This week from CEPR: December 10
Thursday, December 10, 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’.
**** You can sign up to our journalist mailing list here
**** Journalists can also apply for access to CEPR's Discussion Paper series via email
-
New Discussion Papers
-
THE EARLY WITHDRAWAL OF COVID-19 FISCAL STIMULUS HAS NEGATIVE CONSEQUENCES FOR STOCK MARKETS
HANG IN THERE: Stock market reactions to withdrawals of COVID-19 stimulus measures
Jorge A. Chan-Lau and Yunhui Zhao
Issue 60 Covid Economics | 04 December 2020
There is a significant negative reaction when Covid-19 stimulus is withdrawn prematurely, i.e. when the daily Covid cases were still high relative to the historical pattern. Markets are concerned about the negative impact of early withdrawals of stimulus on the economic recovery prospect, a risk that policymakers have to account for while contemplating the exit strategy from the exceptional crisis-fighting policies.
These are the main findings of a CEPR study by Jorge Chan-Lau and Yunhui Zhao in Issue 60 of Covid Economics, which examines the impact of the withdrawal of fiscal stimulus policies on stock markets using daily data. The assessment is based on an event study analysis, which finds that stock price returns are generally lower in the aftermath of a stimulus withdrawal event.
Some countries have withdrawn Covid-19 fiscal support measures, and other countries are contemplating doing so. However, withdrawals may cut off the lifeline support for hard-hit households and businesses and threaten the fledging economic recovery, particularly in the presence of the long-lasting scarring effects of the pandemic. Withdrawals may also signal to the market that the ‘firepower’ of the government is limited and may be inadequate to support the economy in the future when new waves of Covid-19 outbreaks occur. A prudent exit strategy from the Covid-19 stimulus era should allay these concerns to restore market confidence.
-
COUNTRIES WITH STRONGER FAMILY TIES SHOW A HIGHER NUMBER OF COVID-19 INFECTIONS AND DEATHS
Family ties and the pandemic: Some evidence from Sars-CoV-2
Luca Di Gialleonardo, Mauro Marè, Antonello Motroni and Francesco Porcelli
Issue 60 Covid Economics | 04 December 2020
A new CEPR paper by Luca Di Gialleonardo, Mauro Marè, Antonello Motroni and Francesco Porcelli, in Issue 60 of Covid Economics, analyses the relationship between strength of family ties and the spread of Covid-19 and show that family ties and the attitude of parents towards the wellbeing of their children are key variables in explaining the spread of Covid-19 across countries. Among the findings:
- Countries where family ties are stronger and more important tend to show a larger virus diffusion.
- Family ties and especially those that go from parents to their children tend to reduce compliance to the compulsory measure of social distancing.
- These results are also confirmed when religion, trust (that affect public morale and the degree of people's civicness) and social capital are considered.
- Measures that prevent close contacts between the different members of families – especially the ones that go from parents to their children – seem to be a good tool for the restraint of the virus.
- Actions that temporarily isolate family members and protect people with different age structure may be quite effective in controlling the spread of the pandemic.
-
LOCAL POLITICIANS SUFFER DROPS IN APPROVAL DUE TO GOVERNMENT UNPREPAREDNESS DURING COVID-19: Evidence from Italy
Centralisation, voter perception, and the sense of government unpreparedness during the COVID-19 pandemic in Italy
Massimiliano Ferraresi and Gianluca Gucciardi
Issue 60 Covid Economics | 04 December 2020
If policies adopted by the central government are unpopular or if there is an impression of a lack of government preparedness against the pandemic, such a (negative) perception is exacerbated in cities whose local politicians share the same political affiliation as the central government.
These are among the findings of a new CEPR study by Massimiliano Ferraresi and Gianluca Gucciardi, in Issue 60 of Covid Economics, which examines whether and to what extent the shift in policy-making decisions induced by the Covid-19 pandemic (moving to a more centralised decision-making system) has affected citizens’ perceptions regarding attributions of responsibility. The study uses a public opinion poll indicator of the performance of the mayor, collected for 103 large cities in Italy and in three waves (2015, 2017, and 2020). Among the findings:
- When decisions are in the hands of the local governments (pre-Covid-19), the attribution of responsibility is not affected by alignment status of the politician - citizens appear perfectly able to punish or reward politicians at different levels of government for their actions.
