This week from CEPR: April 30

Thursday, April 30, 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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    • New Discussion Papers

    • VOLUNTARY AND MANDATORY SOCIAL DISTANCING: Evidence on Covid-19 exposure rates from Chinese provinces and selected countries   

    Alexander Chudik, M Hashem Pesaran, Alessandro Rebucci                 
    CEPR DP No. 14646  | April 2020 

    While targeted mandated lockdown policies can be very useful in flattening the epidemic curve, voluntary policies are relatively ineffective. Self-isolation can affect the epidemic curve, but only when it is close to its peak. While mandating social distancing is costly in terms of employment loss, if it is targeted towards individuals most likely to spread the infection, the employment loss can be somewhat reduced. The degree of effective isolation is lowest in Italy and Spain with an exposure five times larger than Hubei province, the epicentre of the epidemic in China.

    These are among the findings of new research by Alessandro Rebucci and colleagues, which studies the implications of social distancing both on the epidemic and recession curves, by considering a modification of the standard Susceptible-Infected-Recovered (SIR) model of epidemic that allows for different degrees of compulsory as well as voluntary social distancing. The study shows that:

    • The fraction of population that self-isolates varies with the perceived probability of contracting the disease. 
    • Mandating social distancing is very effective at flattening the epidemic curve, but is costly in terms of employment loss. 
    • If targeted towards individuals most likely to spread the infection, the employment loss can be somewhat reduced. 
    • Voluntary self-isolation driven by individual's perceived risk of becoming infected kicks in only towards the peak of the epidemic and has little or no impact on flattening the curve. 
    • The exposure rates for some European countries (Italy and Spain) are three to five times larger than Hubei (the epicentre of the epidemic). 

    The study also provides country-specific estimates of the recovery rate, showing it to be about 21 days (a week longer than the 14 days typically assumed), and relatively homogeneous across Chinese provinces and for a selected number of countries. 


    Mark Harrison         
    CEPR DP No. 14649 | April 2020

    In two world wars, both sides committed substantial resources to economic warfare. Before the event, influential thinkers believed that the threat of blockade (and later of bombing) would deter aggression. When war broke out, they hoped that economic action might bring the war to a close without the need for a conclusive military struggle. Why were they disappointed – and what was the true relationship between economic warfare and combat between military forces? 

    A new CEPR study by Mark Harrison examines this question both in general and focused specifically on the Allied air campaign against Germany in World War II. He concludes that economic warfare and combat were usually strategic complements; they acted together and did not substitute for each other. There are implications for history and policy. Among the findings: 

    1. It was often hoped that economic warfare would act as a substitute for combat, but experience showed that this was largely an illusion.
    2. The most important effect of economic warfare was to raise the overall costs of the adversary’s war effort. 
    3. Economic warfare found its logic only in protracted wars of resources.
    4. The objective of economic warfare was largely to attack production. The success of this plan relied on success in combat – such as the example of the Allied air war against the German economy in World War II. 
    5. Wars of resources were also wars of attrition. Economic warfare was sometimes seen as a way to avoid the attrition of armed forces. Instead, economic warfare turned out to be a phase of the war of attrition. 
    6. The complementarity of economic warfare and combat is further illustrated by cases in which choosing one over the other carried high costs. It was inefficient to engage in combat without considering the possibility of striking at the enemy’s supply chain, as the Soviet Union did in 1941. It was reckless to embark on economic warfare without the readiness to engage in combat, as the United States did in 1940: this encouraged the adversary to respond by aggression.
    7. While the age of mass warfare is likely to be over, similar lessons may apply to the peacetime use of trade sanctions to resolve disputes. When an economy is sanctioned, losses to civilians are inevitable. If sanctions raise the cost of resistance by enough, violence may become an attractive option. If trade sanctions heighten the risks of militarised conflict, strong defences or credible deterrents are required to manage them.

    A new CEPR eBook edited by Mark Harrison and Stephen Broadberry on ‘The Economics of the Second World War: Seventy-Five Years On’ will be published on Monday 4th May ahead of the VE anniversary. If you would like a press copy of the document before publication, please contact [email protected]


    Barry Eichengreen, Ganesh Viswanath-Natraj              
    25 April 2020

    Earlier this month the Libra Association issued a new White Paper updating its paper of June 2019. Writing at Vox, Barry Eichengreen and Ganesh Viswanath-Natraj argue that while the authors of the paper now understand that to succeed, their project must address economic and political concerns, they have done nothing to address worries about currency substitution. A new proposed capital buffer is underspecified. A key market in Libra futures or forwards is missing, as is a Libra lender of last resort.

