Person:
Pennings, Steven

Macroeconomic and Growth Team, Development Research Group

Fields of Specialization

Fiscal policy, Monetary policy, Growth, Business cycles, Macroeconomics, International economics, Development economics

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Macroeconomic and Growth Team, Development Research Group

Last updated January 31, 2023

Biography

Steven Pennings is an Economist in the World Bank's Development Research Group, Macroeconomics and Growth Team. His research interests include fiscal policy (especially fiscal transfers), economic growth, exchange rate pass-through, and monetary policy. He has worked at the Federal Reserve Board, the IMF, the Asian Development Bank, the Reserve Bank of Australia, as well as for Save the Children in Vietnam. He studied at New York University (PhD in economics).

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Publication Search Results

Now showing 1 - 10 of 18

The Impact of Monetary Policy on Financial Markets in Small Open Economies: More or Less Effective During the Global Financial Crisis?

(Elsevier, 2015-06) Pennings, Steven ; Ramayandi, Arief ; Tang, Hsiao Chink

This paper estimates the impact of monetary policy on exchange rates and stock prices of eight small open economies: Australia, Canada, the Republic of Korea, New Zealand, the United Kingdom, Indonesia, Malaysia, and Thailand. On average across these countries in the full sample, a one percentage point surprise rise in official interest rates leads to a 1% appreciation of the exchange rate and a 0.5–1% fall in stock prices, with somewhat stronger effects in OECD countries than non-OECD countries (though differences are sometimes not significant). We find little robust evidence of a change in the effect of monetary policy surprises during the recent financial crisis.
Pass-Through of Competitors' Exchange Rates to U.S. Import and Producer Prices

(Elsevier, 2017-03) Pennings, Steven

This paper shows that in theory and BLS microdata, the prices of imported goods respond to the exchange rates (ER) of the producer's foreign competitors. In contrast, standard models have no role for competitors' ERs. Excluding the effects of competitors' exchange rates typically biases upwards estimates of bilateral exchange rate pass-through because competitors' ERs and bilateral ERs are positively correlated. A multi-country version of Atkeson and Burstein's (2008) industry aggregation model is able to explain a sizable proportion of pass-through of competitors' exchange rates to import prices, and also predicts pass-through of foreign competitors' prices and pass-through of competitors' ERs to US producer prices — both of which are supported in the data. The results suggest that pass-through will be larger for ER movements shared by a greater fraction of foreign competitor countries.
When Is the Government Transfer Multiplier Large?

(Elsevier, 2017-11) Giambattista, Eric ; Pennings, Steven

Transfers to individuals were a larger part of the 2009 US stimulus package than government purchases. Using a two-agent New Keynesian model, we show analytically that the multiplier on targeted transfers to financially constrained households is (i) larger than the purchase multiplier if the zero lower bound (ZLB) binds, and (ii) is more sensitive to the degree of monetary accommodation of inflation. Targeted transfers provide the same boost to demand as purchases, but lower aggregate supply relative to purchases, as those receiving transfers want to work less. When the aggregate demand curve inverts — such as when the ZLB binds — the extra inflation from lower supply boosts the multiplier. We show this result also holds quantitatively in a medium-scale version of the model.
Consumption Smoothing and Shock Persistence: Optimal Simple Fiscal Rules for Commodity Exporters

(World Bank, Washington, DC, 2017-04) Mendes, Arthur ; Pennings, Steven

A common criticism of balanced budget fiscal rules is that they increase the consumption volatility of financially constrained households who are unable to smooth consumption. This paper evaluates the welfare consequences of simple fiscal rules in a model of a small commodity-exporting country with a share of financially constrained households, where fiscal policy takes the form of transfers. A main finding is that balanced budget rules for commodity revenues often outperform more sophisticated fiscal rules where commodity revenues are saved in a Sovereign Wealth Fund (SWF). Because commodity price shocks are typically highly persistent, the households' current income is close to their permanent income, making balanced budget rules close to optimal. For commodities like oil, where price shocks are highly persistent, it is optimal to spend more than two-thirds of windfall revenues in times of high prices, and in some cases even spend the entire windfall. But for commodities where price shocks are less persistent, like bananas or sugar, the optimal rule involves spending less than half of above-average commodity revenues (with the rest saved in a SWF). It is also best to respond counter-cyclically to non-resource GDP shocks, because those shocks are less persistent (and also affect households other income). The government does not have the ability to perfectly smooth constrained households’ consumption without adversely affecting unconstrained households.
Macroeconomic Policy in the Time of COVID-19: A Primer for Developing Countries

(World Bank, Washington, DC, 2020-03-26) Loayza, Norman V. ; Pennings, Steven

COVID-19 not only represents a worldwide public health emergency but has become an international economic crisis that could surpass the global financial crisis of 2008–09. Right now, containment and mitigation measures are necessary to limit the spread of the virus and save lives. However, they come at a cost, as shutdowns imply reducing economic activity. These human and economic costs are likely to be larger for developing countries, which generally have lower health care capacity, larger informal sectors, shallower financial markets, less fiscal space, and poorer governance. Policy makers will need to weigh carefully the effectiveness and socioeconomic consequences of containment and mitigation policies, responding to epidemiological evidence on how the virus spreads and trying to avoid unintended consequences. Economic policy in the short term should be focused on providing emergency relief to vulnerable populations and affected businesses. The short-term goal is not to stimulate the economy—which is impossible, given the supply-restricting containment measures, but rather to avoid mass layoffs and bankruptcies. In the medium term, macroeconomic policy should turn to recovery measures, which typically involve monetary and fiscal stimulus. However, in many developing countries, stimulus may be less effective because monetary transmission is weak and fiscal space and fiscal multipliers are often small. A more viable goal for macroeconomic policy in developing countries is avoiding procyclicality, ensuring the continuity of public services for the economy, and supporting the vulnerable. Because COVID-19 is truly a global shock, international coordination is essential, in economic policy,health care and science, and containment and mitigation efforts. Critical times call for well-designed government action and effective public service delivery—preserving, rather than ignoring, the practices for macroeconomic stability and proper governance that serve in good and bad times.
One Rule Fits All? Heterogeneous Fiscal Rules for Commodity Exporters When Price Shocks Can Be Persistent: Theory and Evidence

