This week from CEPR: June 10

Thursday, June 10, 2021

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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    MEASURING HISTORICAL INCOME INEQUALITY IN AFRICA: What can we learn from social tables?
    Jutta Bolt, Michiel De Haas, Ellen Hillbom, Federico Tadei  
    CEPR Discussion Paper No. 16218 | June 2021

    A new CEPR study by Jutta Bolt, Michiel De Haas, Ellen Hillbom and Federico Tadei explores the historical roots of long-term inequality trends in Africa using data for the period 1910s - 1960s, from six African countries  – Botswana, Ghana, Ivory Coast, Kenya, Senegal, and Uganda. The study introduces an alternative analytical framework to study African inequality trajectories during the 20th century, particularly the colonial era. Tracing country-level inequality trends and levels using three different inequality metrics, the study finds that:  

    • Inequality increased as commercialisation progressed.  
    • Relative levels of inequality differed substantially and were linked to European settlers and colonial institutions.
    • Capital-intensive commodities were associated with larger inequality in the self-employed sector and the presence of European settlers and a large colonial administration increased the salience of race as a major fault line.
    • Overall African inequality increased between 1910 and 1965, but there is substantial heterogeneity between colonies and those with large European presence ranks as the most unequal.
    • Colonial policies and expatriate presence are a primary explanation for high income inequality levels, both indirectly and through a direct effect of the presence of a large colonial bureaucracy.
    • Particular resource requirements and commodity characteristics mediated the effect of commercialisation and were the primary driver of inequality trends, both for Africans and non-Africans and particularly in capital intensive agricultural production.

    Overall, the authors conclude that colonial policies and settler presence had a large influence on relative levels of income inequality, while trends were primarily driven by processes of commercialisation, which were mediated by existing social inequality, resource requirements, and colonial policies.


    • LONG-TERM MENTAL HEALTH EFFECTS OF COVID COULD BE SUBSTANTIAL: Evidence from Norway  

    COVID-19 AND MENTAL HEALTH: a Longitudinal Population Study from Norway
    Hans K Hvide, Julian Johnsen     
    CEPR Discussion Paper No. 16195 | May 2021

    New findings suggest that the accumulated effects of the COVID-19 pandemic on mental health far exceeds the short-term effects. The effects are particularly strong for females and for residents in urban areas.

    These are the findings from a new CEPR study by Hans Hvide and Julian Johnsen, which examines the less documented long-term consequences of the Covid pandemic on mental health problems, using newly released register data on all general practitioner consultations in Norway through 2020 (about 14 million consultations in total). Among the findings:  

    • During the spring and early summer 2020, the number of psychological cases initially increased relative to prior years, but then fell back towards the level of prior years during the summer 2020.
    • In early September 2020, the number of cases accelerated, a pattern that held up through December 2020.
    • The acceleration of psychological cases during fall 2020 suggests that the accumulated effects of stress in the fall of 2020 outweighed the development of better coping strategies in the population. so that the gap between 2020 and prior years became largest end-of-year.
    • The acceleration in cases is likely to be due to accumulated effects of lockdowns and movement restrictions (rather than stress due to fear of infection).
    • The effects are particularly strong for females and for residents in urban areas.

    • HOW THE RUSSIAN GOVERNMENT DOMINATES THE ONLINE NEWS MARKET  

    DEMAND FOR ONLINE NEWS UNDER GOVERNMENT CONTROL: Evidence from Russia
    Justin Rao, Andrey Simonov     
    CEPR Discussion Paper No. 16233 | June 2021

    Many consumers in the Russian online news market have a strong, persistent taste for state-controlled outlets even though they have a distaste for the pro-government ideological coverage. New research suggests this consumption is largely driven by third-party referrals and users initially visiting sites for non-sensitive news content. Once on the website, consumers are more likely to keep reading other news articles from this outlet, including the coverage of politically sensitive news. Thus, the outlet-level drivers of consumption enable the government to impose its sensitive news coverage on the readers and potentially persuade them to change their ideological preferences.

    These are the main findings of a new CEPR Study by Justin Rao and Andrey Simonov, which examines the nature of consumer demand for government-controlled online news outlets in Russia, testing whether such demand reflects a preference for pro-government ideological coverage, or other factors unrelated to outlets' ideological positions. The study detects government-sensitive topics and measures outlets' news reporting decisions from news article texts, and estimates a structural model of demand for news using detailed browsing data that traces individual-level consumption.

    In the new era of broad and unrestricted access to information, it is critical to understand whether governments can influence public opinion online. The study finds that high persistent preferences for government controlled outlets allow them to capture the attention of consumers who prefer the sensitive news coverage of independent outlets, even on days with a lot of sensitive news events. The control over this group of consumers is particularly interesting since they are more likely to oppose the incumbent government in voting and engage in protests.



    FOOD INSECURITY AND GLOBAL HUNGER: Covid’s economic fallout risks reversing years of progress

    Christian Bogmans, Andrea Pescatori, Ervin Prifti         
    05 June 2021

    Global food security is being threatened by the COVID-19 pandemic and the restrictive measures to control it. Jammed food supply chains, falling incomes for some population segments, and rising food prices are placing food out of reach for millions of individuals.

