This week from CEPR: January 23

Thursday, January 23, 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

    • MIDLIFE EFFECTS OF GRADUATING IN A RECESSION: Socioeconomic decline and higher rates of mortality 

    SOCIOECONOMIC DECLINE AND DEATH: Midlife Impacts of Graduating in a Recession 
    Hannes Schwandt, Till von Wachter  
    CEPR DP No. 14325  17 January 2020 

    Temporary disadvantages in the labour market during young adulthood can have big effects on later life outcomes, according to a new CEPR study by Hannes Schwandt and Till von Wachter. They have developed a new approach to estimating the midlife effects of entering the labour market in a recession on mortality by cause and various measures of socioeconomic status, using evidence from the 1980s recession in the United States. Among the findings: 

    • Cohorts coming of age during the deep recession of the early 1980s suffer increases in mortality that appear in their late 30s and further strengthen through age 50. 
    • Mortality impacts are driven by disease-related causes such as heart disease, lung cancer and liver disease, as well as drug overdoses. 
    • At the same time, unlucky middle-aged labour market entrants earn less and work more while receiving less welfare support. 
    • They are also less likely to be married, more likely to be divorced and experience higher rates of childlessness. 
    • After initial recovery in their mid-thirties, adversely affected entry cohorts suffer a reduction in earnings as they reach their mid-forties.
    • While the effects on overall mortality are similar by race, increases in ‘deaths of despair’ appear to be chiefly concentrated among white, non-Hispanic men.

    These findings suggest long-term costs of entering the labour market in a recession may be greater than previously understood. In particular, the results imply that the costs of recessions go beyond the initial earnings effects usually documented.  


    Ethan Ilzetzki, Carmen M. Reinhart, Kenneth Rogoff  
    CEPR DP No. 14315  16 January 2020

    Twenty years after the euro was launched, its role as an international currency is no greater than the German Deutschemark and the French franc, which it replaced. A new CEPR study by Ethan Ilzetzki, Carmen Reinhart and Kenneth Rogoff demonstrates the currency’s distant second status behind the dollar, notes the emerging threat of China’s renminbi as a competitor in the world monetary system, and explains why the euro punches so far below its weight.

    The authors’ central explanation for the euro’s lagging role is the shortage of safe euro-denominated assets, which is partly due to the highly fragmented financial markets in the Eurozone. For example, an asset issued in Italy or Greece isn’t viewed as a close substitute for German bonds. Indeed, the Eurozone functions more like economic archipelago than a unified financial and economic zone.  

    The Eurozone’s limited unity, particularly in the post-crisis decade, has also posed difficulties for monetary policy. The study finds evidence that the European Central Bank (ECB) was slow to find its own voice and its 20 years can be divided into a ‘Bundesbank-plus’ period and a ‘whatever it takes’ period.

    The first decade showed a slow transition from the European Exchange Rate Mechanism with stable German inflation as its goal. In this period, the ECB’s implicit policy rule put a far greater weight on German inflation than on inflation in the Eurozone as a whole.

    The second period has been characterised by zero and negative interest rates, and an expanding ECB arsenal of credit facilities to European banks and sovereigns. Lack of ECB policy clarity makes the nature of the euro hard to assess and therefore a less attractive currency to use as an anchor. This may be an additional factor limiting the euro’s international reach.

    • LAWS SHAPE POSITIVE ATTITUDES TOWARDS SAME-SEX RELATIONSHIPS: Evidence from recognition policies in Europe 

    DO LAWS SHAPE ATTITUDES? Evidence from Same-Sex Relationship Recognition Policies in Europe
    Cevat Giray Aksoy, Christopher S. Carpenter, Ralph de Haas, Kevin Tran  
    CEPR DP No. 14309 14 January 2020

    Do laws shape attitudes? Or do they simply reflect them? A new CEPR study by Ralph de Haas and colleagues studies 13 European countries that adopted same-sex relationship recognition policies over the period 2002-2016 to show that such policies significantly improved attitudes towards sexual minorities. 

    The findings show that these effects are widespread across demographic groups but are consistently larger for more conservative groups in countries with less gender equality. In no case do the authors find that policies to recognise same-sex relationships legally are associated with a significant worsening of attitudes toward LGB people. 

    The results suggest that laws can exert a powerful influence in shaping social attitudes, whereby legal status confers legitimacy toward a group (here, sexual minorities), and attitudes adjust in response. This could translate into less discrimination (or more inclusion) in labour and housing markets, improved mental health for sexual minorities, and a range of other benefits associated with less anti-LGB sentiment.

    Figure 1: Trends in attitudes toward sexual minorities

    Note: This figure includes all countries that were observed during at least 10 years of the European Social Survey (ESS).


