This week from CEPR: December 12th

Thursday, December 12, 2019

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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    Holger Breinlich, Elsa Leromain, Dennis Novy, Thomas Sampson     
    CEPR DP No. 14176 | 08 December

    Brexit has already pushed up UK inflation, according to a new CEPR study by Holger Breinlich and colleagues, which assesses the consumer price effects of the depreciation of sterling after the UK voted to leave the European Union in June 2016.

    The authors find that the Brexit vote led currency investors to anticipate that barriers to trade and immigration between the UK and the EU would rise at some unknown future date, while also increasing economic uncertainty in the UK. This shift in expectations led to the depreciation of the pound. Among the findings:  

    • The fall in sterling was unanticipated, sharp and persistent and, unlike most sudden depreciations, affected the currency of a major industrialised economy.
    • Following the referendum, the increase in inflation was higher for product groups with larger import shares in consumer expenditure. This effect is driven by both direct consumption of imported goods and the use of imported inputs in domestic production.
    • The authors do not reject the hypothesis that there is complete pass-through of import costs into consumer prices which, for the UK, implies an aggregate exchange rate pass-through of 0:29.
    • Producer price index inflation was higher in sectors with a larger share of imported intermediates in production costs.
    • The Brexit vote increased consumer prices by 2.9%, costing the average household an estimated £870 per year.
    • Increases in the cost of living were similar across households in different deciles of the income distribution, but not across regions. London suffered least, while Northern Ireland and Wales were worst hit.

    Figure 1: The depreciation of sterling after the 2016 referendum 

     


    • STRIKING GENDER BIAS IN THE PROVISION OF DISABILITY INSURANCE: US evidence

    DISABILITY INSURANCE: Error Rates and Gender Differences
    Hamish Low, Luigi Pistaferri       
    CEPR DP No. 14169 | 05 December

    Women with a severe, work-limiting, permanent impairment are 20 percentage points more likely to be rejected for disability insurance than men, controlling for the type of health condition, occupation and a host of demographic characteristics. This is one of the central findings of a new CEPR study by Hamish Low and Luigi Pistaferri.
    The research reveals the extent of errors made in the award of disability insurance in two major programmes in the United States that pay benefits against disability risk for working age individuals: the Social Security Disability Insurance (DI) program and the Supplemental Security Income (SSI) program. Among the findings: 
     

    • False rejections (Type I errors) are widespread, and there are large gender differences in these Type I error rates. 
    • Among men and women with the same health condition, women are more likely to be assessed as being able to find other work.
    • Among rejected women, those who previously self-reported severe work-limitations return to work at a much lower rate than those that do not report a work-limitation. This suggests that the SSA has wrongly assessed these women as being able to work. Indeed, no such differences emerge among men or among women in the years preceding application.
    • Potential deciding factors, including women being in better health than men, women having lower pain thresholds, or women applying more readily for disability insurance. None of these explanations are consistent with the data.

    The authors suggest that there are different acceptance thresholds for men and women. The results show that differences by gender arise because women are more likely to be assessed as being able to find other work than observationally equivalent men. The results of the study raise important questions concerning the accuracy of the provision of disability insurance in other countries. 

    Figure 1: Denial rates by primary disability code 


    • US-CHINA TRADE WAR: New evidence that protectionist tariffs hurt those they are meant to protect  

    THE U.S.-CHINESE TRADE WAR: An Event Study of Stock-Market Responses
    Peter Egger, Jiaqing Zhu      
    CEPR DP No. 14164 | 02 December

    Protective tariff measures introduced by the United States against products from China, as well as retaliatory actions by China against US products, have achieved more or less the exact opposite of what they were at least officially intended to do, harming firms in the very industries they were supposed to protect. That is the central finding of new CEPR research by Peter Egger and Jiaqing Zhu, due to be published in the journal Economic Policy.
     
    The study analyses the early consequences of the trade war between the United States and China by focusing on the stock market reactions of all listed firms in the two countries and 38 other countries and territories within windows of up to 10 days after multiple tariff announcement events between March 2018 and May 2019.
     
    A key insight from their analysis, which is consistent with rumours from business, is that the protectionist tariffs hurt the domestic firms of the country that implements them – and even more so in the United States than in China. What’s more, with modern business organised in global value chains, the tariffs are causing extensive collateral damage to untargeted sectors as well as to third countries.



    ARE THE RICH WEALTHIER THAN THEY LET ON? Using history to understand the UK’s hidden wealth

    Neil Cummins        
    08 December 2019

    Sharp declines in the concentration of declared wealth occurred across Europe and the United States during the 20th century. But the rich may have been hiding much of their wealth. Writing at Vox, Neil Cummins introduces a new method to measure this hidden wealth, in any form. He finds that between 1920 and 1992, English elites concealed 20-32% of their wealth. Accounting for hidden wealth eliminates one-third of the observed decline of top 10% wealth share over the past century.