    Writing at Vox, Christian Bogmans, Andrea Pescatori and Ervin Prifti discuss the short-run relationship between food (in)security and income and food prices, and the implications of the current economic crisis for global hunger. The authors show that the pandemic’s economic fallout risks setting us back a full decade on eliminating undernourishment, especially in low-income countries. Governments should strengthen social safety nets for the most vulnerable to keep inequality in check.

     

    MONETARY POLICY AND CENTRAL BANKING IN THE COVID ERA: A new eBook

    Bill English, Kristin Forbes, Ángel Ubide                            
    03 June 2021

    As Covid-19 spread in early 2020, many central banks were still struggling to boost inflation. The abruptness and speed of the economic deterioration, the sharp increase in market volatility, and the blinding uncertainty over the impact of the pandemic motivated a central bank reaction that was unprecedented in terms of size, speed and scope.

     A new CEPR/ICMB eBook, edited by Bill English, Kristin Forbes and Ángel Ubide, summarises the responses by sixteen central banks from both advanced and emerging economies – with chapters written by senior central bank officials and economists in each of the countries to explain the actions taken. While responses varied across countries, there are several common threads: the size, speed and breadth of the responses; the reliance on a more multidimensional set of tools; and the ability of emerging markets to behave more like advanced economies.


    HOW RUSSIAN BANKS ANTICIPATED AND DEALT WITH GLOBAL FINANCIAL SANCTIONS

    Mikhail Mamonov, Anna Pestova, Steven Ongena                       
    10 June 2021

    Financial sanctions against Russia’s state-owned and controlled banks were imposed consecutively between 2014 and 2019, allowing banks that would potentially be targeted in the future to adjust their international and domestic exposures.

    Writing at Vox, Mikhail Mamonov, Anna Pestova and Steven Ongena explore the informational effects of financial sanctions, showing that compared to similar private banks, ‘not yet sanctioned’ financial institutions immediately reduced their foreign assets while, rather unexpectedly, expanding their foreign liabilities. These informational effects crucially depend on geography, with targeted banks located further from Moscow decreasing their foreign assets by more and raising foreign liabilities by less than those located near the Kremlin.


    HOUSEHOLD FINANCIAL CONCERNS DUE TO COVID-19: Cross-country evidence from a new survey

    Dimitris Christelis, Dimitris Georgarakos, Tullio Jappelli, Geoff Kenny                         
    08 June 2021

    Financial concerns in the wake of the pandemic are significantly greater for young people, women and those on low incomes in countries where the first wave was more severe, finds a new study by Dimitris Christelis, Dimitris Georgarakos, Tullio Jappelli and Geoff Kenny. The authors use evidence from 10,000 households across Europe to reveal substantial divergences in the pandemic-induced financial concerns of households across population subgroups and countries.


    INEQUALITY IN DEVELOPING NATIONS - INFORMALITY MATTERS: Evidence from Brazil

    Niklas Engbom, Gustavo Gonzaga, Christian Moser, Roberta Olivieri                            
    07 June 2021

    Relatively little is known about the patterns of inequality in developing countries, despite their importance for designing social and economic policies. A study by Niklas Engbom, Gustavo Gonzaga, Christian Moser and Roberta Olivieri analyses new data to describe the trends in earnings inequality and dynamics in Brazil since late 1980s, providing a more complete picture of the Brazilian labour market than has been previously possible.

    The findings suggest that the observed fall in earnings inequality and volatility may have been driven by the process of formalisation and other changes within the informal sector.


    FISCAL RULES IN THE EUROPEAN MONETARY UNION NEED CHANGE: Results from the latest CfM-CEPR survey

    Ethan Ilzetzki                      
    10 June 2021


     

    Writing at Vox, Ethan Ilzetzki presents the latest CfM-CEPR survey, in which the panel of experts on the European economy were nearly unanimous in agreeing that the existing EU fiscal rules require revision. Among the findings:

    • Most panel members would opt for some combination of fiscal councils; more flexible, countercyclical, or expenditure-based rules; and increased fiscal capacity at the EU level.
    • A smaller share of panelists would scrap fiscal rules altogether, leave fiscal policy to national authorities, and provide greater clarity that the EU would not bail out countries facing debt problems.
    • A single panel member called for stricter rules with greater enforcement.

    WHY THE UNITED STATES NEEDS UNIVERSAL, PUBLIC PRESCHOOL PROGRAMMES: Evidence from Head Start

    Martha J. Bailey, Shuqiao Sun, Brenden Timpe                     
    06 June 2021

    Preschool attendance in the United States is largely funded by parents, which means that the children of more affluent and educated parents are more likely to attend. Children of less educated and less affluent parents start kindergarten and first grade already behind in terms of social and academic skills.

    Analysing the impact of Head Start, a large-scale public preschool programme that serves roughly 1 million children annually, a study by Martha Bailey, Shuqiao Sun and Brenden Timpe finds that children who attended went on to achieve substantially higher levels of education and led to improvements in adult economic self-sufficiency – even though the programme was underfunded compared to model preschool programmes. These findings suggest that a large-scale preschool programme can deliver long-run benefits to students.


