Publications:

Abstract: We study the long-term macroeconomic effects of climate change across ten Canadian provinces between 1961 and 2017. Following Kahn et al. (2021), our econometric strategy links deviations of temperature and precipitation (weather) from their multi-decade historical rolling averages (climate) to various province-specific economic performance indicators at the aggregate and sectoral levels. We show that climate change (proxied by a series of weather shocks) has a long-lasting adverse impact on real output in various Canadian provinces and economic sectors. Adaptation reduces the income losses but cannot offset them entirely. Moreover, in contrast to most cross-country results, our within-country estimates suggest asymmetrical growth effects from precipitation and temperature anomalies. Specifically, persistently higher-than-normal precipitation is associated with lower long-term GDP growth, whereas the effect of below-than-normal precipitation is not statistically significant. As regards temperature, while extended periods of cold spells (temperature persistently below historical norms) is detrimental to growth (though less likely in the future), Canada is not benefiting from a warmer climate as often argued in the literature.

JEL Classifications: C33, O40, O44, O51, Q51, Q54.

Key Words: Climate change, economic growth, adaptation, Canada.


Abstract: We investigate the long-term macroeconomic effects of climate change across 48 U.S. states over the period 1963--2016 using a novel econometric strategy which links deviations of temperature and precipitation (weather) from their long-term moving-average historical norms (climate) to various state-specific economic performance indicators at the aggregate and sectoral levels. We show that climate change has a long-lasting adverse impact on real output in various states and economic sectors, and on labour productivity and employment in the United States. Moreover, in contrast to most cross-country results, our within U.S. estimates tend to be asymmetrical with respect to deviations of climate variables (including precipitation) from their historical norms.

JEL Classifications: C33, O40, O44, O51, Q51, Q54.

Key Words: Climate change, economic growth, adaptation, United States.

Cambridge Working Paper Version: CWPE2205.

Codes and Data: Click here for the Stata data, do, and ado files needed to replicate the empirical findings in "Climate Change and Economic Activity: Evidence from U.S. States". 


Abstract: We develop a quarterly macro-econometric model for the Saudi economy over the period 1981Q2-2018Q2 and integrate it within a compact model of the world economy (including the global oil market). This framework enables us to disentangle the size and speed of the transmission of growth shocks originating from the United States, China, and the world economy to Saudi Arabia, as well as study the implications of stress in global financial markets, low oil prices, and domestic fiscal adjustment on the Saudi economy. Results show that Saudi Arabia's economy is becoming more sensitive to developments in China than to shocks in the United States – in line with the direction of evolving trade patterns and China's growing role in the global oil market. A global growth slowdown (e.g. from trade tensions or geopolitical developments) could have significant implications for Saudi Arabia (with a growth elasticity of about 2½ after one year) and the oil market (reducing prices by about 5% for 0.5 percentage point reduction in global growth). We also illustrate that a 10% lower oil prices and stress in global financial markets could both have a negative effect on the Saudi economy, but given the prevailing social contract in Saudi Arabia, their impact is countered by fiscal easing. Finally, we observe that a domestic fiscal adjustment in Saudi Arabia does not show a negative impact on economic growth in the data. The impact on growth would depend upon the quality of fiscal adjustment and whether it is complemented with structural reforms.

JEL Classifications: C32, E32, E62, F44, O53.

Key Words: Saudi Arabia, stress in global financial markets, international business cycle, fiscal policy, and Global VAR.

United Nations (Economic and Social Commission for Western Asia) Working Paper Version: E/ESCWA/EDID/2019/WP.15


Abstract: Mexico’s fiscal response to the pandemic has been modest compared to its peers, reflecting the authorities’ desire to not issue new debt for spending. This approach, however, risks a more severe recession and a weaker economic recovery, with further costs in the future. Balancing the need for stronger near-term fiscal support for the people and the recovery against medium-term discipline, this paper lays out an alternative strategy. We show that credibly announcing a pro-growth and inclusive medium-term fiscal reform upfront—including increased tax capacity, higher public investment and strengthened social safety nets—would open space for larger short-term support and close medium-term fiscal gaps. Model simulations suggest that this package would boost output, limit lasting economic damage from the pandemic, and put debt trajectory on a declining path in the medium term as tax reforms pay off and risk premia decline.

