Inflation Indexation: Current International Practices

InflationIndexationinPublicFinances AGlobalDatasetonCurrentPractices VybhaviBalasundharam,ArikaKayastha,MarcosPoplawski-Ribeiro WP/23/264 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate. TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. 2023 DEC ©2023InternationalMonetaryFundWP/23/264 IMFWorkingPaper FiscalAffairsDepartment InflationIndexationinPublicFinances:AGlobalDatasetonCurrentPractices* PreparedbyVybhaviBalasundharam,ArikaKayastha,andMarcosPoplawski-Ribeiro AuthorizedfordistributionbyVitorGaspar December2023 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. ABSTRACT:Thispaperpresentsanewglobaldatasetoncurrentpracticesforfourbudgetitemsintermsofindexationtothepricelevelandothernominalvariables.Compilingdatafromdocumentsofselectmultilateralorganizations,governments,andrelatedliteratureaswellasconductingasurveyamongIMFcountrydesksof190country-members,weshowhowindexationisinternationallyappliedin(i)personalincometaxbrackets;(ii)pensions;(iii)socialassistanceprograms;and(iv)publicwages.Thedatasetshowsthatwhileindexationpoliciesvarysignificantlyacrosseconomies,sometrendscanbeidentified.Forexample,indexationismorecommononpensionandsocialgrantsthanontaxes,andfallswiththedegreeofeconomicdevelopment.Wefurtherdiscusssomeapplicationsofthisnewdataset.Thoseincludeanaccountingexerciseillustratingtheimpactsofindexationonfiscaloutcomesduringepisodesofinflationsurprises;andananalysisoftheassociationbetweentheoveralldegreeofindexationcombiningthefourbudgetitemsandinflationpersistence. JELClassificationNumbers:Indexation;Inflation;FiscalPolicy;FiscalInsititutionsKeywords:D02,E31,E64,H55Author’sE-MailAddress:VBalasundharam@imf.org,AKayastha@imf.org, MPoplawskiRibeiro@imf.org *TheopinionsexpressedhereinarethoseoftheauthorsanddonotnecessarilyreflectthoseoftheInternationalMonetaryFund. TheauthorswouldliketothankIMFcountrydesksforverifyingtheinitialdatacollectedandcomplementitwithadditionalinputs.TheauthorsfurtheracknowledgeVitorGaspar,EraDabla-Norris,SaioaArmendariz,PhilippEngler,DanielGarcia-Macia,CarlosGonçalves,MarkGriffiths,JiroHonda,RaphaelLam,PaoloMauro,PauloMedas,DinarPrihardini,ZhonghaoWei,YongzhengYang,andJingZhouforhelpfulcommentsanddiscussions.ThispaperispartoftheanalysespreparedforChapter2oftheApril2023FiscalMonitor.So,theauthorswouldalsoliketothankparticipantsinseveralseminarsattheCentralBankofChile,CentralBankofColombia,IMF,IndianNationalCouncilofAppliedEconomicResearch(NCAER),JohnHopkinsUniversity,OECD,UniversityofChile,andYonseiUniversityforhelpfulcommentsonthisdatasetandanalysisinthatcontext.Allremainingerrorsareourown. WORKINGPAPERS InflationIndexationinPublicFinances AGlobalDatasetonCurrentPractices PreparedbyVybhaviBalasundharam,ArikaKayastha,andMarcosPoplawski-Ribeiro Contents Glossary3 I.Introduction4 II.DataCompilationProcess6 A.ReviewoftheLiteratureandOfficialDocumentsontheStatusofIndexation6 B.SurveyofIndexationPracticesamongIMFCountryDesks7 III.Findings8 A.IndexationAcrossGeographicRegions8 B.IndexationAcrossEconomicRegions11 C.IndexationandGovernmentEffectiveness13 D.IndexationandEconomicandPoliticalStability15 E.IndexationandCountrySizeandResource-richEconomies16 IV.DataApplication:IndexationandFiscalOutcomesViaanAccountingExercise18 V.DataApplication:InflationPersistenceandIndexation23 VI.Conclusions25 References37 ANNEXES I.ListofEconomiesandIndexationPractices28 II.MainDataSources33 III.SummaryStatisticsfortheAccountingExercise34 IV.WeightedIndexationValuesperEconomy35 Glossary ADB AsianDevelopmentBank AE AdvancedEconomies AFR EconomiesbelongingtotheAfricanDepartmentattheIMF APD EconomiesbelongingtotheAsiaandPacificDepartmentattheIMF ECB EuropeanCentralBank EM EmergingMarkets EUR EconomiesbelongingtotheEuropeanDepartmentattheIMF FCS FragileandConflictedStates GDP GrossDomesticProduct IBP InternationalBudgetPartnership IMF InternationalMonetaryFund ISSA InternationalSocialSecurityAssociation LIDC Low-IncomeandDevelopingCountries MCD EconomiesbelongingtotheMiddleEastandCentralAsiaDepartmentattheIMF OBI OpenBudgetIndex OECD OrganisationforEconomicCooperationandDevelopment MISSOC MutualInformationSystemonSocialProtection RRC ResourceRichCountries SDS SmallandDevelopingStates SSA SocialSecurityAdministration WB WorldBank WHD EconomiesbelongingtotheWesternHemisphereDepartmentattheIMF I.Introduction Indexationofpaymentsandrenumerations—usuallytothepricelevelortoprivate(minimum)wages—isakeyissueforpublicfinances.Inanattempttolessentheimpactfacedbydifferentagentsinthefaceofhighandvolatileprices,ithasbeenhistoricallyadoptedbymanypublicadministrations(forexample,fortheadjustmentoftaxesbracketsandbudgetitems),sothattheirnominalvaluesremainintandemwithinflationor