    THE INTERACTION BETWEEN COVID-19 AND AN AGEING SOCIETY: Older populations raise the value of social distancing

    Andrew Scott, Jonathan David Old             
    27 April 2020

    Covid-19 is the first pandemic since the world’s population consisted of more people aged over 65 than children under five. Given that Covid-19 fatality rates rise sharply with age, that substantially affects the number of people at risk and the gains from social distancing. Writing at Vox, Andrew Scott reveals that adjusting for change in the age structure and longevity of the United States, the value of social distancing today is more than three times its corresponding 1920 value. Ageing societies and longer lives support considerably longer economic shutdowns compared to past pandemics.


    Monika Queisser, Willem Adema, Chris Clarke            
    22 April 2020

    Unlike most previous economic crises, this crisis has the potential to do disproportionate damage to women’s jobs and incomes. Writing at Vox, OECD economists show how confinement and distancing measures are threatening to shatter several female-dominated industries, including retail, accommodation services, and food and beverage service activities. This puts many women’s jobs at risk.

    Even when they do not work in ‘at-risk’ industries, many women are struggling to balance work with the additional care responsibilities caused by school and childcare closures. When formulating policy responses to the crisis, it is crucial that governments do not ignore the impact the crisis can, is, and will have on women’s lives. 

    HIBERNATION: Keeping firms afloat during the Covid-19 crisis

    Tatiana Didier, Federico Huneeus, Mauricio Larrain, Sergio Schmukler             
    24 April 2020

    The Covid-19 pandemic has nearly halted economic activity worldwide. Firm cash flows have collapsed, triggering inefficient bankruptcies as firms' valuable relationships are broken. 

    Writing at Vox, Tatiana Didier and colleagues propose a hibernation policy, which could allow firms to survive the pandemic while preserving their vital relationships. All stakeholders could share the burden of economic inactivity, helping more firms to survive. But financial systems are not well equipped to handle this type of exogenous and synchronised systemic shock so governments should work with the financial sector to keep firms afloat.


    Vasco Carvalho, Juan Ramón García, Stephen Hansen, Alvaro Ortiz, Tomasa Rodrigo, José V. Rodríguez Mora, Pep Ruiz              
    27 April 2020

    There has been a large decline in overall expenditure and anticipatory spending (stockpiling) has taken place, while non-essentials have more or less collapsed. There is no evidence that poorer regions have adjusted their expenditure differently from richer regions, but within cities, areas with more prevalence of the pandemic have suffered a bigger economic collapse overall.

    These are among the findings of a new study by Vasco Carvalho and colleagues, who use individual transaction-level data to map the changes in consumer behaviour in response to the Covid-19 lockdown measures, making us of data from BBVA to analyse the nature of the impact in Spain. 


    Daniel Gros              
    22 April 2020

    A united response to the coronavirus crisis is needed. Multiple proposals for a ‘solidarity fund’ have been made, along with suggestions for how to finance it. Writing at Vox, Daniel Gros argues that a one-time EU-wide levy on financial assets could raise €300-400 billion, and thus finance a European Solidarity Fund. This levy would be non-distortionary, could be implemented quickly through financial intermediaries, and would avoid the need for controversial Coronabonds.


    Jonathan Heathcote, Andrew Glover, Dirk Krueger, Víctor Ríos-Rull         
    26 April 2020

    A new study by Dirk Krueger and colleagues examines how the welfare effects of shutdown policies vary across different types of households. The model predicts that some groups – young workers in sectors deemed non-essential – would benefit from ending the current shutdown, while others – the old – will surely lose. Current disagreements over when to end shutdowns are thus easy to understand.

    CASH WILL HELP FIRMS IN THE TIME OF CORONA: Lessons from the global financial crisis

    Andreas Joseph, Christiane Kneer, Neeltje van Horen, Jumana Saleheen              
    26 April 2020

    Many firms are facing an unprecedented turnover shock as the corona pandemic unfolds. Writing at Vox, Neeltje van Horen and colleagues suggest that firms with high levels of cash going into a crisis are not only better placed to weather the downturn but can improve their competitive positions in the long run. During the global financial crisis, cash-rich firms were able to continue to invest while industry rivals without cash had to divest. This led to a shift in competition dynamics, allowing cash-rich firms to outperform their rivals when the economy recovered.

