This week from CEPR: June 26

Friday, June 26, 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

    • UNEQUAL CONSEQUENCES OF COVID-19 ACROSS AGE AND INCOME: Evidence from China, South Korea, Japan, Italy, the UK and the United States 

    UNEQUAL CONSEQUENCES OF COVID-19 ACROSS AGE AND INCOME: Representative Evidence from Six Countries
    Michèle Belot, Syngjoo Choi, Julian C. Jamison, Nicholas Papageorge, Egon Tripodi, Eline Van den Broek-Altenburg     
    CEPR DP No. 14908 June 2020 

    There is consistent evidence that younger people have been more negatively affected – both economically and psychologically – by the pandemic, and that they appear to be less supportive of their governments’ approaches. But there is a much less clear pattern across income groups, possibly due to different measures across countries to shield low-income groups. 

    These are the central findings of a new CEPR study by Michèle Belot and colleagues, who use nationally representative surveys to document how people of different ages and incomes have been affected across six countries (China, South Korea, Japan, Italy, the UK and the United States). 

    The survey documents changes in income/work and leisure; self-reported negative and positive non-financial effects of the crisis; attitudes towards recommendations (wearing a mask in particular); and the approach taken by public authorities. Among the findings: 

    • There are similarities across countries in how people of different generations have been affected. 
    • Young people have experienced more drastic changes to their lives, and overall they are less supportive of these measures. 
    • These patterns are less clear across income groups: while some countries have managed to shield lower-income individuals from negative consequences, others have not. 
    • Despite their lower ability to work from home, lower-income people have not necessarily experienced the strongest negative income consequences, at least not in all countries.
    • How people have been affected by the crisis (positively or negatively) does little to explain whether or not they support measures implemented by the public authorities. 
    • Young people are overall less supportive of such measures independently of how they have been affected.
    • For most of the surveyed countries, women are less likely to have started teleworking, more likely to be socially isolated because of the pandemic and more likely to report suffering psychological consequences.

    • COPING WITH DISASTERS: Two centuries of international official lending   

    COPING WITH DISASTERS: Two centuries of international official lending
    Sebastian Horn, Carmen M. Reinhart, Christoph Trebesch   
    CEPR DP No. 14902 |  May 2020

    Official (government-to-government) lending is much larger than commonly known, often surpassing total private cross-border capital flows, especially during disasters such as wars, financial crises and natural catastrophes. A new CEPR study by Christoph Trebesch and colleagues assembles the first comprehensive long-run dataset of official international lending, covering 230,000 loans, grants and guarantees extended by governments, central banks and multilateral institutions in the period 1790-2015. Among the findings: 

    • Historically, wars have been the main catalyst of government-to-government transfers. The scale of official credits granted in and around the two world wars was particularly large, easily surpassing the scale of total international bailout lending after the 2008 crash. 
    • During peacetime, development finance and financial crises are the main drivers of official cross-border finance, with official flows often stepping in when private flows retrench. 
    • Official lending increases with the degree of economic integration. In crises and disasters, governments help those countries to which they have greater trade and banking exposure, hoping to reduce the collateral damage to their own economies. 
    • Official cross-border loans and bailouts have also become much more institutionalised. Dozens of new official creditor institutions have been created since the 1970s, including regional development banks.
    • Since the 2000s, official finance has made a sharp comeback, largely due to the rise of China as an international creditor and the return of central bank cross-border lending in times of stress, this time in the form of swap lines.

    While their character may morph over time, the study concludes that official capital flows will remain a central element of the international financial system for decades to come. Against this background, more work is needed to analyse the features of official lending around the world, as well as its determinants and consequences. The unfolding pandemic is likely to raise a whole new set of questions on the design and efficacy of new crisis lending facilities and official debt relief efforts.

