This week from CEPR: 14 April

Thursday, April 14, 2022

Highlights from some of the latest research reports published in the Centre for Economic Policy Research (CEPR) network’s long-running series of discussion papers, as well as some other recent CEPR publications.

Also, links to some of the latest columns on Vox, the Centre’s policy portal, which provides ‘research-based policy analysis and commentary from leading economists’.

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    Ming Deng, Markus Leippold, Alexander F Wagner, Qian Wang
    CEPR DP No. 17207 | 11 April 2022

    A new CEPR study by Ming Deng, Markus Leippold, Alexander F Wagner and Qian Wang investigates the stock price reactions of firms around the globe to the Russia-Ukraine war in early 2022 and its consequences. Among the findings: 

    • In the build-up to and in the weeks after the Russian invasion of Ukraine, stocks strongly exposed to the regulatory risks of the transition to a low-carbon economy did well. This was especially true of US stocks. 
    • However, in Europe, these stocks tended to underperform after the invasion, arguably because of stronger expected policy responses supporting renewable energy sources in the face of the pronounced dependence of Europe on Russian oil and gas. 
    • Investors thus expect the speed of transition to a low-carbon economy to be diverging between the US and Europe. 
    • Relating six different Environmental, Social, and Governance (ESG) measures with stock price performance yields mixed results, suggesting that investors cannot blindly rely on such measures in general to indicate corporate resilience against crises. 
    • Companies that more frequently refer to inflation in their conference calls with analysts performed worse than their peers.
    • Internationally oriented firms did poorly, and investors were particularly concerned regarding companies' exposure to China. 

    Overall, the results offer a preview of the future economic impact of the Russia-Ukraine war.

    Figure: Stock Market Reaction across Industries

    Note: This figure plots the market reaction of different GICS industries for three periods: Build-up (January 24 - February 23), Outbreak (February 24 - March 08), and Continuation (March 09 - March 31). 


    • THE DETERIORATING IMPACT OF THE INTERNET ON YOUNG PEOPLE’S MENTAL HEALTH: Evidence from Italy 

    LOST IN THE NET? Broadband Internet and Youth Mental Health
    Dante Donati, Ruben Durante, Francesco Sobbrio, Dijana Zejcirovic
    CEPR DP No. 17170 | 02 April 2022

    Does the internet really affect young people's mental health? A new CEPR study by Dante Donati, Ruben Durante, Francesco Sobbrio and Dijana Zejcirovic examines this question in the context of Italy, using data on young patients admitted to Italian hospitals between 2001 and 2013 who were diagnosed with a mental health disorder, which the authors combine with information on the availability of high-speed internet. This research is the first to provide systematic evidence of the causal impact of internet on mental health disorders diagnosed by health professionals. Among the findings:

    • Access to high-speed internet has a significant effect on the incidence of mental disorders for young cohorts but not for older ones. i.e., those born between 1985 and 1995 and aged 6 to 16 years old in 2001 when internet started to spread in Italy.
    • In particular, internet access leads to an increase in diagnoses of depression, anxiety, drug abuse, and personality disorders - for both males and females - and of eating and sleep disorders - for females only. 
    • The research finds similar results for urgent and compulsory hospitalisations and self-harm episodes.
    • On the positive side, the internet makes it easier for individuals experiencing mental disorders to access information about these pathologies, learn about potential treatments, and seek the help of health professionals.

    Overall, the results speak in favour of a true increase in mental disorder prevalence – rather than just increased awareness – as the authors also identify raises in self-inflicted harm, compulsory, and urgent mental health hospitalisations. The findings also highlight that the deteriorating impact of the internet on mental health may be driven by several factors besides these specific digital platforms. 



    SHOULD THE EU EMBARGO RUSSIAN OIL AND GAS?

    John Sturm
    13 Aril 2022

    Writing at VoxEU, John Sturm argues that unlike a full energy embargo, introducing small EU tariffs on energy imports from Russia could weaken the Russian economy while simultaneously making the EU better off. While larger tariffs would come at a cost to the EU, they are likely to be more efficient than other sanctions already in place.

     

    THE 2014 SANCTIONS ON RUSSIA MAY HAVE CREATED THE ECONOMIC AND POLITICAL CONDITIONS FOR TODAY’S CONFLICT IN UKRAINE

    Sumru Altuğ, Sevcan Yesiltas 
    13 April 2022

     

    Writing at VoxEU, Sumru Altuğ and Sevcan Yesiltas argue that the 2014 sanctions imposed on Russia after the first Ukraine Crisis, which stagnated the performance of the Russian economy - characterised by weak private investment and declining productivity – may have laid the seeds of the current war in Ukraine. 

