This week from CEPR: July 16

Thursday, July 16, 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


    Graziella Bertocchi, Arcangelo Dimico       
    CEPR DP No. 15013 July 2020 

    African-Americans are overrepresented in terms of Covid-19 related deaths, since---as of June 16, 2020---they constitute 35% of the dead, so that they are dying at a rate 1.3 times higher than their population share. Furthermore, historically lower-graded neighbourhoods suffer higher mortality rates, driven by presence of African-Americans. This suggests a persistent influence of the racial segregation induced by the discriminatory lending practices of the 1930s (‘Redlining’), by way of a diminished resilience of the black population to the shock represented by the Covid-19 outbreak. Far from being determined by genetic and biological factors, such vulnerability can be linked to socioeconomic status and household composition, as the likely channels through which the legacy of the past manifests itself.

    These are the central conclusions of a new CEPR study by Graziella Bertocchi and Arcangelo Dimico, who present new evidence on the disproportionate impact of Covid-19 on African Americans in the United States. Using daily individual and geographical mortality data by the Cook County Medical Examiner, of which Chicago is included, the authors provide the first evidence that race does affect Covid-19 outcomes. Among the findings: 

    • In Cook County blacks are overrepresented in terms of Covid-19 related deaths, constituting 35% of the dead, dying at a rate 1.3 times higher than their population share. 
    • after the outbreak of the epidemic, historically lower-graded neighbourhoods display a sharper increase in mortality, driven by blacks, while no pre-treatment differences are detected. 
    • There is a persistent influence of the racial segregation induced by the discriminatory lending practices of the 1930s, by way of a diminished resilience of the black population to the shock represented by the Covid-19 outbreak.
    • The main channels of transmission are socioeconomic status and household composition, whose influence is magnified in combination with a higher black share.
    • Not only are blacks disproportionately hit by Covid-19, but they also started to succumb to it earlier than other groups.

    The evolution of the epidemiological curve has revealed an extraordinary degree of racial and ethnic segregation in the United States, with different groups displaying profoundly distinct patterns even in the timing of their exposure to the epidemic. It is possible that blacks become infected as much as the rest of the population, but they experience a faster progression through the stages of the disease, because of pre-existing medical conditions and/or access to health. It may also be the case that blacks were more exposed from the beginning of the outbreak, because of their occupations and living conditions.

    • THE FUTURE OF THE EUROPEAN PROJECT: Survey results from members of national parliaments in France, Italy and Germany   

    THE FUTURE OF THE EUROPEAN PROJECT: Survey results from members of national parliaments in France, Italy and Germany
    Sebastian Blesse, Massimo Bordignon, Pierre Boyer, Piergiorgio Carapella, Friedrich Heinemann, Eckhard Janeba, Anasuya Raj 
    CEPR DP No. 15021 | July 2020

    The euro area debt crisis has revealed that the institutional set-up of the Economic and Monetary Union (EMU) as established by the Treaty of Maastricht was imperfect. A new CEPR study by Pierre Boyer and colleagues explores the potential for six well-known reform proposals in the European Union such as Eurobonds and European Unemployment insurance through a survey of members of national parliaments in France, Germany and Italy in 2018. 

    In addition, the study addresses three institutional reforms and fiscal policies: a new tax-based own resource for the EU budget, majority voting of the European council on tax policy, and the extension of legislative initiative to the European Parliament. The study finds that: 

    • Nationality and party alliance are key determinants of reform preferences, but the latter dominates quantitatively the former. 
    • On average Italian politicians and members belonging to the Socialists and Democrats group are much more in favour of further European integration than German policymakers and those from the European People's Party group. 
    • Populist parties in Germany and Italy have radically different views on the future of Europe. Which makes it clear that there is not a unified populist power. 
    • Comparing the answers for the same questions to the answers made by French and German parliament members in 2016, the study shows that there is considerable stability of views over time.


    Marco Buti, Gabriele Giudice, José Leandro        
    13 July 2020

    The crisis generated by the Covid-19 pandemic has required rapid and strong action. It also entails key choices, including on how the EU could help mitigate the impact of Covid-19, foster the economic recovery and support the dual green and digital transitions. In September 2019, before the crisis, the Directorate General for Economy and Finance of the European Commission organised a workshop on strengthening the institutional architecture of the EMU. This column introduces a new eBook which presents the main ideas discussed at the workshop.


