Vegh, Carlos A.

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Vegh, Carlos A.

Chief Economist for Latin America and Caribbean Region, The World Bank

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Macroeconomics

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Chief Economist for Latin America and Caribbean Region, The World Bank

Last updated: January 31, 2023

Biography

Carlos Vegh, a Uruguayan national, is the World Bank Chief Economist for Latin America and the Caribbean. He oversees a team of economists charged with providing intellectual leadership, economic analysis, and advice on the development issues facing Latin America and the Caribbean region. Prior to starting his new role at the Bank on February 1st 2017, he was the Fred H. Sanderson Professor of International Economics at the Johns Hopkins School of Advanced International Studies (SAIS) and a Research Associate at the National Bureau of Economic Research (NBER). He also served as Professor of Economics and Vice-Chair of Undergraduate Studies at UCLA, and before that as Chair of the Program in Comparative and Topical Studies at UCLA's Latin American Center. His research on monetary and fiscal policy in emerging and developing countries has been highly influential and is regularly featured in the international financial press. He has contributed to several World Bank reports such as the Global Economic Prospects (GEP). He has also served as visiting scholar at several central banks: Chile’s Banco Central, Colombia’s Banco de la República and Banco de México. During the 1980s and 1990s he served in different research positions at the International Monetary Fund and the Inter-American Development Bank in Washington D.C. He is currently editor in chief of Economía, a publication of the Latin American and Caribbean Economic Association. He has also held other editorial positions in specialized publications such as the IMF Economic Review, the Journal of Development Economics and the Journal of International Economics, among others. He holds a doctorate degree on Economics from the University of Chicago and a bachelor’s degree on economics from American University in Washington DC and Universidad de la República in Uruguay.

