RESEARCH AT IOB
15
Interview with Dennis
Essers on the Synthetic Control Method
E2C: Can you briefly introduce your current research project? What are the main research questions you want to answer?
My current research project is an empirical evaluation of the Flexible Credit Line( FCL) 1, the IMF’ s prime precautionary lending instrument which so far has been taken up by only three emerging
1
The Flexible Credit Line or FCL is a precautionary instrument of the IMF that provides large amounts of resources to countries with strong macroeconomic fundamentals and a solid policy track record. For more on this see https:// www. imf. org / external / np / exr / facts / pdf / fcl. pdf. market economies: Mexico, Colombia and Poland. Together with my co-author Stefaan Ide( of the National Bank of Belgium) I try to answer two questions. First, which factors explain the participation of these three countries in FCL arrangements? And second, to what extent have such arrangements delivered on their promise of boosting market confidence in their users?
E2C: In this research, you make use of a quite novel method in quantitative impact evaluation, namely the Synthetic Control Method( SCM)...
Yes, I use the Synthetic Control Method( SCM) to answer the second question. More specifically, I employ it to evaluate the effects that the FCL arrangements have had on international( EMBI 2) bond spreads and capital inflows in Mexico, Colombia and Poland.
2
JP Morgan’ s Emerging Markets Bond Index or EMBI tracks dollar-denominated sovereign bonds issued by a selection of emerging market countries.
E2C: Can you tell us what the main intuition / idea is behind this SCM?
The method measures the impact of an intervention( here: the FCL) as the difference between post-intervention outcomes( here: bond spreads or capital flows) in the treated unit( here: Mexico, Colombia or Poland) and those same outcomes in a‘ synthetic’ control group. This control group is constructed as a weighted average of untreated units( here: other emerging market economies that are governed by structural processes similar to those in Mexico, Colombia and Poland). The weights attached to the different control units are chosen so that the characteristics of the synthetic control( here: bond spreads or capital flows and their determinants) over the pre-intervention period
Exchange to change January 2017