- When decisions are fully centralised (during the lockdown), the voter approval for the mayor of an politically aligned city decreases by around 7% compared to what it would have been in the absence of the lockdown, i.e. when policy decisions are in the local government’s own hands.
- These results are more marked:
- (i) during pre-electoral years as compared to other years of a term
- (ii) in cities with a lower level of social capital.
- The decrease in the approval ratings of mayors observed in politically aligned cities reflects a sense of ‘punishment’ for the lack of central government preparedness against the pandemic.
These findings are in line with those recently documented for other European countries, and suggests that the pandemic may have led to substantial drops in institutional trust.
THE RAPID REBOUND OF EUROPEAN FINANCIAL INTEGRATION DURING THE COVID-19 CRISIS: Insights from a new indicatorStefano Borgioli, Carl-Wolfram Horn, Urszula Kochanska, Philippe Molitor, Francesco Paolo Mongelli, Eva Mulder, Alessandro Zito |
|
|
A remarkable feature of the Covid-19 crisis has been the rapid rebound of financial integration in recent months. Writing at Vox, European Central Bank economists introduce a novel indicator, which can identify the key dates and sources of stabilisation. The results show that after an initial sharp deterioration, euro area financial integration broadly recovered to pre-crisis levels by mid-September. This was due to the powerful stabilising effects of monetary and supervisory responses (such as the freezing of collaterals) together with the European fiscal response, which came in two stages: (1) safety nets; and (2) the announcement of, and progress with, Next Generation EU (including temporary joint borrowing). |
 |
THE ROLE OF MIGRANTS AS KEY WORKERS ACROSS EUROPE DURING COVID-19Lukas Kleine-Rueschkamp, Cem Özgüzel |
|
 |
Faced with labour shortages, which were apparent even prior to the crisis, the demand for key workers of all skill groups has increased amid the pandemic. In particular, the role of migrants, who often work in low-paid but vital occupations, has gained greater recognition across the OECD. A study by Lukas Kleine-Rueschkamp and Cem Özgüzel assesses the contribution of migrants to ‘key worker’ occupations across regions in 31 European countries. The results show that migrants are as likely to support regional economies in key worker occupations as native-born workers are. However, within countries, large differences exist across regions and between cities and rural areas. |
WHICH POLICIES CURB COVID-19 FATALITY GROWTH? Stay-at-home orders, mask requirements, park and restaurant closures, and high-risk business closures appear most effectiveMatthew Spiegel, Heather E. Tookes |
|
|
A study by Matthew Spiegel and Heather Tookes examines the relationship between future fatalities due to Covid-19 and a wide range of business restrictions. The results show that stay-at-home orders, mandatory mask requirements, beach and park closures, restaurant closures, and high-risk (Level 2) business closures most consistently predict lower fatality growth four to six weeks ahead. Closures of low- and medium-risk businesses do not appear effective and, despite their costs, may even be counterproductive. Mask mandates appear to be effective in every specification and are accompanied by relatively low economic and social costs. |
 |
THE IMPACT OF EXTRACTIVE COLONIALISM: Evidence from AfricaPhilip Roessler, Yannick Pengl, Robert Marty, Kyle Sorlie Titlow, Nicolas van de Walle |
|
 |
The colonial history of Africa still casts a shadow on development in the continent. A study by Philip Roessler, Yannick Pengl, Robert Marty, Kyle Sorlie Titlow and Nicolas van de Walle uses a new geospatial dataset to study the long-term effects of colonial cash crop extraction in Africa. It finds that cash crop production had a positive long-run effect on local development in terms of urbanisation, road infrastructure, night-time luminosity, and household wealth. However, this came at the expense of investments in surrounding areas, which appear worse off today than predicted by precolonial factors. The legacy of the colonial economy in Africa was a negative feedback loop of weak institutions and spatial inequities. |
OUTPUT GAPS IN PRACTICE: Proceed with cautionJelle Barkema, Tryggvi Gudmundsson, Mico Mrkaic |
|
|
Output gaps remain a popular metric for assessing the stance of countries’ business cycles. However, their usefulness for real-time policymaking is disputed due to the challenges in estimating potential output. Writing at Vox, IMF economists Jelle Barkema, Tryggvi Gudmundsson and Mico Mrkaic study the use of output gaps in IMF surveillance work and finds that output gap measures are skewed to the downside, often revised, and only slightly correlated with other indicators of slack. Furthermore, text analysis finds a limited connection between the size of the output gap and policy recommendations. Taken together, these results suggest caution in using output gap estimates for policymaking during the Covid-19 recovery. |