    COVID-19 IN ITALY: Underreported mortality and the benefits of mass testing 

    Gabriele Ciminelli, Sílvia Garcia-Mandicó            
    22 April 2020

    Data from Italy show that Covid-19 may have killed 0.1% of the local population in just over a month and that mortality is vastly underreported in official statistics, plausibly by a factor of two. 

    These are the findings of a study by Gabriele Ciminelli and Sílvia Garcia-Mandicó, which analyses daily death registry data for a sample of 1,161 Italian municipalities in the seven regions most severely hit by Covid-19. The authors note there is some good news for policy-makers: in the Veneto region, which has embraced mass testing, contact tracing, and at-home care provision, Covid-19-induced mortality is significantly lower than in neighbouring Emilia-Romagna and Lombardy.

    LACK OF GLOBAL CAPACITY IN HEALTHCARE: Lessons for the next pandemic

    Mehdi Shiva        
    26 April 2020

    A failure to invest in public health and access to healthcare has meant that much of the world is ill-equipped to detect viral threats, protect frontline healthcare workers and treat those who fall ill. More capital investment is needed to give healthcare systems a head start for when the next pandemic strikes, argues Mehdi Shiva at Vox. 


    Ester Faia, Maximilian Mayer, Vincenzo Pezone             
    26 April 2020

    Directors of corporations often sit on several boards at once. Is this connectivity beneficial for firm value (due to a wider network of knowledge sharing)? Or is it simply crony capitalism built on deep exclusivity at the board level?

    Analysing data from Italy, economists from the Goethe University Frankfurt suggest that network centrality may not always translate into a gain for consumers, and that policy-makers must be cautious in accommodating the appropriate reactions for cases that may have different implications for consumer welfare.

    FORECASTING RECOVERIES IS DIFFICULT: Evidence from past recessions

    Zidong An, Prakash Loungani             
    26 April 2020


    Forecasters expect a recession this year in major economies and a rebound in economic activity in 2021. Writing at Vox, Zidong Anand and Prakash Loungani explore how credible such forecasts of recovery really are. They find that the past record is not inspiring: forecasters have had little ability to tell in advance whether a recession will end in a rebound or continue on for another year. Policy choices, particularly on fiscal stimulus, are better guided by worse case scenarios than by the baseline forecasts of recovery. 

    GREEN ZONES: A proposal to exit the Covid-19 lockdown

    Miquel Oliu-Barton, Bary Pradelski, Luc Attia           
    25 April 2020

    A wide range of social distancing and confinement measures has been implemented globally to reduce the spread of Covid-19. Returning to normality is the next challenge. 

    Writing at Vox, Miquel Oliu-Barton and colleagues proposes a lockdown exit strategy based on two key elements: identifying ‘green zones'; and then progressively joining them together once it is safe to do so. The zoning approach provides a safe, tractable and efficient way of rebuilding our social and economic interactions. While exponential growth works against us during the spread of the virus, it can also work for us to create a safe future.


    Anirudh Shingal          
    25 April 2020

    After the global lockdowns imposed in the wake of Covid-19, trade in services is likely to take longer to recover, with knock-on effects on other sectors of economic activity. 

    This is a central conclusion of a new study by Anirudh Shingal, who argues that social distancing has already had, and will continue to have, a significantly adverse impact on services transactions that require proximity between buyers and sellers. In the future, the world could see more regulatory restrictions on services trade on health grounds.  


    Petr Sedláček, Vincent Sterk           
    25 April 2020

    Start-ups are being hit hard by the Covid-19 pandemic and the lockdown. Job losses may be large and may last well beyond the pandemic itself.

    A new study by Petr Sedláček and Vincent Sterk explores the effects of a decline in start-up activity on aggregate employment and suggests introducing a ‘start-up calculator’ that allows anyone to compute the aggregate employment losses under various economic scenarios. 

    CENTRAL BANK DIGITAL CURRENCY: Central banking for all

    Jesús Fernández-Villaverde, Daniel Sanches, Linda Schilling, Harald Uhlig           
    25 April 2020

    The possibility and logistics of developing a central bank digital currency for the general public has attracted significant attention. Such an initiative would require central banks to be involved in financial intermediation and maturity transformation. 

    A study by Jesús Fernández-Villaverde and colleagues explores the implications of such a venture by central banks using a classic banking model. With sufficient competition, a central bank digital currency can be beneficial and achieve the optimal allocation of funds. But it also risks giving central banks excessive monopoly power, which could result in inferior outcomes. 

