This week from CEPR: February 14

Thursday, February 14, 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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    • LABOUR MARKET SPEED-DATES FOR UNEMPLOYED WORKERS: Experimental evidence of an initially positive impact on job finding

    A Field Experiment on Labor Market Speeddates for Unemployed Workers 
    Bas van der Klaauw and Lennart Ziegler
    CEPR DP No. 13516

    ‘Speed dates’, in which, unemployed workers meet temporary employment agencies, can have an immediate positive impact on their job finding, according to new CEPR research. But the results of the field experiment to evaluate the effectiveness of such labour market initiatives indicate that the employment effects of participation subsequently diminish. This suggests that vacancies mediated through temporary employment agencies have no long-lasting effect on employment prospects.

    The study finds that while the intervention is cost-effective for the unemployment benefits administration, the higher labour earnings of jobseekers who go on speed dates do not fully compensate for the decline in benefit payments. Additional survey evidence shows that participation in speed dates increases job search motivation and reduces reservation wages.

    • MONETARY POLICY IN A WORLD OF CRYPTOCURRENCIES: The competitive threat to central banks’ control of interest rates and prices

    Monetary Policy in a World of Cryptocurrencies 
    Pierpaolo Benigno
    CEPR DP No. 13517

    Can currency competition destabilise central banks' control of interest rates and prices? Yes, it can, according to new CEPR research.

    The study shows that in a two-currency world, the growth rate of a cryptocurrency sets a lower bound on the nominal interest rate and the attainable inflation rate. In a world of multiple competing currencies issued by profit-maximising agents, the central bank completely loses control of the nominal interest rate and the inflation rate, which are both determined by structural factors, and thus not subject to manipulation, a result welcomed by the proponents of currency competition.

    • SOVEREIGN BONDS SINCE WATERLOO: New evidence that returns compensate for risk

    Sovereign Bonds since Waterloo
    Josefin Meyer, Carmen M. Reinhart and Christoph Trebesch
    CEPR DP No. 13514

    As in equity markets, the returns on external sovereign bonds have been sufficiently high over two centuries, including default episodes, major wars and global crises, to compensate for risk. That is the central finding of a new CEPR study, which has compiled and analysed a new database of 220,000 monthly prices of foreign-currency government bonds traded in London and New York between 1815 (the Battle of Waterloo) and 2016, covering 91 countries.

    The research shows that real ex-post returns on external sovereign bonds averaged 7% annually across two centuries. This represents an excess return of around 4% above US or UK government bonds, which is comparable to stocks and outperforms corporate bonds. Based on an archive of more than 300 sovereign debt restructurings since 1815, the researchers show that full repudiation is rare; the median haircut is below 50%.

    Figure 11: Returns vs. haircuts across years - historical and modern sample

    Note: This figure shows mean ex-post real returns on our global portfolio of foreigncurrency sovereign bonds and compares it to the size of haircuts, both computed as yearly averages. Results are shown separately for the historical period (1815-1973, left panel) and for the modern period (1995-2016, right panel). To calculate average yearly haircuts, we consider only bond restructurings, thus dropping many restructurings of sovereign bank loans of the 1980s and 1990s.


    Alberto Alesina, Michela Carlana, Eliana La Ferrara, Paolo Pinotti
    2 February 2019

    Revealing schoolteachers’ unconscious biases affects their grading of immigrant and native students, according to a study in Italy by Alberto Alesina, Michela Carlana, Eliana La Ferrara and Paolo Pinotti.

    There is a lively debate about whether biased behaviour can be changed through the use of ‘implicit bias training’ or awareness of stereotypes, but until now, there has been little evidence to guide this debate. Using data on teachers’ stereotypes about immigrants elicited through an Implicit Association Test, the new research suggests that revealing biases may be a powerful intervention to reduce discrimination; but it may also induce a reaction from individuals who were not acting in a biased way.