JEL Classifications: H2, H5, H6, E2, E6.

Key Words:  Covid-19, fiscal response, tax, social safety nets, general equilibrium model.

IMF Working Paper Version: WP/20/215.

Media Coverage: This paper was featured in El Economista. 


Abstract: Productivity growth in Italy has been persistently anemic and has lagged that of the euro area over the period 1999-2015, while the indebtedness of its corporate sector has increased. Using the ORBIS firm-level database, this paper studies the long-term impact of persistent corporate-debt accumulation on the productivity growth of Italian firms and investigates whether total factor productivity growth varies with the level of corporate indebtedness. We employ a novel estimation technique proposed by Chudik, Mohaddes, Pesaran, and Raissi (2017) to account for dynamics, bi-directional feedback effects, cross-firm heterogeneity, and cross-sectional dependence arising from unobserved common factors (for example, oil price shocks, labor and product market frictions, and stance of global financial cycle). Filtering out the effects of unobserved common factors and controlling for firm-specific characteristics, we find significant negative effects of persistent corporate debt build-up on total factor productivity growth, and weak evidence of a threshold level of corporate debt, beyond which productivity growth drops off significantly. Our results have strong policy implications, for example the design of the tax system should discourage persistent corporate debt accumulation, and effective and timely frameworks to reduce corporate debt overhangs are essential.

JEL Classifications: C23, D22, D24, G3.

Key Words: Italy, corporate debt, productivity, dynamic heterogeneous panel threshold models, cross-sectional dependence.

IMF Working Paper Version: WP/18/33.


Abstract: We study the long-term impact of climate change on economic activity across countries, using a stochastic growth model where productivity is affected by deviations of temperature and precipitation from their long-term moving average historical norms. Using a panel data set of 174 countries over the years 1960 to 2014, we find that per capita real output growth is adversely affected by persistent changes in the temperature above or below its historical norm, but we do not obtain any statistically significant effects for changes in precipitation. We also show that the marginal effects of temperature shocks vary across climates and income groups. Our counterfactual analysis suggests that a persistent increase in average global temperature by 0.04°C per year, in the absence of mitigation policies, reduces world real GDP per capita by more than 7 percent by 2100. On the other hand, abiding by the Paris Agreement goals, thereby limiting the temperature increase to 0.01°C per annum, reduces the loss substantially to about 1 percent. These effects vary significantly across countries depending on the pace of temperature increases and variability of climate conditions. The estimated losses would increase to 13 percent globally if country-specific variability of climate conditions were to rise commensurate with annual temperature increases of 0.04°C.

JEL Classifications: C33, O40, O44, O51, Q51, Q54.

Key Words: Climate change, economic growth, adaptation, counterfactual analysis. 

IMF Working Paper Version: WP/19/215.

NBER Working Paper Version: No. 26167

Codes and Data: Click here for the Stata data, do, and ado files needed to replicate the empirical findings in "Long-Term Macroeconomic Effects of Climate Change: A Cross-Country Analysis". 

Media Coverage: This paper has been covered extensively in major international news outlets including the Washington Post, Bloomberg, Fox News, Reuters, CNBC, New York Post, the Financial Times, and Scientific American. It has also been covered by national news agencies, including in China, India, Japan, the United Kingdom, and the United States.

University of Cambridge News: The paper was also highlighted by the University of Cambridge Research News and the Gates Cambridge Trust. 

Conference Talk: Click here for a video recording of a talk based on this paper given by M. Hashem Pesaran at the Federal Reserve Bank of San Francisco's Conference on the Economics of Climate Change.