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Now showing 1 - 10 of 14

The Macroeconomic Effects of Macroprudential Policy: Evidence from a Narrative Approach
(World Bank, Washington, DC, 2022-08) Rojas, Diego; Vegh, Carlos; Vuletin, Guillermo
This paper analyzes the macroeconomic effects of macroprudential policy—in the form of legal reserve requirements—in three Latin American countries (Argentina, Brazil, and Uruguay). To correctly identify innovations in changes in legal reserve requirements, a narrative approach—based on contemporaneous reports from the IMF and central banks in the spirit of Romer and Romer (2010)—is developed in which each change is classified into endogenous or exogenous to the business cycle. This distinction is critical in understanding the macroeconomic effects of reserve requirements. In particular, while output falls in response to exogenous increases in legal reserve requirements, it is not affected when using all changes and relying on traditional time-identifying strategies. This bias reflects the practical relevance of the misidentification of endogenous countercyclical changes in reserve requirements. The empirical frontier is also pushed along two important dimensions. First, in measuring legal reserve requirements, both the different types of legal reserve requirements in terms of maturity and currency of denomination as well as the structure of deposits are taken in account. Second, since in practice reserve requirement policy is tightly linked to monetary policy, the study jointly analyze the macroeconomic effects of changes in central bank interest rates. To properly identify exogenous central bank interest rate shocks, the Romer and Romer (2004) strategy is used.
Fooled by the Cycle: Permanent versus Cyclical Improvements in Social Indicators
(Washington, DC : World Bank, 2022-06) Camarena, José Andrée; Galeano, Luciana; Morano, Luis; Puig, Jorge; Riera-Crichton, Daniel; Vegh, Carlos; Venturi, Lucila; Vuletin, Guillermo
This paper studies the time series behavior of a set of widely-used social indicators and uncovers two important stylized facts. First, not all social indicators are created equal in terms of the importance of cyclical fluctuations. While some social indicators such as the unemployment rate and monetary poverty show large cyclical fluctuations, other social measures such as the Human Development Index are, by construction, dominated by long-run trends. Second, interestingly, yet not surprisingly, a large part of the cyclical fluctuations in social indicators can be explained by cyclical changes in income (proxied by real GDP per capita). For this reason, countries with large cyclical income volatility exhibit, in turn, large cyclical changes in some of these social indicators (particularly in those indicators that are more prone to cyclical fluctuations). Since cyclical income volatility is much larger in the developing world, these two critical stylized facts raise fundamental issues regarding the duration of improvements in social indicators (like the ones observed in many developing countries during the last commodity super-cycle). After a detailed conceptual and methodological discussion of these issues, and relying on a global sample of industrial and developing countries, this paper digs deeper into the importance of cyclical versus permanent components by extending the seminal contribution of Datt and Ravallion (1992). In particular, it shows that more than 40 percent of the fall in monetary poverty observed in Latin America and the Caribbean during the so-called Golden Decade can be attributed to cyclical changes in income. While in principle universal, these concerns are particularly relevant in the developing world where, compared to developed countries, output volatility is larger and driven, to a large extent, by external factors (such as commodity prices).
Effects of the Business Cycle on Social Indicators in Latin America and the Caribbean: When Dreams Meet Reality
(Washington, DC: World Bank, 2019-04-04) Vegh, Carlos A.; Riera-Crichton, Daniel; Puig, Jorge; Camarena, José Andrée; Galeano, Luciana; Morano, Luis; Venturi, Lucila; Vuletin, Guillermo
After mediocre growth in 2018 of 0.7 percent. LAC is expected to perform only marginally better in 2019 (growth of 0.9 percent) followed by a much more solid growth of 2.1 percent in 2020. LAC will face both internal and external challenges during 2019. On the domestic front. the recession in Argentina; a slower than expected recovery in Brazil from the 2014-2015 recession, anemic growth in Mexico. and the continued deterioration of Venezuela. present the biggest challenges. On the external front. the sharp drop in net capital inflows to the region since early 2018 and the monetary policy normalization in the United States stand among the greatest perils. Furthermore, the recent increase in poverty in Brazil because of the recession points to the large effects that the business cycle may have on poverty. The core of this report argues that social indicators that are very sensitive to the business cycle may yield a highly misleading picture of permanent social gains in the region.
From Known Unknowns to Black Swans: How to Manage Risk in Latin America and the Caribbean
(Washington, DC: World Bank, 2018-10-05) Vegh, Carlos A.; Riera-Crichton, Daniel; Medina, Juan Pablo; Friedheim, Diego; Morano, Luis; Venturi, Lucila; Vuletin, Guillermo
After a growth recovery, with an expansion of 1.1 percent in 2017, the region has encountered some bumps in the road. The Latin America and the Caribbean (LAC) region is expected to grow at a modest rate of 0.6 percent in 2018 and 1.6 percent in 2019. This slowdown in the region’s recovery is mainly explained by the crisis that started in Argentina in April, the growth slowdown in Brazil, and the continuing economic, social, and humanitarian collapse in Venezuela. Furthermore, net capital inflows to the region have fallen dramatically since early 2018, bringing once again to the fore the risks faced by LAC. In addition, natural disasters such as earthquakes and hurricanes have brought devastation to the region with disturbing frequency. The core of the report analyzes the foundations of risk, develops a theoretical framework to price risk instruments, and reviews how LAC has managed risk in practice. The overall message of the report is that there are different types of risk: (i) those that follow standard probabilistic distributions that can be easily insured by the market; and (ii) those that exhibit fat-tails (i.e., non-negligible probabilities of extreme events) that are much harder to ensure by the market (like earthquakes). Finally, there are “black swans” that, by definition, are unpredictable events that cannot be insured and force countries to rely exclusively on ex-post aid and/or broad preventive measures. In other words, the fatter are the tails of a distribution, the less market insurance is available, and the more countries will have to rely on ex-post aid. Yet progress in managing risk continues to be made (the Catastrophe Bond for earthquakes in the Pacific Alliance, recently sponsored by the World Bank, being an outstanding example). This would have been unthinkable some time ago. New knowledge and insurance schemes, all supported by institutions such as the World Bank, will undoubtedly make LAC a safer region to live and prosper.
Fiscal Adjustment in Latin America and the Caribbean: Short-Run Pain, Long-Run Gain?
(Washington, DC: World Bank, 2018-04-17) Vegh, Carlos A.; Riera-Crichton, Daniel; Friedheim, Diego; Morano, Luis; Camarena, José Andrée; Vuletin, Guillermo
