CEPR News In focus this week: 02 February 2 Feb 2023 This weekly press briefing highlights some of the latest research reports, discussion papers and other publications from CEPR. It also features some of the latest columns on VoxEU, as well as new blogs/reviews, audio interviews and short films.
Expected inflation in the euro area: Measurement and Policy Responses Measures of expected inflation from both surveys and market prices provided valuable signals during the 2021-22 rise in euro area inflation. A new CEPR study by Ricardo Reis combines these measures, as opposed to picking just one, and looks at distributions, as opposed to only measures of central tendency, to show a sustained drift upwards in inflation expectations since the middle of 2021. In June of 2022, these measures point to an expected gradual decline in inflation over the next two years, and a small risk to the credibility of the ECB’s inflation target. A baseline model suggests that a central bank should respond to these measures by raising interest rates. How much and how fast depends on how it assesses the source of the shock and how expectations are linked to actions.
Arrests for domestic violence deter future abuse: Evidence from the UK A new CEPR study by Sofia Amaral, Gordon Dahl, Victoria Endl-Geyer, Timo Hener and Helmut Rainer examines the impact of arrests on domestic violence and finds that arrests reduce future domestic violence emergency calls by 51% and have a deterrent effect, increasing the probability of offenders being charged with a crime. Arrests virtually eliminate the large spike in re-victimisation which occurs in the 48 hours after a call, consistent with arrest facilitating a cooling off period during a volatile, at-risk time. The findings argue against recent calls for decriminalization of domestic violence.
Bitcoin has become an important channel to receive remittances and evade capital controls in emerging markets A new CEPR study by Clemens Graf von Luckner, Carmen Reinhart and Kenneth Rogoff uses high frequency transaction data to examine the use of Bitcoin and finds that it has become a significant channel for receiving remittances and evading capital controls in emerging markets. Given that the global underground economy (including tax and regulatory evasion) is quite substantial, perhaps as much as 20% of global GDP, the value to an innovation that helps facilitate these “illegitimate” transactions could be very substantial, particularly if regulators cannot, or choose not, to curtail it. The findings challenge the dominant view that Bitcoin is little used for transactions purposes (other than buying other cryptocurrencies), and that its value is almost entirely based on speculation.
A lot of money for little of no growth: The failure of regional growth policies in Italy Writing at VoxEU, Guglielmo Barone and Guido de Blasio shows that regional policies to promote local growth in Italy have been ineffective and are often hampered by problems with the quality of local institutions and organised crime’s grip on the economy. Despite multiple policies to promote regional development in the post-war period, there remains a significant divide between Northern and Southern regions of Italy. In 2020, GDP per capita in the South (the ‘Mezzogiorno’) was only 55% of that in Northern Italy.
Italy’s regional growth policies are causing serious negative side effects In this column, Guglielmo Barone and Guido de Blasio also show that Italian regional growth policies have also had negative side effects, including increasing corruption, inefficient use of public funds, and disproportionately benefiting richer people.The authors call for more resources to be invested in education and towards reducing the grip of organised crime on the Italian economy.
What is a fair day's wage for a CEO? Performance-related pay provides an ex-post reward to CEOs and can ensure that they feel fairly treated. If a CEO’s pay falls short of what is perceived as fair, it can be a strong demotivator. Writing at VoxEU, Pierre Chaigneau, Alex Edmans and Daniel Gottlieb discuss how fairness concerns affect optimal CEO contracts. The most efficient contract resembles performance shares, which provide fair wages if performance is good.
Support for welfare can be racially biased: Evidence from the United States A study by Jesper Akesson, Robert Hahn, Robert Metcalfe and Itzhak Rasooly uses two experiments to show that beliefs about the racial identity of welfare recipients have a significant effect on welfare support in the United States. The results suggest that when White people believe that a higher proportion of welfare recipients are Black, this reduces their support for welfare.
New technologies force workers to upskill: Evidence from Germany Using firm-level data from Germany, a study by Michele Battisti, Christian Dustmann and Uta Schönberg finds that workers in routine jobs move to more skilled jobs after technological and organisational change. This suggests that technological change need not result in a significant welfare loss, even for those workers whose jobs are directly affected.
China’s internationalisation has important trade-offs China's strategy for internationalising the renminbi involves controlling the access of foreign investors to the domestic bond market. Writing at VoxEU, Christopher Clayton, Amanda Dos Santos, Matteo Maggiori and Jesse Schreger argue China's policy involves a trade-off between building a reputation as a country capable of providing a global store of value and risking disruptive foreign capital flight. Using micro data on foreign investors' portfolios, the authors show that investors perceive China's reputation as a borrower to be between that of an emerging and a developed market.
Discounted energy bills only work if vulnerable households are adequately informed of the claim process Writing at VoxEU, Florian Heiss, Carmine Ornaghi and Mirco Tonin discuss the take-up of a preferential water tariff in the UK, which shows that households living in less affluent areas were less likely to pay attention and react to potential savings. Households in more affluent areas were more likely to notice and understand the advantageous tariff. Overall, the research finds that the difference in attention is so high, that the special tariff turns out to be more beneficial to better off households. The policy thus becomes regressive, even if it is not so by design.
Integration of electricity markets in Chile boosted renewable energy and lowered electricity costs A study by Luis Gonzales, Koichiro Ito and Mar Reguant looks at the impact of the integration of two previously separate electricity markets in Chile on renewables expansion and allocative efficiency. The authors find that connecting these markets by expanding electricity transmission lines reduced regional price disparities in electricity, boosted renewable energy, and lowered the overall cost of electricity. One of the obstacles that countries face in accelerating their transition to a low-carbon economy is shortening the distance between consumption centres (e.g. large cities) and renewable energy sources. The research shows how the elimination of these barriers through better transmission infrastructure can cause an expansion in the production and use of renewable energy.
Traumatic experiences during pregnancy have long-term negative impacts for children: evidence from Nazi raids in WWII Investigating Nazi raids across Italy during WWII, a study by Vincenzo Atella, Edoardo Di Porto, Joanna Kopinska and Maarten Lindeboom finds that woman’s exposure to traumatic events during pregnancy affects the lifetime labour outcomes of children. Prenatal exposure to extreme stress influences a person’s entire working career – from lower educational attainment to the type of jobs held, depressed earnings, episodes of unemployment, and larger earnings penalties after job loss. The research highlights that the fear and suffering caused by Russia’s invasion of Ukraine will have lasting effects on children born during the fighting.
Gender gaps at the academies A study by David Card, Stefano DellaVigna, Patricia Funk and Nagore Iriberri examines gender differences in research recognition over time for three disciplines: economics, psychology, and mathematics. Using membership of one of two prestigious US academies as a proxy, the authors find surprisingly similar trends for all three disciplines. In the 1960s, qualified female researchers were held to a higher standard. But over the last 20 years, women whose publication and citation records resembled their male counterparts were more likely to be selected for membership.