    • WORK TASKS THAT CAN BE DONE FROM HOME: Evidence on variation within and across occupations and industries 

    THE COVID-19 SHOCK AND EQUITY SHORTFALL: Firm-level evidence from Italy
    Abigail Adams, Teodora Boneva, Marta Golin, Christopher Rauh   
    CEPR DP No. 14901 | June 2020

    A new CEPR study by Abigail Adams and colleagues exploits new survey data from the United States and the UK to document differences in the extent to which workers can perform their tasks from home across occupations and industries. The study highlights three main findings:

    • The share of tasks that can be done from home varies considerably both across as well as within occupations and industries. The distribution of the share of tasks that can be done from home within occupations, industries, and occupation-industry pairs is systematic and remarkably consistent across countries and survey waves. 
    • As the pandemic has progressed, the share of workers who can do all tasks from home has increased most in those occupations in which the pre-existing share was already high.
    • Even within occupations and industries, women can do fewer tasks from home. 


    Simeon Djankov, Ugo Panizza      
    22 June 2020

    At the beginning of the pandemic, it was hoped that warm weather and younger populations would shield many developing countries from the virus. This hope has not been in realised: infected cases in Africa, South Asia and Latin America are still growing, with Latin America having surpassed the number of cases in Europe and growing rapidly. Writing at Vox, Simeon Djankov and Ugo Panizza introduce a new eBook that describes the early work focusing on developing and emerging markets. It concludes that the international community should step up, by providing aid, technical assistance and debt relief so that countries will not need to decide between saving lives and servicing their debts.

    Free download available here


    Timo Mitze, Reinhold Kosfeld, Johannes Rode, Klaus Wälde      
    22 June 2020

    A study by Timo Mitze and colleagues looks at the town of Jena and other German regions that introduced face masks before the rest of the country to see whether the requirement makes a difference in the number of new Covid-19 cases. The results show that requiring face masks to be worn decreases the growth rate of cases by about 40%. These results suggest that requiring masks is a cost-effective, less economically harmful, and democracy-compatible containment measure for Covid-19.


    Supriya Garikipati, Uma Kambhampati      
    21 June 2020

    The effectiveness of women leaders in handling the Covid-19 crisis has received a lot of media attention. Writing at Vox, Supriya Garikipati and Uma Kambhampati examine whether the gender of the national leader truly makes a significant difference to the number of Covid-19 cases and deaths.

    The findings show that Covid-19 outcomes are systematically better in countries led by women in the first quarter of the pandemic and, to some extent, this may be explained by the proactive policy responses they adopted. Even accounting for institutional context and other controls, being led by a woman has provided countries with an advantage in the current crisis. 

    COVID-19: A backward step for gender equality

    Stefania Fabrizio, Vivian Malta, Marina M. Tavares      
    20 June 2020

    A new study by economists at the International Monetary Fund (IMF) illustrates that women are among the worst affected by the Covid-19 fallout. Women are vulnerable not only because of their jobs, but also because of gender inequalities within housework division, education and health. There is an urgent need to support women, to repair gender disparities aggravated by crisis and to reduce women’s vulnerability going forward. Gender-responsive fiscal measures are viable tools that work in the interests of women, as well as supporting economic growth and reducing poverty and inequality. 

    COVID-19 AND BREXIT: Contrasting sectoral impacts on the UK

    Josh De Lyon, Swati Dhingra      
    19 June 2020

    Despite the pandemic, the UK has been continuing its preparations to leave the European Union by the end of 2020. Covid-19 has had a huge negative impact on the UK economy and Brexit will present another profound change in circumstances for UK businesses. 

    Analysing real-time business survey data from the UK, LSE economists show that sectoral impacts of Covid-19 and Brexit are very different. Sectors that have suffered less during the lockdown are the ones that are exposed to bigger negative impacts from Brexit, as measured by actual effects since the Brexit vote and predicted effects from higher trade barriers with the EU.

    Rushing Brexit through this year without a new deal in place would therefore broaden the set of sectors that see worsening business conditions. As the Covid-19 impacts continue to become clearer over time, the government must move beyond its broad assessment of Brexit impacts to much more finely tuned plans that account for the differences in market conditions and constraints faced by UK businesses in the biggest slowdown of our lifetime.