Abstract: This paper develops a threshold-augmented dynamic multi-country model (TGVAR) to quantify the macroeconomic effects of Covid-19. We show that there exist threshold effects in the relationship between output growth and excess global volatility at individual country levels in a significant majority of advanced economies and in the case of several emerging markets. We then estimate a more general multi-country model augmented with these threshold effects as well as long term interest rates, oil prices, exchange rates and equity returns to perform counterfactual analyses. We distinguish common global factors from trade-related spillovers, and identify the Covid-19 shock using GDP growth forecast revisions of the IMF in 2020Q1. We account for sample uncertainty by bootstrapping the multi-country model estimated over four decades of quarterly observations. Our results show that the Covid-19 pandemic will lead to a significant fall in world output that is most likely long-lasting, with outcomes that are quite heterogenous across countries and regions. While the impact on China and other emerging Asian economies are estimated to be less severe, the United States, the United Kingdom, and several other advanced economies may experience deeper and longer-lasting effects. Non-Asian emerging markets stand out for their vulnerability. We show that no country is immune to the economic fallout of the pandemic because of global interconnections as evidenced by the case of Sweden. We also find that long-term interest rates could fall significantly below their recent lows in core advanced economies, but this does not seem to be the case in emerging markets.

JEL Classifications: C32, E44, F44.

Key Words: Threshold-augmented Global VAR (TGVAR), international business cycle, Covid-19, global volatility, threshold effects.

NBER Working Paper Version: No. 27855

Matlab Codes and Data: Click here for the data as well as the Matlab files needed to replicate the empirical findings in "A Counterfactual Economic Analysis of Covid-19 Using a Threshold Augmented Multi-Country Model". 

Video: Click here to watch M. Hashem Pesaran presenting our paper at the CAMA global webinar series and here to watch him discussing an earlier version of the paper at the Royal Economics Society Policy Webinar Series on July 16, 2020.

Media Coverage: This paper has been covered in various news outlies, such as Times of India and Tejarat-e Farda.

University of Cambridge News: The paper was also highlighted by the University of Cambridge Research News and the Gates Cambridge Trust.


Abstract: This paper uses a threshold-augmented Global VAR model to quantify the macroeconomic effects of countries' discretionary fiscal actions in response to the Covid-19 pandemic and its fallout. Our results are threefold: (1) fiscal policy is playing a key role in mitigating the effects of the pandemic; (2) all else equal, countries that implemented larger fiscal support are expected to experience less output contractions; (3) emerging markets are also benefiting from the synchronized fiscal actions globally through the spillover channel and reduced financial market volatility.

JEL Classifications: C32, E44, E62, F44.

Key Words: Threshold-augmented Global VAR (TGVAR), Covid-19, threshold effects, fiscal policy.

Cambridge Working Paper Version: CWPE2116.

Matlab Codes and Data: Click here for the data as well as the Matlab files needed to replicate the empirical findings in "Covid-19 Fiscal Support and its Effectiveness". 

University of Cambridge News: The paper was highlighted by Insight from the Judge Business School.

Media Coverage: This paper was featured in the Financial Times . 


Abstract: Published in late 2017, the Italian medium-term fiscal plan aims to achieve structural balance by 2020, although concrete, high-quality measures to meet the target are yet to be specified. This paper seeks to contribute to the discussion by (i) assessing spending patterns to identify areas for savings; (ii) evaluating the pension system; (iii) analyzing the scope for revenue rebalancing; and (iv) putting forward a package of spending cuts and tax rebalancing that is growth friendly and inclusive, could have limited near-term output costs, and would achieve a notable reduction in public debt over the medium term. Such a package could help the authorities balance the need to bring down public debt and, thus, reduce vulnerabilities while supporting the economic recovery.

JEL Classifications: E27, E62, H55.

Key Words: Growth-friendly fiscal policy, public pensions, dynamic stochastic general equilibrium models, Italy.

IMF Working Paper Version: WP/18/59.

Media Coverage: The paper was widely reported by news agencies Ansa and AdnKronos as well as IlSole24Ore, L’Avvenire and IlGiornale. It was also discussed in a Focus paper by the  Italian Parliamentary Budget Office. 


Abstract: This paper investigates the global macroeconomic consequences of falling oil prices due to the oil revolution in the United States, using a Global VAR model estimated for 38 countries/regions over the period 1979Q2 to 2011Q2. Set-identification of the U.S. oil supply shock is achieved through imposing dynamic sign restrictions on the impulse responses of the model. The results show that there are considerable heterogeneities in the responses of different countries to a U.S. supply-driven oil price shock, with real GDP increasing in both advanced and emerging market oil-importing economies, output declining in commodity exporters, inflation falling in most countries, and equity prices rising worldwide. Overall, our results suggest that following the U.S. oil revolution, with oil prices falling by 51 percent in the first year, global growth increases by 0.16 to 0.37 percentage points. This is mainly due to an increase in spending by oil importing countries, which exceeds the decline in expenditure by oil exporters. 

