This week from CEPR: 23 June

Thursday, June 23, 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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    GLOBAL STAGFLATION

    Jongrim Ha, Ayhan Kose, Franziska Ohnsorge
    CEPR DP No. 17381 | 13 June 2022

    A new CEPR study by Jongrim Ha, Ayhan Kose and Franziska Ohnsorge discusses how the risk of stagflation – a combination of high inflation and sluggish growth – similar to what happened during the 1970s, has risen. The authors show that: 

    • A protracted period of weak growth likely lies ahead for the 2020s as the fundamental drivers of growth continue to weaken.
    • In addition, a prolonged period of high inflation may be in store, driven by rebounding global demand, supply bottlenecks, and soaring food and energy prices, especially since Russia's invasion of Ukraine.
    • Markets expect inflation to peak in mid-2022 and then decline, but to remain elevated even after these shocks subside and monetary policies are tightened further. 
    • The recovery from the stagflation of the 1970s required steep increases in interest rates by major advanced-economy central banks to quell inflation, which triggered a global recession and a string of financial crises in emerging market and developing economies. 
    • If current stagflationary pressures intensify, they would likely face severe challenges again because of their less well-anchored inflation expectations, elevated financial vulnerabilities, and weakening growth fundamentals.
    • Broader policy efforts aimed at protecting the poorest, strengthening fiscal and monetary policy frameworks, and improving debt management are required in these economies.

    Policy interventions will be difficult, especially when fiscal space is limited and financial vulnerabilities are prominent. However, carefully calibrating and clearly communicating cyclical policies within credible policy frameworks can pay large dividends in making EMDEs more resilient as they navigate stagflationary pressures.

    Figure: Headline CPI Inflation

    Note: Based on a sample of 155 countries (30 advanced economies and 125 EMDEs). The values show year-on-year headline CPI inflation. Last observation is 2021.


    DID THE GLOBAL FINANCIAL CRISIS AND THE PANDEMIC INDUCE PERSISTENT DEFLATION AVOIDANCE IN MAJOR CENTRAL BANKS?

    Alex Cukierman
    CEPR DP No. 17384 | 13 June 2022

    A new CEPR study by Alex Cukierman discusses why major western central banks, such as the Fed and the ECB, reacted very mildly or not at all to the return of inflation since the second half of 2020. The research shows that:

    • The huge balance sheets accumulated by those central banks over the global financial crisis and the pandemic are still at elevated levels and the recent correlation between inflation and the real exante policy rate is negative rather than positive violating Taylor's principle.
    • At least part of those findings are due to the emergence of recession avoidance (RA) preferences at those central banks in the aftermath of the two crises. In the face of uncertainty such preferences assign higher importance to downward shocks to the output gap than to upward shocks to the inflation gap relatively to preferences that are symmetric in both gaps.
    • This asymmetry in central bank preference is likely to persist in light of the longer run changes in monetary institutions and policies triggered by the two crises.
    • Chinese monetary policy over the two crises was expansionary albeit to a lesser extent than those of the Fed and the ECB. RA preferences emerged in Japanese monetary policy long before, and intensified with, the outbreak of the last two crises. By contrast in countries with permanently loose monetary policies such as Argentina the main concern of the CB over the two crises remained inflation as was the case long before they occurred.
       

    THE POLITICAL POLARISATION OF CORPORATE AMERICA

    Vyacheslav Fos, Elisabeth Kempf and Margarita Tsoutsoura
    CEPR DP No. 17402 | 21 June 2022

    A new CEPR study by Vyacheslav Fos, Elisabeth Kempf and Margarita Tsoutsoura discusses how the executive teams in US firms are becoming increasingly partisan using data on political affiliations from voter registration records for top executives of S&P 1500 firms between 2008 and 2020. The authors show that:

    • Political partisanship shapes the perception of the economy and economic decisions not only by households, but also by economically sophisticated agents in high-stakes environments. Therefore, political polarisation in executive teams may have important implications for firm value.
    • Departures of politically misaligned executives are value-destroying for shareholders, implying the increasing political polarisation of corporate America may not be in the financial interest of shareholders.
    • The increasing partisanship of executive teams is even more remarkable in light of the increasing diversity along the gender dimension, which should, if anything, lead to greater diversity in political views.
    • 61% of the increase in partisanship is driven by an increased tendency of executives to match with other executives who share their political views. The remaining 39% is driven by the executive population as a whole becoming more politically homogeneous (i.e., Republican).
    • Within a given firm-year, executives who are politically misaligned with the majority of the team have a 3.2-percentage-point-higher probability of leaving the firm than executives whose views are aligned with the rest of the team.
    • Departures of misaligned executives trigger substantially larger losses for shareholders, indicating greater political homogeneity in the executive suite is likely not in the interest of shareholders. The incremental losses to shareholders around executive departures amount to $238 million for executives who are politically misaligned.
       


