This week from CEPR: July 30

Thursday, July 30, 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

    • THE DISTRIBUTIONAL IMPACT OF THE PANDEMIC: Across earnings, income and spending  

    Sinem Hacioglu, Diego R Känzig, Paolo Surico          
    CEPR DP No. 15101 July 2020 

    The highest earners in the United Kingdom account for almost half of the pandemic-related decline in consumption, with expenditure for this group falling much more than income. In contrast, the lowest earners have seen the smallest spending cuts and the largest earnings drop, but their total incomes have fallen by much less because of the increase in government benefits. The decline in consumers' spending preceded the introduction of the lockdown, whose partial lifting has triggered a stronger recovery in sectors with a lower contract rate. The largest spending contractions are concentrated in the most affluent regions.

    These are the central conclusions of a new CEPR study by Paolo Surico and colleagues, which tracks the economy in real-time by analysing detailed high-frequency transaction data on spending, earnings and income from a large Fintech company in the United Kingdom. Among the findings: 

    • The most affluent households have cut their spending the most during the second quarter of 2020, with the top quartile accounting for about 45% of the decline in aggregate consumption. This represents a 10% increase relative to the contribution of this group to total household expenditure during normal times.
    • In contrast, Fintech App users with less than £20,000 annual income in 2019 have contracted their expenditure the least, possibly reflecting a larger spending on essential goods and services.
    • Low-income users have, however, experienced the largest drop in earnings, around 15%, but their incomes have declined by much less.
    • An increase in government benefits since the start of the pandemic likely accounts for the significantly smaller fall in income (relative to earnings) for this group and, therefore, may also explain part of the less pronounced decline in their spending relative to the other groups.
    • Users at the top of the income distribution may have seen a disproportionally larger increase in their personal savings.
    • A significant part of the spending drop actually occurred before the introduction of lockdown measures and social distancing policies in the second half of March, suggesting that fears and uncertainty about contracting the virus and/or about future income have likely contributed to shape the dynamics of household expenditure.
    • The spending increase in June, after the partial lifting of some of the restrictive measures, has been more pronounced in sectors characterised by a lower contact rate such as retail, food delivery and durable goods.
    • Spending on categories such as restaurants, travel & holidays and recreation outside home is still significantly below pre-pandemic levels.
    • London and the South East exhibit the largest contractions in the second quarter of 2020 whereas Northern Ireland and Wales have experienced a much milder spending reduction.
    • There is little evidence of any systematic relationship between local spending changes and either the share of Covid-19 causalities or the share of furloughed workers across regions


    Sebastian Blesse, Massimo Bordignon, Pierre Boyer, Piergiorgio Carapella, Friedrich Heinemann, Eckhard Janeba, Anasuya Raj 
    CEPR DP No. 15021 | July 2020

    In the absence of a vaccine or effective treatments, containment measures are key to halting the spread of the virus, limiting the number of fatalities and flattening the "pandemic curve", but there are significant differences across countries. 

    Containment measures have had stronger effects in countries where the measures were implemented faster and resulted in less mobility—de facto, more social distancing—and in countries with lower temperatures, lower population density, a larger share of older population, and stronger health systems.

    A new CEPR study by IMF economists uses daily data on the number of coronavirus disease cases as well as on real-time containment measures implemented by countries to assess the effect of containment measures on the Covid-19 pandemic. Among the findings: 

    • Containment measures have significantly reduced the number of infections and therefore more importantly, the number of deaths.
    • Countries that have put in place stringent measures may have reduced the number of confirmed cases and deaths by more than 90% relative to the absence of measures.
    • Effectiveness is enhanced: 
      • When measures are implemented quickly. 
      • Where de facto mobility is curtailed.
      • In countries with lower temperatures. 
      • In countries with lower population density 
      • In countries with a larger share of the elderly in total population.  
      • In countries with stronger health systems. 
    • The easing of containment measures has resulted in an increase in the number of cases, but the effect has been lower (in absolute value) than that from a tightening of measures.


    Joel Stiebale, Jens Südekum, Nicole Woessner 
    CEPR DP No. 15080 | July 2020

    Robots boost the emergence of superstar firms within European manufacturing, thereby shifting the functional income distribution away from wages and towards profits. 

    This a central conclusion of a new study by economists from the Düsseldorf Institute for Competition Economics (DICE), which studies the impact of a recent digital automation technology - industrial robotics - on the distribution of sales, productivity, markups, and profits within industries. The analysis combines data on the industry-level stock of industrial robots with firms' balance sheet data for six European countries (France, Germany, Italy, Spain, Finland, and Sweden) from 2004 to 2013. 