    Thorsten Beck, Francesco Mazzaferro, Richard Portes, Jean Quin, Christian Schett      
    23 June 2020


    On 27 May, the European Systemic Risk Board (ESRB) adopted a wide-ranging recommendation to suspend pay-outs across different segments of the European financial system until the end of 2020. Writing at Vox, Richard Portes, Founder of CEPR, and ESRB colleagues discuss why arguments for such restrictions weigh stronger than ownership and management rights during these unprecedented times. 

    The study provides a rationale for why the recommendation is a wide-ranging one, including banks, investment firms, insurance companies and CCPs and referring to all voluntary pay-outs, including dividends, share buy-backs and variable remuneration to material risk-takers

    EU FIRMS IN THE POST-COVID-19 ENVIRONMENT: Investment-debt trade-offs and the optimal sequencing of policy responses

    Debora Revoltella, Laurent Maurin, Rozália Pál       
    23 June 2020

    A new study by economists at the European Investment Bank estimates the cumulative net revenue losses of EU companies to be in the range of 13-24% of EU GDP. These losses create a difficult trade-off for firms between protecting investments and increasing their leverage. To accompany the recovery, the authors propose policies to ease access to credit should be matched to enhanced instruments for long-term equity-type financing.

    The study uses an accounting approach and ORBIS firm-level data to assess the medium-term strategic choices for firms, assuming three months of lockdown and under different normalisation scenarios. 

    START-UPS IN THE TIME OF COVID-19: Facing the challenges, seizing the opportunities

    Flavio Calvino, Chiara Criscuolo, Rudy Verlhac      
    23 June 2020

    The Covid-19 crisis is reducing start-up creation, challenging their survival and limiting their growth. Business registrations have been dropping significantly in recent months and a missing generation of new firms has significant implications for economic outcomes, notably employment. 

    Writing at Vox, OECD economists argue that these effects can be mitigated by taking steps to support existing start-ups and the creation of new firms. The authors suggest that policy-makers should tackle short-term challenges, supporting short-term liquidity and availability of funding, but also and importantly foster the ability of start-ups to grasp new business opportunities. Policies that reduce barriers to entrepreneurship, provide incentives for start-ups and boost entrepreneurial potential could help to speed up the recovery and preserve aggregate employment in the long term

    MONEY AND DEBT: Paying for the crisis

    Jean-Pierre Landau       
    23 June 2020

    The simultaneous increase in public debt and central banks' balance sheets in advanced economies results in important policy trade-offs. In effect, the ‘monetisation’ of government debts by central banks transforms current credit and funding risks into future inflation risk. The combination of a low interest rate and inflation rate creates a conducive policy space for financing exceptional public expenditures in response to the Covid-19 shock. Writing at Vox, Jean-Pierre Landau argues that in the presence of very low and stable inflation expectations, this is an optimal policy mix. To be sustainable, the perspective of fiscal dominance must be eliminated and central banks' independence must be respected and reinforced.

    MONETARY POLICY AND US HOUSING EXPANSIONS POST-COVID-19: A sluggish response of housebuilding to rising demand, but a strong response of house prices 

    Bruno Albuquerque, Martin Iseringhausen, Frederic Opitz     
    23 June 2020

    The Covid-19 shock has ended the eight-year long US housing market expansion. At the same time, the Federal Reserve and the US government have deployed significant resources to help weather the crisis. But the trajectory of the post-Covid-19 recovery remains uncertain. 

    A study by Bruno Albuquerque and colleagues uses a time-varying parameter model to predict that the next US housing recovery may exhibit similar features to the 2012-19 expansion: a sluggish response of housebuilding to rising demand, but a strong response of house prices.


    Eiji Yamamura, Yoshiro Tsutsui      
    22 June 2020

    A new study by Eiji Yamamura and Yoshiro Tsutsui presents evidence from various Japanese prefectures, focusing on people’s mental wellbeing before and after the state of emergency was declared. The announcement led citizens to take preventive steps, but caused them to experience certain heightened emotions. 

    The results indicate that the pandemic has caused a substantial strain on citizens' mental health, which may have triggered rises in domestic violence. Stress (under the state of emergency) increased ‘anger’, and that the increase in ‘anger’ was greater for husbands than for wives. Crucially, the importance of mental healthcare should not be overlooked as an additional policy consideration.