    THE IMPACT OF WAR ON ECONOMIC ACTIVITY IN UKRAINE

    Mihnea Constantinescu, Kalle Kappner, Nikodem Szumilo
    21 June 2022

    Using high-frequency data from night lights, online search behaviour, and social media activity, a new study by Mihnea Constantinescu, Kalle Kappner, Nikodem Szumilo estimates that economic activity in Ukraine decreased by 45% at the beginning of the war, but recovered to around 85% of pre-war levels in April.

     

    SEARCHING FOR ‘OPTIMAL’ SANCTIONS ON RUSSIA

    Simon Schropp, Marinos Tsigas
    17 June 2022

     

    Writing at VoxEU, Simon Schropp and Marinos Tsigas argue that instead of implementing an all-out import ban on Russa, sanctioning countries would fare better by limiting import sanctions to the eight most-imported Russian sectors and raising tariffs by 20 to 25 percentage points. The authors also suggest that burden-sharing arrangements, in which proceeds generated from tariff rents are redistributed among Allies, could help distribute the self-harm of sanctions.

     



    SOCIALLY RESPONSIBLE DIVESTMENT: Shunning undesirable industries could be counterproductive

    Alex Edmans, Doron Levit, Jan Schneemeier
    17 June 2022

    Responsible investing has become an increasingly popular practice, with the blanket exclusion of ‘brown’ industries – such as tobacco, gambling, and fossil fuels – widely regarded as its purest form. Writing at VoxEU, Alex Edmans, Doron Levit and Jan Schneemeier suggest that in some cases, ‘tilting’ (leaning away from a brown sector but keeping an industry leader) is a more effective strategy than shunning the industry outright. Though exclusion may work best for such industries as controversial weapons, tilting is preferable for an industry, such as fossil fuels, in which managers can be pressured to take corrective action.

     

    KEY MECHANISMS THROUGH WHICH CLIMATE CHANGE INFLUENCES MONETARY POLICY

    Lena Boneva, Gianluigi Ferrucci, Francesco Paolo Mongelli
    17 June 2022

    Writing at VoxEU, Lena Boneva, Gianluigi Ferrucci and Francesco Paolo Mongelli show that climate change impacts the objective, conduct, and transmission of monetary policy and could bear implications for the design of the monetary policy framework. To ensure price stability, central banks have a clear interest, in some cases an obligation, to incorporate climate change considerations into their policymaking.


    THE ROLE FOR MONETARY POLICY IN THE GREEN TRANSITION

    Lena Boneva, Gianluigi Ferrucci, Francesco Paolo Mongelli     
    18 June 2022

    In the second part of their study on the role for monetary policy in the green transition, Lena Boneva, Gianluigi Ferrucci and Francesco Paolo Mongelli review measures that central banks could consider to internalise climate change objectives into their monetary policy frameworks.

    These range from protective actions to more proactive measures aimed at mitigating climate change and supporting green finance and the transition to a low-carbon economy. The authors then discuss the constraints and trade-offs central banks face.


    HOW COGNITIVE ABILITY INFLUENCES TAXPAYING BEHAVIOUR: Evidence from Sweden

    Spencer Bastani, Daniel Waldenström
    20 June 2022

    Writing at VoxEU, Spencer Bastani and Daniel Waldenström use data from Sweden to show how people with high cognitive ability react stronger to tax incentives than low-ability individuals, suggesting an ability gradient in tax responsiveness.

    The research finds that individuals in the top decile of the ability distribution react twice as strong to a large and salient kink point in the tax code than the average individual, and three times as strong as individuals in the bottom ability decile. This ability gradient reflects both income shifting among high-ability businesses owners and labour supply responses among high-ability wage earners.