    THE GEOGRAPHY OF DISCONTENT: Long-term economic and industrial decline are the fundamental drivers of anti-European voting

    Lewis Dijkstra, Hugo Poelman, Andrés Rodríguez-Pose         
    07 December 2019

    Discontent with the European Union is purportedly driven by the very factors behind the surge of populism: differences in age, wealth, education, or economic and demographic trajectories. New research by Andrés Rodríguez-Pose and colleagues, which maps the geography of discontent across more than 63,000 electoral districts in the EU, challenges this view. 

    The results of the study show that the rise of the anti-EU vote is mainly the consequence of long- to medium-term local economic and industrial decline in combination with lower employment and a less educated workforce.  


    ELITE VIOLENCE AND ELITE NUMERACY IN EUROPE FROM 500 TO 1900 CE: A co-evolution 

    Thomas Keywood, Jörg Baten        
    07 December 2019

    A new Vox study by Thomas Keywood and Jörg Baten explores the relationship of economic development with human capital – specifically, elite numeracy – and violence. The authors conclude that the absence of violence played a significant role in economic development through elite numeracy formation. The findings contribute to our understanding of the longstanding East–West differences in Europe, and the impact of violence and subsequent institutional changes caused by the trauma of nomadic invasions. 


    URGENT POLICY CHANGE NEEDED TO ACCELERATE INVESTMENT & ENSURE SUCCESSFUL TRANSFORMATION

    Laurence Boone, Debora Revoltella         
    06 December 2019

    Reducing policy uncertainty, rethinking fiscal policy, and acting vigorously to address the challenges raised by digitalisation, climate change, and persistent inequalities all have the potential to reverse the current downward trend of global growth and to lift investment and living standards. 

    These are the conclusions of Laura Boone, Chief Economist at the OECD, and Debora Revoltella, Director of Economics at the European Investment Bank, writing at Vox. They argue that urgent policy action is needed to enable the investment needed for a successful transformation that benefits all.


    MACROPRUDENTIAL LIQUIDITY REQUIREMENTS

    Iñaki Aldasoro, Gerardo Ferrara, Sam Langfield, Zijun Liu, Tomohiro Ota          
    04 December 2019

    A new study by Sam Langfield and colleagues shows how a macroprudential approach to liquidity requirements could improve regulatory efficiency. By concentrating liquidity in systemically important banks, financial stability can be enhanced without increasing aggregate requirements.

    Macroprudential regulation is in vogue, but liquidity requirements are typically seen only as a microprudential tool.


    PRICE TRENDS OVER THE PRODUCT LIFECYCLE AND MONETARY POLICY

    Klaus Adam, Henning Weber          
    04 December 2019


     

    What is the relationship between consumer price trends and monetary policy? Writing at Vox, Klaus Adam and Henning Weber show that relative prices tend to fall during the product lifecycle, and demonstrate how these trends can be used to estimate the optimal inflation rate. 


    HIGHER GOVERNMENT DEBT HITS CORPORATE INVESTMENT BY TIGHTENING THE CREDIT CONSTRAINTS FACED BY PRIVATE FIRMS

    Yi Huang, Ugo Panizza, Richard Varghese        
    04 December 2019

    How does increased public debt affect economic growth and investment? Writing a Vox, Ugo Panizza, Yi Huang and Richard Varghese use data on nearly 550,000 firms in 69 countries to show that government debt affects corporate investment by tightening the credit constraints faced by private firms. 

    The study reveals that higher levels of public debt increase the correlation between investment and cashflow for firms that are more likely to be credit constrained – that is ,unlisted, small and young firms – but appear to have no effect on the correlation between cash and investment of listed, well-established and large firms.


    WHY ARTIFICIAL INTELLIGENCE LABELLING IS NEEDED FOR NEW TECHNOLOGIES

    Suguru Tamura         
    05 December 2019

    An increasing number of goods and services employ  technology related to artificial intelligence (AI), yet consumers are not always aware. The spread of new technology may be delayed when information about it is difficult to communicate, and standards governing AI labelling can help to educate consumers and promote the technology’s dissemination.

    These are among the conclusions of a new study by Suguru Tamura, who argues that in order to promote social dissemination of AI-related technology, the difficulty in distinguishing between goods or services that actually use it is an issue that needs to be resolved. Standards and indications (AI labelling) can play an effective role as one means of solving this problem and promoting dissemination of the technology. 