Arabic Abstract: Click here for the Abstract in Arabic. 

JEL Classifications: C32, E17, F44, F47, O13, Q43.

Key Words: Tight oil, shale oil, fracking revolution, oil price decline, oil supply, global macroeconometric modeling, and international business cycle.

IMF Working Paper Version: WP/15/259.

Media Coverage: The paper was featured in the Financial Times (January 27, 2016), in an interview with Kamiar Mohaddes. 


Abstract: The Italian economy has been struggling with low productivity growth and bank balance sheet strains. This paper examines the implications for firm productivity of adverse shocks to bank lending in Italy, using a novel identification scheme and loan-level data on syndicated lending. We exploit the heterogeneous loan exposure of Italian banks to foreign borrowers in distress, and find that a negative shock to bank credit supply reduces firms' loan growth, investment, capital-to-labor ratio, and productivity. The transmission from changes in credit supply to firm productivity relates to labor market rigidities, which delay or distort the adjustment of firms' desired labor and capital allocations, and thereby reduce firms' productivity. Effects are stronger for firms with higher capital intensity and external financial dependence. 

JEL Classifications: D24, E44, G01, G21.

Key Words: Italy, credit-supply shocks, productivity, labor market rigidities.

IMF Working Paper Version: WP/17/67.


Abstract: This paper contributes to the debate on the relationship between public and private investment in India along the following dimensions. First, acknowledging major structural changes that the Indian economy has undergone in the past three decades, we study whether public investment in recent years has become more or less complementary to private investment in comparison to the period before 1980. Second, we construct a novel data-set of quarterly aggregate public and private investment in India over the period 1996-2015 using investment-project data from the CapEx-CMIE database. Third, embedding a theory-driven long-run relationship on the model, we estimate a range of Structural Vector Error Correction Models (SVECMs) to re-examine the public and private investment relationship in India. Identification is achieved by decomposing shocks into those with transitory and permanent effects. Our results suggest that while public investment crowds out private investment in India over the period 1950-2012, the opposite is true when we restrict the sample to post 1980 or conduct a quarterly analysis since 1996. This change can likely be attributed to the policy reforms which started during early 1980s and gained momentum after the 1991 crisis. 

JEL Classifications: C32; E22; H54.

Key Words: India; Public and private investment; Crowding in (out).

IMF Working Paper Version: WP/15/264.


Abstract: The debt–growth relationship is complex, varying across countries and affected by global factors. While there is no simple universal threshold above which debt to GDP significantly depresses growth, high and rising public debt burdens slow growth in the long term, data from the past four decades indicate. 


Abstract: This paper estimates the short-term and long-run price and income elasticity of Indian exports, and investigates the role of supply-side bottlenecks in shaping India’s export demand relationship. We use disaggregated export volume data for 45 Indian industries over the period 1990-2013, as well as industry-specific international relative prices, for estimation. Our results indicate that Indian exports are sensitive to international relative-price competitiveness, world demand, and energy shortages. In addition, binding supply-side constraints (notably energy shortages) dampen price responsiveness in the short-term. 

JEL Classifications: F14, C23, O14, O24.

Key Words: India, export demand, manufacturing, income and price elasticity, energy shortages.

Media Coverage: The paper was featured in an article in the Business Line (April 28, 2016). 


Abstract: This paper studies the impact of commodity terms of trade (CToT) volatility on economic growth (and its sources) in a sample of 69 commodity-dependent countries, and assesses the role of Sovereign Wealth Funds (SWFs) and quality of institutions in their long-term growth performance. Using annual data over the period 1981--2014, we employ the Cross-Sectionally augmented Autoregressive Distributive Lag (CS-ARDL) methodology for estimation to account for cross-country heterogeneity, cross-sectional dependence, and feedback effects. We find that while CToT volatility exerts a negative impact on economic growth (operating through lower accumulation of physical capital and lower TFP), the average impact is dampened if a country has a SWF and a better institutional quality (hence a more stable government expenditure). 

