William Witheridge

Research

Working Papers

Monetary Policy and Fiscal-led Inflation in Emerging Markets

I study monetary policy and inflation in emerging markets and the interaction with fiscal policy. I measure monetary policy shocks—unanticipated changes in monetary policy—using changes in exchange rates around monetary policy announcements. I validate this approach against existing monetary policy shocks. I find that in response to an unanticipated rise in interest rates—a monetary policy tightening—inflation increases and output falls in emerging markets. This inflation response is opposite the one generally found for advanced economies. I show the results are in line with high-frequency changes in inflation expectations. I develop a small open economy New Keynesian model with monetary and fiscal policy interactions. I show a fiscal-led policy mix, i.e., a weak fiscal policy reaction of taxes to changes in government debt and accommodative monetary policy, can explain the increase in inflation. The estimated quantitative model finds a fiscal-led policy mix in emerging markets. The fiscal-led policy mix is supported by the effect of U.S. monetary policy shocks on emerging markets. I also study optimal monetary policy conditional on a fiscal-led policy regime.

The Exchange Rate as an Industrial Policy

with Pablo Ottonello and Diego Perez

We study the role of exchange rates in industrial policy. We construct an open-economy macroeconomic framework with Marshallian production externalities and imperfect capital mobility, and provide conditions under which foreign exchange interventions that keep the currency undervalued can improve welfare. A quantitative analysis applied to China’s growth take-off shows that the observed foreign exchange interventions significantly increased output growth. Our analysis shows that in economies featuring a dynamic path of externalities, the optimal exchange rate industrial policy can lead to sizable welfare gains, especially when combined with time-invariant conventional industrial policies.

The Inflation Consequences of Political Intervention in Monetary Policy

I study the impact of political intervention in monetary policy on inflation. I examine episodes of political pressure on central banks in emerging markets and find that market inflation expectations increase following political pressure events. I model the game between a government and a central bank in a New Keynesian economy where the government can intervene and take control of monetary policy. I show the central bank may set inflation above its target to prevent government intervention. The quantitative model finds the threat of government intervention in monetary policy can explain half of the observed increase in inflation above the central bank’s target.

Finalist, Young Economist Prize 2023, Qatar Centre for Global Banking & Finance, King’s College London

A Genie in a Bottle? Globalization and Domestic Inflation

with Dan Andrews and Peter Gal

Declining inflation and rising trade integration over recent decades has sparked debate on the role of globalization in domestic inflation. This paper explores the implications of global value chain (GVC) integration for producer prices using industry-level data. We find rising participation in GVCs is associated with lower domestic inflationary pressure. Investigating the channels, we show increased GVC participation is associated with raising productivity and reducing wages in importing countries, especially when low-wage countries are integrated in supply chains. We also present evidence that GVC integration dampens the reaction of prices to domestic demand, but accentuates the impact of global demand.

OECD Economics Department Working Paper version

Productivity and Innovation at the Industry Level: What Role for Global Value Chain Integration?

with Peter Gal

This paper explores the role of Global Value Chains (GVCs) - international trade in intermediate inputs - for multi-factor productivity growth using a range of cross-country industry-level data sources. We find that greater participation in GVCs is associated with faster domestic productivity growth at the industry level. We also find that the productivity-enhancing direction of trade differs between sectors. For manufacturing sectors, greater use of intermediate inputs from foreign sources (backward participation) is linked with faster productivity growth. For services sectors, it is more the sales of intermediates (forward participation) that is associated with productivity gains, in line with the traditional role of services in foreign trade as providing inputs to other activities. We also find that GVC integration spurs greater domestic innovation activity.