    Frank Lichtenberg
    8 February 2019

    New cancer drugs launched in 36 countries in the period from 2006 to 2010 reduced the number of disability-adjusted life years lost to cancer in 2015 in those countries by 8.7%, according to research by Frank Lichtenberg on the impact of biomedical innovation on cancer mortality.

    Given the relationships between innovation and growth and between growth and longevity, it seems likely that new ideas have played a major role in increased longevity. This study examines the impact of medical innovation on cancer survival rates and mortality in the United States. The findings suggest that a significant share of the increase in the five-year observed survival rate between 1994 and 2008 may have been due to an increase in the novelty of medical ideas several years earlier.


    Dirk Schoenmaker
    8 February 2019

    Can we do anything to prevent a sad ending to the current boom-bust cycle, which resembles earlier financial crises? In a new VoxEU column, Dirk Schoenmaker says that macroprudential authorities can and should rein in the current unsustainable levels of leveraged finance.

    Leveraged finance is booming, he notes, just as it was in the run-up to the global financial crisis. As before, central banks are bystanders, with only banking instruments for macroprudential policy. The new study argues that there are unused regulatory powers that can rein in investment funds. A cross-sectoral approach would help to tackle the current unsustainable levels of leveraged finance.


    Maryaline Catillon, David M. Cutler, Thomas E. Getzen
    9 February 2019

    Growth in life expectancy during the last two centuries has been attributed to environmental change, productivity growth, improved nutrition and better hygiene, rather than to advances in medical care. New research by Maryaline Catillon, David Cutler and Thomas Getzen traces the development of medical care and the extension of longevity in the United States from 1800 onwards to provide a long-term overview at US health and healthcare. It demonstrates that the contribution of medical care to life-expectancy gains has changed over time.


    Antoine Berthou, Caroline Jardet, Daniele Siena, Urszula Szczerbowicz8 February 2019

    A global and generalised 10 percentage point increase in tariffs could reduce the level of global GDP by almost 2% on impact and up to 3% after two years, according to research by Antoine Berthou and colleagues.

    Escalating tensions between the United States and its trading partners have made a global trade war more likely. In addition to the direct effect due to the increase in tariffs, a trade war may also hit GDP via indirect channels, such as a drop in productivity due to uncertainty and changes in the production environment.


    Raphael Auer, Barthélémy Bonadio, Andrei Levchenko
    7 February 2019

    If NAFTA were revoked, it is the parts of the United States that voted most overwhelmingly for the Trump administration that would experience the greatest falls in wages, according to research by Raphael Auer and colleagues.
    The tide has turned in international trade, they note, with watershed political moments across the world showing the growing popularity of protectionist measures. Their study analyses the relationship between the distributional effects of trade and voting patterns by modelling a scenario in which NAFTA is dismantled. The particularly damaging impact on places that voted for Trump is due to the strong correlation in areas that face import competition from and export exposure to NAFTA partners. 

    THE CIVICNESS DRAIN: Migration from the south of Italy

    Marco Casari, Andrea Ichino, Moti Michaeli, Maria De Paola, Ginevra Marandola, Vincenzo Scoppa
    5 February 2019

    Civic-minded students in the south of Italy are more likely to emigrate when the local share of peers who share their community spirit is either low or high compared with an intermediate value, according to research on the ‘civicness drain’ by Andrea Ichino and colleagues.

    Although differences in social capital have been linked to a variety of outcomes, little is known about why it varies in the first place. Using experimental data from high schools in the north and south of Italy, this study argues that migration is one possible explanation. It finds that when civic students in the south are more likely to emigrate, the opposite happens for uncivic students. Migration thus causes a ‘civicness drain’.

    WINNERS, LOSERS AND FUTURE PROSPECTS: The economic geography of transition countries

    Klaus Desmet, Dávid Krisztián Nagy, Dzhamilya Nigmatulina, Nathaniel Young
    4 February 2019

    In the transition economies of Europe, Central Asia, the Middle East and North Africa, places with the greatest population density today are likely to achieve the greatest gains in wellbeing in the near future, according to an EBRD study of economic geography by Klaus Desmet and colleagues. Large-scale infrastructure projects, such as the Belt and Road Initiative, will have a positive impact, but not more so than modest reductions in general trade frictions. 