Arabic Abstract: Click here for the Abstract in Arabic. 

JEL Classifications: C23, E32, F43, O13, O40.

Key Words: Economic growth, commodity prices, volatility, and sovereign wealth funds.

Dallas Fed Working Paper Version: No. 304.

Commodity Term of Trade (CToT) Data: Click here for the package containing annual data from 1981 to 2014 on growth rate of commodity terms of trade (CToT) and realized CToT volatility for 163 countries. 


Abstract: This paper examines whether a tipping point exists for real GDP growth in Italy above which the ratio of non-performing loans (NPLs) to total loans falls significantly. Estimating a heterogeneous dynamic panel-threshold model with data on 17 Italian regions over the period 1997-2014, we provide evidence for the presence of growth-threshold effects on the NPL ratio in Italy. More specifically, we find that real GDP growth above 1.2 percent, if sustained for a number of years, is associated with a significant decline in the NPLs ratio. Achieving such growth rates requires decisively tackling long-standing structural rigidities and improving the quality of fiscal policy. Given the modest potential growth outlook, however, under which banks are likely to struggle to grow out of their NPL overhang, further policy measures are needed to put the NPL ratio on a firm downward path over the medium term. 

JEL Classifications: C23, E44, G33.

Key Words: Italy, non-performing loans, real output growth, panel tests of threshold effects.

IMF Working Paper Version: WP/17/66.

Media Coverage: The paper was featured in a number of Italian newspapers.

Slides: Click here for the slides used in the AEA hosted session "Non-Performing Loans: Causes, Effects and Remedies", presented at the 2018 ASSA Annual Meeting. 


Abstract: China's GDP growth slowdown and a surge in global financial market volatility could both adversely affect an already weak global economic recovery. To quantify the global macroeconomic consequences of these shocks, we employ a GVAR model estimated for 26 countries/regions over the period 1981Q1 to 2013Q1. Our results indicate that (i) a one percent permanent negative GDP shock in China (equivalent to a one-off one percent growth shock) could have significant global macroeconomic repercussions, with world growth reducing by 0.23 percentage points in the short-run; and (ii) a surge in global financial market volatility could translate into a fall in world economic growth of around 0.29 percentage points, but it could also have negative short-run impacts on global equity markets, oil prices and long-term interest rates. 

JEL Classifications: C32, E32, F44, O53.

Key Words: China's slowdown, global financial market volatility, international business cycle, and Global VAR.

IMF Working Paper Version: WP/16/63.


Abstract: This paper employs a dynamic multi-country framework to analyze the international macroeconomic transmission of El Niño weather shocks. This framework comprises 21 country/region-specific models, estimated over the period 1979Q2 to 2013Q1, and accounts for not only direct exposures of countries to El Niño shocks but also indirect effects through third-markets. We contribute to the climate-macroeconomy literature by exploiting exogenous variation in El Niño weather events over time, and their impact on different regions cross-sectionally, to causatively identify the effects of El Niño shocks on growth, inflation, energy and non-fuel commodity prices. The results show that there are considerable heterogeneities in the responses of different countries to El Niño shocks. While Australia, Chile, Indonesia, India, Japan, New Zealand and South Africa face a short-lived fall in economic activity in response to an El Niño shock, for other countries, an El Niño occurrence has a growth-enhancing effect; some (for instance the U.S.) due to direct effects while others (for instance the European region) through positive spillovers from major trading partners. Furthermore, most countries in our sample experience short-run inflationary pressures as both energy and non-fuel commodity prices increase. Given these findings, macroeconomic policy formulation should take into consideration the likelihood and effects of El Niño episodes. 

JEL Classifications: C32, F44, O13, Q54.

Key Words: El Niño weather shocks, oil and non-fuel commodity prices, global macroeconometric modelling, international business cycle.

IMF Working Paper Version: WP/15/89.

Dallas Fed Working Paper Version: No. 239.

Media Coverage: This paper has been covered extensively in major international news outlets including Bloomberg, the Economist, the Financial Times, the New York Times, the Wall Street Journal, and the Washington Post. It has also been featured in national news agencies in Australia, China, India, Japan, New Zealand, the United Kingdom, and the United States, to name a few. The paper was also highlighted in Ken Rogoff's opinion piece on Extreme Weather and Global Growth.