    COVID-19: Putting the Chinese policy reaction into context

    Robert Gilhooly, Carolina Martinez, Abigail Watt       
    22 June 2020

    A study by economists at Aberdeen Standard Investments examines China’s policy response to Covid-19 and suggests that the recent loosening in financial conditions should support activity over the next six to nine months, but it will only be at best half that seen in 2016 and a third of that after the Global Crisis given the relative change in financial conditions thus far. Moreover, the policy levers are at best only 40% of that deployed during the Global Crisis. This contrasts with the approach of many other countries, which have reacted more aggressively to the coronavirus shock. 

    MACROECONOMIC ANALYSIS: A ineffective tool or misunderstood? 

    Dirk Niepelt       
    22 June 2020

    Notoriously inconclusive policy recommendations and the failure to foresee the Great Recession have caused many commentators to voice doubts about the usefulness of macroeconomics. 

    Writing at Vox, Dirk Niepelt argues that macroeconomics can indeed offer a coherent framework to understand and evaluate policy options, but macroeconomists need to explain the field’s subject matter and findings better both to policy-makers and the general public. A new textbook aims at closing the gulf between macroeconomic research and widespread misconceptions about it by providing a concise and rigorous introduction to modern macroeconomic theory.

    THE GLOBAL WEAKNESS INDEX: Reading the economy’s vital signs during the Covid-19 crisis

    Danilo Leiva-León, Gabriel Pérez-Quirós, Eyno Rots       
    21 June 2020

    The Global Weakness Index (GWI) is a real-time measure of how weak the global economy is. Writing at Vox, Gabriel Pérez-Quirós and colleagues use the GWI to assess the repercussions of the coronavirus (Covid-19) crisis in real time. It finds that, after the release of certain soft indicators on 2 March 2020, the GWI increased sharply – much faster than in the 2008 crisis. Moreover, the index remained at a record high at the time of writing, 14 May 2020. This indicator helps to provide early warnings of a downturn that can be crucial for a fast policy response. 

    THE IMPACT OF COVID-19 ON INSURERS: Analysis from IMF economists 

    Divya Kirti, Mu Yang Shin       
    20 June 2020

    The grim impact of Covid-19 – extensive financial dislocations across asset classes and potentially large increases in morbidity and mortality – could pose a challenge to the insurance industry, particularly life insurers. 

    Writing at Vox, IMF economists urge central banks looking to preserve credit supply to account for changes in insurer risk appetite, which could take place well before capital levels approach regulatory thresholds. In a scenario with widespread bond rating downgrades, regulators should closely monitor and, as appropriate after all supervisory measures have been taken, reassess linkages to rating actions within supervisory frameworks, while enhancing supervision for insurers with risky holdings. Financial stability assessments should examine the implications of the pandemic for insurers, which operate in some countries on a comparable scale to banks.

    SERVICES TRADE POLICY SINCE THE GREAT RECESSION: New evidence from the World Bank and World Trade Organization

    Ingo Borchert, Joscelyn Magdeleine, Juan Marchetti, Aaditya Mattoo      
    20 June 2020

    Despite the growing importance of services in output and trade, there has been relatively little information on how services policies have evolved over the past decades. New evidence on services trade policies from a new database created by the World Bank and WTO reveals that higher-income economies are more open on average than developing economies, but the chronology of reform varies across sectors. In addition, while explicit restrictions are being lowered, regulatory scrutiny is increasing in most sectors, especially in higher-income economies.


    Daniela Del Boca, Noemi Oggero, Paola Profeta, Mariacristina Rossi       
    19 June 2020

    Using survey data from Italian women, Daniela Del Boca and colleagues explore how working from home – combined with school closures – has affected the working arrangements, housework and childcare provisions of couples in which both partners are employed. 

    The results show that most of the additional responsibilities have fallen on women, although childcare activities are shared more equally than housework. These results may have long-term implications; the consequences of Covid-19 on women’s labour market outcomes risk being amplified by the unequal intrahousehold allocation of extra work (housework and childcare) created by the emergency.

