CEPR News In focus this week: 11 January 11 Jan 2024 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.
THE POLARISING EFFECT OF NATURAL DISASTER EXPERIENCE ON CLIMATE CHANGE BELIEFS: Evidence from the United States A new CEPR study by Milena Djourelova, Ruben Durante, Elliot Motte and Eleonora Patacchini documents a polarizing effect of natural disaster experience on views on climate change and the environment. Linking the location and timing of Federal Emergency Management Agency (FEMA)-declared disasters to large-scale electoral survey data, the authors find that liberal respondents express greater concerns about climate change and the environment in the aftermath of a local disaster, while conservative respondents show the opposite effect. In other words, people seem to not only interpret the same experience differently depending on their prior ideological pre-disposition, but to also update their beliefs in opposite directions as they witness the same event.
MATERIAL CONSTRAINTS EXERT SUBSTANTIAL INFLATIONARY PRESSURE IN TIMES OF LOOSE MONETARY POLICY: Evidence from Germany COVID-19 disrupts global supply chains, causing severe material constraints for firms, often linked to inflation. Using unique firm-level survey data from Germany, a study by Almut Balleer and Marvin Noeller investigates two measures of supply constraints: 1) a new direct measure that indicates material shortages and 2) capacity utilisation, a widely accepted measure of bottlenecks and slack. Findings reveal diverse constraints across industries, short-lived shortages for firms, and high capacity use doesn't always indicate shortages. Material-constrained firms, despite low resource use, raise prices more during expansionary policies. The study highlights material shortages' substantial role in inflation during loose monetary policy periods.
WHAT EXPLAINS GLOBAL INFLATION A new CEPR study by Jongrim Ha, M. Ayhan Kose, Franziska Ohnsorge and Hakan Yilmazkuday examines the drivers of fluctuations in global inflation. The study reports three main results 1) Oil price shocks followed by global demand shocks explained the lion’s share of variation in global inflation. 2) The contribution of global demand and oil price shocks increased over time, from 56% during 1970-1985 to 6% during 2001-2022, whereas the importance of global supply shocks declined. Since the pandemic, global demand and oil price shocks have accounted for most of the variation in global inflation. 3) Oil price shocks played a much smaller role in global core CPI inflation variation, for which global supply shocks were the main source of variation.
A CENTRAL BANK'S VOICE RISING ABOVE THE ROAR OF GUNFIRE In response to Russia’s invasion of Ukraine, the National Bank of Ukraine immediately fixed the exchange rate of the Ukrainian hryvnia. Ge Gao, Alex Nikolsko-Rzhevskyy and Oleksandr Talavera examine how the central bank regulated foreign exchange markets during 2022. Data collected from both black and authorised foreign exchange markets suggest that announcements aimed at maintaining a fixed (floating) foreign exchange rate prompted an increase (decrease) in the black-market premium in cash transactions. Furthermore, the central bank’s announcements influenced the sale side of foreign currency more than any other aspect, an area in which foreign exchange traders on the black market possessed near-monopolistic power.
OIL PRICE SHOCKS IN REAL TIME Oil prices contain information about global shocks that is key relevance for monetary policy decisions, but interpreting the drivers of daily fluctuations in prices is not straightforward. Writing at VoxEU, Andrea Gazzani, Fabrizio Venditti and Giovanni Veronese introduce a novel approach to identify such shocks at a daily frequency which can be used in real time to interpret developments in the oil market and their implications for the macroeconomy, circumventing the problem of publication lags that plagues monthly data used in workhorse models. The method proves particularly valuable when macroeconomic conditions are evolving rapidly, such as the outburst of the conflict in the Middle East or the recent negative surprises to China’s outlook.
THE EUROPEAN ENERGY CRISIS AND THE CONSEQUENCES FOR THE GLOBAL NATURAL GAS MARKET A study by Fabrizio Ferriani and Andrea Gazzani examines how the Russian invasion of Ukraine has reshaped the natural gas market, with an emphasis on the role of liquefied natural gas. The findings show that Europe has become a major importer of liquefied natural gas, crowding out imports to Latin America and Asia. Its gas market is becoming more integrated and global. Nonetheless, the outlook for the natural gas market remains subject to high uncertainty.