Translation into other languages: You can also read a short version of the IMF Working Paper version in Arabic, French, Russian, and Spanish. A summary of the paper is also available in Persian.


Abstract: This paper studies the long-run impact of public debt expansion on economic growth and investigates whether the debt-growth relation varies with the level of indebtedness. Our contribution is both theoretical and empirical. On the theoretical side, we develop tests for threshold effects in the context of dynamic heterogeneous panel data models with cross-sectionally dependent errors and illustrate, by means of Monte Carlo experiments, that they perform well in small samples. On the empirical side, using data on a sample of 40 countries (grouped into advanced and developing) over the 1965-2010 period, we find no evidence for a universally applicable threshold effect in the relationship between public debt and economic growth, once we account for the impact of global factors and their spillover effects. Regardless of the threshold, however, we find significant negative long-run effects of public debt build-up on output growth. Provided that public debt is on a downward trajectory, a country with a high level of debt can grow just as fast as its peers.

JEL Classifications: C23, E62, F34, H6.

Key Words: Panel tests of threshold effects, long-run relationships, estimation and inference, large dynamic heterogeneous panels, cross-section dependence, debt, and inflation.

Supplement: Click here for the online supplement to "Is There a Debt-Threshold Effect on Output Growth?". 

Dallas Fed Working Paper Version: No. 245.

Matlab Codes for the CS-DL Estimators: Click here for the Matlab codes for the cross-sectionally augmented distributed lag (CS-DL) Mean Group and Pooled estimators.

Matlab Codes for Panel Tests of Threshold Effects: Click here for the Matlab codes to test for threshold effects in the context of dynamic heterogeneous panel data models with cross-sectionally dependent errors.

Media Coverage: The paper was featured in the Financial Times (May 3, 2017).


Abstract: El Niño has important effects on the world's economies–and not all of them are bad. 

Translation into other languages: This paper is also available in Arabic, French, Russian, and Spanish. 


Abstract: This paper develops a cross-sectionally augmented distributed lag (CS-DL) approach to the estimation of long-run effects in large dynamic heterogeneous panel data models with cross-sectionally dependent errors. The asymptotic distribution of the CS-DL estimator is derived under coefficient heterogeneity in the case where the time dimension (T) and the cross-section dimension (N) are both large. The CS-DL approach is compared with more standard panel data estimators that are based on autoregressive distributed lag (ARDL) specifications. It is shown that unlike the ARDL type estimator, the CS-DL estimator is robust to misspecification of dynamics and error serial correlation. The theoretical results are illustrated with small sample evidence obtained by means of Monte Carlo simulations, which suggest that the performance of the CS-DL approach is often superior to the alternative panel ARDL estimates particularly when T is not too large and lies in the range of 30≤T<100.

JEL Classifications: C23.

Key Words: Long-run relationships, estimation and inference, large dynamic heterogeneous panels, cross-section dependence.

Dallas Fed Working Paper Version: No. 223.

Matlab Codes for the CS-DL Estimators: Click here for the Matlab codes for the cross-sectionally augmented distributed lag (CS-DL) Mean Group and Pooled estimators.


Abstract: This paper analyzes spillovers from macroeconomic shocks in systemic economies (China, the Euro Area, and the United States) to the Middle East and North Africa (MENA) region as well as outward spillovers from a GDP shock in the Gulf Cooperation Council (GCC) countries and MENA oil exporters to the rest of the world. This analysis is based on a Global Vector Autoregression (GVAR) model, estimated for 38 countries/regions over the period 1979Q2 to 2011Q2. Spillovers are transmitted across economies via trade, financial, and commodity price linkages. The results show that the MENA countries are more sensitive to developments in China than to shocks in the Euro Area or the United States, in line with the direction of evolving trade patterns and the emergence of China in the global economy as a major player. Outward spillovers from the GCC region and MENA oil exporters are likely to be stronger in their immediate geographical proximity, but also have global implications. 

Arabic Abstract: Click here for the Abstract in Arabic. 

JEL Classifications: C32, E17, E32, F44, O53, Q41.