 |
FROM A COMMON EMPIRE TO COLONIAL RULE: Commodity market disintegration in the Near EastLaura Panza |
|
|
|
Do trade ties persist after the breakdown of a political union? A study by Laura Panza investigates the effect of the breakup of the Ottoman Empire on commodity market integration in the Near East. The study finds that rising political and economic nationalism, tariff wars, and other protectionist practices prevailed over trade cost-reducing forces, leading to the disintegration of regional markets. At the same, new trade ties were created and colonial market linkages strengthened, despite the anti-global environment of the interwar era. However, the process of trade diversion reflected a shift from multilateralism to bilateralism. With Brexit negotiations still underway and uncertainty over what form future relations between the UK and the EU will take, turning to history can offer some useful insights on the potential implications of political disintegrations. The Ottoman experience shows that when the end of a political union coincides with a shift away from multilateral trade, the successor states expose themselves to a greater risk of trade and welfare losses. |
WHY THE RECENT FALL IN FDI FLOWS TO THE UNITED STATES? A corrosion of openness to trade and global cooperationSimeon Djankov, Eva (Yiwen) Zhang |
|
|
Foreign direct investment flows to the US have seen a sharp decline in the past two years, despite a cut in the corporate tax rate from 35% to 21% in 2017, which should have resulted in increased investor appetite. Simeon Djankov, Eva Zhang show that countervailing forces, in particular the shift in investment sentiment driven by the corrosion of US openness to trade and global cooperation, have played the dominant role in reducing flows. |
|
HOW THE ELITE SHAPE AFRICA’S ROAD INFRASTRUCURE FOR PROFITRoberto Bonfatti, Steven Poelhekke |
|
|
|
Africa’s interior-to-coast roads are well placed to export natural resources, but not to support regional trade. This is the result of political distortions and ethnic favouritism by autocracies, who have shaped the continent’s suboptimal infrastructure. A study by Roberto Bonfatti and Steven Poelhekke investigates the political determinants of road paving in West Africa in 1965–2014. The results show that autocracies focused more than democracies on connecting metal and mineral deposits to ports, resulting in more interior-to-coast networks. This deposit-to-port bias was only present for deposits located on the elite’s ethnic homeland. The logical implication is that African countries should indeed take steps to re-balance their interior-to-coast networks in favour of interior-to-interior links and long-distance, intra-African connections, as advocated by the African Development Bank. However the lion’s share of recent investment has been taken up by China and its state-owned construction companies, in which only a small percentage of projects completed connect two African countries with each other, and usually to connect a landlocked country to the coast. These results suggest that this may be the continuation of a suboptimal political process. |
INTRODUCING A NEW WAY OF LOOKING AT INEQUALITY: Classifying capitalist systems and income inequalityMarco Ranaldi, Branko Milanovic |
|
|
Similar levels of income inequality may coexist with completely different distributions of capital and labour incomes. Writing at Vox, Marco Ranaldi and Branko Milanovic introduce a new measure of compositional inequality to distinguish between different capitalist societies. The class analysis (where class is defined narrowly depending on the type of income one receives) is thus separated from the analysis of income inequality proper. The analysis suggests that:
|
|
TAXING CORPORATE DIVIDENDS CAN STIMULATE INVESTMENT AND REDUCE THE MISALLOCATION OF CAPITALAdrien Matray |
|
 |
Academic research has so far had little to say on the impact of an increase in payout taxes on firm behaviour and the allocation of capital across firms. Using French administrative tax files that cover the universe of firms, a study by Adrien Matray tracks firm outcomes over the period 2008–2017 and estimates the effect of a steep increase in the dividend tax rate in 2013. It finds that the tax reform led to increased investment and cash holding, improved allocation of capital, and no discernible reduction in investment even among equity-dependent firms. |
IS THE CURRENT COVID-19 STRATEGY EFFECTIVE? Analysis of the Dutch government policyBarbara Baarsma, Eline van den Broek-Altenburg, Robin Fransman, Bas Jacobs, Carl Koopmans, Coen Teulings |
|
|
