This week from CEPR: 19 May

Thursday, May 19, 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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    Kai A. Konrad, Marcel Thum
    CEPR DP No. 17308 | 15 May 2022

    Unlike produced commodities, the extraction and sale of fossil energy resources such as oil or natural gas is an "asset swap": assets stored in the ground are converted into financial assets. The value of assets in the ground is reduced by the amount taken out and sold. A new CEPR study by Kai Konrad and Marcel Thum shows that this is important for assessing the coercive power of the threat of implementing an export embargo: 

    • Even if the country affected by the embargo is ruled by an autocratic kleptocrat, who appropriates all the revenues from resource sales, the sanctioning effect is close to zero in a functioning financial market environment no transaction costs, secure property rights in particular). 
    • However, a sanctioned autocrat’s incomplete political office security can change the picture. If the autocrat considers their future government power to be at risk and, at the same time, can bunker the extraction proceeds in a financial safe haven, then the embargo leads to expected wealth losses for the autocrat. 
    • The expected wealth losses increase in the difference between the likelihood of retaining power and the wealth security of the financial assets in a safe haven.

    The research indicates that the flow of foregone revenues of an oil or gas exporter turns out to be a poor and conceptually flawed indicator of the damage imposed on the embargoed country, and is a relevant policy message that is missed in the debate about export embargoing autocrat governments natural resource exports.


    LOW-COST PSYCHOTHERAPY CAN HAVE HUGE EFFECTS ON MENTAL HEALTH OUTCOMES IN LOW-INCOME COUNTRIES: Evidence from India 
    Bhargav Bhat, Jonathan de Quidt, Johannes Haushofer, Vikram Patel, Gautam Rao, Frank Schilbach, Pierre-Luc Vautrey
    CEPR DP No. 17309 | 16 May 2022

    Psychotherapy is widely used in the rich world yet remains out of reach for most people in low-income countries. A new CEPR study by Bhargav Bhat et al. examines a series of clinical trials on depressed adults in India, where individuals were exposed to a brief course of psychotherapy to measure the effects on mental health, behavioral and economic outcomes in low-income countries.

    The research finds that four to five years later, the treatment group was 11 percentage points less likely to be depressed than a control group. The more effective intervention averted 9 months of depression on average over five years and cost only $66 per recipient. Therapy changed people's beliefs about themselves in three ways: 

    1. It reduced their likelihood of seeing themselves as a failure or feeling bad about themselves. 
    2. When faced with a novel work opportunity, therapy reduced over-optimistic belief updating in response to feedback and thus reduced overconfidence. 
    3. It increased self-assessed levels of patience and altruism. 

    The authors find that therapy did not increase levels of employment or consumption, possibly because of other constraints on employment in the largely female study sample. The research suggests that simplified forms of psychotherapy can contribute to filling the enormous treatment gaps for mental illness in low-income countries.



    SOARING COMMODITY PRICES DUE TO RUSSIA-UKRAINE WAR REVEALS VULNERABILITY OF WESTERN ECONOMIES TO ENERGY PRICE COST-PUSH INFLATION

    Guillaume Daudin, Violaine Faubert
    13 May 2022

    A study by Guillaume Daudin and Violaine Faubert documents the large exposure of eastern and central European economies to a rise in Russian hydrocarbon prices.

    Analysing cost-push inflation using world input-output tables, the authors find that Euro Area countries have very different vulnerability to external shocks, such as the recent rise in hydrocarbon prices due to the Russia-Ukraine war, making it hard to calibrate common monetary policy reaction to them.

     

    ARE SANCTIONS FAILING? The Russian ruble and the exchange rate

    Oleg Itskhoki, Dmitry Mukhin 
    16 May 2022

     

    Despite sanctions since Ukraine invasion, the rouble has appreciated back to its pre-war level. As study by Oleg Itskhoki and Dmitry Mukhin shows that the prevalence of import over export sanctions and the financial repression imposed in Russia, which lowered the local demand for foreign currency, have driven the appreciation. 

    Despite the opposite effects on the exchange rate, the sanctions on imports and exports are equivalent in terms of their impact on consumption, welfare, and government fiscal losses. Nonetheless, the level of the exchange rate remains relevant for imports, savings, and monetary policy.


    RUSSIAN E-COMMERCE TRADE DROPS SUBSTANTIALLY AFTER SANCTIONS, INDICATING DE-LINKING FROM THE WEST

    Alexandra Avdeenko, Maximilian Kaiser, Krisztina Kis-Katos
    19 May 2022

    A study by Alexandra Avdeenko, Maximilian Kaiser and Krisztina Kis-Katos uses transaction-level data from 2,288 selected companies show that the economic sanctions imposed by the West have been followed by a substantial decline in the volume of online cross-border trade, whereas online trade within Russia declined only slightly. 