    CLIMATE CHANGE: Policy recommendations for central banks

    Markus K Brunnermeier, Jean-Pierre Landau  
    15 January 2020

    Central banks may want to take climate change concerns into account when designing and implementing monetary policies. But they should retain discretion to interrupt any action if the first-priority objective of price stability were to be compromised.

    These are among the conclusions of a new study by Markus Brunnermeier and Jean-Pierre Landau. They also note that climate concerns should be a major part of risk assessments of the financial sector. What’s more, capital ratios could be used in a proactive way by applying favourable regimes to ‘green’ loans and investments. 


    HOW DO SHIFTS IN US MONETARY POLICY AFFECT OTHER NATIONS? Risk spillovers and policy options

    Sebnem Kalemli-Ozcan  
    16 January 2020

    Writing at Vox, Sebnem Kalemli-Ozcan combines a simple theoretical framework with macro data from 70+ countries and micro data from over a million non-financial firms in 43 of these countries to show that monetary policy spillovers from the United States to the rest of the world operate through changes in risk premia, with emerging market economies most vulnerable. She also discusses the policy options available to countries to deal with the effects of these risk spillovers. 



    Maria Savona 
    17 January 2020

    Economists failed to predict the massive concentration of data value in the hands of large platforms and to account for the complex political economy of data accumulation, argues Maria Savona in a new Vox column. She presents a novel data-rights approach to redistributing data value while not undermining the ethical, legal and governance challenges of doing so. This can be done by giving individuals authorship rights to their personal data.



    Katharina Janke, Carol Propper, Raffaella Sadun  
    17 January 2020

    Changing the chief executive of National Health Service (NHS) hospitals makes little difference to the performance of these large and complex public sector organisations, according to a study by Carol Propper and colleagues. They find that a chief executive who has improved financial performance, decreased waiting lists or improved clinical performance in one hospital cannot simply replicate this effect in the next. 

    Their findings cast doubt on the ‘turnaround CEO’ approach to management in the public sector. They contrast sharply with earlier results for the private sector and smaller public sector organisations, where top managers and executives seem able make a difference in the performance of their organisations and have a ‘style’ that is portable across firms. 



    Anna Samarina, Nikos Apokoritis  
    15 January 2020

    Central banks in advanced economies are defining lower, narrower inflation targets; transparency and commitment have been enhanced, and the monetary policy toolkit has been expanded. These are among the findings of a survey of how monetary policy frameworks have evolved since the global crisis by Anna Samarina and Nikos Apokoritis.


    A NEW PILLAR OF EU COMPETITION LAW: Responding to the challenges raised by Chinese state capitalism

    Thorsten Kaeseberg  
    15 January 2020


    European Union competition policy appears not sufficiently equipped to deal with the challenges recently raised by Chinese state capitalism. That is the conclusion of new study by Thorsten Kaeseberg, which examines some of the gaps in the EU’s economic toolbox and identifies several strategic issues that will need to be addressed as the Commission looks to close these gaps with the introduction of a ‘level playing field instrument’.


    DIGITAL MONEY: Implications for emerging market and developing economies

    Erik Feyen, Jon Frost, Harish Natarajan  
    16 January 2020

    Stablecoin arrangements aspire to improve financial inclusion and cross-border remittances – but they are neither necessary nor sufficient to meet these policy goals. That is the conclusion of a study by Erik Feyen and colleagues, who argue that stablecoins pose particular development, macroeconomic and cross-border challenges for emerging market and developing economies. 

    The authors note that it remains to be seen whether stablecoins can offer a decisive comparative advantage over fast-moving fintech innovations in these countries that are built on or improve the existing financial plumbing. 

    This column is a lead commentary in the VoxEU debate on the The Future of Digital Money’.



    Thomas Drechsel, Michael McLeay, Silvana Tenreyro  
    13 January 2020

    A study by Silvana Tenreyro and colleagues examines optimal monetary policy for commodity exporters in a small open economy framework that includes a key role for financial conditions. A positive commodity price shock leads to an inefficient boom, with inflation rising and output increasing relative to its efficient level. The optimal policy lets the exchange rate appreciate and raises interest rates, with a larger appreciation required the greater the loosening in borrowing conditions. 

    The analysis suggests that exchange-rate pegs are highly sub-optimal for commodity exporters, exacerbating inefficient swings in commodity production. Given the prevalence of managed exchange-rate regimes in emerging and developing commodity-exporting economies, the authors discuss the practical challenges that might justify such frameworks.



    Jean Barthélemy, Eric Mengus, Guillaume Plantin   
    21 January 2020

    In the current context of low inflation, preserving central bank independence may require that the public deficit be financed with helicopter money, rather than government debt, to prevent the government from entering into uncontrollable spending. That is the conclusion of a new study by Eric Mengus and colleagues, who explore the implications of real interest rates at historically low levels in advanced economies for central bank independence? 

