How should governments design progressive labor-income taxes when workers can shift labor supply into untaxed informal work? Using household surveys for Brazil, Colombia, Mexico, and Peru, we document steep gradients in informality, employment, and unemployment across the income distribution. We analyze non-linear tax schedules in a heterogeneous-agent model with search frictions, savings, and an endogenous formal--informal labor-supply margin. Progressivity operates through an inclusion margin at the bottom-negative income taxes increase formal attachment-and an evasion margin at the top, where higher marginal tax rates shift labor supply into the untaxed sector. These opposing forces imply that both welfare and formality are hump-shaped in progressivity; in a calibration to Mexico, the welfare-maximizing degree of progressivity is about five times the current level.

We examine hedging as a macroprudential tool in a Sudden Stops model of an economy exposed to commodity price fluctuations. We find that hedging commodity revenues yields significant welfare gains by stabilizing public expenditure, which heavily depends on these revenues. However, this added stability weakens precautionary motives and exacerbates the pecuniary externality that drives overborrowing in such models. As a result, hedging and traditional macroprudential policy act as complements rather than substitutes, with more ag- gressive hedging inducing a stronger macroprudential response. Our findings suggest that while hedging enhances stability and improves welfare, it does not eliminate the need for macroprudential regulation.

Structural reforms modify the institutional and regulatory framework to foster economic growth and improve welfare. While initially linked to economic liberalization, the concept has expanded to encompass a more comprehensive array of sector-specific interventions. However, the increased level of detail in these reforms presents significant challenges in accurately identifying the specific type of reform implemented by each country. In this study, we employ a comprehensive analysis of the policy discussions in Article IV Staff Reports of the International Monetary Fund to shed light on the dynamic nature of reforms and unveil regional disparities in reform priorities. The findings demonstrate a notable shift in Latin American and the Caribbean countries, where there is a growing emphasis on reforms that prioritize transparency, enhance institutional quality, advance education and healthcare systems, and strengthen safety nets.

This paper provides evidence on the effect of fiscal stimulus on economic activity for countries with different degrees of institutional quality. For a panel of 113 countries during the period 1988-2017, we find evidence that an increment of 1% in government consumption yields a sizable, persistent and stable increase in economic activity of 0.9% in countries with higher institutional quality.

Sudden stops in net capital flows can be prevented if domestic investors either repatriate foreign-held assets or roll over their local asset holdings when foreign investors stop lending or sell off their local asset holdings. This paper presents evidence showing that domestic factors such as low levels of liability dollarization, the consistency of the monetary and exchange rate regimes, low inflation, higher growth, and a solid institutional background, explain why some countries are more successful in eliciting the behaviors that increase the probability of preventing a sudden stop following a tightening of the external borrowing constraint. Prevention is key to offsetting an external credit crunch originating in factors that are usually outside the control of borrowing countries, which can turn into costly sudden stops in net capital flows in the affected economies.

The dependence of many countries in the region on oil exports makes them vulnerable to oil price volatility. In particular, the sharp declines observed between 2014 and 2016 show how public finances weakened with significant debt increases in these countries. A strategy to mitigate the effect of sharp falls in oil prices would allow oil exporting countries to suffer a smaller impact on their public finances. This paper shows that using put options to insure against oil price hikes lowers public debt and fiscal deficits.

This paper estimates the impact of relative price volatility on sector-level investment allocation using a panel of 65 countries with data for 26 manufacturing industries over the period 1985–2003. Results indicate that volatility distorts efficient investment allocation in that investment is not necessarily devoted to relatively more productive sectors, especially in emerging market economies that are highly exposed and may lack the necessary institutions to deal with it successfully. This is evidence in support of theories suggesting that relative price volatility provides incentives for entrepreneurs to adopt more “malleable” but less productive production technologies, enabling them to accommodate more easily abrupt and frequent changes in relative prices, but at the cost of using less productive technologies.