    The economic geography of transition economies has changed dramatically over the last quarter century, with large urban areas growing fast and many smaller places facing declining populations. Using a high-resolution spatial growth model, the new research projects the transition economies as a whole to perform economically well over the next decades, especially the region’s densest places.


    Guido Friebel, Miriam Manchin, Mariapia Mendola, Giovanni Prarolo
    2 February 2019

    Migrants’ intent to leave their home country depends on the availability of smuggling services, according to research by Guido Friebel and colleagues, which explores the effective opening to Libyan refugees of the central Mediterranean migration route to Europe following the fall of Gaddafi. Their Findings indicate that when the smuggling distance between country-pairs gets shorter, there is an increase in individual intentions to migrate.

    There is a general understanding that illegal migration only exists because of the smuggling industry. But there is no reliable information on how migrants’ intent to leave their home country depends on the availability of smuggling services. This study uses data on migrant flows arriving at European borders after the fall of Gaddafi, to estimate the supply elasticity of the lucrative smuggling industry.


    Emilio Calvano, Giacomo Calzolari, Vincenzo Denicolò, Sergio Pastorello
    3 February 2019

    Competition policy-makers face a new challenge from artificial intelligence (AI), according to research by Giacomo Calzolari and colleagues. Their study finds that even relatively simple pricing algorithms systematically learn to play sophisticated collusive strategies.

    Antitrust agencies are concerned that the autonomous pricing algorithms increasingly used by online vendors may learn to collude. This study uses experiments with pricing algorithms powered by AI in a controlled environment to demonstrate how algorithms learn collusive strategies. Most worrying is that they learn to collude by trial and error, with no prior knowledge of the environment in which they operate, without communicating with one another, and without being specifically designed to collude.

    IN MY BACK YARD: Neighbourhood spillovers in mortgage foreclosure

    Weiran Huang, Ashlyn Aiko Nelson, Stephen Ross
    1 February 2019

    US mortgage foreclosures depress the sales price of very nearby homes and increase the risk of foreclosure on those homes, according to research on ‘neighbourhood spillovers’ by Weiran Huang, Ashlyn Aiko Nelson and Stephen Ross.

    Heavily depressed housing prices and high contemporaneous rates of foreclosure have been observed in many low-income and minority neighbourhoods in US cities, suggesting foreclosures may have spillover effects within neighbourhoods. This study demonstrates that foreclosures affect the price of nearby homes and the risk of foreclosure on those homes. The aggregate impact of these spillovers could be large.

    THE EURO: From monetary independence to monetary sovereignty

    Lourdes Acedo Montoya, Marco Buti
    3 February 2019

    It’s time to revisit Europe’s traditional ‘benign neglect’ towards the international use of the euro, according to Marco Buti, Director General of DG Economic and Financial Affairs at the European Commission, writing at VoxEU. ‘Monetary sovereignty’ needs to be built on the basis of a reassessment of the benefits and costs of euro’s global role, he and his colleague Lourdes Acedo Montoya conclude.

    Although the euro instantly became the second-most important global currency when it was created, its internationalisation was not a primary concern for policy-makers at the time. This analysis argues that the benefits attached to the international role of the euro outweigh the costs. There is no silver bullet, however, that would rapidly increase use of the euro abroad. This requires a comprehensive package of measures and time.

    WHAT COUNTRIES DO WHEN EXPORTING: Measuring functional specialisation in trade

    Marcel Timmer, Sébastien Miroudot, Gaaitzen De Vries
    1 February 2019

    Countries today specialise in exporting activities, such as R&D, marketing or fabrication, rather than in exporting particular products. In a new study, Marcel Timmer, Sébastien Miroudot and Gaaitzen De Vries provide new evidence on ‘functional specialisation’ in trade and a new international division of labour.