    The study finds that robots disproportionally raise productivity in those firms that are already most productive to begin with. Those firms are able to increase their markups and overall profits, while they tend to decline for less profitable firms within the same industry, country and year. 

    The study also shows that robots contribute to the falling aggregate labour income share through a rising concentration of industry sales in highly productive firms with low firm-specific labour shares. 

    The results suggest that robots boost the emergence of superstar firms within European manufacturing, and thereby shifts the functional income distribution away from wages and towards profits.


    Muhammad Cheema, Robert Faff, Kenneth Szulczyk         
    25 July 2020

    Writing at Vox, Robert Faff and colleagues compare the performance of safe havens assets across the world’s ten largest economies during Covid-19 and the 2008 Global Financial Crisis. Among the findings: 

    • The character of safe haven assets has changed since the 2008 crisis.
    • Traditional assets such as gold and silver failed to protect investors’ wealth during the crisis
    • The Swiss franc, the US dollar and US Treasuries retained their safe haven status. 
    • Investors are willing to adopt new safe havens like Tether (a cryptocurrency) – probably because it is pegged to other financial assets.
    • Bitcoin is not the ‘new gold’, since it lost almost half of its value in one trading day during a Covid-19 market selloff.


    Mathias Reynaert         
    26 July 2020

    In 2009, the EU adopted one of the world’s most demanding emission standards for its automobile market, requiring automakers to reduce emissions by 18%. A study by Mathias Reynaert, uses data from the Netherlands and finds a growing divergence between on-road fuel consumption and laboratory results since the new policy, suggesting strategic ‘gaming’ by automakers

    The political environment, the enforcement of the policy, and strategic decisions by firms are crucial to evaluating the welfare consequences of the emission standard. 

    COVID-19 IN EMERGING MARKETS: Firm-survey evidence

    Thorsten Beck, Burton Flynn, Mikael Homanen         
    22 July 2020

    The vast majority of firms in emerging markets have been negatively affected by Covid-19 and reacted by reducing investment rather than payrolls. There is also a surprising degree of support vis-à-vis employees, customers, other stakeholders and broader society. Stakeholder-centric firms experienced lower stock price declines during the crisis drawdown.

    These are the findings of a study by Thorsten Beck and colleagues, that uses survey responses from early April across nearly 500 listed firms in ten emerging markets, including Bangladesh, Indonesia, Malaysia, Pakistan, Philippines, Saudi Arabia, South Africa, Thailand, Turkey, and Vietnam.

    REAL-TIME INFLATION MEASUREMENT DURING COVID-19: Sharp upturn in inflation and significant fall in product variety

    Xavier Jaravel, Martin O'Connell        
    26 July 2020

    At the beginning of lockdown there was a sharp upturn in inflation and a significant fall in product variety. Lockdown coincided with unusually high inflation, which was experienced by almost all households and in almost all product categories. The pervasive nature of the inflation, along with the fact that it is observed even in product categories with declines in output, point toward a risk of stagflation.

    A new study by Xavier Jaravel and Martin O'Connell summarises findings, based on real-time scanner data in UK, on inflation among fast-moving consumer goods during the pandemic.


    Olivier Marie, Judit Vall Castello          
    28 July 2020

    When the generosity of paid sick leave available to public sector employees is reduced, work absences fall but the likelihood of relapses increases, most of it driven by recurring infectious diseases. A study by Olivier Marie and Judit Castello uses evidence from Spain to suggest that policymakers need to manage changes in sick-leave generosity, especially in the face of persistent or recurring infectious diseases such as Covid-19.


    Luis Brandao-Marques, Gaston Gelos, Machiko Narita, Erlend Nier         
    24 July 2020


    Tighter macroprudential policies can be very effective in mitigating emerging vulnerabilities, mainly by reducing the future volatility of output. Other policies, including foreign exchange interventions and capital controls, do not appear to generate such benefits. In addition, such tightening is best accompanied by looser, not tighter, monetary policy.

    Writing at Vox, IMF economists introduce a new empirical approach to study the effects of both macroprudential and monetary policies in response to looser financial conditions. 


    Maritta Paloviita, Markus Haavio, Pirkka Jalasjoki, Juha Kilponen, Ilona Vänni         
    28 July 2020

    The introductory statements made by the European Central Bank are some of the most important sources of insight into the central banks’ policy goals. Writing at Vox, Bank of Finland economists present a textual analysis which seeks to measure the tone of the statements, with the aim of estimating the Governing Council's ‘loss function’. 