    Henk Jan Reinders, Dirk Schoenmaker, Mathijs van Dijk        
    13 July 2020

    Market-implied losses for euro area banks could reach over €1 trillion, or, depending on the scenario, 7-43% of available bank capital. The economic impact of the Covid-19 pandemic could severely threaten financial stability.

    A new study by Dirk Schoenmaker and colleagues adopts a real-time, market-based assessment of the impact on corporate loan portfolios in the wake of Covid-19.

    WHAT TO DO IF COVID-19 IS HERE TO STAY? Partial lockdown/social distancing measures may become the norm for years to come

    Chryssi Giannitsarou, Flavio Toxvaerd        
    12 July 2020

    We do not yet know whether individuals who recover from Covid-19 can be re-infected. If immunity wanes, as recent research from King’s College London suggests, the disease will become endemic, in sharp contrast to a model in which recovery confers permanent immunity. 

    A timely study by Chryssi Giannitsarou and Flavio Toxvaerd considers the possibility that immunity is indeed only temporary. The optimal policy will make an initial effort to reduce the first great infection wave and then engage in a permanent low level management of the persistent infection in the population in order to keep it under control. In practice, this means that partial lockdowns and social distancing measures may be the norm for years to come.


    Neil Gandal, Matan Yonas, Michal Feldman, Ady Pauzner, Avraham Tabbach       
    13 July 2020

    A new study uses data from 32 countries in Europe and the 50 US states to show that the Covid -19 death rate is higher in countries and states with more long-term care beds. This provides evidence that living in long-term care facilities is a significant risk factor for death from Covid-19, and suggests that countries should adopt policies to protect their older populations living in such facilities before the second wave (likely) arrives. Policymakers might even consider alternative dwelling options during the epidemic period, such as encouraging residents to live with their families whenever possible.


    Nicolas Gonne, Olivier Hubert         
    08 July 2020

    A new study by Nicolas Gonne (OECD) & Olivier Hubert (Banque de France) presents a cost-benefit analysis of the global freeze of passenger air traffic during Covid-19, pandemic slowed the spread of the disease but caused major economic losses for the sector. 

    Blanket restrictions are likely to fail the cost-benefit test. Instead, the authors advocate a more targeted and coordinated approach. This is essential because a country could enforce a strict lockdown, stop the spread of the virus, and then see its infection rate spike again, warranting a new (hopefully lighter) lockdown, simply because individuals from a highly affected area were allowed to freely travel. The European Commission “Re-open EU” initiative and its real-time dashboard are steps in the right direction.

    While any conclusion is highly dependent on a handful of factors, including the controversial and difficult-to-calculate ‘value of a statistical life’, the simulations provide useful anchoring points at a time when governments are contemplating reopening air routes, as well as in the face of a potential second wave of infections.

    AROUND THE WORLD IN THE LEGAL PROFESSION: Women get in, but not up

    Ina Ganguli, Ricardo Hausmann, Martina Viarengo        
    09 July 2020


    Though women have achieved near parity with men among new hires at large law firms, they still hold notably few positions of leadership in the profession broadly. A new study by Ina Ganguli and colleagues reviews international evidence of career trajectories in the legal sector using employment records from one of the largest multinational law firms. 

    In addition to providing new facts about career dynamics for a sizable share of the global legal workforce, the column details differences in institutions and national cultures that contribute to disparities in gender mobility. Among the findings: 

    • In some countries with large initial gender gaps, such as France, more females were hired in entry level positions over the years.
    • However, no new female lawyers at the entry-level position were hired in some countries, such as Japan and Sweden, following the 2008 financial crisis.
    • The share of women among associates increased for most countries from 2004-2011; in Poland, Belgium, the UK, Sweden, and Hong Kong, the share even reached 50% or above.
    • But a significant gender gap exists at senior positions; in 2011, only Sweden had at most 50% of female partners, while several countries had no female partners at all.
    • The gender gap in promotion probability is smaller at the highest promotion level, i.e. from managing associate to partner. The study finds no evidence of significant changes over the period in any of the countries in the sample.