    THE 2020 TRADE IMPACT OF THE COVID-19 PANDEMIC

    Xuepeng Liu, Emanuel Ornelas, Huimin Shi                           
    09 June 2021

    A study by Xuepeng Liu, Emanuel Ornelas and Huimin Shi analyses how various pandemic - related factors shaped international trade flows, estimating how Covid-19 incidence and lockdown restrictions affected the monthly year-over-year growth of imports from China for all destinations to which China exported goods in 2019–2020.

    The research shows that government measures to curb economic activities had a larger impact on a country’s imports than the direct health and behavioural effects of the pandemic itself.


    THE TRANSMISSION MECHANISM OF THE ECB'S CORPORATE SECTOR PURCHASE PROGRAMME

    Frank Betz, Roberto De Santis, Andrea Zaghini                              
    04 June 2021

    Writing at Vox, Frank Betz, Roberto De Santis, and Andrea Zaghini assess euro area financing conditions, and show that they have improved since the announcement of the ECB Corporate Sector Purchase Programme on 10 March 2016, with corporate bond spreads tightening and bond issuance increasing. Moreover, the unconventional monetary policy triggered a shift in bank loan supply in favour of firms that do not have access to bond-based financing.


    HOW HOUSEHOLDS SELF-INSURE AGAINST JOB LOSS: Evidence from Denmark

    Asger Lau Andersen, Amalie Jensen, Niels Johannesen, Claus Thustrup Kreiner, Søren Leth-Petersen, Adam Sheridan                  
    08 June 2021

    To what extent do households self-insure to avoid cutting back on consumption following income losses, and which self-insurance channels are most important? Writing at Vox, Søren Leth-Petersen and colleagues review evidence on household responses to job loss using comprehensive high-frequency data from multiple sources in Denmark. The authors find that:

    • Over the two years following job loss, 30% of the decline in disposable income is accounted for by a drop in household spending, leaving a gap of 70% that reflects the effects of self-insurance.
    • This gap is filled by lower accumulation of liquid assets (~50%), increases in private transfers and other inflows (~10%), higher spousal labour supply (~5%), and lower net debt repayments (~5%).
    • Mortgage borrowing and refinancing play only a small role.

    THE DISCIPLINING EFFECT OF SUPERVISORY SCRUTINY IN THE EU-WIDE STRESS TEST

    Christoffer Kok, Carola Müller, Steven Ongena, Cosimo Pancaro                    
    09 June 2021

    Since the financial crisis, stress tests have become an important supervisory and financial stability tool. Relying on confidential data available at the ECB, a study by Christoffer Kok, Carola Müller, Steven Ongena and Cosimo Pancaro presents novel evidence that supervisory scrutiny associated with stress testing has a disciplining effect on bank risk. The authors find that:

    • Banks that participated in the 2016 EU-wide stress test subsequently reduced their credit risk relative to banks that were not part of this exercise.
    • The disciplining effect is stronger for banks subject to more intrusive supervisory scrutiny during the stress test.

    REGIONAL FIRM SUBSIDIES TO COMBAT INEQUALITY: Direct, spillover, and welfare effects in East Germany

    Sebastian Siegloch, Nils Wehrhöfer, Tobias Etzel                  
    04 June 2021

    Place-based policies, which directly subsidise regions that are economically lagging behind, are a prominent instrument in policymakers’ toolkits. Writing at Vox, Sebastian Siegloch, Nils Wehrhöfer and Tobias Etze investigate the effects of a large place-based investment subsidy targeted at manufacturing firms in East Germany.

    The authors show that a decrease in the subsidy rate leads to a decrease in manufacturing employment, highlighting spillovers to untreated sectors in treated counties and untreated counties connected via trade and local taxes. They also find that the place-based policy is at least as efficient as cash transfers for the unemployed but is more effective in curbing regional inequality overall.


    THE CHANGING NATURE OF CAPITAL FLOWS

    Cathérine Casanova, Beatrice Scheubel, Livio Stracca                    
    04 June 2021

    Writing at Vox, Cathérine Casanova, Beatrice Scheubel and Livio Stracca show that since the Global Crisis, the channels of capital flows have changed drastically. The authors document three key factors at play:

    • The increasing importance of market-based funding
    • A growing reliance on domestic currency liabilities,
    • A less stable foreign direct investment environment, particularly for emerging market economies.

    Although these changes create risks which should be managed, capital flows also present clear benefits for stimulating economic performance and efficiency.



    HOW CENTRAL BANKS SAVED US FROM COVID-19

    Bill English, Ángel Ubide interviewed by Tim Phillips, 04 June 2021

    How well has monetary policy coped with the challenge of Covid-19? Central banks get good grades in a new VoxEU ebook. But Bill English and Angel Ubide warn Tim Phillips that success today may lead to problems in future.

    Download the new eBook here: Monetary Policy and Central Banking in the Covid Era