Key Words: Global VAR (GVAR), interconnectedness, global macroeconomic modeling, impulse responses, macroeconomic shocks, international business cycle, China, Euro Area, USA, Gulf Cooperation Council Countries, and the MENA region.

IMF Working Paper Version: WP/12/255.


Abstract: This paper examines the long-run relationship between consumer price index industrial workers (CPI-IW) inflation and GDP growth in India. We collect data on a sample of 14 Indian states over the period 1989–2013, and use the cross-sectionally augmented distributed lag (CS-DL) approach of Chudik et al. (2013) as well as the standard panel ARDL method for estimation––to account for cross-state heterogeneity and dependence, dynamics and feedback effects. Our findings suggest that, on average, there is a negative long-run relationship between inflation and economic growth in India. We also find statistically-significant inflation-growth threshold effects in the case of states with persistently-elevated inflation rates of above 5.5 percent. This suggest the need for the Reserve Bank of India to balance the short-term growth-inflation trade-off, in light of the long-term negative effects on growth of persistently-high inflation. 

JEL Classifications: C23, E31, O40.

Key Words: India, inflation, growth, threshold effects, cross-sectional heterogeneity and dependence.

IMF Working Paper Version: WP/14/222.

Media Coverage: The paper was featured in an article in the liveMint (December 22, 2014).


Abstract:  Do congestion externalities offer a reason to depart from complete price stability as the only goal of monetary policy in a New Keynesian model featuring search frictions, and under what conditions is the welfare cost of labor-market distortions sizable? This paper tries to answer these questions by deriving a linear quadratic framework for optimal monetary policy analysis — ala Benigno and Woodford (2005)— that is consistent with a Pareto inefficient labor market allocation, where the Hosios (1990) condition is not satisfied, and as a consequence, the flexible-price steady state of the model is distorted. The results indicate that maximization of expected utility of the representative household is equivalent to minimizing a quadratic loss function that consists of inflation, and two appropriately defined gaps involving unemployment and labor market tightness; and that search externalities give rise to an endogenous cost-push term in the New Keynesian Phillips Curve. Hence, full stabilization of both inflation and the welfare relevant unemployment gap is not feasible and deviation from complete price stability is welfare improving (because it allows to contain inefficient unemployment fluctuations). The inflation-unemployment trade-off and the welfare cost of search externalities are shown to be quantitatively sizable in response to shocks when steady state distortions are large and thereby the cost-push term is more volatile over the business cycle. Finally, a monetary policy rule that responds to unemployment growth rate is presented to be more efficient than a rule responding to unemployment gap.

JEL Classifications: E52, E61, J64.

Key Words: Optimal monetary policy, unemployment, search externalities.


Abstract: This paper studies the impact of the level and volatility of the commodity terms of trade on economic growth, as well as on the three main growth channels: total factor productivity, physical capital accumulation, and human capital acquisition. We use the standard system GMM approach as well as a cross-sectionally augmented version of the pooled mean group (CPMG) methodology of Pesaran et al. (1999) for estimation. The latter takes account of cross-country heterogeneity and cross-sectional dependence, while the former controls for biases associated with simultaneity and unobserved country-specific effects. Using both annual data for 1970--2007 and five-year non-overlapping observations, we find that while commodity terms of trade growth enhances real output per capita, volatility exerts a negative impact on economic growth operating mainly through lower accumulation of physical capital. Our results indicate that the negative growth effects of commodity terms of trade volatility offset the positive impact of commodity booms; and export diversification of primary commodity abundant countries contribute to faster growth. Therefore, we argue that volatility, rather than abundance per se, drives the "resource curse" paradox. 

Arabic Abstract: Click here for the Abstract in Arabic. 

JEL Classifications: C23, F43, O13, O40.

Key Words: Growth models, resource curse, commodity prices, volatility.

Data Supplement: Click here for the online data supplement to "Commodity Price Volatility and the Sources of Growth".

Data: Click here for the data used in this paper.

IMF Working Paper Version: WP/12/12.