    These estimates suggest that even within the same global law firm, there are differences across countries in the promotion of women relative to men, as well as in ratings and wages, that are unexplained by worker and job characteristics. Part of this gap appears to be attributable to differences in the prevailing preferences and beliefs about women’s role in society, or national culture.


    Paolo Falco, Sarah Zaccagni        
    09 July 2020

    A study in Denmark examining what types of messages are most (and least) effective in convincing people to stay home during lockdowns finds that people’s good intentions often do not translate into the desired actions. The share of people who stayed home at the height of the crisis was quite low - less than 15% of people across Denmark stayed home on any given day in the two weeks of the study, and over 40% of the people who declared an intention to stay home went out instead. However, reminders did significantly increase compliance with social distancing among people in poor health (by more than 80%) who face the greatest risks. 

    These are among the central findings of a randomised controlled trial conducted in Denmark by Paolo Falco and Sarah Zaccagni, who show that reminders need to be targeted and timed well in order to make a difference.

    EARLY LOCKDOWNS SAVE MORE LIVES AND LIVELIHOODS: Analysis from World Bank economists 

    Asli Demirgüç-Kunt, Michael Lokshin, Iván Torre        
    09 July 2020

    A study by World Bank economists analyses high-frequency proxies of economic activity and suggests that lockdowns led to a decline of about 10% in economic activity across Europe and Central Asia. On average, countries that implemented lockdowns in the early stages of the pandemic are found to have better short-term economic outcomes and lower cumulative mortality.

    Countries that implemented lockdowns one week before the first death by Covid-19 was reported saw a decrease in economic activity that was about 2% smaller than countries that implemented a lockdown on the day of the first death. On the other hand, countries that implemented the lockdown only one week after the first death by COVID-19 experienced a 2% larger decrease in economic activity. Each day of delay is estimated to be associated with a 0.3% additional decrease in activity.

    The drop in economic activity observed when lockdowns are in place is not solely explained by the lockdown restrictions themselves but is also associated with the behavioural response to the spread of the disease. Therefore, a fast reopening that generates a rebound in the spread of the disease can be damaging not only in human terms but also in economic ones. An unexpected increase in the infection rates or the number of deaths after opening up might slow down or even reverse positive economic trends.


    Chen Chen, Sudipto Dasgupta, Thanh Huynh, Ying Xia         
    08 July 2020

    New research from Sudipto Dasgupta and Monash University economists studies the market reactions following staggered lockdown events across US states during Covid-19. It finds that returns on firms located in lockdown states are higher following the lockdown. These reactions can be interpreted as reflecting updated beliefs of market participants in the light of events that follow the lockdowns, such as compliance with stay-at-home orders.

    The results suggest that shareholders respond more positively to lockdowns when infections are high, compliance is better, and the short-term costs are smaller in relation to future costs in the event of future work stoppages. These findings support policies that soften the immediate adverse economic impact, and caution against easing of NPIs to revive the economy until effective containment measures are well in place.

    SELECTING THE NEXT WTO DIRECTOR-GENERAL: What the trade community thinks

    Matteo Fiorini, Bernard Hoekman, Petros Mavroidis, Douglas Nelson, Robert Wolfe       
    26 June 2020

    The World Trade Organisation (WTO) is looking for a new Director-General. Writing at Vox, Bernard Hoekman and colleagues report on selected results of a recent survey designed to help identify what the trade community thinks is needed. 

    The results suggest strong support for someone with managerial and political experience, and a professional network that spans international organisations, major capitals, and international business. African respondents assign the highest priority to regional diversity. Overall, there is a distinct contrast between the preferred profile and that of the incumbent.


    Christos Makridis, Jonathan Rothwell        
    10 July 2020

    In the United States, Republicans are significantly less worried about Covid-19 and less likely to expect long-term economic disruption due to the virus. These results suggest that the macroeconomic effects of the pandemic on consumption may depend on behavioural factors, like political affiliation.

    These are the central conclusions of a new study by Christos Makridis and Jonathan Rothwell, which documents the overwhelming importance of political affiliation as a determinant of beliefs about the pandemic and its economic implications, and the adverse effects of partisanship on local economic activity.