    THE CIRCULAR RELATIONSHIP BETWEEN PRODUCTIVITY GROWTH AND REAL INTEREST RATES

    Antonin Bergeaud, Gilbert Cette, Rémy Lecat        
    05 December 2019

    The circular relationship between productivity growth and real interest rates in advanced countries means that without a technology shock we are stuck in an equilibrium in which growth and interest rates are both low, according to research by Antonin Bergeaud, Gilbert Cette and Rémy Lecat.  


    SLUGGISH UPDATING OF INFORMATION AND CONSUMER SPENDING 

    Jiri Slacalek         
    05 December 2019

    Many economic models assume that households have up-to-date information and rational expectations. Writing at Vox, Jiri Slacalek illustrates that relaxing these assumptions produces models whose predictions are more consistent with actual data. In particular, such models can reconcile the contrasting empirical evidence on consumption growth at the household level and at the aggregate level.


    DISTRIBUTING POST-DISASTER SUBSIDIES FOR FIRM RECOVERY: Lessons from the Great East Japan Earthquake 

    Yuzuka Kashiwagi          
    06 December 2019

    Writing at Vox, Yuzuka Kashiwagi investigates the impact of subsidies after the Great East Japan Earthquake. He finds that capital subsidies were effective for the retail sector, but not in the manufacturing or other service sectors. The results suggest that the heterogeneity comes from variations in the degree of private support across sectors rather than variations in supply chain disruption.. 

    RESEARCH ON HUMANITARIAN SOCIAL PROTECTION IS DESPERATELY NEEDED

    Tilman Brück, José Cuesta, Ugo Gentilini, Jacob de Hoop, Angie Lee, Amber Peterman          
    07 December 2019

    Rigorous research in humanitarian emergencies is not only feasible but also necessary to determine what constitutes effective assistance in these settings. That is the conclusion of Tilman Brück and colleagues, who introduce a Special Issue of the Journal of Development Studies, which demonstrates that research establishing causal effects is vital for the design of efficient and effective social protection in settings of fragility and displacement. 

    FINANCIAL INTEGRATION AND EXTERNAL ADJUSTMENT

    Andreas Fischer, Henrike Leonie Groeger, Philip Sauré, Pınar Yeşin          
    09 December 2019

    Shortcomings of balance of payments accounting standards mean that official current accounts are not enough to understand financially integrated economies, argue Andreas Fischer and colleagues, writing at Vox. 

    Adjustments in income flows in equity investment therefore remain concealed in official current account statistics. In today’s financially integrated world with existing accounting standards, external adjustment mechanisms should be considered more broadly than just as an evolution of trade balance and exchange rate movements. 


    THE ART OF ASSESSING PUBLIC DEBT SUSTAINABILITY: Relevance, simplicity, transparency

    Xavier Debrun, Jonathan D. Ostry, Tim Willems, Charles Wyplosz        
    09 December 2019

    A new study by Charles Wyplosz and colleagues fleshes out three principles that should guide the design and implementation of sound debt sustainability frameworks: relevance, simplicity and transparency.

    Knowing whether public debt is sustainable is as critical for economists analysing fiscal policy as for practitioners tasked with charting desirable policy paths. But because sustainability is intimately related to the government’s ability to honour all its current and future obligations, it is purely forward-looking and assessing it amounts to making a prediction about an unknowable future. 

    HOUSEHOLD HETEROGENEITY AND THE GOVERNMENT SPENDING MULTIPLIER: Evidence from Italy

    Paweł Kopiec        
    06 December 2019

    New research by Paweł Kopiec shows that individual spending behaviour is heterogeneous across households and that it depends on characteristics such as income and wealth. Using Italian data, Paweł shows that household heterogeneity plays a crucial role in the propagation of fiscal expenditure shocks.

    Household inequality gives rise to a rich set of new channels that propagate government expenditures shocks through consumer spending, which are related to households’ balance sheets and monetary-fiscal interactions. The values of the fiscal multiplier diverge from those predicted by the standard macroeconomic framework and the difference is particularly large at the zero lower bound.



    WEALTH TAXES: Evidence from Switzerland

    Marius Brülhart  interviewed by Tim Phillips, 06 December 2019

    Few countries tax their citizens' wealth annually, but Switzerland is one of them. Marius Brülhart tells Tim Phillips about a natural experiment in Swiss cantons that teaches us about how people would respond if more countries decided to tax wealth instead of income.



    FINANCIAL REGULATION SHOULDN’T BE HARD — HERE’S WHAT WE NEED TO MAKE IT WORK

    Anat Admati 06 December 2019

    Anat Admati discusses what’s needed to get financial regulation that works.
    We can land planes safely at crowded airports, yet we can’t manage to make our financial system safe. Why? Stanford University economist Anat Admati talks about what’s needed to get financial regulation that works