Inflation Announcements and Social Dynamics

We propose a new framework for understanding the effectiveness of central bank announcements when firms have heterogeneous inflation expectations. Expectations are updated through social dynamics and, with heterogeneity, not all firms choose to operate, putting downward pressure on realized inflation. Our model rationalizes why countries stuck at the zero lower bound have had a hard time increasing inflation without being aggressive. The same model also predicts that announcing an abrupt target to disinflate will cause inflation to undershoot the target, whereas announcing gradual targets will not. We present new empirical evidence that corroborates this prediction.     

FIRM PRODUCTIVITY AND INVESTMENT CLIMATE IN DEVELOPING COUNTRIES: HOW DOES MIDDLE EAST AND NORTH AFRICA MANUFACTURING PERFORM?

Firm productive performances in five Middle East and North African (MENA) economies and eight manufacturing industries are compared to those in 17 other developing countries. Although the broad picture hides some heterogeneity, enterprises in MENA often performed inadequately given the middle‐income status of the MENA economies, with the exception of Morocco and, to some extent, Saudi Arabia. Firm competitiveness is a more constant constraint, with a unit labor cost higher than in most competitor countries, as well as investment climate (IC) deficiencies. The empirical analysis also points out how IC matters for firm productivity through the quality of infrastructure, the experience and education of the labor force, the cost and access to financing, and different dimensions of the government–business relationship. These findings bear important policy implications by showing which dimensions of the IC, in which industry, could help manufacturing in MENA to be more competitive in the globalization context.