    COVID-19 AND FINANCIAL STABILITY: Implementing a European Pandemic Equity Fund

    Arnoud Boot, Elena Carletti, Hans‐Helmut Kotz, Jan Pieter Krahnen, Loriana Pelizzon, Marti Subrahmanyam             
    25 April 2020

    The involvement of the European Union in fighting the detrimental consequences of the Covid-19 crisis has to be increased. Writing at Vox, Arnoud Boot and colleagues develop a proposal for a European Pandemic Equity Fund – a programme of government assistance for firms hurt by the crisis in the EU – and discuss the principles and conditions relevant for the operationalisation of such a fund.

    The wide participation in an equity-like scheme via the European Pandemic Equity Fund would allow all EU citizens to participate not only in the common risks, but also in the potential post-crisis rewards of a broad-based participation in Europe’s industry, particularly its small and medium-sized enterprises sector.


    Olivier Blanchard              
    24 April 2020

    Will falling commodity prices, stumbling oil prices and a depressed labour market bring low inflation and perhaps even deflation? Or will very large increases in fiscal deficits and central bank balance sheets bring inflation? 

    Writing at Vox, Olivier Blanchard argues that it is hard to see strong demand leading to inflation. Precautionary saving is likely to play a lasting role, leading to low consumption, and uncertainty is likely to lead to low investment. The challenge for monetary and fiscal policy is thus likely to be to sustain demand and avoid deflation rather than the reverse.

    TRADE AND COVID-19: The World Trade Organisation’s forecasts for 2020 and 2021

    Eddy Bekkers, Alexander Keck, Robert Koopman, Coleman Nee              
    24 April 2020

    Covid-19 will have a strong impact on international trade. Writing at Vox, economists from the World Trade Organisation (WTO) develop a range of scenarios in a dynamic CGE model to simulate possible trajectories for GDP and generate short-term forecasts of trade for various regions and the world using time-series analysis. The outlook for 2020 is bleak with trade possibly declining by between 13% and 32%. Some recovery is expected in 2021.  

    NATIONAL POLICIES IN A GLOBAL PANDEMIC: The need for more coordination 

    Thorsten Beck, Wolf Wagner              
    24 April 2020

    Policy responses to Covid-19 have so far have been almost exclusively national. Writing at Vox, Thorsten Beck and Wolf Wagner use a theoretical model to analyse national containment policies in an integrated world. The results suggest that the first-best solution is global coordination on public health responses, including domestic containment policies. In the absence of ability to coordinate on the global level, regional coordination is called for. 

    INCREASING US TAX COMPLIANCE: Increase audit rates, improve third-party information reporting and invest in better technology

    Natasha Sarin, Lawrence H. Summers               
    24 April 2020

    The US government’s spending needs have been heightened by the Covid-19 crisis. Writing at Vox, Natasha Sarin and Lawrence Summers identify ways for the United States to raise more revenue in a progressive way. They estimate that the Internal Revenue Service could generate over $100 billion annually, and perhaps more than $200 billion, by substantially increasing audit rates (with a focus on high-income individuals), improving third-party information reporting, and investing in better technology. 


    Jennifer Castle, Jurgen A. Doornik, David Hendry               
    24 April 2020

    Can short-term forecasting by useful during the Covid-19 pandemic, despite the fact that shifts in distributions can lead to systematic mis-forecasting? Writing at Vox, Jennifer Castle, Jurgen Doornik and David Hendry from the Institute for New Economic Thinking at the Oxford Martin School, argue that there is an important role for short-term forecasts using adaptive data-based models that are `robust’ after distributional shifts. They discuss their approach for doing so in the Covid-19 pandemic.

    THE DEMAND FOR LABOUR (DE)REGULATION IN DEVELOPING COUNTRIES: Revisiting the insider-outsider divide

    Lucas Ronconi, Ravi Kanbur, Santiago López-Cariboni               
    24 April 2020

    A standard argument in labour economics is that labour regulations benefit the ‘insiders’ who are covered by them, but hurt the ‘outsiders’ who are not. Writing at Vox, Ravi Kanbur and colleagues provide evidence on outsiders’ preferences for labour regulations in developing countries. The results show that contrary to the predictions of the insider-outsider theory, unemployed and informal workers in all countries are typically in favour of increasing labour regulations.  