    The research finds that around five weeks after the war started, revenues from e-commerce imports to Russia had fallen by half, with no signs of compensation by Russian retailers in the sample studied.

     


    TOP MANAGERS ARE HIRED DISPROPORTIONATELY BY FIRMS WITH MARKET POWER, AND THEY GET REWARDED FOR IT – INCREASINGLY SO

    Renjie Bao, Jan De Loecker, Jan Eeckhout   
    17 May 2022

    Writing at VoxEU, Renjie Bao, Jan De Loecker and Jan Eeckhout examine the contribution of monopoly power to manager pay. The research shows that as firms grow in size, the contribution of the manager to the value of a firm increases, and firms are willing to bid higher to poach the best manager. Top managers are hired disproportionately by firms with market power in their sectors, and they get rewarded for it because better managers help increase the rents from market power. 

     

    VOTING FOR CHANGE – VOTING INCUMBENTS OUT OF OFFICE – DELIVERS BETTER LIVELIHOODS FOR CITIZENS

    Benjamin Marx, Vincent Pons, Vincent Rollet   
    16 May 2022

    A study by Benjamin Marx, Vincent Pons and Vincent Rollet uses data from national elections conducted worldwide since 1945 to show that electoral turnovers lead to improvements in governance, economic performance, and other measures of national performance over the subsequent years. These findings suggest that turnovers play a positive role by bringing in new leaders with better incentives to deliver tangible benefits for the electorate.


    SCHOOL DESEGREGATION BOOSTED OUTCOMES FOR CHILDREN IN US SOUTH, BUT EFFECTS WERE LIMITED IN THE NORTH 

    Garrett Anstreicher, Jason Fletcher, Owen Thompson    
    15 May 2022

    A study by Garrett Anstreicher, Jason Fletcher and Owen Thompson finds that desegregated schools, implemented across the US after 1960, resulted in better academic and economic outcomes for Black children in the US South, but that Black children in the North showed little benefit from comparable integration initiatives.


    PEOPLE TEND TO MARRY BASED ON THEIR OWN PRE-MARRIAGE WEALTH, NOT THEIR PARENT’S WEALTH: Evidence from Norway

    Luigi Guiso, Luigi Pistaferri   
    14 May 2022

    A study by Luigi Guiso and Luigi Pistaferri finds that people tend to marry based on their own pre-marriage wealth, not their parent’s wealth, and that individuals also marry based on their personal returns to wealth. 

    The research shows that among wealthy couples, the partner with the highest pre-marriage return tends to manage the household’s assets, allowing the households to grow their assets even faster over time and boosting wealth concentration. 


    CRYPTOCRASH - HOW ALGORITHMIC STABLECOINS ARE VULNERABLE TO SPECULATIVE ATTACKS WHEN THE SYSTEM IS UNDER-COLLATERALISED

    Amit Chaudhary, Ganesh Viswanath-Natraj    
    13 May 2022

    On 10 May 2022, the price of TerraUSD, an algorithmic stablecoin operating on the Terra blockchain, fell and it lost its peg to one US dollar. Using the devaluation of the TerraUSD peg as a case study, Amit Chaudhary and Ganesh Viswanath-Natraj show how algorithmic stablecoins are vulnerable to speculative attacks when the system is under-collateralised. The authors point to solutions – stable collateral and over-collateralisation – to stabilise the peg.


    HOW THE RISE OF REMOTE WORK MAY IMPACT WAGES ACROSS THE WORLD

    Agostina Brinatti, Alberto Cavallo, Javier Cravino, Andres Drenik   
    19 May 2022

    A study by Agostina Brinatti, Alberto Cavallo, Javier Cravino and Andres Drenik uses a new dataset from one of the largest job platforms to examine remote wages across locations and offshorability of work:

    • Remote wages are more equalised than local wages across countries, but the wage gaps across locations are still large. 
    • Outside the US, local-currency remote wages are strongly affected by fluctuations in the dollar exchange rate. 
    • Whether a job is performed remotely is an imperfect proxy for whether a job can be easily offshored.


    IS THE ROAD TO HELL PAVED WITH GOOD INTENTIONS? Budget projections that miss the mark

    Roel Beetsma interviewed by Tim Phillips, 17 May 2022

    Member states supply budgetary projections as part of EU Stability and Convergence Programmes. How good are those projections, and how can we improve them?




    WHAT CAN HELICOPTER MONEY DO?

    Ricardo Reis interviewed by Tim Phillips, 13 May 2022

    If you're going to drop lots of money from a helicopter, what will happen to the economy? When would it make a difference, and to who? Helicopter money is increasingly being taken seriously as policy. Ricardo Reis tells Tim Phillips whether helicopter money really can solve our economic problems.