Abstract: We employ a set of sign restrictions on the impulse responses of a Global VAR model, estimated for 38 countries/regions over the period 1979Q2-2011Q2, as well as bounds on impact price elasticities of oil supply and oil demand to discriminate between supply-driven and demand-driven oil-price shocks, and to study the time profile of their macroeconomic effects across a wide range of countries and real/financial variables. We show that the above identification scheme can greatly benefit from the cross-sectional dimension of the GVAR by providing a large number of additional cross-country sign restrictions and hence reducing the set of admissible models. The results indicate that the economic consequences of a supply-driven oil-price shock are very different from those of an oil-demand shock driven by global economic activity, and vary for oil-importing countries compared to energy exporters. While oil importers typically face a long-lived fall in economic activity in response to a supply-driven surge in oil prices, the impact is positive for energy-exporting countries that possess large proven oil/gas reserves. However, in response to an oil-demand disturbance, almost all countries in our sample experience long-run inflationary pressures, an increase in real output, a rise in interest rates, and a fall in equity prices. 

Arabic Abstract: Click here for the Abstract in Arabic. 

JEL Classifications: C32, E17, F44, F47, Q41.

Key Words: Global VAR (GVAR), interconnectedness, global macroeconomic modeling, sign restrictions, impulse responses, international business cycle, oil-demand and oil-supply shocks.

Working Paper Version: March 18, 2014.

Media Coverage: The paper was cited in an IMF blog (iMFdirect) about the recent oil price slump by Rabah Arezki and Olivier Blanchard (December 22, 2014).


Abstract: This paper extends the long-run growth model of Esfahani et al. (2012) to a labor exporting country that receives large inflows of external income—the sum of remittances, FDI and general government transfers—from major oil-exporting economies. The theoretical model predicts real oil prices to be one of the main long-run drivers of real output. Using quarterly data between 1979 and 2009 on core macroeconomic variables for Jordan and a number of key foreign variables, we identify two long-run relationships: an output equation as predicted by theory and an equation linking foreign and domestic inflation rates. It is shown that real output in the long run is shaped by: (i) oil prices through their impact on external income and in turn on capital accumulation, and (ii) technological transfers through foreign output. The empirical analysis of the paper confirms the hypothesis that a large share of Jordan's output volatility can be associated with fluctuations in net income received from abroad. External factors, however, cannot be relied upon to provide similar growth stimuli in the future, and therefore it will be important to diversify the sources of growth in order to achieve a high and sustained level of income.

Arabic Abstract: Click here for the Abstract in Arabic. 

JEL Classifications: C32, C53, E17, F43, F47, Q32.

Key Words: Growth models, long run relations, Jordanian economy, remittances, FDI, oil price shocks, foreign output and inflation shocks, and error correcting relations.

IMF Working Paper Version: WP/11/291.


Abstract: This article explores whether natural resource abundance is a curse. Our results reveal that oil abundance has a positive effect on both long-run income levels and short-run economic growth. 

In the News: Benefits by the barrel 


Abstract: This paper explores whether natural resource abundance is a curse or a blessing. To do so, we firstly develop a theory consistent econometric model, in which we show that there is a long run relationship between real income, the investment rate, and the real value of oil production. Secondly, we investigate the long-run (level) impacts of natural resource abundance on domestic output as well as the short-run (growth) effects. Thirdly, we explicitly recognize that there is a substantial cross-sectional dependence and cross-country heterogeneity in our sample, which covers 53 oil exporting and importing countries with very different historical and institutional backgrounds, and adopt the non-stationary panel methodologies developed by Pesaran (2006) and Pedroni (2000) for estimation. Our results, using the real value of oil production, rent or reserves as a proxy for resource endowment, reveal that oil abundance has a positive effect on both income levels and economic growth. While we accept that oil rich countries could benefit more from their natural wealth by adopting growth and welfare enhancing policies and institutions, we challenge the common view that oil abundance affects economic growth negatively. 

JEL Classifications: C23, O13, O40, Q32.

Key Words: Growth models, natural resource curse, cointegration, cross sectional dependence, common correlated effects, and oil.

Working Paper Version: July 10, 2011.

Data: Click here for the data used in this paper. You can replicate the results in Tables 4 and 8 by using these codes and amending the 4 lines relating to the folder that the data needs to be read from as well as the range and the relevant sheet of the .xls file provided.