This week from CEPR: April 02

Thursday, April 2, 2020

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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    Óscar Jordá, Sanjay R. Singh, Alan M. Taylor       
    CEPR DP No. 14543  | 29 March 2020 

    How do major pandemics affect economic activity in the medium to longer term? Significant macroeconomic after-effects of pandemics persist for about 40 years, with real rates of return substantially depressed. 

    These are is the central findings of a new CEPR study by Óscar Jordá, Sanjay Singh and Alan Taylor, which explores the medium- to long-term macroeconomic effects of global pandemics, through studying rates of return on assets using a dataset stretching back to the 14th century, focusing on 12 major pandemics where more than 100,000 people died. Among the findings: 

    • The great historical pandemics of the last millennium have typically been associated with subsequent low returns to assets.
    • Real wages somewhat elevated following pandemics. 
    • Pandemics are followed by sustained periods – over multiple decades – with depressed investment opportunities, possibly due to excess capital per unit of surviving labour, and/or heightened desires to save, possibly due to an increase in precautionary saving or a rebuilding of depleted wealth.
    • In contrast, wars have no such effect, indeed the opposite. This is consistent with the destruction of capital that happens in wars, but not in pandemics. 

    If the trends play out similarly in the wake of Covid-19 – adjusted to the scale of this pandemic – the global economic trajectory will be very different than was expected only a few weeks ago. If low real interest rates are sustained for decades, they will provide welcome fiscal space for governments to mitigate the consequences of the pandemic.

    The major caveat is that past pandemics occurred at times when virtually no members of society survived to old age. The Black Death and other plagues hit populations with the great mass of the age pyramid below 60, so this time may be different.


    Luca Fornaro, Martin Wolf        
    CEPR DP No. 14529 | 24 March 2020

    The spread of the coronavirus might generate a demand-driven slump, give rise to a supply-demand doom loop, and open the door to stagnation traps induced by pessimistic animal spirits. Aggressive policies to support investment can reverse the supply-demand doom loop and jumpstart the economy out of stagnation traps.

    These are the central findings of a new CEPR study by Luca Fornaro and Martin Wolf, which focuses on a scenario in which the Covid-19 outbreak causes a persistent supply disruption, potentially extending beyond the end of the epidemic, using a simple model to understand the macroeconomic implications of the coronavirus epidemic. Among the findings:

    • Central banks might need to respond to the Covid-19 outbreak by easing monetary policy.
    • Restoring full employment through monetary stimulus might not be that easy.
    • A reduction in interest rates might thus have a much weaker impact on demand, compared with normal times.
    • The spread of the virus might depress global demand. 
    • A supply-demand doom loop might take place, amplifying the supply disruption directly caused by the virus. 
    • The epidemic might make the global economy vulnerable to stagnation traps, episodes of low growth and high unemployment driven by pessimistic animal spirits.
    • While monetary easing can help mitigate the drop in global demand, aggressive fiscal policy interventions to support investment will be needed to push the global economy out of stagnation.

    The authors conclude that at present, more pessimistic outcomes cannot be ruled out, in which the supply disruption caused by the virus is going to be severe and protracted. If so, drastic policy interventions might be needed to prevent this negative supply shock from severely affecting
    employment and productivity

    • CAN THIS TIME BE DIFFERENT? Policy options in times of rising debt  

    CAN THIS TIME BE DIFFERENT? Policy Options in Times of Rising Debt
    Ayhan Kose, Peter Nagle, Franziska Ohnsorge, Naotaka Sugawara    
    CEPR DP No. 14528 | 24 March 2020

    The global economy has experienced four waves of rapid debt accumulation in emerging and developing economies over the past 50 years. The current wave of debt, which started in 2010, is unprecedented in its size, speed and reach. Similar past debt build-ups have often ended in widespread financial crises in these economies. 

    A new CEPR study by World Bank economists Ayhan Kose, Peter Nagle, Franziska Ohnsorge and Naotaka Sugawara examines the factors that will determine the outcome of the most recent debt wave, and considers policy options to help reduce the likelihood that it ends again in widespread crises. The study highlights two main results:

    1. The rapid increase in debt has made emerging and developing economies more vulnerable to shifts in market sentiment, notwithstanding historically low global interest rates. 
    2. Policy options are available to lower the likelihood of financial crises, and to help manage the adverse impacts of crises when they do occur. These include sound debt management, strong monetary and fiscal frameworks, and robust bank supervision and regulation. 

    The debt build-up since the Global Financial Crisis has coincided with a period of subdued growth as well as the emergence of non-traditional creditors. As a result, policy priorities also need to ensure that debt is spent on productive purposes to improve growth prospects and that all debt-related transactions are transparently reported.


    Enrico Perotti      
    27 March 2020

    Writing at Vox, Enrico Perotti argues that the coronavirus shock poses a serious liquidity risk for the shadow banking sector, where significant funding has been extended on the basis of cash flow rather than real collateral. Avoiding financial panic is key, and will require liquidity support as well as targeted fiscal measures. 

