using the panel data from 2007 to 2016. Our analysis confirms that during this time, average firm age increased due to low rates of firm entry and exit. Average age of CEOs also increased with population aging and low turnover of CEOs. Aging of firms and CEOs is more salient in rural areas than urban areas. Furthermore, as voluntary firm exits are positively correlated with the age of CEOs, more exits are likely to occur as population aging intensifies. In rural areas, low density of firms may imply higher search costs in finding new transaction partners. Firm exit induced by exit of transaction partners is more likely to happen for rural areas. Our results suggest that policies aimed at supporting business succession and addressing increases in voluntary exists should cater to the lifecycle of firms as well as the geographic location of firms.

11. "Achieving the Bank of Japan's Inflation Target" with Rahul Anand and Yaroslav Hul. IMF WP/19/229.

Abstract. The Bank of Japan has introduced various unconventional monetary policy tools since the launch of Abenomics in 2013, to achieve the price stability target of 2 percent inflation. In this paper, a forward-looking open-economy general equilibrium model with endogenously determined policy credibility and an effective lower bound is developed for forecasting and policy analysis (FPAS) for Japan. In the model’s baseline scenario, the likelihood of the Bank of Japan reaching its 2 percent inflation target over the medium term is below 40 percent, assuming the absence of other policy reactions aside from monetary policy. The likelihood of achieving the inflation target is even lower under alternative risk scenarios. A positive shock to central bank credibility increases this likelihood, and would require less accommodative macroeconomic policies.

12.  "What Do Deviations from Covered Interest Parity and Higher FX Hedging Costs Mean for Asia?" with Anne Oeking, Kenneth Kang, and Changyong Rhee. IMF WP/19/169. (Bloomberg)

Abstract. Asian countries have high demand for U.S. dollars and are sensitive to U.S. dollar funding costs. An important, but often overlooked, component of these costs is the basis spread in the cross-currency swap market that emerges when there are deviations from covered interest parity (CIP). CIP deviations mean that investors need to pay a premium to borrow U.S. dollars or other currencies on a hedged basis via cross-currency swap markets. These deviations can be explained by regulatory changes since the global financial crisis, which have limited arbitrage opportunities and country-specific factors that contribute to a mismatch in the demand and supply of U.S. dollars. We find that an increase in the basis spread tightens financial conditions in net debtor countries, while easing financial conditions in net creditor countries. The main reason is that net debtor countries are, in general, unable to substitute smoothly to other domestic funding channels. Policies that promote reliable alternative funding sources, such as long-term corporate bond market or stable long-term investors, including a “hedging counterpart of last resort,” can help stabilize financial intermediation when U.S. dollar funding markets come under stress.

13.  "Productivity Drag from Small and Medium-Sized Enterprises in Japan" with Mariana Colacelli. IMF WP/19/137.

Abstract. Productivity growth in Japan, as in most advanced economies, has moderated. This paper finds supportive evidence for the important role of small and medium-sized enterprises (SMEs) in explaining Japan’s modest productivity growth. Results show a substantial dispersion in firm-level productivity growth across sectors and even across firms within the same sector. SMEs, on average, exhibit lower productivity growth than non-SMEs in Japan, with smaller and older SMEs showing particularly low productivity growth. Estimates suggest that boosting productivity growth in all of the worst-performing SMEs could improve overall productivity growth by up to 1.8 percentage points. The SME credit guarantee system, SME financing constraints, demographic factors, and lack of intangible capital investment are discussed as contributors to the slow productivity growth of Japan’s small and old SMEs. 

14.  "More Slack than Meets the Eye? Recent Wage Dynamics in Advanced Economies," with Zsoka Koczan, Weicheng Lian, and Malhar Nabar. IMF WP/18/50.

Abstract. Nominal wage growth in most advanced economies remains markedly lower than it was before the Great Recession of 2008–09. This paper finds that the bulk of the wage slowdown is accounted for by labor market slack, inflation expectations, and trend productivity growth. In particular, there appears to be greater slack than meets the eye. Involuntary part-time employment appears to have weakened wage growth even in economies where headline unemployment rates are now at, or below, their averages in the years leading up to the recession.

15.  "Portfolio Inflows Eclipsing Banking Inflows: Alternative Facts? with Eugenio Cerutti. IMF WP/18/29.