    Andrea Galeotti, Paolo Surico, Jakub Steiner                
    23 April 2020

    Writing at Vox, Andrea Galeotti and colleagues discuss the informational value of testing. They make the distinction between individual and collective value, both of which depend on the characteristics of the virus, the phase of the epidemic, the instruments available to control the spread, and the reliability of the test. It concludes with a proposal for a sequential testing strategy. 


    Graziella Bertocchi             
    23 April 2020

    Working-age women are more susceptible to Covid-19 than working-age men. This is likely to be due to women’s over-representation in jobs – namely, health and education – that expose them to a higher risk of contagion. Policies that count on women replacing men as lockdowns lift could aggravate the problem rather than solve it.

    These are the central findings of a new study by Graziella Bertocchi, which looks at which segments of the population are least susceptible to Covid-19 and should return to work first, using evidence from Italy. 

    COVID-19 AND GENDER GAPS: Latest evidence and lessons from the UK

    Claudia Hupkau, Barbara Petrongolo             
    22 April 2020

    Unlike previous recessions, the current crisis caused by Covid-19 is harming women’s labour market prospects more than those of men. Women are also likely to be on the receiving end of the bulk of increased home production requirements. 

    These are the central findings of a study by Claudia Hupkau and Barbara Petrongolo, using data from the UK to examine how the Covid-19 crisis has hit service sectors, and added education and childcare services to pre-existing home production needs. 

    COVID-19: Employment in middle-income economies

    Zsoka Koczan, Alexander Plekhanov             
    22 April 2020

    Impending job and income losses from Covid-19 are likely to be most severe where fewer people have permanent contracts, where many are self-employed, and where more people work for small firms and in retail. In the long term, these asymmetric impacts may further increase the demand for public sector jobs. These are the findings of a study by Zsoka Koczan and Alexander Plekhanov, which explores how labour market structures may determine how employment levels across middle-income countries are affected by the shock. 

    JOBS AT RISK: Policy responses to Covid-19 in emerging markets

    Çağatay Bircan, Zsoka Koczan, Alexander Plekhanov              
    21 April 2020

    A new study by EBRD economists provides estimates of job displacement and surveys the policy measures taken by 38 emerging economies in Europe, Central Asia, and the Southern and Eastern Mediterranean in response to the economic disruptions. The results show that given the predominance of small businesses in employment, job displacement rate in many of these economies is expected to reach 30%. In the presence of constraints on fiscal measures and limited administrative capacity to disburse funding, second-best measures such as price control have been implemented widely.

    COVID ECONOMICS: The future of offshoring

    Jonathan Dingel        

    People are being encouraged to work from home during the current crisis and Jonathan Dingel (University of Chicago) points out that a shift towards asynchronous working between colleagues would make it possible to distribute work across a much larger geographical scope and allow for more international offshoring. His study with Brent Neiman of working from home, can be found in issue one of CEPR's Covid Economics Review.

    COVID-19: What's moving the markets?

    Steven Davis        

    Stock market volatility in the early phase of the pandemic was largely driven by media reports of its likely extent and effect. In more recent weeks, the reaction has been much more a response to policy measures.

    Steven Davis is co-author of a paper on stock market reactions in issue one of CEPR's new Covid Economics Review. You can download the paper here>>>

    COVID-19: Bringing industry back

    Sergei Guriev      

    Although nationalists often talk about bringing industry home, the modern economy is based more around the idea of global value chains. The European value chain model works well for participating countries and in the current crisis even seemingly largely self-sufficient countries such as the United States are found to be reliant on external sources for some medical and other supplies.
    Sergei Guriev is speaking at the CEPR/PIIE webinar: Containing the economic nationalist virus through global coordination, held 15 April 2020.

    COVID-19: The consequences of nationalism

    Monica de Bolle       

    Monica de Bolle, PIIE, is hopeful that while nationalist leaders may be benefiting from a surge of popularity during the current crisis, moving forward in a post-pandemic world, they are likely to be held to account for poor policy decisions by the electorate. Taken from the CEPR/PIIE Webinar 'Containing the economic nationalist virus through global coordination', held 15 April 2020.

    COVID-19: Stock market reactions

    James Bullard       

    No previous infectious disease outbreak, including the Spanish flu, has affected the stock market as powerfully as the Covid-19 pandemic. Steven Davis (University of Chicago) and his co-authors use text-based analysis of newspaper reports back to 1900 to track stock market volatility. They also argue that policy responses to the Covid-19 pandemic provide the most compelling explanation for its unprecedented stock market impact.