Research

             Conference in Rome, Italy, 2022

Job Market Paper

IMF trade forecasts for crisis countries: Bias, inefficiency, and their origins (with Theo Eicher)
Published in International Journal of Forecasting; Presented at UCLA Seminar

External sector surveillance and stabilization are core missions of the International Monetary Fund (IMF). Since 1992, the IMF approved over 600 crisis country loan programs, conditional on reforms and performance targets that are contingent on IMF crisis assessments and recovery forecasts. The literature evaluating IMF crisis forecasts has primarily focused on GDP, inflation, and fiscal budgets, but IMF programs often originate with balance of payments crises. Our evaluation of IMF imports/exports/exchange rates in crisis countries reveals a surprising dichotomy: import forecasts are largely efficient and unbiased, while exports and exchange rate forecasts exhibit substantial biases and inefficiencies. We show forecast errors in the full sample are driven by deeply flawed IMF forecasts for LICs in crisis. Fixed exchange rate LICs (predominantly African franc zone countries) receive systematically inefficient import forecasts. Exchange rate forecasts for LICs with flexible exchange rates are so inefficient, they cannot outperform a naive random walk, and over 30 percent of the forecasts cannot match the exchange rate’s directional movement during the first year of the recovery. Examining the sources of biases and inefficiencies, we highlight effects of conditionality and geopolitics that were not fully accounted for in IMF forecasts, specifically those relating to arrears (domestic and foreign), fiscal finance (balance and credit limits), policy reforms (trade and government), (civil) wars, and elections.

Other Publications

Systemic Bias of IMF Reserve and Debt Forecasts for Program Countries (with Theo Eicher)
Forthcoming at International Journal of Forecasting;

Countries experiencing balance of payments (BOP) crises may obtain IMF loans to stabilize external accounts. These loans require IMF programs that outline performance targets to ensure forecasted recovery trajectories. Two key indicators of external account performance are reserves and short-term external debt (“STdebt”). Extensive literature evaluates IMF forecasts, but reserves and STdebt have not been studied. We construct a database of nearly 300 BOP crisis countries with IMF BOP programs from 1992–2019. Reserve forecasts are shown to be systematically biased and inefficient, a result that is startlingly persistent across (a) degrees of capital mobility, (b) trade openness, (c) exchange rate regimes, (d) inflation, and (e) country income levels. We show the bias is driven by deeply pessimistic IMF reserve forecasts that underestimate reserves and systematically ignore information known at the time of the forecast. STdebt forecasts are also inefficient but with an optimistic bias, systematically underestimating future debt. If STdebt is used to peg reserve requirements, the optimistic bias of STdebt forecasts may drive the pessimistic bias of reserve forecasts.

Public Debt and Real GDP: Revisiting the Impact (with Constance de Soyres and Mengxue Wang)
IMF WP Number: 2022/076; Presented at PDM Conference, IMF FIN Seminar, and PSU Seminar

This paper provides new empirical evidence of the impact of an unanticipated change in public debt on real GDP. Using public debt forecast errors, we identify exogenous changes in public debt to assess the impact of a change in the debt to GDP ratio on real GDP. By analyzing data on gross public debt for 178 countries over 1995-2020, we find that the impact of an unanticipated increase in public debt on the real GDP level is generally negative and varies depending on other fundamental characteristics. Specifically, an unanticipated increase in the public debt to GDP ratio hurts real GDP level for countries that have (i) a high initial debt level or (ii) a rising debt trajectory over the five preceding years. On the contrary, an unanticipated increase in public debt boosts real GDP for countries that have (iii) a low-income level or (iv) completed the HIPC debt relief initiative.

Working Papers

• Differential Growth Effects of Different Types of Government Expenditures (with Stephen Turnovsky)
  Presented at IMF Finance Departmental Seminar on 11/9/2022

  Existing results show that fiscal spending negatively impacts growth in general. However, evidence and reasons as to how the usage of fiscal revenue (additional government borrowings or tax) affects growth are limited since it is exceedingly difficult to identify based on existing models. To address this issue in a general framework, we construct an endogenous growth model based on Bruce and Turnovsky (1999). Analyzing the resulting empirical nuances by applying Bayesian Model Averaging, our stylized results for 180 countries from 1990-2019 reveal that public debt and tax generally hurt growth. On the contrary, infrastructure investment will positively impact economic growth regardless of fiscal origin (i.e., public debt, tax). The estimated response was strictly negated by government consumption expenditure. Our findings suggest that as a policy implication, when governments face a trade-off in supporting current consumption or boosting infrastructure investment, they are encouraged to spend more for the latter since it is forecasted to provide robust increases in economic growth.

Work in Progress Paper

• International Reserve and Cryptocurrencies: Is There Hedging Effect? (single author)

Publication as Research Assistant

• The accuracy of IMF crises nowcasts (by Theo Eicher and Monica Gao Rollinson)
  Published in International Journal of Forecasting