Abstract. Superficial examination of aggregate gross cross-border capital inflow data suggests that there was no substitution between portfolio inflows and bank loans in recent years. However, our novel analysis of disaggregate inflows (both by types of instrument and borrower) shows interesting heterogeneity. There has been substitution of bank loans for portfolio debt securities not only in the case of corporate and sovereign borrowers in advanced countries, but also sovereign borrowers in emerging countries. In the case of corporate borrowers in emerging markets, the relationship corresponds to complementarity across types of gross capital inflows, especially during periods of positive capital gross inflows after the global financial crisis. A large part of these patterns does not seem to be driven by a common phenomenon across countries associated with the global financial cycle, but rather by country-specific factors. 

16.  "How Banks React to Negative Rates: Early Evidence from Japan" with John Kandrac, IMF WP 18/11 

Abstract. In this paper, we investigate how negative interest rate policy (NIRP) introduced in January 2016 by the Bank of Japan (BoJ) affected Japanese banks' lending and risk taking behavior. The BoJ's announcement was an unexpected surprise to the market and was followed by a sharp drop in equity prices of Japanese financial firms. We exploit the cross-sectional variation in the change of share prices on the day of the announcement to measure banks' differential exposure to NIRP. We show that more exposed banks increased their credit and took on more risk compared to banks that were less exposed to negative rates.

17.  "Extensive Margin Adjustment of Multi-Product Firms and Risk Diversification" with Carlos Viana de Carvalho and Jing Zhou. IMF Working Paper WP/17/146.  

Abstract. Product scope adjustment is a key mechanism through which multi-product firms achieve efficient resource allocations. In this paper, we take a novel perspective to study firms’ product scope adjustment behavior through the lens of asset pricing. Using a unique panel scanner data set containing detailed information on products, matched with the financial information of their manufacturers, we find that multi-product firms with higher product turnover have lower financial risks and lower risk premia. To understand this channel, we propose a stylized model with a time-dependent (Calvo-type) product turnover rate to highlight the ’risk absorption channel’ of product scope adjustment. In response to an economy-wide shock, a firm that can adjust its product scope more flexibly shows lower excess equity returns and lower asset volatility.

18.  "Financial Frictions and the Great Productivity Slowdown" with Romain Duval, Yannick Timmer (May 2017), IMF WP/17/129, submitted. (in Wall Street Journal, Bloomberg)

Abstract. We study the role of financial frictions in explaining the sharp and persistent productivity growth slowdown in advanced economies after the 2008 global financial crisis. Using a rich cross-country, firm-level data set and exploiting quasi-experimental variation in firm-level exposure to the crisis, we find that the combination of pre-existing firm-level financial fragilities and tightening credit conditions made an important contribution to the post-crisis productivity slowdown. Specifically: (i) firms that entered the crisis with weaker balance sheets experienced decline in total factor productivity growth relative to their less vulnerable counterparts after the crisis; (ii) this decline was larger for firms located in countries where credit conditions tightened more; (iii) financially fragile firms cut back on intangible capital investment compared to more resilient firms, which is one plausible way through which financial frictions undermined productivity. All of these effects are highly persistent and quantitatively large—possibly accounting on average for about a third of the post-crisis slowdown in within-firm total factor productivity growth. Furthermore, our results are not driven by more vulnerable firms being less productive or having experienced slower productivity growth before the crisis, or differing from less vulnerable firms along other dimensions.

19. "Singapore's Export Elasticities: A Disaggregated Look into the Role of Global Value Chains and Economic Complexity" with Elif Arbatli, (March  2016), IMF WP/16/52. 

Abstract. Singapore is one of the world’s most open economies, with the size of its trade reaching about 350 percent of its GDP. With the rise of highly diversified cross-border production networks, Singapore has come to play an integral role in the global supply chain with heavy reliance on foreign contents in its exports and production. It has also successfully moved up the value chain, exporting goods with high sophistication and economic complexity. Against this backdrop, in this paper, using disaggregate industry/product level trade data, we revisit Singapore’s export elasticities and find that growing participation in global production chains and rising export complexity are important determinants. 

20. "Dynamic Connectedness of Asian Equity Market" with Roberto Guimaraes-Filho, (March 2016), IMF WP/16/57. 