(World Bank, Washington, DC, 2020-09) Mendes, Arthur ; Pennings, Steven

Commodity-exporting developing economies are often characterized as having needlessly procyclical fiscal policy: spending when commodity prices are high and cutting back when prices fall. The standard policy advice is instead to save during price windfalls and maintain spending during price busts. This paper questions this characterization and policy advice. Using a New Keynesian model, it finds that optimal fiscal policy is heterogeneous depending on the commodity exported and exchange rate regime. Optimal fiscal policy is often procyclical in countries with floating exchange rates because many commodity price shocks are highly persistent, and so they should be spent according to the permanent income hypothesis. In contrast, in countries with fixed exchange rates, optimal fiscal policy becomes countercyclical to smooth the business cycle. Empirically, the paper introduces a new measure of fiscal cyclicality, the marginal propensity to spend (MPS) an extra dollar of commodity revenues, and shows that it is moderately procyclical overall but highly heterogeneous across countries depending on their characteristics. Consistent with theory, the MPS is more procyclical in countries with floating exchange rates than those with fixed exchange rates. Moreover, in countries with floating exchange rates, the MPS is higher in countries facing more persistent commodity price shocks.
When is the Government Transfer Multiplier Large?

(World Bank, Washington, DC, 2017-09) Giambattista, Eric ; Pennings, Steven

Transfers to individuals were a larger part of the 2009 U.S. stimulus package than government purchases. Using a two-agent New Keynesian model, this paper shows analytically that the multiplier on targeted transfers to financially constrained households is (i) larger than the purchase multiplier if the zero lower bound (ZLB) binds, and (ii) is more sensitive to the degree of monetary accommodation of inflation. Targeted transfers provide the same boost to demand as purchases, but lower aggregate supply relative to purchases, as those receiving transfers want to work less. When the aggregate demand curve inverts, such as when the zero lower bound binds, the extra inflation from lower supply boosts the multiplier. This result also holds quantitatively in a medium-scale version of the model.
Assessing the Effect of Public Capital on Growth: An Extension of the World Bank Long-Term Growth Model

(World Bank, Washington, DC, 2018-10) Devadas, Sharmila ; Pennings, Steven

To analyze the effect of an increase in the quantity or quality of public investment on growth, this paper extends the World Bank’s Long-Term Growth Model (LTGM), by separating the total capital stock into public and private portions, with the former adjusted for its quality. The paper presents the Long-Term Growth Model Public Capital Extension (LTGM-PC) and accompanying freely downloadable Excel-based tool. It also constructs a new Infrastructure Efficiency Index (IEI), by combining quality indicators for power, roads, and water as a cardinal measure of the quality of public capital in each country. In the model, public investment generates a larger boost to growth if existing stocks of public capital are low, or if public capital is particularly important in the production function. Through the lens of the model and utilizing newly-collated cross-country data, the paper presents three stylized facts and some related policy implications. First, the measured public capital stock is roughly constant as a share of gross domestic product (GDP) across income groups, which implies that the returns to new public investment, and its effect on growth, are roughly constant across development levels. Second, developing countries are relatively short of private capital, which means that private investment provides the largest boost to growth in low-income countries. Third, low-income countries have the lowest quality of public capital and the lowest efficient public capital stock as a share of gross domestic product. Although this does not affect the returns to public investment, it means that improving the efficiency of public investment has a sizable effect on growth in low-income countries. Quantitatively, a permanent 1ppt GDP increase in public investment boosts growth by around 0.1-0.2ppts over the following few years (depending on the parameters), with the effect declining over time.
Pass-through of Competitors' Exchange Rates to U.S. Import and Producer Prices

(World Bank, Washington, DC, 2016-12) Pennings, Steven

This paper shows that in theory and BLS microdata, the prices of imported goods respond to the exchange rates (ER) of the producer's foreign competitors. In contrast, standard models have no role for competitors' ERs. Excluding the effects of competitors' exchange rates typically biases upwards estimates of bilateral exchange rate pass-through because competitors' ERs and bilateral ERs are positively correlated. A multi-country version of Atkeson and Burstein's (2008) industry aggregation model is able to explain a sizable proportion of pass-through of competitors' exchange rates to import prices, and also predicts pass-through of foreign competitors' prices and pass-through of competitors' ERs to US producer prices -- both of which are supported in the data. The results suggest that pass-through will be larger for ER movements shared by a greater fraction of foreign competitor countries.
Cross-Region Transfers in a Monetary Union: Evidence from the US and Some Implications

(World Bank, Washington, DC, 2020-05) Pennings, Steven

US federal transfers to individuals are large, countercyclical, vary geographically, and are often credited for helping stabilize regional economies. This paper estimates the short-run effects of these transfers using plausibly exogenous regional variation in temporary stimulus packages and earlier permanent Social Security increases. States that received larger transfers tended to grow faster contemporaneously, with a multiplier of around 1.5 for permanent transfers and 1/3 for temporary transfers. Results are broadly consistent with an open-economy New Keynesian model. At business-cycle frequencies, cross-region transfer multipliers are not large, suggesting only modest gains in regional stabilization from US federal automatic stabilizers.