    They note that a country that appears to be a dominant exporter in a particular good may in fact contribute little value when the production process is internationally fragmented. They propose a new measure that tracks functional specialisation in international trade, and show that countries at similar levels of development can vary widely in their specialisation pattern.


    Christophe Gouel, David Laborde 
    6 February 2019

    Climate change will create new patterns of comparative advantage in agriculture and hence new trade flows. In a new study, Christophe Gouel and David Laborde reveal the potential hit to poor countries and the importance of a rule-based world trading system to enable climate change adaptation. 

    Given our collective failure to mitigate greenhouse gas emissions, the world will have to adapt to a certain level of climate change. This may mean that as climate change affects the yield potential of many crops, new patterns of comparative advantage, and hence new trade flows, will emerge. The new study examines the importance of the market adaptations in mediating welfare losses in the agricultural sector. The findings suggest a large role for international trade: when adjustments in trade flows are constrained, global welfare losses from climate change increase by 76%.

    SPAIN’S EXPORT MIRACLE: How the domestic slump drove producers to find new overseas customers

    Miguel Almunia, Pol Antràs, David Lopez Rodriguez, Eduardo Morales
    4 February 2019

    Faced with excess capacity during the Great Recession, which hit Spain harder than most other countries, local producers were forced to step up efforts to seek new customers in foreign markets. According to research by Miguel Almunia and colleagues, that is a key explanation for the country’s export success of recent years.

    The study notes that after the shock of the financial crisis of 2007/08 and the global trade collapse of 2009, Spanish merchandise exports quickly recovered, growing by almost 40% between 2009 and 2013 and outperforming other Eurozone economies.

    The researchers estimate what share of the export boom can be explained by Adam Smith’s ‘vent for surplus’ channel, in which a slump in domestic demand leads firms to try to recoup some domestic revenue losses in foreign markets. They find that this share is substantial and could be powerful enough to explain more than half of the growth in Spanish exports.


    Giuseppe Berlingieri, Frank Pisch, Claudia Steinwender
    5 February 2019

    Multinationals with large and complex production networks have become the dominant feature of today’s economies, but while their supply networks are large, that does not mean that they own every step of the global production chain. New research by Giuseppe Berlingieri, Frank Pisch and Claudia Steinwender provides evidence from French firms on the key ‘make-or-buy’ decision: whether to source imported inputs from independent suppliers or from affiliates.

    The results show that multinationals typically own and source from international suppliers that provide technologically important inputs – that is, those that account for a high share of costs.


    Friederike Niepmann, Tim Schmidt-Eisenlohr
    6 February 2019

    Risk appetite in global capital markets has become a key driver of credit supply to US firms, according to research by Friederike Niepmann and Tim Schmidt-Eisenlohr. They find that when the dollar appreciates, institutional investors demand fewer loans on the secondary market, causing US banks to reduce lending and tighten credit standards.  
    The issuance of syndicated loans, including leveraged loans, has grown substantially in the United States. Institutional investors increasingly hold these loans. The new study discusses how this has created a strong link between the dollar and US corporate credit conditions.


    Matthias Helble, Trang Thu Le, Trinh Q. Long
    10 February 2019

    Vietnam’s increased trade with China has reduced income inequality in the country, according to research by Matthias Helble, Trang Thu Le and Trinh Long. Their study finds that incomes have grown for the lowest income quantiles while higher income groups have seen their incomes decline.

    The researchers note that the sudden rise in trade between China and the United States – known as the ‘China shock’ – has been the subject of numerous studies, but the even more dramatic increase in trade between China and developing countries in Asia has been somewhat overlooked. Their study examines the impact of the China shock on income inequality in Vietnam.


    Jonathan Ashworth  interviewed by Tim Phillips

    8 February 2019

    On 17 October 2018, Canada legalised recreational cannabis use, with an immediate effect on how Canadian people use cash. Jonathan Ashworth explains to Tim Phillips how legalisation crimps the black economy.