Abstract. Understanding how markets are connected and shocks are transmitted is an important issue for policymakers and market participants. In this paper, we examine the connectedness of Asian equity markets within the region and vis-à-vis other major global markets. Using time-varying connectedness measures, we address the following questions: (1) How has connectedness in asset returns and volatilities changed over time? Do markets become more connected during crises periods? (2) Which markets are major sources and major recipients of shocks? Has there been a shift in terms of the net shock givers and shock receivers (directional connectedness over time)? Finally, we investigate the connectedness between China’s equity markets and other countries’ equity markets since August 2015 to highlight the growing importance of emerging market economies, particularly China, as sources of shocks.

21. "China and Asia in Global Trade Slowdown" with Jaewoo Lee, Wei Liao and Dulani Seneviratne, (May 2016), IMF WP/16/105.

Abstract. Asia and China made disproportionate contributions to the slowdown of global trade growth in 2015. China’s import growth slowed starkly, driven by both external and domestic factors, including a rebalancing of demand. Econometric results point to weak investment and rebalancing as the main causes of the import slowdown. Spillover effects from China’s rebalancing are estimated for some 60 countries using value-added trade data, and are found to be more negative on Asia and commodity exporters than others.

22. "Should Korea Worry About a Permanently Weak Yen?" with Jack Joo K. Ree and Seoen (Thelma) Choi, (July 2015), IMF WP/15/158. (in Media)

Abstract. Three years have passed since the Bank of Japan’s asset purchase program was introduced in 2011, causing a sharp decline in the value of the Japanese Yen. What would be the implications for Japan and Korea’s exporters if the weak Yen is here to stay? We explore this question by examining exporters’ pricing behaviors and volume responses to exchange rate shocks. We find that if the weak Yen persists, it would strengthen Japan’s price competitiveness over time as export prices respond with a lag. We also find that while direct boosts to export demand will be rather limited, a persistently weaker Yen would expand the Japanese exporters’ profits lastingly, which could reinvigorate the ability, particularly of flagship exporting firms, to compete and grow in the global market over time. These findings suggest that the muted price and volume response so far to the sustained weakness of the Yen may mask a more fundamental shift in the relative competitiveness of Japanese and Korean exporters. 

    IMF Policy Contributions 

1. Asia's Export Performance: What is Holding Back? with Joong Shik Kang, (April 2015), Regional Economic Outlook: Asia and Pacific. 

2. The Impact of Yen Depreciation on Japanese and Korean Exports: Is This Time Different? with Jack Joo K. Ree, (April 2015), Regional Economic Outlook: Asia and Pacific. 

3. Financial Spillovers in Asia: Evidence from Equity Markets, with Roberto Guimaraes-Filho, (April 2015), Regional Economic Outlook: Asia and Pacific. 

4. Singapore's Trade Elasticities: A Disaggregated Look Into the Role of Global Value Chains and Complexity, with Elif C. Arbatli (July 2015)

    - Singapore: Selected Issues, IMF Country Report No. 15/200. 

    - Macroeconomic Review, October 2015, Box Contribution, Monetary Authority of Singapore. (link) 

5.  Navigating the Transition: Trade and Financial Spillovers from China (April 2016), contributed to Regional Economic Outlook: Asia and Pacific, Chapter 2. 

6. China's Evolving Trade with Advanced Upstream Economies and Commodity Exporters (April 2016), contributed to Regional Economic Outlook: 

Asia and Pacific, Chapter 2.

7. China's Changing Trade and the Implications for the CLMV Economies with Koshy Mathai, Geoff Gottlieb, Sung Eun Jung, Jochen Schmittmann, Jiangyan Yu (September 2016), Asia and Pacific Departmental Paper 16/01.

8. Negative Interest Rate Policies - Initial Experience and Assessments (August 2017), IMF Policy Paper

9. Recent Wage Dynamics in Advanced Economics: Drivers and Implications (October 2017), World Economic Outlook, Chapter 2. 

10. Land of the Rising Robots (June 2018) with Todd Schneider, Anh Le Van, Finance and Development

11. Fiscal Monitor, April 2021, October 2021 Chapter 2, April 2022

12. The Return to Fiscal Rules, IMF Staff Discussion Note, No. 2022/002

13. The State as Financier of Last Resort, IMF Staff Discussion Note, No. 2022/001