Research & Other Publications
Research Publications
November 2021
with Chris Redl (IMF Working Paper, WP/2021/263)
Abstract: We produce a social unrest risk index for 125 countries covering a period of 1996 to 2020. The risk of social unrest is based on the probability of unrest in the following year derived from a machine learning model drawing on over 340 indicators covering a wide range of macro-financial, socioeconomic, development and political variables. The prediction model correctly forecasts unrest in the following year approximately two-thirds of the time. Shapley values indicate that the key drivers of the predictions include high current and prior levels of unrest, food price inflation, and mobile phone penetration, which accord with previous findings in the literature.
July 2021
with Yongquan Cao; Yingjie Fan; Monica Petrescu; and Zaijin Zhan (IMF Working Paper, WP/2021/192)
Abstract: Direct measurement of corruption is difficult due to its hidden nature, and measuring the perceptions of corruption via survey-based methods is often used as an alternative. This paper constructs a new non-survey based perceptions index for 111 countries by applying sentiment analysis to Financial Times articles over 2005–18. This sentiment-enhanced corruption perception index (SECPI) captures not only the frequency of corruption related articles, but also the articles’ sentiment towards corruption. This index, while correlated with existing corruption perception indexes, offers some distinct advantages, including heightened sensitivity to current events (e.g., corruption investigations and elections), availability at a higher frequency, and lower costs to update. The SECPI is negatively correlated with business environment and institutional quality. Increases in the perceived incidence or scope of corruption influences economic agents’ behaviors, and thus economic dynamics. We found that when the SECPI is at least one standard deviation above the mean, the growth per capita falls by 0.65 percentage point on average, with more pronounced impacts for emerging market and low income countries.
How to Assess Country Risk (Technical Manual)
May 2021
Abstract: The IMF’s Vulnerability Exercise (VE) is a cross-country exercise that identifies country-specific near-term macroeconomic risks. As a key element of the Fund’s broader risk architecture, the VE is a bottom-up, multi-sectoral approach to risk assessments for all IMF member countries. The VE modeling toolkit is regularly updated in response to global economic developments and the latest modeling innovations. The new generation of VE models presented here leverages machine-learning algorithms. The models can better capture interactions between different parts of the economy and non-linear relationships that are not well measured in ”normal times.” The performance of machine-learning-based models is evaluated against more conventional models in a horse-race format. The paper also presents direct, transparent methods for communicating model results.
with Anne Oeking; Manuk Ghazanchyan; David Corvino; Ananya Shukla; and Lamin Leigh. (IMF Working Paper, WP/18/195, 2018)
Abstract: Corruption is macro-relevant for many countries, but is often hidden, making measurement of it—and its effects—inherently difficult. Existing indicators suffer from several weaknesses, including a lack of time variation due to the sticky nature of perception-based measures, reliance on a limited pool of experts, and an inability to distinguish between corruption and institutional capacity gaps. This paper attempts to address these limitations by leveraging news media coverage of corruption. We contribute to the literature by constructing the first big data, cross-country news flow indices of corruption (NIC) and anti-corruption (anti-NIC) by running country-specific search algorithms over more than 665 million international news articles. These indices correlate well with existing measures of corruption but offer additional richness in their time-series variation. Drawing on theory from the corporate finance and behavioral economics literature, we also test to what extent news about corruption and anti-corruption efforts affects economic agents’ assessments of corruption and, in turn, economic outcomes. We find that NIC shocks appear to negatively impact both financial (e.g., stock market returns and yield spreads) and real variables (e.g., growth), albeit with some country heterogeneity. On average, NIC shocks lower real per capita GDP growth by 3 percentage points over a two-year period, illustrating persistence in the effect of such shocks. Conversely, there is suggestive evidence that anti-NIC efforts appear to have a sustained positive macro impact only when paired with meaningful institutional strengthening, proxied by capacity development efforts.