    The research finds that the economic uncertainty that has pervaded the Russian economy for several years weakened investment by Russian non-financial firms as well as negatively affecting their productivity growth. Sectoral variation in foreign exchange debt exposure, oil cost dependence, and exposure of inputs to indirect sanctions are all important mechanisms through which the heightened uncertainty operated. Thus, the absence of constraints exerted by a dynamic private sector integrated with the global economy may have created the economic and political conditions for the conflict we observe in Ukraine today.


    THE IMPACT OF THE RUSSIAN INVASION OF UKRAINE ON THE UK ECONOMY

    Ethan Ilzetzki
    13 April 2022

    Writing at VoxEU, Ethan Ilzetzki discusses the results of the March 2022 CfM survey, which asked economists how the Bank of England and the UK Treasury should respond to the economic fallout of the war in Ukraine on the UK economy: 

    • A solid majority of the panel think that the Bank of England should slow the pace of interest rate increases planned this year due to the events in Eastern Europe. 
    • The panel is nearly unanimous that the government should increase public spending. 
    • But is split on whether increased spending should exceed inflation and on whether taxes should be increased or cut in response to recent events.  
     

    RECONCILING THE EU’S DOMESTIC AND GLOBAL AGENDAS IN THE WAKE OF COVID & THE UKRAINE CRISIS

    Marco Buti, Marcello Messori
    11 April 2022

    Writing at VoxEU, Marco Buti and Marcello Messori discuss how, given the fallout from the Covid crisis and the dramatic consequences of the Russian invasion of Ukraine, it makes sense for the EU’s domestic and international agendas to eventually merge.

    The authors argue that a central fiscal capacity is a key element for reconciling the EU’s domestic and international goals. Domestically, it would help achieve a balanced policy mix and ensure an adequate supply of European public goods, and globally it would give credibility to the geo-economic role of the EU. 


    CHINA’S OVERSEAS LENDING MAY BECOME MORE CAUTIOUS DUE THE WAR IN UKRAINE, PARTICULARLY AFFECTING EDMEs

    Sebastian Horn, Carmen Reinhart, Christoph Trebesch                    
    08 April 2022

    China and Russia have built close financial ties over the past ten years, with Russia becoming the largest recipient of Belt and Road lending. Given the sums at stake, the war in Ukraine is putting China’s overseas lending portfolio at higher risk than ever before. 

    Writing at VoxEU, Sebastian Horn, Carmen Reinhart and Christoph Trebesch argue that this is likely to make Chinese state-owned banks more cautious in extending fresh international loans and in rolling over old ones. Because China is a common lender to many developing countries, they now face the added risk of a ‘sudden stop’ in foreign lending


    THE CIVILIAN IMPACT OF THE WAR IN UKRAINE: Vulnerability, resilience, and resistance

    Patricia Justino                     
    14 April 2022

    The Ukraine war is causing unmeasurable civilian suffering, but civilians may nonetheless shape the course of the conflict. Writing at VoxEU, Patricia Justino argues that the levels of vulnerability and resistance of civilians in wartime depend on three factors: 

    1. The nature of violence during the war causing economic, psychological, and social disruption. 
    2. The effectiveness of coping strategies employed by civilians, which depend on both economic needs and targeting by the enemy.
    3. Civilians’ own agency to both resist and shape the behaviour of armed forces, which is particularly important if ongoing civilian resistance transforms into a sustained insurgency.


    GIVE REFUGEES A CHOICE OF WHERE TO LIVE AND INVEST IN LANGUAGE SKILLS: Evidence from 40 years of Danish asylum policies

    Jacob Arendt, Christian Dustmann, Hyejin Ku
    10 April 2022

    A study by Jacob Arendt, Christian Dustmann and Hyejin Ku brings together evidence from four decades of Danish refugee policies to identify two policies whose benefits have outweighed their costs: allowing refugees to choose where they settle, and labour market programmes that increase investment in language skills. 

    The research finds that policies that emphasise early job-training, regulate access to welfare benefits, or use permanent-residency incentives, on the other hand, create long-run disadvantages for some migrants.