    The results suggest that the ECB has been either more averse to inflation above the 2% ceiling, or that the de facto inflation target has been considerably below this threshold. The results also suggest that an inflation aim of 2%, combined with asymmetry, is a plausible specification of the ECB's wider preferences.


    Chad Jones, Christopher Tonetti         
    28 July 2020

    Having consumers own their personal data instead of firms may help achieve two important goals. First, consumers would respect their own privacy. Second, consumers would have incentives to sell their data to multiple organisations, thus taking advantage of infinite usability. 

    A study by Chad Jones and Christopher Tonetti explores the economic implications of the ‘nonrival’ nature of data. The study finds that under a very wide range of parameter values, consumers owning data produces better outcomes than firms owning data.

    DEMAND VERSUS SUPPLY: Price adjustment during the Covid-19 pandemic

    Almut Balleer, Sebastian Link, Manuel Menkhoff, Peter Zorn          
    27 July 2020

    The relative importance of supply & demand during the Covid 19 pandemic: Firm-level data on planned price changes from a monthly survey of the German economy show that both forces co-exist, but that demand deficiencies dominate in the short run. 

    The relative importance of supply and demand during the Covid-19 pandemic is a key input into effective policy design. Policymakers must stabilise demand while containing Covid-19. Current firm-level price-setting behaviour suggests large demand deficiencies, as prices predominantly decline.


    Viral Acharya, Guillaume Plantin        
    26 July 2020

    A study by CEPR researchers Viral Acharya and Guillaume Plantin explains how a socially undesirable yet shareholder value-maximising crowding out of business investment by payouts can arise as an unintended consequence of aggressive monetary easing.

    In the aftermath of the 2008 Global Crisis, ultra-low US policy rates have been coincident with significantly large positive shareholder payouts by US firms while investment growth has failed to keep pace with firm assets, leading to assertions of a causal link between the two trends. 


    Francesca Borgonovi, Elodie Andrieu, S V Subramanian       
    22 July 2020

    The spread of Covid-19 was faster in communities with higher social capital, possibly due to high levels of social interaction. However, case fatality rates between January and May 2020 were lower in communities with higher levels of social capital. As case numbers in the United States start to rise following the relaxation of social distancing regulations, social capital may become an important social determinant of health.

    Writing at Vox, Francesca Borgonovi and colleagues demonstrate how norms of trust and reciprocity could have contributed to reducing the health impact of the pandemic.

    THE VIABILITY OF WORKING FROM HOME: A study of couples in the United States

    Egor Malkov         
    22 July 2020

    The existing distribution of working couples suggests that two-thirds of the US ‘dual-earner’ couples are exposed to greater intra-household contagion risk. About one-fourth are exposed to greater labour income risk. Patterns in skill requirements increase the likelihood of skill mismatch for the newly unemployed. 

    Writing at Vox, Egor Malkov discusses how teleworkability and contact intensity of different jobs both shape the distribution of risks created by the pandemic. These observations have direct policy implications whilst highlighting potential constraints on their effectiveness. 

    COVID-19 IN REAL TIME: A collaborative approach from central banks, academia, and the private sector

    Isaiah Hull      
    23 July 2020

    The Covid-19 pandemic has placed pressure on central banks and other public institutions to monitor the economy at a higher frequency than usual. However, much of the data and expertise needed to perform such monitoring is concentrated in the private sector and academia. 

    Writing at Vox, Isiah Hull describes the effort made by the Swedish Riksbank to alleviate this bottleneck by opening up a collaborative public channel through which academics and the private sector can directly contribute to the research in real time.


    Dimitris Papanikolaou, Lawrence D.W. Schmidt         
    23 July 2020

    US industries that are not able to do their work remotely have been hit much harder than business that can; aid that targets disrupted sectors may be a more cost-effective means to alleviate the impacts of Covid-19. 

    A study by Dimitris Papanikolaou and Lawrence Schmidt analyses how Covid-19 disruptions affected different types of firms and workers by looking at how effectively different sectors can shift to remote work. This cross-sectional dispersion shows up across a variety of measures, including changes in employment, revenue projections, likelihood of default, current liquidity, and stock returns.

    UNEQUAL CONSEQUENCES OF COVID-19 ACROSS AGE AND INCOME: Representative evidence from six countries

    Michèle Belot, Syngjoo Choi, Egon Tripodi, Eline van den Broek-Altenburg, Julian C. Jamison, Nicholas W. Papageorge          
    24 July 2020

    Younger groups in all countries have been affected more by Covid-19, both economically and non-economically. Differences across income groups are less clear and less consistent across countries. The young are less compliant and supportive of the containment measures, no matter how hard they have been affected by them.