    THE STOCK MARKET AND THE ECONOMY: Insights from the Covid-19 crisis

    Gunther Capelle-Blancard, Adrien Desroziers       
    19 June 2020

    A new study by Gunther Capelle-Blancard and Adrien Desroziers explores the surprising trends of the stock market since the advent of Covid-19.

    The results show that there is some evidence that shareholders have favoured the less vulnerable firms, and that credit facilities and government guarantees, lower policy interest rates and lockdown measures mitigated the decline in stock prices. But fundamentals only explain a small part of the stock market variations at the country level. Overall, it is hard to deny that the links between stock prices and fundamentals have been loose at best.

    In particular, the study suggests that it was not the situation of countries before the crisis that influenced the reaction of stock markets, but rather the health policies implemented during the crisis to limit the transmission of the virus and the macroeconomic policies aiming to support companies.


    Olivier Coibion, Yuriy Gorodnichenko, Michael Weber       
    19 June 2020

    How does new information about the coronavirus and associated policy responses affect US households’ expectations? A study by Yuriy Gorodnichenko and colleagues finds that such information treatments have little effect on both households’ economic beliefs and future spending plans. This result is a fundamental challenge to workhorse models used by macroeconomists in which the rapid and endogenous adjustment of household expectations is a key driver of macroeconomic outcomes.


    Elena Carletti, Tommaso Oliviero, Marco Pagano, Loriana Pelizzon, Marti Subrahmanyam        
    19 June 2020

    Writing at Vox, Elena Carletti and colleagues estimate the profit and equity shortfalls triggered by the Covid-19 shock for a representative sample of Italian companies, including large, medium and small companies. 

    A three-month lockdown is found to lead to an aggregate annual drop in profits of €170 billion, with an implied equity erosion of €117 billion. Some 17% of all firms, employing over 800,000 workers, are estimated to face severe distress. Small and medium enterprises are affected disproportionately, with 17.2% of affected compared with 6.4% of large firms.


    Elena Carletti, Stijn Claessens, Antonio Fatás, Xavier Vives        
    18 June 2020

    The pandemic has induced a deep global economic crisis. While so far banks have shown their resilience, partly thanks to major reforms after the crisis of 2007-09, the crisis will put them under stress. Moreover, the traditional banking model was already being challenged pre-Covid-19 by three trends: persistently low interest rates, enhanced regulation, and increased competition from shadow banks and digital entrants. This column introduces the second report in the Future of Banking series from the IESE Business School and CEPR, which provides a perspective on how the current crisis and these trends will shape the future of the banking sector.

    You can download the report ‘The Bank Business Model in the Post-Covid-19 World’ here


    Lars Jonung        
    18 June 2020

    The Swedish policy response to Covid-19 is exceptional by international comparison. Writing at Vox, Lars Jonung explains how the approach is determined by three articles in the Swedish constitution. The first guarantees the freedom of movement for Swedish citizens, ruling out nationwide lockdowns. The second establishes unique independence for public agencies, allowing them to design the policy response to the pandemic. The third grants exceptional powers to local government. In addition, the Swedish approach is fostered by strong trust in the government.

    THE ROLE OF SOCIAL CAPITAL IN THE SPREAD OF COVID-19: Analysis of seven European countries

    Alina Kristin Bartscher, Sebastian Seitz, Sebastian Siegloch, Michaela Slotwinski, Nils Wehrhöfer       
    18 June 2020

    A study by Sebastian Siegloch and colleagues shows that areas with high social capital registered between 12% and 32% fewer Covid-19 cases from mid-March until mid-May. Areas with high social capital seem to be better able to contain the virus compared with low social capital areas, even absent any lockdown policy. 

    A case study of Italy validates the independent role of social capital, showing a consistent reduction in excess deaths and documenting a reduction in mobility prior to the lockdown as a mediating channel. Policy-makers need to invest not only into the healthcare system, but also into social capital formation to be well prepared for future pandemics. 


    Ester Faia, Sébastien Laffitte, Maximilian Mayer, Gianmarco Ottaviano        
    17 June 2020

    A new study by Gianmarco Ottaviano and colleagues argues that automation and offshoring fundamentally affect the matching between firms and workers and do so in contrasting ways. The authors predict that automation will increase firms’ and workers’ job selectivity and decrease employment, while offshoring will have the opposite effect. Empirical evidence as well as a quantitative model support this hypothesis and provide a mechanism of technological change typically missed in standard neoclassical reasoning. 