    BANKS AND THEIR INTEREST RATE RISK SENSITIVITY: A two-tier analysis

    Katarzyna Budnik, Jiri Panos, Cosimo Pancaro, Aurea Ponte Marques
    20 June 2022

    Interest rate risks on banks’ balance sheets represent a relevant financial stability concern with a view to the normalisation of monetary policy. A study by Katarzyna Budnik, Jiri Panos, Cosimo Pancaro and Aurea Ponte Marques explores how a parallel shift in the euro area yield curve, or its steepening, might impact banking sector profitability and solvency.

    Leveraging on two distinct ECB stress-testing frameworks, the research finds that banks are overall well equipped to face the interest rate normalisation as it brings a positive profitability outlook with a hardly affected system-wide solvency forecast.


    TECHNOLOGY IMPROVES TAX CAPACITY IN GHANA, WITH A COST

    James Dzansi, Anders Jensen, David Lagakos, Henry Telli
    19 June 2022

    A study by James Dzansi, Anders Jensen, David Lagakos and Henry Telli finds that technology improving government tax capacity in Ghana increases the number of delivered tax bills by 27% and increases the amount of revenue collected by 103%. However, the technology also increases the incidence of bribes.


    THE SPENDING EFFECTS OF FISCAL TRANSFERS WERE MUTED DURING THE PANDEMIC: Evidence from Germany

    Olga Goldfayn-Frank, Vivien Lewis, Nils Wehrhöfer
    23 June 2022

    A study by Olga Goldfayn-Frank, Vivien Lewis and Nils Wehrhöfer evaluates Germany’s fiscal response to the Covid-19 pandemic, which included direct transfers to households in the form of three payments to families with children. The research finds that:

    • There was a significant but small spending effect of the first transfer which is higher for low-income and liquidity-constrained households, and in areas with lower infection rates. 

    • The second and third payments failed to increase spending. 

    These results suggest that the effectiveness of fiscal transfers is muted during a pandemic.


    TEMPORARY CONTRACTS CAN LEAD TO WORKERS LEAVING FIRMS SOONER AND HAVING CHILDREN LATER: Evidence from the Japanese airline industry

    Yukiko Asai, Dmitri Koustas 
    23 June 2022

    How does being a temporary contract holder affect young workers’ subsequent labour market and family outcomes? A study by Yukiko Asai and Dmitri Koustas uses data from the Japanese airline industry, which changed the nature of contracts for flight attendants in the mid-1990s and then again in the mid-2010s, to show that workers starting on temporary contracts were less likely to remain with the firm over time and were significantly less likely to have children within ten years of starting the job. 


    PAST AND PRESENT INFLATION ARE MORE SIMILAR THAN YOU THINK

    Marijn A. Bolhuis, Judd N. L. Cramer, Lawrence H. Summers
    22 June 2022

    A study by Marijn Bolhuis, Judd Cramer and Lawrence Summers finds that previous inflationary cycles look more volatile and responsive to Fed policy due to differences in how housing inflation was measured before and after 1983. The research presents new historical series for CPI headline and core inflation that are more consistent with current practices and expenditure shares for the post-war period, which suggest that the current inflation regime is considerably closer to that of the late 1970s than it appears.



    SUBSTANCE ABUSE DURING THE PANDEMIC

    Nezih Guner interviewed by Tim Phillips, 21 June 2022

    During the COVID-19 pandemic, there was a large drop in labour-force participation. Some of it was due to early retirement. But how much can we attribute to a more disturbing cause: a rise in substance abuse?


    PIKETTY ON EQUALITY

    Thomas Piketty interviewed by Tim Phillips, 17 June 2022

    Recorded live at CEPR Paris Symposium 2022: Thomas Piketty’s short new book promises A brief history of equality. He tells Tim Phillips about why institutions are precarious, why policymakers should consider the consequences for inequality before they intervene – but also why we should be optimistic about the long-term trends in equality.


    THE ECONOMICS OF BREXIT: What have we learned?

    Jonathan Portes, Thomas Sampson, Sarah Hall interviewed by Tim Phillips, 13 May 2022

    The latest CEPR eBook investigates the impact of Brexit so far on the economies of the UK and EU. Tim Phillips talks to three of the authors: Jonathan Portes, Thomas Sampson and Sarah Hall.