    THE ECONOMIC IMPACT OF CORONAVIRUS ON UK BUSINESSES: Early evidence from the Decision Maker Panel

    Nicholas Bloom, Philip Bunn, Scarlet Chen, Paul Mizen, Pawel Smietanka         
    27 March 2020

    The latest Decision Maker Panel survey of UK chief financial officers reveals that businesses expect the spread of the virus to have a large impact on their sales over the next year. The effects on sales are expected to be material across all sectors, but businesses in accommodation and food, leisure and transport services are most severely affected. The survey also suggests that Covid-19 is now a more important source of uncertainty than Brexit for most UK businesses.

    FUTURE IMPERFECT: Tackling inflation and debt after coronavirus 

    Charles Goodhart, Manoj Pradhan        
    27 March 2020

    Following this period of massive fiscal and monetary expansion, what will happen when the lockdown is lifted and the recovery period starts? Writing at Vox, former Monetary Policy Committee member Charles Goodhart and Manoj Pradhan argue that we will see a surge in inflation that can only be tackled once indebtedness has been restored to viable levels. Continuing high levels of debt make our economies still very fragile. If central banks try to raise interest rates in such a context, they will face political ire to a point that might threaten their 'independence’.  


    David Miles    
    30 March 2020

    In response to the current crisis, central banks have embarked on operations to purchase huge quantities of government bonds. Accusations that these policies amount to ‘printing money’ or ‘helicopter drops’ are unfounded and misleading. 
    Writing at Vox, former Monetary Policy Committee member David Miles argues that the asset purchase operations undertaken when interest rates are very low can help greatly in stabilising the economy. These actions allow governments to issue long-term bonds, incur low effective costs in the near horizon, and avoid volatile financial markets. 

    AUTOMATION VERSUS PROCREATION – or bots versus tots

    Hal Varian       
    30 March 2020

    Writing at Vox, Hal Varian, chief economist at Google, discusses the effects of demographic shifts on future wages and employment. He finds that Increasing productivity, most likely with automation, will become increasingly important. 

    Most jobs, even low-level jobs, consist of a variety of tasks that are difficult to automate, so we can expect them to be with us for a long time. Demographic shifts, on the other hand, will hit us in the near-term future, and it is likely that we will see a tight labour market for decades to come. Increasing productivity, most likely with automation, will become increasingly important.


    Shigeru Fujita, Giuseppe Moscarini, Fabien Postel-Vinay        
    30 March 2020


    Writing at Vox, Giuseppe Moscarini argues that the policy response to Covid-19 should balance two objectives: 1) facilitating prompt reallocation of employment to essential activities during the emergency, and (2) maintaining workers’ attachment to their previous employers, preserving the aggregate stock of firm-specific human capital, and avoiding persistent mismatch, which would propagate the temporary shock into a prolonged stagnation. 


    Abhijit Banerjee, Emily Breza, Esther Duflo, Cynthia Kinnan        
    30 March 2020

    Writing at Vox, Nobel laureates Esther Duflo and Abhijit Banerjee report on a study following households in India, exposed to different levels of microfinance. Their findings reveal that microfinance has potentially transformative impacts for some entrepreneurs – especially those who without it were stuck in a poverty trap. But for other households, the effect is very small, suggesting that microlenders should consider more screening of households in order to provide some larger loans.


    David Martínez Turégano       
    30 March 2020

    A study by David Turégano finds an overall positive relationship between firm size and labour productivity across EU countries. Countries with smaller firms – especially in Southern Europe – show significantly depressed productivity performance. Improving judicial and government efficiency could help stimulate productivity growth in these member states.


    Richard Hughes         
    29 March 2020

    Writing at Vox, Richard Hughes draws on experiences from past viral outbreaks to outline ten lessons for calibrating the correct policy response. Funding for healthcare systems should be prioritised, and targeted support for households and businesses is crucial. The rising costs and decreasing revenues for governments will also be challenging, and are likely to require assistance from central banks as well as international and regional institutions.  

    COVID-19: Preventing a corporate cash crunch among listed firms

    Antonio De Vito, Juan-Pedro Gomez        
    29 March 2020

    The coronavirus pandemic has endangered the liquidity position of not only small and medium-sized firms, but also large listed firms. Writing at Vox, Antonio De Vito and Juan-Pedro Gomez uses firm-level data from 26 countries to study how long it may take for these listed firms to become cash constrained, and what kind of interventions would be most effective. It concludes that while bridge loans would cost governments almost twice as much as a six-month tax deferral, the policy seems justified given the higher efficacy in preventing a global cash crunch. 



    Romesh Vaitilingam        
    31 March 2020

    The latest survey of leading US economists by the IGM Forum at Chicago Booth reveals a strong consensus among the experts that abandoning lockdowns prematurely will cause greater economic damage in the longer term. There is also unanimity on the need for more US government spending on expanding treatment capacity: building temporary hospitals, accelerating testing, making more masks and ventilators, and providing financial incentives for the production of a successful vaccine.