    Almost all countries in the world have implemented drastic measures to contain the Covid-19 pandemic. A study by Michèle Belot and colleagues documents the effects of the epidemic and containment measures using representative individual data on age and income from three Western (US, UK, and Italy) and three Asian (China, Japan, and South Korea) countries.


    David E. Altig, Scott Baker, Jose Maria Barrero, Nicholas Bloom, Philip Bunn, Scarlet Chen, Steven Davis, Julia Leather, Brent Meyer, Emil Mihaylov, Paul Mizen, Nicholas Parker, Thomas Renault, Pawel Smietanka, Gregory Thwaites         
    24 July 2020

    Writing at Vox, David Altig and colleagues assess indicators of economic uncertainty for the United States and United Kingdom before and during the Covid-19 pandemic. All indicators show huge jumps in uncertainty in reaction to the pandemic and its economic fallout. Most indicators reach their highest values on record, but the extent of increases and time paths differ.

    The extraordinary scale and unusual nature of the COVID-19 crisis helps explain why it has generated such a tremendous surge in economic uncertainty. Much previous research finds that elevated uncertainty generally makes firms and consumers cautious, holding back investment, hiring and expenditures on consumer durables.

    ENDING THE TRADE WAR: China’s import strategy for agricultural products

    Robert Feenstra, Chang Hong          
    25 July 2020

    In December 2019, the US and China reached a Phase One agreement, to end the trade war that had started in early 2018, which mandates China to purchase additional imports from the US worth $200 billion in 2020 and 2021. Writing at Vox, Robert Feenstra and Chang Hong suggest that the most efficient way for China to increase imports from the United States is to mimic the effects of an import subsidy. 

    For agricultural products, this subsidy would need to be as high as 42% for 2020 and 59% for 2021 in order to meet the target. Such subsidies would divert agricultural imports away from other countries, especially decreasing Chinas imports from Australia and Canada


    Jay Pil Choi, Jota Ishikawa, Hirofumi Okoshi          
    27 July 2020

    Multinational enterprises take advantage of corporate tax systems worldwide to avoid taxation, often artificially shifting their profits across countries to avoid taxation. Transfer pricing is one common method used for profit-shifting, as intra-firm transactions are shielded from the market mechanism. Numerous guidelines and regulations have been implemented to tackle such profit-shifting, but challenges remain. 

    A study by Jay Pil Choi and colleagues explores how one such regulation, the ‘arm’s length principle’, affects the licensing strategies of multinationals in the presence of a tax haven. It shows that the mere existence of this principle may lead to further profit-shifting and may worsen the welfare of high-tax countries.


    Alex Cukierman          
    27 July 2020

    Writing at Vox, Alex Cukierman compares the use of helicopter money and quantitative easing, as used in the wake of the global financial crisis. He evaluates the similarities and differences, as well as the contrasting contexts of each crisis, key advantages and disadvantages are identified. He concludes that the two policy mechanisms may not be as different as first thought, and helicopter money could well be crucial in combating the economic effects of Covid-19. 


    Diane Coyle, David Nguyen, interviewed by Tim Phillips, 24 July 2020

    The Covid-19 lockdown has provided the opportunity to measure the financial value we give to 'free' digital services like social media and Google search. Diane Coyle and David Nguyen tell Tim Phillips what they discovered, and whether this value should be counted in GDP.

    Read the paper in Covid Economics 33

    GENDER EQUALITY AND PUBLIC POLICY: How women can improve decision-making

    Paola Profeta         

    With recent research that may suggest that countries with female leaders are faring generally better in the struggle against Covid-19, Paola Profeta (Bocconi University) is not surprised. Her recent book 'Gender Equality and Public Policy' reveals how the presence of women in the economy and decision-making positions is itself shaping public policy, as she discusses with Tim Phillips.

    ESTIMATING FIRM LIQUIDITY NEEDS: When should governments guarantee bank loans?

    Fabiano Schivardi          

    The Covid-19 crisis has induced a sharp drop in cash flow for many firms, possibly pushing solvent but illiquid firms into bankruptcy. Fabiano Schivardi tells Tim Phillips about a simple method that governments could use to determine the number of firms that could become illiquid, and when. When the method is applied to the population of Italian businesses he finds that at the peak, around 200,000 companies (employing 3.3 million workers) could become illiquid due to a total liquidity shortfall of €72 billion euros. It is essential that policymakers shelter businesses by acting quickly, especially if there is a ‘second peak’ after the summer.