    They argue that low rates, even though they relax the budget constraint of the public sector, will not necessarily strengthen central bank independence.



    Jennifer Castle, David Hendry, Andrew Martinez 
    22 January 2020

    Real wages and productivity in the UK have stagnated since 2007, whereas employment has risen considerably. Many commentators lament the consequent failure of `living standards’ to rise at historical rates. But real GDP per capita has grown by more than 20% since 2000 despite the Great Recession, so aggregate living standards have in fact risen. David Hendry, Jennifer Castle and Andrew Martinez resolve the apparent paradox.


    Ishac Diwan, Jamal Ibrahim Haidar   
    18 January 2020

    Firm-level political connections are widespread in Lebanon. A new study by Ishac Diwan and Jamal Haidar finds that this cronyism is leading to lower aggregate job creation and disincentives to innovate and invest, negatively affecting growth. 

    While politically connected firms create more jobs than unconnected firms, the presence of such firms in a sector is correlated with lower aggregate job creation. This finding is consistent with the hypothesis that unfair competition from politically connected firms hurts unconnected competitors so much that aggregate growth in the sector is affected negatively.


    Michele Fioretti, Hongming Wang   
    19 January 2020

    Pay-for-performance in Medicare increases health inequality because insurers respond to the performance incentives by risk selecting enrollees across locations. These are the findings of a new study by Michele Fioretti and Hongming Wand, which examines the efficiency and equity consequences of the introduction of pay-for-performance in the Medicare insurance programme in the United States.

    The study finds that after the payment reform, high-quality insurers selected healthier enrollees, shifting the distribution of high-quality insurance to the healthiest counties and worsening regional disparities in healthcare access.


    Karl Aiginger   
    20 January 2020

    The new president of the European Commission, Ursula von der Leyen, has announced a ‘European Green Deal’ and the Commission has asserted Europe’s need to develop a new growth model to achieve climate neutrality. 

    But according to Karl Aiginger writing at Vox, the Commission’s limited view of ‘productivity’ ignores the fact that raising labour productivity can raise emissions and accelerate climate change. Aiginger argues that a welfare-oriented Green Deal needs to focus on resource and energy productivity, not raising labour productivity.

    REFUGEES BOOST FOREIGN INVESTMENT IN COUNTRIES OF ORIGIN: Evidence from the US Refugee Resettlement Program

    Anna Maria Mayda, Christopher Parsons, Han Pham, Pierre-Louis Vézina   
    20 January 2020

    While resettled refugees in the United States historically exhibit remarkable success, a new study by Anna Maria Mayda and colleagues reveals that refugees also foster development to their origin countries through the mechanism of foreign direct investment (FDI). 

    The study finds that a 10% increase in refugees in a given commuting zone causes outward FDI flows to increase to their countries of origin, 10 to 15 years after having taken refuge, by 0.54%. Decisions made primarily for humanitarian reasons in developed host nations thus yield economic benefits for some of the world's poorest nations in the medium run.

    CALL FOR PAPERS: Special Issue of Economic Policy on the economics of climate change

    Ghazala Azmat, John Hassler, Andrea Ichino   
    17 January 2020

    Climate change is at the top of our policy agendas. What can economics contribute to help deal with this important global challenge? With the aim of answering this question, the Managing Editors of Economic Policy are opening a call for papers for a special issue on ‘The Economics of Climate Change’ to bring together the best ideas to inform the debate and provide high-impact policy advice.

    SEIGNIORAGE THROUGH PERIODIC RECOINAGE: When the validity of money was restricted in time

    Roger Svensson, Andreas Westermark   
    21 January 2020

    The Gesell tax, a stamp tax on money, is usually considered a theoretical idea of the 20th century. But a millennium earlier, it was being used across Europe to raise taxes; for almost 200 years, old coins were frequently declared invalid in large parts of medieval Europe and had to be exchanged for new ones for an exchange fee. Could this type of taxation work in modern society? 

    Writing at Vox, Roger Svensson and Andreas Westermark demonstrate that frequent recoinage generates incomes for the minting authority when the tax level is low enough and the punishment for using invalid coins is high enough, and when there is a limited coin volume in circulation and also an exchange monopoly. 



    Charles Goodhart, Anthony Venables interviewed by Tim Phillips, 17 January 2019

    When the industries that have sustained our cities decline, how can we regenerate urban areas? At the SUERF conference in Amsterdam, Tony Venables and Charles Goodhart tell Tim Phillips that redevelopment policies may have made regional inequality and social conflict worse.