    Vyacheslav Fos, Naser Hamdi, Ankit Kalda, Jordan Nickerson          
    29 March 2020

    The gig economy plays a substantial role in reducing labour market frictions, and the ensuing effect on a worker's response to job loss. It also alters labour market dynamics by increasing the pool of easily accessible short-term jobs. 

    These are the findings of a study by Vyacheslav Fos and colleagues, which uses a combination of Uber product launch dates and employee-level data on job separations, to show that employees who are laid off from their formal occupations but have access to Uber are less likely to rely on unemployment insurance. Instead, gig labour provides a safety net as they search for more permanent work in the formal market.


    Andrea Galeotti, Paolo Surico          
    27 March 2020

    The fight against Covid-19 is lacking two important weapons: full awareness of populations (especially carriers) and knowledge of the individual traits that are most likely to identify a carrier. Writing at Vox, Andrea Galeotti and Paolo Surico introduce a ‘user’s guide to Covid-19’ – a package of resources that offers a narrative of events and presents the trade-offs inherent in any policy option.  

    COVID-19 CRISIS: Fiscal policy should lead and the Bank of England should follow for the duration of the crisis

    Richard Barwell, Jagjit Chadha, Michael Grady           
    29 March 2020

    Doing ‘whatever it takes’ does not mean the Bank of England has to undermine long-run monetary and financial stability. Writing at Vox, Richard Barwell, Jagjit Chadha and Michael Grady outline the options faced by the Bank of England in supporting the economy during the Covid-19 crisis including closer coordination with fiscal policy.


    Ana Venâncio, Victor Barros, Clara Raposo            
    29 March 2020

    Corporate tax is often seen as a constraint on entrepreneurial activity. Writing at Vox, Ana Venâncio, Victor Barros and Clara Raposo use evidence from a tax reform in Portugal to study the relationship between corporate taxes and the behaviour of entrepreneurs. 

    The results show that lower corporate taxes improve both the quantity and quality of entrepreneurial activity, inducing larger and more productive firms to the market, which are more likely to survive in the long term. The study suggests that, on average, the entrepreneurs able to take advantage of the reform are mostly male, relatively older, and well-educated individuals.

    COVID-19: The right economic policy response for the UK

    Ethan Ilzetzki            
    28 March 2020

    The latest Centre for Macroeconomics survey of leading UK macroeconomists asks about the policies best suited for dealing with the Covid economic crisis in the UK. The results show a broad consensus on the need to support households and businesses, through unemployment benefits, credit support, and direct transfers. Likewise, a substantial share of economists agrees that higher public debt burdens should not be a concern in the process of supporting the economy.

    CREATING AN EU ‘CORONA PANEL’: Standardised European sample tests to uncover the true spread of the coronavirus

    Daniel Gros            
    28 March 2020

    Containment measures to control the spread of Covid-19 have been taken without reliable information on the true spread of the disease. Writing at Vox, Daniel Gros suggests implementing an EU-wide survey test of a representative sample of the entire population using an existing panel of European households. This would yield key data on the spread of the disease, for example by showing whether suppression is still possible. Having reliable data that are comparable across countries would also be indispensable for any exit strategy from the internal border controls that have proliferated as the crisis spread.


    David Canning, David Bloom            
    29 March 2020

    The true number of Covid-19 cases in New York may be as much as 50 or 100 times the number currently testing positive. Accurate population-level numbers are essential to make correct policy decisions. Writing at Vox, David Bloom and David Canning suggest that a random sample of 5,000 people is large enough to pin down the prevalence of Covid-19 infection, which will improve our understanding of transmission and of how prevention measures are working.

    FROM IMMIGRANTS TO AMERICANS: Race and assimilation in the age of mass migration

    Richard Barwell, Jagjit Chadha, Michael Grady           
    29 March 2020

    Doing ‘whatever it takes’ does not mean the Bank of England has to undermine long-run monetary and financial stability. Writing at Vox, Richard Barwell, Jagjit Chadha and Michael Grady outline the options faced by the Bank of England in supporting the economy during the Covid-19 crisis including closer coordination with fiscal policy.


    Enrico Perotti interviewed by Tim Phillips, 27 March 2020

    Enrico Perotti tells Tim Phillips that while regulatory reform means that banks are unlikely to be at risk, the coronavirus shock poses a serious liquidity risk for the shadow banking sector, where significant funding has been extended on the basis of cash flow rather than real collateral. Avoiding financial panic is key, and will require liquidity support as well as targeted fiscal measures.


    Torsten Slok, Richard Portes     

    What's going on in the financial markets at the moment, and what does it mean for the economy? Torsten Slok, chief economist at Deutsche Bank, and Richard Portes of the London Business School, honorary president of the CEPR, explain.