CEPR News In focus this week: 16 February 16 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.
THE RECESSION IN RUSSIA DEEPENS: Evidence from an alternative tracker of domestic economic activity Writing at VoxEU, Adrian Schmith and Hanna Sakhno introduce a new monthly tracker of domestic economic activity in Russia, using alternative indicators that are independent of official statistics. The tracker serves as a leading indicator and a check on official data releases, revealing that domestic activity in Russia suffered a further setback at the end of 2022, which is not fully reflected in official statistics. As tracking economic activity in Russia becomes increasingly important, this innovative approach provides a valuable tool for gaining insights into the country's economy.
EUROPE'S IT SECTOR AT RISK: Ukraine's Conflict Threatens Vital Resource for European Companies European companies have increasingly relied on Ukrainian IT providers in the face of massive shortages of IT specialists in Europe. But the Ukraine war is eroding the country’s IT competitiveness. Although more than half of Ukrainian IT startups continue their operations exclusively from Ukraine, they are losing staff and need financial support. Meanwhile, Russian attacks on the energy infrastructure make it increasingly difficult to sustain remote work. Writing at VoxEU, Monika Schnitzer argues that supporting Ukraine is not only a humanitarian duty but is also in the interest of Europe’s other economies.
SLOVAKIA'S SUCCESSFUL STRATEGY FOR CLEARING NON-PERFORMING LOANS: Lessons for Ukraine's Banking Sector The Ukrainian banking sector will be burdened by substantial overhang of non-performing loans after cessation of the hostilities, which will have to be cleared before the financial system can function properly again. Writing at VoxEU, Sander Winckel explains how Slovakia managed to solve this problem by radically disposing of bad assets through a special purpose vehicle, recapitalising and selling state-owned banks to foreign owners, and creating an enabling environment for private entrepreneurship. Strong political leadership with a clear vision, the support of civil society, donors and international financial institutions, and thorough preparation proved to be decisive and laid the groundwork for its accession to the EU.
THE EFFECT OF ENERGY PRICE SHOCKS ON INFLATION IS MISUNDERSTOOD Contrary to popular belief, the surge in US inflation in 2021 and 2022 was not primarily caused by energy price shocks. A study by Lutz Kilian and Xiaoqing Zhou shows that an unexpected increase in energy prices only creates a blip in the inflation rate. In contrast, year-over-year rates will look more persistent, even when inflationary pressures no longer exist, due to temporal aggregation. Care is called for when looking for signs of slowing effects of energy price shocks on inflation rates.
THE INTERNATIONAL SPILLOVER EFFECTS OF AIR POLLUTION Air pollution affects countries across borders but the spillover effects of environmental regulation from one country are not incorporated in cost-benefit analyses. A study by Seonmin "Will" Heo, Koichiro Ito and Rao Kotamarthi examines the effect of air pollution from China on mortality and morbidity in South Korea, to show that: •An increase in transboundary PM2.5 from China in the past 70 days results in an increase in annual mortality in South Korea by 31.2 per million people. •It also increases emergency-department visits for asthma and rhinitis. •The Chinese ‘war on pollution’ environmental regulations could save South Korea $2.62 billion per year, based on avoided mortality.
THE IMPACT OF SLAVERY ON BRITAIN'S INDUSTRIAL REVOLUTION A study by Stephan Heblich, Stephen Redding and Hans-Joachim Voth uses geographically disaggregated data to analyse the effects of slavery wealth on industrial development, revealing that slaveholding areas were less agricultural and closer to cotton mills, with higher property wealth. The research also suggests that the slave trade contributed to accelerating Britain's Industrial Revolution. The findings highlight the complexity of the legacy of slavery and its role in shaping economic development.
FINANCIAL INCENTIVES MAY HAVE A NEGLIGIBLE EFFECT ON PERFORMANCE Economists believe that monetary rewards can motivate people to work harder, but psychologists argue that this may not always be true. To test this relationship, a study by Petr Cala, Tomas Havranek, Zuzana Irsova, Jindrich Matousek and Jiri Nova reviews 44 experimental studies in economics, to show that financial incentives have a negligible effect on performance across all contexts of field experiments. Incentives that rely heavily on financial motives, like paying people to get vaccinated against Covid-19, may not be as effective as commonly believed.
HOUSING PRICE DISPARITIES SOAR AMIDST FALLING INTEREST RATES, CHALLENGING PREVAILING THEORIES Regional housing price disparities have increased significantly in the past four decades in the US and globally, alongside a steady decline in real interest rates. Using a novel long-term dataset of housing prices and rents for 27 major urban centers, a study by Francisco Amaral, Martin Dohmen, Sebastian Kohl and Moritz Schularick shows that differences in housing prices have increased much more than differences in rents. This phenomenon contradicts existing theories about the drivers of regional housing price inequality. The study proposes a new mechanism: the decline in real interest rates has artificially boosted prices in major cities with lower initial rent-to-price ratios, resulting in a polarised housing market between cities.
WHY IS THERE NO INTERNATIONAL POLICY COORDINATION DURING DISINFLATION? Countries’ monetary policies have addressed the current inflation crisis with a strict national focus. As global spillovers from these policies are significant and create the risk of turmoil in the international debt market, there could be a case for cross-border policy cooperation. Writing at VoxEU, Giancarlo Corsetti and Riccardo Trezzi discuss why we do not see cooperation during disinflation episodes and the reasons why it may well be in the cards in the coming quarters.