    HOW LONG SHOULD THE UK LOCKDOWN CONTINUE FOR? Balancing costs against benefits

    David Miles         
    13 July 2020

    A new study by David Miles (Imperial College) analyses what an assessment of costs and benefits of lockdown imply for how policy should be set in the UK. The question is simple: Has the length of the UK lockdown been warranted and should restrictions now be eased significantly? Using a wide range of scenarios for costs and benefits it appears as though extending the UK lockdown beyond three-months (that is beyond June) was not likely to be optimal.  

    COVID-19 AND THE NATIONAL PAYMENTS SYSTEM: Steps for getting funds to those in need and enabling access to money 

    Biagio Bossone, Harish Natarajan     
    13 July 2020

    For policies combatting the Covid-19 pandemic to be effective and economies to function, payment and settlement systems and services – collectively referred to as the National Payments System – must operate efficiently, reliably, and securely. 

    Writing at Vox, World Bank economists Biagio Bossone and Harish Natarajan identify the challenges affecting payment services during emergencies and discusses measures to ensure that payment systems keep operating. The authors stress that public authorities should be proactive in mitigating risks to payment systems to support economic activity and help the public.

    A TALE OF TWO CRISES: Lessons from the financial crisis to prevent the Great Fragmentation

    Marco Buti        
    13 July 2020

    Both the severity of the recession in Europe in 2020 and the subsequent bounce back of economies are likely to differ markedly across member states. Avoiding that the current crisis risks will be remembered as the Great Fragmentation is a key goal of the EU strategy. 

    Writing at Vox, Marco Buti (Head of Cabinet of Commissioner Paolo Gentiloni, previously Director General for Economic and Financial Affairs at the European Commission), looks at the lessons learned during the financial crisis, and argues that a more consensual narrative, the lower risks of moral hazard and the rising political awareness that Europe has to count on ‘indigenous’ growth drivers provide a better chance of adopting an ambitious EU policy response. Whether it will also lead to deeper political integration, will depend on finalising long-lasting open institutional 'chantiers' such as Banking Union and Capital Markets Union. 

    DOES RELIGION MATTER FOR ECONOMIC SUCCESS? The Protestant ethic and the spirit of nationalism

    Felix Kersting, Iris Wohnsiedler, Nikolaus Wolf         
    11 July 2020

    Max Weber famously hypothesised that the Protestant work ethic fostered modern economic development. Does religion matter for economic success? Writing at Vox, economists from Humboldt University revisit Weber’s hypothesis in the context of 19th-century Prussia. 

    The study finds that Protestantism did not matter for savings, literacy rates, or income levels across Prussian counties after 1870. Instead, there are large differences between ethnic groups, likely due to ethnic discrimination. Nationalism must be taken into account to understand Weber’s writings


    Sascha O. Becker, Jared Rubin, Ludger Woessmann        
    12 July 2020

    Over the past two decades, analysis of the relevance of religion has entered centre stage in the study of economic history, addressing questions such as how religion and religious beliefs in God and the afterlife have historically affected economies, and how historical socioeconomic circumstances have shaped religious beliefs and activities. 

    Writing at Vox, Sascha O. Becker and colleagues derive a few general insights emerging from the rapidly growing literature: 

    • The doctrine that there is ‘one true God’ that is the defining characteristic of monotheistic faiths was both a stabilising factor for societies – because monopolised rule could curtail disagreements within religious groups – and at the same time a destabilising factor because it spurred conflict between religions
    • Religious norms spurred or prevented literacy and mass education in many societies. Religion-induced human capital has been a defining element both in Jewish economic history and in the Protestant-Catholic divide in Christian economic history, as well as in how Christian missionaries impacted the historical development in affected areas.
    • The recent literature has produced ample evidence that socioeconomic factors matter in the historical development of religions.


    Emanuele Ciani, Guido de Blasio, Samuele Poy         
    11 July 2020

    A study by Bank of Italy economists presents historical evidence that questions the assumption that large transportation infrastructure projects are considered a promising investment to spur economic growth in lagging areas. 

    It studies the most important Italian infrastructure project in the aftermath of WWII: the 440km freeway connecting the Southern regions of Italy. It finds, that while the freeway caused a significant reorganisation of both economic activity and population from places far from the freeway to locations close to it, there is no evidence that it had any long-run effect on economic growth of the Southern region as a whole.