WHY THE MIDDLE CLASS BENEFITS FROM INFLATION Central banks and the media have focused on the negative effect of inflation on real incomes. While this income effect is particularly salient for consumers, the overall impact of inflation is a combination of a negative income effect and a positive wealth effect. Writing at VoxEU, Edward Wolff argues that the net impact of inflation on median wealth was positive in the US over the 1983-2019 period, and it also decreases wealth inequality when compared with the top 1%. Conversely, the recent drop in inflation is bad news for the middle class.
SHIFT IN PENSION PLANS AMPLIFIES RISK The long-term shift from defined benefit to defined contribution pension plans has increased the risk profile of American household wealth and retirement savings. The study by Sean Klein and Alan M. Taylor shows that: - Well-intentioned strategies such as automatic enrolment and target date funds encouraged saving in defined contribution plans, but they also heightened the risk profile of household net worth. - Balances have increased in these plans, and more of those assets are exposed to equities. - From 1992 to 2019, net worth volatility among middle-aged, middle-wealth households jumped by nearly 20%, and the tail risk associated with crisis events has started to loom large.
THE ROLE OF INDUSTRIES IN RISING INEQUALITY: Evidence from Italy Does inequality grow between firms within the same industry or across different industries? A study by Juraj Briskar, Edoardo Di Porto, José V Rodríguez Mora and Cristina Tealdi analyses Italy's private-sector employment over 30 years and reveals that most of the increase in earnings inequality occurs between industries, with few low-paying sectors accounting for a vast majority of this growth. The findings shed light on the pivotal role of industry-level dynamics often overlooked in existing literature and provide crucial insights for shaping effective policy strategies.
THE RETURN OF INDUSTRIAL POLICY IN DATA Writing at VoxEU, Simon Evenett, Adam Jakubik, Fernando Martín and Michele Ruta introduce the New Industrial Policy Observatory dataset and documents emergent patterns of policy intervention during 2023. Among the findings: - Globally, over 2,500 industrial policy measures have been recorded, out of which 71% are trade distorting. - This recent wave of activity is primarily driven by key players, with the US, the EU and China accounting for 48% of the measures. - Political economy factors and tit-for-tat dynamics are highly correlated with policy interventions, pointing to the need for careful assessment and multialteral rules on industrial policy.
ANTITRUST AND THE POLITICAL ECONOMY: PART 2 The first in a series of two columns by Cristina Caffara, Co-founder and Vice Chair of CEPR’s Competition Research Policy Network, argued that in the face of major paradigm shifts in other key areas of economic policy in the wake of the ‘polycrisis’, it would seem bizarre and unusual for antitrust enforcement to regard itself as an island of stillness. Yet there is enormous resistance throughout the antitrust community to recognising that antitrust can have a major role to play as part of an effort to deal with existential issues of our times: concentration begetting economic power and political influence, inequality, the North-South divide. This second column considers ideas for a more open approach to antitrust enforcement.
LACK OF RECOVERY OF THE POST-‘ICE AGE’ COHORTS IN JAPAN In Japan, labour market conditions at entry have had persistent ‘scarring’ effects on employment and earnings over the long term. Using updated data, a study by Ayako Kondo finds more stable employment and higher earnings for cohorts who entered the labour market before the prolonged recession from 1993 to 2004 than during this ‘ice age’. However, the scarring effect may have become weaker since the ice age, with structural changes to the labour market and increased job mobility.
THE GLOBAL TRANSMISSION OF FED RATE HIKES Recorded at CEPR Paris Symposium 2023: The Fed has been rapidly raising rates recently. In the recent past this would have caused a red alert in the central banks of emerging markets. But not this time – so why not? Şebnem Kalemli-Özcan tells Tim Phillips why this time, it’s different.
SOLVING THE WICKEDEST PROBLEM In the brief history of climate finance, Andrew Karolyi has been one of the pioneers, both as an author and a catalyst to encourage other finance experts to become involved. He talks to Alissa Kleinnijenhuis and Tim Phillips about what inspired him to take on what he calls “the wickedest of wicked problems”, how he kickstarted research on the topic, and the little-known involvement of King Charles III in the genesis of climate finance.