A study by Coen Teulings and colleagues examines the Dutch government’s current policy to combat Covid-19 and argues that recent data show that societies can handle a much larger number of infections during this second wave without excessive social costs, and that the Dutch policy should therefore move away from almost eliminating infections towards creating herd immunity by letting the Covid-19-virus circulate more freely among the non-vulnerable groups, while strictly protecting the vulnerable groups. |
 |
GLOBAL VALUE CHAIN RESPONSES TO PREVIOUS HEALTH SHOCKS: Lessons for Covid-19Anirudh Shingal, Prachi Agarwal |
|
 |
A study by Anirudh Shingal and Prachi Agarwal examines how global value chains have responded to two previous health shocks – SARS and MERS – in order to draw lessons for the Covid-19 pandemic. The study finds that while value-chains may have exhibited selective resilience to previous health shocks despite disruptions, there may be more permanent changes this time around, including a conscious diversification away from China. The results show geographical diversification within value chains, as well as of an overall non-resilience to the SARS epidemic in particular. The effects are driven by lower-middle-income importers that were more integrated in global value chains, received more investment, were more competitive, and were more reliant on the severely affected partners. Similar disruptions are likely to follow Covid-19. |
MONETARY EASING IN THE UNITED STATES HAS BEEN LESS EFFICIENT WHEN HOUSE PRICES WERE HIGH OR STARTED FALLING RAPIDLYKristina Bluwstein, Michał Brzoza-Brzezina, Paolo Gelain, Marcin Kolasa |
|
|
Transmission of monetary policy depends to a large extent on the phase of the housing cycle. This is because residential property prices are important determinants of banks’ willingness to lend. Writing at Vox, Kristina Bluwstein, Michał Brzoza-Brzezina, Paolo Gelain and Marcin Kolasa present analysis for the United States which shows that in the mature phase of the housing market boom, or immediately after a bust began, the effects of a monetary expansion were smaller than they were earlier in the housing cycle. This is relevant in the current context, when policy makers have to respond to the Covid-19 pandemic, at a time when residential property valuations are high in many advanced economies. |
 |
HOW CENTRAL BANKS COMMUNICATE WITH THE GENERAL PUBLIC: Narrative monetary policy surprises and the mediaSaskia ter Ellen, Vegard H. Larsen, Leif Anders Thorsrud |
|
 |
Does central bank communication reach the general public? Writing at Vox, Norges Bank economists show how central bank communication indirectly reaches the general public by affecting news media coverage on topics of particular relevance for monetary policy decisions. These findings suggest that the media, and how it acts as an information intermediary, can have a sizeable effect on economic outcomes. |
THE BENEFITS OF FINANCIAL AID FOR COLLEGE STUDENTS OUTWEIGH THE ECONOMIC COSTS: Evidence from NebraskaJosh Angrist, David Autor, Amanda Pallais |
|
|
The United States government and private organisations spend substantial amounts on financial aid for college students - in 2018, college aid amounted to $187 billion. Does this lead more students to complete college, or simply reimburse students who would have earned degrees anyway? Writing at Vox, Josh Angrist, David Autor and Amanda Pallais use data from Nebraska, which shows that financial aid increases enrolment and that recipients are considerably more likely to enrol at a four-year, rather than a two-year, college. Aid also boosts bachelor’s degree completion rates in particular among subgroups (non-white students, Pell-eligible students, first generation students, and students with below-median high school GPAs or ACT scores) that are typically less likely to complete a college degree. |
 |
THE ECONOMIC CONSEQUENCES OF SIR ROBERT PEEL: An assessment of the repeal of the Corn LawsDouglas Irwin, Maksym Chepeliev |
|
 |
The repeal of the Corn Laws in 1846 was a significant policy change that led the move to freer trade by Britain. Writing at Vox, Douglas Irwin and Maksym Chepeliev assess the impact of the repeal using a new general equilibrium framework and input-output data from 1841.
They find that the aggregate welfare effects of the policy change were negligible, due to an offsetting terms-of-trade impact and static efficiency gains. However, there were notable distributional consequences, as the welfare of the top 10% of income earners declined while the bottom 90% benefited. In line with recent findings, the move to free trade was thus a progressive ‘pro-poor’ policy. |
THE SPANISH EMPIRE'S SHIPWRECK PROBLEM
Fernando Arteaga, Desiree Desierto, Mark Koyama interviewed by Tim Phillips, 04 December 2020
When the galleon San José sank in a typhoon in 1694, it was carrying a cargo worth 2% of the GDP of the entire Spanish empire. Fernando Arteaga, Desiree Desierto and Mark Koyama tell Tim Phillips about how bribes sank Spanish treasure ships.