    Stefan Thewissen, Duncan MacDonald, Christopher Prinz, Maëlle Stricot         
    08 July 2020

    A new study by OECD economists examines how different countries implemented paid sick leave during the Covid-19 crisis. The evidence suggests that sick-leave policies will facilitate an orderly end to lockdowns – and sustain workers during subsequent waves of infection. 

    Paid sick leave, however, can only facilitate an orderly de-confinement and be an effective device during a possible second wave of infection under two conditions. First, if countries keep in place their temporary extensions, and second, if they further extend paid sick leave entitlements to groups of workers that are still not covered. Otherwise, like many other policy tools, paid sick leave remains a partial response with significant inequalities across different groups of employed and self-employed workers.


    Matteo Fiorini, Bernard Hoekman, Petros Mavroidis, Douglas Nelson, Robert Wolfe         
    09 July 2020

    Writing at Vox, Bernard Hoekman and colleagues report on the results of a recent survey of the trade community regarding the priorities confronting the next WTO Director-General. The study finds that there is a substantial degree of commonality in rank orderings of substantive issues for negotiation, institutional reform, and daily operations of the WTO, but underlying this are significant differences in rankings of issues and options across groups of respondents. Resolving the dispute settlement crisis is a clear priority for most respondents, especially government officials.

    FINANCE AND POLITICS: New insights from the first London Political Finance (POLFIN) workshop

    Thorsten Beck, Orkun Saka, Paolo Volpin          
    10 July 2020

    A rapidly expanding literature has shown the importance of political economy factors for legislative and regulatory actions in the financial sector and ultimately financial sector stability and efficiency. 

    Writing at Vox, Thorsten Beck and colleagues report on recent research in this field, presented at the first London Political Finance (POLFIN) workshop, including work on financial fragility leading to the rise of right-wing extremist parties, private interests in financial regulation, financial gains from political connections, political beliefs and financial decisions and the role of media in financial decisions. It lays out some of the important takeaways and suggests directions for further research that can shed light on the remaining issues.

    COVID-19: How to build better Early Warning Systems

    Henrik Müller, Nico Hornig          
    10 July 2020

    The Covid-19 pandemic has spread massive economic uncertainty, yet popular indicators were largely late in indicating the size of the impact. It is clear we need to prepare for future shocks by designing better early warning systems, so that we have more time to make provisions to cushion the impact.

    To gauge the severity of future shocks in a timelier fashion, a study by Henrik Müller and Nico Hornig proposes a new taxonomy of economic uncertainty and an approach to measure it. In this vein it constructs a news-based indicator called Uncertainty Perception Indicator (UPI). 

    BANKS UNDER PRESSURE: Low profitability, non-performing loans, and competition from Big Tech

    Xavier Vives interviewed by Tim Phillips, 08 July 2020

    Low profitability, non-performing loans, and competition from Big Tech. A new report from the CEPR concludes that the banking sector faces "deep restructuring". Xavier Vives tell Tim Phillips why.

    Read about the report and download it.

    COVID-19: The Risk of Being a Fallen Angel and the Corporate Dash for Cash

    Sascha Steffen       

    Sascha Steffen talks to Tim Phillips about the pandemic-driven ‘dash for cash’ among firms and how the US stock market rewarded firms with access to liquidity through either cash or committed lines of credit from banks. High-quality investment-grade firms issued bonds in public capital markets, particularly after the Federal Reserve Bank initiated its corporate bond-buying programme. In contrast, bond issuances of the lowest-rated investment-grade firms remained mostly flat; instead, these firms rushed to convert their credit line commitments from banks into cash, accounting for about half of all the credit line drawdowns. Consistent with the risk of becoming a fallen angel, this dash for cash has been driven by the lowest-quality BBB-rated firms.

    FOLLOW-MY-LEADER: Explaining the Difference in Covid-19 Policies

    Karl Wennberg         

    What explains how, and when, infection prevention policies were adopted in different countries? Were they following the science, or following each other? New research by Karl Wennberg of Linköping University and his co-authors reaches some unexpected conclusions.