with Magnus Saxegaard. (IMF Working Paper, WP/16/113, 2016)
Abstract: In recent years, the relationship between the real effective exchange rate (REER) and exports has weakened in South Africa–while exports still rise in response to real exchange rate depreciations, the REER-export elasticity is well below historical estimates. The literature has put forward a number of alternative explanations for recent disconnects and dilutions in the REER-export relationship–from increasingly multi-national supply-chains to muted exchange rate pass-through. This research explores a new explanation–the role of domestic economic policy uncertainty in reducing the responsiveness of exports to relative price changes. The primary channel for this effect is decreased and delayed investment as firms adopt a “wait and see” approach to exporting-related fixed costs (e.g., market entry costs, product entry costs, expansion/upgrading costs, or hiring costs to meet increased demand). To do so, we construct a novel ?news chatter? measure of South African policy uncertainty and examine how it, paired with other supply-side constraints, can improve our understanding of export competitiveness and performance. We find that increased policy uncertainty diminishes the responsiveness of exports to relative price changes. Moreover, increases in policy uncertainty are also directly associated with both short and long-run level effects on export performance. To date, the uncertainty explanation is robust to alternative explanations that center on credit constraints, supply-chains, and threshold/ boundary effects. Finally, we show that a measure of competitiveness that adjusts the REER for uncertainty and supply-side constraints greatly outperforms the unadjusted REER in tracking exports in South Africa. RSA Policy Uncertainty Index (Q1 1990 - Q3 2018)
with A. Michael Spence. (American Economic Review: Papers & Proceedings, 104(5), 2014, pg. 272-277).
Abstract: There are lessons advanced markets can glean from developing market experiences with defective growth patterns. This paper focuses on the U.S. economy where there are relatively detailed data on structural trends and where the structural divergences and rigidities of the eurozone are less present. We examine the structural evolution of the economy in relation to cyclical forces and balance sheet shocks by employing Jensen and Kletzer’s (2005) approach for measuring the tradability of an industry based on its geographic concentration. The data show that external demand is already helping shift the U.S.’s structure back toward a more sustainable balance; the tradable sector has generated more than half of gross gains since the start of the recovery even though it is only a third of the economy. However, there are also potential hurdles to this growth pattern. Most of the post-crisis employment growth originated in largely non-tradable industries, indicating a divergence between drivers of employment and drivers of value added. This trend has and will continue to result in worsening income inequality.
with Matthew Clair and Peter Blair Henry (Proceedings of the American Philosophical Society, 157(1), 2013, pg. 32-57).
Abstract: From 1961 to 2011, Barbados’s GDP per capita grew roughly two times faster than Jamaica’s. As a result, the income gap between Barbados and Jamaica is now more than three times larger than at the time of independence. Qualitative historical analysis, exploiting the interplay between public policy and entrepreneurship before and after the 1973 oil price shock, demonstrates that pro-entrepreneurial policies in Barbados versus anti-business policies in Jamaica explain in part the economic divergence of these two islands.
with A. Michael Spence. (Comparative Economic Studies, 54(4), 2012, pg. 703-738).
Abstract: This paper examines the evolving structure of the American economy, specifically the trends in employment, value added, and value added per employee from 1990 to 2008. Employing historical time series data from the Bureau of Labor Statistics and the Bureau of Economic Analysis, US industries are separated into internationally tradable and non-tradable components, allowing for employment and value added trends at both the industry and the aggregate level to be examined. Value added grew across the economy, but almost all of the incremental employment increase of 27.3 million jobs was on the non-tradable side, where government and health care are the largest employers and provided the largest increments (an additional 10.4 million jobs) over the past two decades. There are obvious questions about whether those trends can continue; without fast job creation in the non-tradable sector during this period, the United States would already have faced a major employment challenge. The non-tradable sector also experienced much slower growth in value added per employee; because value added per employee is highly correlated with income, it goes a long way to explain the stagnation of wages across large segments of the workforce. The evolution of the US economy supports the notion of there being a long-term structural challenge with respect to the quantity and quality of employment opportunities in the United States.
with David Neves, Michael Samson, Ingrid van Niekerk, and Andries du Toit. (Finmark Trust, 2009, 60).
Abstract: This research examines the effectiveness of social grants in South Africa, and how recipients use their grants. As a form of social protection, social grants not only ameliorate poverty and provide a safety net, they also potentially promote social transformation. The main report pulls together a number of aspects. The research combines both qualitative and quantitative inquiries. The qualitative inquiry is built on a number of urban and rural case studies, and examines not only the way in which social grants are used, but also the larger context that drives decision-making. Four of these in-depth case studies are in the report. The quantitative analysis draws on a constructed panel dataset from Statistics South Africa’s Labour Force Surveys conducted in 2001, 2002 and 2003 (Stats SA, 2001; 2002; 2003), and employs a quasi-experimental propensity score matching approach to compare grant recipients with non-recipients of a similar socioeconomic status. The empirical research confirms that cash transfers in South Africa support consumption and improve the welfare of recipients and their broader households. The data also suggests that social grants facilitate investments in human capital (nutrition and schooling), along with investments in productive assets and activities. The qualitative and quantitative data suggest that social grants support financial activities. Grant beneficiaries have higher levels of savings, and are able to engage with credit markets on generally more favorable terms. The data also point to the way in which social grant income helps satisfy beneficiaries’ needs for precautionary savings.