    Pragyan Deb, Davide Furceri, Jonathan D. Ostry, Nour Tawk        
    17 June 2020

    Containment measures to halt the spread of the coronavirus entail large short-term economic costs. Writing at Vox, IMF economists attempt to quantify these effects using daily global data on real-time containment measures and daily indicators of economic activity. 

    Over a 30-day period from implementation, the results show that containment measures have, on average, led to a loss of about 15% in industrial production. Macroeconomic policy measures have however mitigated some of these economic costs. Stay-at-home requirements and workplace closures are most effective in curbing both infections and deaths but are also associated with the largest economic costs.


    Scott Baker, R.A. Farrokhnia, Michaela Pagel, Steffen Meyer, Constantine Yannelis        
    17 June 2020

    A new study by R.A. Farrokhnia and colleagues examines the effect of shelter-in-place orders and government-issued stimulus checks across income levels and locations in the United States in the wake of Covid-19. It shows that larger increases in spending on food and payments – from credit cards to rents and mortgages – reflect a short-term debt overhang and suggests that direct payments failed to stimulate aggregate consumption.

    VIOLENCE IN THE UNITED STATES: What we can learn from the 1965 Voting Rights Act

    Jean Lacroix        
    17 June 2020

    Last December, the US House of Representatives passed a bill to restore some of the provisions of the 1965 Voting Rights Act, which had been nullified in a 2013 Supreme Court decision. Writing at Vox, Jean Lacroix exploits variation resulting from the Act’s coverage formula to show that it decreased violence by both pro-segregationists and anti-segregationists, particularly before elections. The passing of the Act in 1965 thus appears to offer an example from US history of enfranchisement curbing political violence.


    Milena Almagro, Angelo Orane-Hutchinson interviewed by Tim Phillips, 19 June 2020

    Different countries and cities have different rates of Covid-19 exposure, but what can explain the difference in incidence between neighbourhoods? New York residents Milena Almagro and Angelo Orane-Hutchinson tell Tim Phillips what made the difference in their city.
    Read their research in Covid Economics 13.


    Gita Gopinath     

    As part of her work to foster sustainable growth, Gita Gopinath emphasises how countries need to ensure that all people can benefit from new growth opportunities. Taking action that boosts economic growth while at the same time improving inclusiveness is needed across all economies, according to Professor Gopinath. ‘How do you continue to raise income levels and improve the livelihoods of people while at the same time not creating increased inequality? How do we get people who have otherwise not been big participants in the global economy to play a bigger role? All of this is important for sustainability.’


    Gita Gopinath     

    Together with her research colleagues, Gita Gopinath developed the ‘dominant currency paradigm’. Unlike other standard economic models, it takes into account that prices in global trade are predominantly not set in either the producer’s or destination’s currency but are set in dollars. The economists found that when most transactions are dollar-denominated, a currency depreciation is unlikely to increase exports. 

    ‘When you’re in this world of dominant currency pricing, you don’t really see a big export boost that comes immediately after your currency weakens’, says Professor Gopinath. 

    At the same time, a currency depreciation relative to the dollar leads to an increase in the price of imported goods, which means high pressures on inflation.


    Gita Gopinath     

    A regular part of Gita Gopinath's agenda at the IMF is the World Economic Outlook, which is essentially a growth projection for the upcoming year, but also includes policy advise to address global or country-specific challenges. The outbreak of the coronavirus or the US-China trade tensions are developments that Professsor Gopinath and her team monitor closely, to adjust their growth projections and discuss policy responses.

    When the coronavirus crisis hit the global economy, Gopinath said it was the ‘worst recession since the Great Depression’. In April 2019, the IMF projected global growth in 2020 to fall to -3%, which was a downgrade of 6.3 percentage points in less than three months. ‘We’ve had a hundred countries approach us for emergency financing’, says Gopinath. ‘It’s never happened before. That tells you the gravity of this crisis.’