After a growth slowdown that lasted six years, the Latin America and the Caribbean (LAC) region has finally turned the corner and resumed growth at a modest rate of 1.1 percent in 2017 and 1.8 percent expected in 2018. This reflects a more favorable external environment, particularly a recovery in commodity prices. In spite of the benign external environment, most LAC countries still face a fragile fiscal situation. While gradual fiscal adjustments have started in several countries, most countries are still running fiscal deficits and debt levels are high. Further fiscal consolidation is needed to preserve the substantial gains achieved by the region in recent times, in terms of lower inflation, less poverty and inequality, and inclusive growth. This Semiannual Report analyzes the complex decisions regarding fiscal adjustment policies.
Between a Rock and a Hard Place: The Monetary Policy Dilemma in Latin America and the Caribbean
(Washington, DC: World Bank, 2017-10-11) Morano, Luis; Vegh, Carlos A.; Friedheim, Diego; Rojas, Diego
After a growth slowdown that lasted six years (including a contraction of 1.3 percent last year), the Latin American and Caribbean (LAC) region is finally expected to resume positive growth in 2017, with market analysts forecasting real GDP growth of 1.2 percent for 2017 and 2.3 percent for 2018. The recovery, particularly in South America, will be led by a strong rebound in Argentina, which is expected to grow by 2.8 percent in 2017 and 3.0 percent in 2018, and Brazil, which is expected to resume positive growth as well, expanding by 0.7 percent in 2017 and 2.3 in 2018, after contracting for two consecutive years. The usual external drivers of growth (particularly commodity prices, and growth in China and U.S.) are expected to remain relatively neutral, which points to the need for the region to reinforce its own sources of growth (e.g., structural reforms, investment in infrastructure, and further international trade both within and outside the region). Unfortunately, the region finds itself in a weak fiscal situation with 28 out of 32 countries with an overall fiscal deficit, which implies that a gradual but sustained fiscal consolidation will be needed in the years ahead. The report's main focus (Chapter 2) is on the monetary policy dilemma faced by countries in LAC. When a typical commodity-exporter country in LAC is hit by, say, a negative terms of trade shock, real GDP falls, the currency depreciates, and inflation increases. The Central Bank faces the dilemma of (i) increasing policy rates to defend the currency/fight inflation, but at the cost of aggravating the recession or (ii) reducing the policy rate, thus stimulating output, but encouraging further depreciation and inflation. Traditionally, LAC countries have chosen the first option and have thus pursued procyclical monetary policy (i.e., increasing policy rates in bad times). Recently, however, many countries have been able to switch and become countercyclical (i.e., reducing policy rates in bad times), which enables them to prop up the economy in recessionary times (which is particularly important when lack of fiscal space precludes countercyclical fiscal policy).
Policy Implications of Non-linear Effects of Tax Changes on Output
(World Bank, Washington, DC, 2019-01) Gunter, Samara; Riera-Crichton, Daniel; Vegh, Carlos; Vuletin, Guillermo
An earlier paper titled "Non-linear effects of tax changes on output: The role of the initial level of taxation," estimated tax multipliers using (i) a novel dataset on value-added taxes for 51 countries (21 industrial and 30 developing) for the period 1970-2014, and (ii) the so-called narrative approach developed by Romer and Romer (2010) to properly identify exogenous tax changes. The main finding is that, in line with existing theoretical distortionary and disincentive-based arguments, the effect of tax changes on output is highly non-linear. The tax multiplier is essentially zero under relatively low/moderate initial tax rate levels and more negative as the initial tax rate and the size of the change in the tax rate increase. This companion paper first shows that these findings have important policy implications, given that the initial level of taxes varies greatly across countries and thus so will the potential output effect of changing tax rates. The paper then turns to some specific policy applications. It focuses on the relevance of the arguments for revenue mobilization in countries with low levels of provision of public goods and social and infrastructure gaps, as well as in commodity-dependent countries. The paper then considers some practical implications for the standard debt sustainability analysis. Lastly, it evaluates the implications of the findings for the Laffer curve.
Non-Linear Effects of Tax Changes on Output: The Role of the Initial Level of Taxation
(World Bank, Washington, DC, 2018-12) Gunter, Samara; Riera-Crichton, Daniel; Vegh, Carlos; Vuletin, Guillermo
This paper estimates the effect of worldwide tax changes on output following the narrative approach developed for the United States by Romer and Romer (2010). The analysis uses a novel dataset on value-added taxes for 51 countries (21 industrial and 30 developing) for the period 1970-2014 to identify 96 tax changes. It then uses contemporaneous economic records to classify such changes as endogenous or exogenous to current (or prospective) economic conditions. In line with theoretical distortionary and disincentive-based arguments, and using only exogenous tax changes, the main finding is that the effect of tax changes on output is highly non-linear. The tax multiplier is essentially zero under relatively low/moderate initial tax rate levels and more negative as the initial tax rate and the size of the change in the tax rate increase. Based on a global sample, these novel non-linear findings suggest that the recent consensus pointing to large negative tax multipliers in industrial countries, particularly in Europe (e.g., Alesina, Favero, and Giavazzi, 2015), (i) is not a robust empirical regularity, and (ii) is mainly driven by high initial tax rates in these countries. The paper also shows that the bias introduced by misidentification of tax shocks critically depends on the procyclical or countercyclical nature of endogenous tax changes. The relevance of the arguments is evaluated both for the novel global sample and for Romer and Romer's U.S. dataset.
Leaning Against the Wind: Fiscal Policy in Latin America and the Caribbean in a Historical Perspective
(World Bank, Washington, DC, 2017-04) Bennett, Federico R.; Vegh, Carlos; Lederman, Daniel; Bennett, Federico
This report by the Office of the Chief Economist for Latin America and the Caribbean (LAC) of the World Bank studies the region’s fiscal policies. After reviewing LAC’s growth performance, Chapter 1 provides an accounting of its financing needs during the 21st Century to understand how such a diverse region ended up with fiscal deficits across the board in 2016. Chapter 2 goes back to the 1960s and assesses the cyclical properties of fiscal policies. LAC, like most developing countries and in contrast with most developed economies, exhibited procyclical fiscal policies. Good news arrived in the 2000s: one in three economies became countercyclical, which helped improve credit ratings. Yet fiscal policy is complicated by our inability to know if current economic conditions are temporary or permanent. The report argues for a prudent stance that would err on the side of saving too much during upswings and perhaps borrowing too little during downturns.
How is Tax Policy Conducted over the Business Cycle?
(American Economic Association, 2015-08) Vegh, Carlos A.; Vuletin, Guillermo
It is well known by now that government spending has typically been procyclical in developing economies but acyclical or countercyclical in industrial countries. Little, if any, is known, however, about the cyclical behavior of tax rates (as opposed to tax revenues, which are endogenous to the business cycle and, hence, cannot shed light on the cyclicality of tax policy). We build a novel dataset on tax rates for 62 countries for the period 1960-2013 that comprises corporate income, personal income, and value-added tax rates. We find that tax policy is acyclical in industrial countries but mostly pro cyclical in developing countries.