Non-Research Publications
December 2021
with Alberto Behar (IMF How-To Notes).
Abstract: This note explains the value of strategic foresight and provides implementation advice based on the IMF’s experience with scenario planning and policy gaming. Section II provides an overview of strategic foresight and some of its tools. Scenario planning and policy gaming have been the Fund’s main foresight techniques so far, though other tools have been complementary. Accordingly, section III focuses on the scenario planning by illustrating applications before detailing the methods we have been using, while section IV describes policy gaming including the matrix policy gaming approach with which we have experimented so far. Section V summarizes the key points. In so doing, the note extends an invitation to those in the economics and finance fields (e.g., researchers, policymakers) to incorporate strategic foresight in their analysis and decision making.
2021 Comprehensive Surveillance Review— Background Paper on Scenario Planning
May 2021
with Alberto Behar (IMF Policy Paper, No. 2021/035 )
Abstract: The scenario planning exercises help to draw out the surveillance priorities and stress- test the robustness of those priorities to uncertainties in the decade ahead. To inform the two priorities on confronting risks and uncertainties and mitigating spillovers, the scenarios illustrate how different shocks and alternative policy approaches carry their own risks and can have both positive and negative spillovers. The scenarios also illustrate some of the complex economic and non-economic factors that feed into the priority on economic sustainability and demonstrate how resource constraints and changing economic structures underpin the need for a unified policy approach.
Work in Progress
Unpacking Policy Uncertainty: Evidence from European Firms
Abstract: The intensifying nature of policy uncertainty makes it a popular explanation for recent weak economic performance and puzzles. However, the empirical literature is limited in its ability to make causal claims because it largely relies on macro-level measures of policy uncertainty and treats the concept as homogeneous but indeterminate. This research addresses these weaknesses by exploiting variation in firms' exposure to external markets to construct a firm-level measure of policy uncertainty. The approach both highlights a new channel for policy uncertainty and allows for stronger causal identification of the effects of policy uncertainty on economic performance. As part of this effort, I refine prior approaches to measuring policy uncertainty and distinguish between generic, fiscal, monetary, and trade policy uncertainty. I find that firms with greater exposure to external markets tend to experience larger declines in investment, sales, profits, and employment when fiscal and monetary policy uncertainty increase. Unexpectedly, increases in trade policy uncertainty appear to have a positive impact on exports for exposed firms. Both sets of findings can be rationalized in a standard model of firm investment under uncertainty. In particular, I present evidence that exposed firms may perceive increased uncertainty around trade agreement negotiations as a signal that negative outcomes are less likely in the near-term, incentivizing immediate investments.
Valuing Justice: the International Criminal Court’s Indictment of the “Ocampo 6”
Abstract: When the 2013 Kenyan election transpired without violence or allegations of fraud, international legal scholars argued that the International Criminal Court’s (ICC) ongoing case against six of Kenya’s top leaders drove the positive outcome, acting as a catalyst for political stability in the country. This research examines whether investors’ valuations of listed Kenyan firms support such an assertion. I find little evidence of investors levying any aggregative opinion—good or bad—on the ICC’s intervention for the economy as a whole. While overall abnormal market returns tended to be negative during ICC news shocks, difference-in-differences estimations uncover that unconnected firms did not experience significantly negative revaluations surrounding adverse ICC news announcements. This finding suggests that investors in Kenyan firms have been discerning when it comes to the fallout associated with the ICC case by focusing their revaluation efforts on connected firms. To this end, there is strong evidence that connected firms experienced declines in abnormal returns during ICC shocks, with particularly negative revaluations for ICC-board linked firms. One explanation for the disproportionate impact on ICC-board linked firms is that these firms have more transparent links to the current President, and ICC accused, Uhuru Kenyatta, relative to firms with board members that serve as “inner circle” advisors to the ICC accused. This research not only confirms that close connections with political leadership have value for connected firms, but also that a lack of transparency about such connections can potentially shield connected firms from large negative shocks related to their connections.