     

    EVANGELICAL CHURCHES SIGNIFICANTLY REDUCE REINCARCERATION RATES AMONG YOUNG INMATES IN CHILE

    Andrés Barrios-Fernández, Jorge García-Hombrados
    09 April 2022

    Between 30% and 50% of individuals sentenced to prison are reincarcerated in the two years after their release. A new study by Andrés Barrios-Fernández and Jorge García-Hombrados finds that the opening of an Evangelical church in the neighbourhood significantly reduces 12-month reincarceration rates among recently released young inmates, suggesting that local institutions can provide a support network that helps former inmates cope and find work.


    HOW HEALTH INTERVENTIONS CAN PREVENT CONFLICT: Evidence from Africa

    Andrea Berlanda, Matteo Cervellati, Elena Esposito, Dominic Rohner, Uwe Sunde
    09 April 2022

    A study by Andrea Berlanda, Matteo Cervellati, Elena Esposito, Dominic Rohner and Uwe Sunde shows that the expansion of HIV antiretroviral therapy, a large-scale health intervention, had a significant impact on preventing violent events throughout Africa. 

    The research shows that where the treatment was expanded, incidents of social violence dropped substantially at both country and sub-national levels. This finding shows that successful public health interventions can yield legitimacy to the state, help build trust, and serve as a ‘medicine’ against both ill health and conflict.


    A WELCOME EVOLUTION: The IMF now recognises that capital controls may need to be used pre-emptively

    Anton Korinek, Prakash Loungani, Jonathan D. Ostry
    28 March 2022

    The large capital outflows from China since the onset of the war in Ukraine serve as a reminder of the volatility of capital flows. Writing at VoxEU, Anton Korinek, Prakash Loungani and Jonathan D. Ostry argue that the IMF’s recent acceptance of the occasional need for pre-emptive use of capital controls to increase resilience against volatile capital flows continues the welcome evolution of the international financial institution’s policies. 

    The research shows that the framework should continue to evolve to provide countries with policy space when capital flows impinge on domestic objectives (e.g. reducing inequality) or generate international spillovers.


    HOW INDIA COULD REDUCE IT’S RECURRING ELECTRICITY BLACKOUTS

    Fiona Burlig, Akshaya Jha, Louis Preonas
    08 April 2022

    Writing at VoxEU, Fiona Burlig, Akshaya Jha and Louis Preonas provide a new explanation for India’s damaging electricity blackouts: utilities choose to purchase less electricity from the wholesale sector when procurement costs are high, leading to less electricity reaching end-users. The authors suggest that India could reduce blackouts by making its existing fleet of power plants available to generate more often, which would require addressing ongoing inefficiencies in Indian electricity supply.

    OVERHEATING CONDITIONS INDICATE HIGH PROBABILITY OF A US RECESSION

    Alex Domash, Lawrence H. Summers
    13 April 2022

    As inflation accelerates in the US, the Federal Reserve will raise interest rates in the hope of achieving a soft landing for the economy. A study by Alex Domash and Lawrence Summers uses historical data on unemployment and inflation to evaluate the likelihood that the Fed can lower inflation without causing a recession. 

    The authors find that low levels of unemployment and high inflation are both strong predictors of future recessions, and that overheating indicators today suggest a very high probability of recession over the next two years. The likelihood of the Fed achieving a soft landing in the economy appears low. 


    CENTRAL BANK DIGITAL CURRENCIES COULD HELP STABILISE THE FINANCIAL AND MONETARY SYSTEM

    Susana Martín Belmonte, Christian Gelleri, James Stodder
    08 April 2022

    Writing at VoxEU, Susana Martín Belmonte, Christian Gelleri and James Stodder argue that a complementary currency backed by a central bank digital currency can not only compensate for the demise of commercial bank money, but it can also democratise money creation. The authors also show that complementary currencies can have higher multiplier effects on local expenditure, allow central banks to control circulation velocity, and help countries in currency crises.


    REVISING THE EUROPEAN FISCAL FRAMEWORK: Fiscal rules and debt management

    Veronica Guerrieri interviewed by Tim Phillips, 12 April 2022

    In January 2023, the suspension of the EU's Stability and Growth Pact will expire. That means painful fiscal adjustments in countries struggling with the impact of Covid-19. A new proposal has a two-part solution to this problem.




    THE ECONOMIC IMPACT OF MASS DISPLACEMENT IN HISTORY

    Sascha O. Becker interviewed by Tim Phillips, 08 April 2022

    Syria, Venezuela, Ukraine: forced migration is constantly in the news, but these events have been happening for hundreds of years. Sascha Becker tells Tim Phillips about new research that is discovering the economic impact of mass displacement in history, both on refugees and on communities – and the lessons we can learn from the past.