This week from CEPR: March 04

Thursday, March 4, 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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    Mathieu Cros, Anne Epaulard, and Philippe Martin
    Issue 70 Covid Economics  | 25 February 2021

    Concerns have emerged that public support to firms in the COVID-19 crisis has been too generous, reducing exit of unproductive firms and preventing Schumpeterian destructive creation. Using data on French firm failures in 2020, a new CEPR study by Mathieu Cros, Anne Epaulard, and Philippe Martin suggests that these concerns are, at this stage, unwarranted. Although the number of firms filing for bankruptcy was well below its normal level, the same factors that predicted firm failures in 2019 – primarily low productivity and debt – were at work in a similar way in 2020. Overall, the findings point to hibernation rather than zombification. Among the findings: 

    • The number of firms filing for bankruptcy is currently much below its normal level (- 36% compared to 2019).
    • The same factors that predicted firm failures (primarily productivity and debt) in 2019 are at work in a similar way as in 2020. Hence, the selection process, although much reduced, has not been distorted in 2020. 
    • Due to policy measures to support firms, partial hibernation rather than zombification characterises the selection into firm survival or failure.  
    • The sectoral heterogeneity of the turnover COVID shock (proxied by the change in credit card transactions) has been largely (but not fully) absorbed by public policy support because it predicts little of the probability of bankruptcy at the firm level. 
    • Entry and exit of firms is a sizeable component of labour productivity growth. This effect comes from exiting firms that are less productive - and/or less innovative - than both continuing and entering firms. 
    • Public policies to support firms may impair the cleansing effect of the recession by saving unproductive firms from exit. There now exists a potential burden of surviving low productivity firms on aggregate productivity. 

    The policy challenge will therefore be to continue support to productive and viable firms (but with potentially high debt due to the COVID shock) while at the same time progressively discontinue support to firms that are not viable.

    • IN VACCINES WE TRUST? The Effects of the CIA's Vaccine Ruse on Immunisation in Pakistan   

    IN VACCINES WE TRUST? The Effects of the CIA's Vaccine Ruse on Immunisation in Pakistan
    Monica Martinez-Bravo, Andreas Stegmann      
    CEPR DP No. 15847 | February 2021

    In July 2011, the Pakistani public learnt that the CIA had used a vaccination campaign as cover to capture Osama Bin Laden. The Taliban leveraged on this information, and launched an anti-vaccine propaganda campaign to discredit vaccines and vaccination workers. Vaccination rates decreased substantially in the aftermath of the incident, with worrying health outcomes.

     A new CEPR study by Monica Martinez-Bravo and Andreas Stegmann evaluates how the disclosure of the vaccine ruse and the subsequent anti-vaccine propaganda campaign affected immunisation rates and other forms of health seeking behaviour. Among the findings:  

    • The anti-vaccine propaganda campaign led to accusations against health workers of being CIA agents, and claimed that the polio vaccination campaigns were a conspiracy to sterilise the Muslim population. 
    • Parents in districts with higher support for Islamist groups are likely to have been more exposed to the anti-vaccine propaganda campaign.
    • It is likely that parents with an initial ideological affinity to the Taliban granted greater credibility to their anti-vaccine messages.
    • The disclosure of the vaccine ruse had substantial negative effects on vaccination rates: districts in the 90th percentile of the distribution of Islamist support experienced a decline in vaccination rates between 23% and 39% relative to districts in the 10th percentile of Islamist support.
    • Increase in support for Islamist groups is associated with an increase in cases of polio per district. 
    • The intensity of vaccination activities did not systematically differ across districts with different levels of Islamist support after the disclosure of the vaccine ruse.

    These results suggest that information discrediting vaccination campaigns can negatively affect trust in health services and demand for immunization.

    • REPUBLICAN POLITICIANS ARE THREE TIMES AS LIKELY AS DEMOCRATS TO CATCH COVID: Partisan differences suggest important role for protective behaviours and public health outcomes 

    Partisan differences in COVID-19 prevalence among politicians suggest important role for protective behaviours
    Patrick Carlin, Sumedha Gupta, Daniel W. Sacks and Coady Wing
    Issue 70 Covid Economics | 25 February 2021

    Republicans make up a disproportionate share of COVID-19- infected politicians, this difference cannot be explained by many plausible factors, including geographic differences and incentives to campaign. Instead, personal protective behaviours are found to be key factors, indicating they can have a large impact on COVID-19 prevalence.

    These are among the findings of a new study by Patrick Carlin, Sumedha Gupta, Daniel W. Sacks and Coady Wing, in CEPR’s Covid Economics, which analyses the prevalence of COVID-19 infections among state governors and members of the U.S. Congress, to show how important risk-avoidance behaviours are for preventing the spread of COVID-19.

    Politicians face similar occupational risks and are frequently tested. Yet, findings show large differences in COVID-19 prevalence along party lines: Republican politicians are three times as likely as Democratic ones to have ever reported a COVID case. The association between COVID-19 and party affiliation is not due to demographic differences, differences in state riskiness, or differential campaign strategies.

    Given well-documented differences in risk attitudes and preventive behaviour along political lines – Republicans are less likely to socially distance; less likely to consider COVID-19 a serious health risk; less likely to wear a mask; and social distancing policies were imposed later in states with Republican governors. While Democrat-controlled House of Representatives has stricter COVID-precautions in place than the Republican-controlled Senate; for example, allowing remote voting –  the differential COVID-19 rate is consistent with the view that behavioural risk is a key determinant of COVID-19 infections.


    Gideon Bornstein, Per Krusell, Sérgio Rebelo         
    01 March 2021

    As fracking accounts for an increasingly sizeable fraction of the world oil supply, it may herald a new era of lower, more stable oil prices. Writing at Vox, Gideon Bornstein, Per Krusell and Sérgio Rebelo explore the impact of the rising use of fracking on how oil markets are best conceived within modern macroeconomic theory, as part of a new, emerging body of research that uses micro-data to shed new light on key aspects of the oil industry. The study finds fracking affects the global economy in three ways: 

    1. The volatility of oil prices falls because the supply of oil becomes more elastic. 
    2. The volatility of global output rises because the economy becomes more responsive to aggregate demand shocks. Without fracking, a positive demand shock implies a larger rise in oil prices. This rise dampens the effect of the demand shock on the economy.
    3. The average level of oil prices falls because fracking firms add to global oil supply and weaken OPEC’s cartel power.


    Xinshen Diao, Mia Ellis, Margaret McMillan, Dani Rodrik                   
    01 March 2021

    Countries in sub-Saharan Africa had achieved some success in industrialising before the COVID-19 pandemic. However, economists are increasingly questioning the primacy of manufacturing as a path to development. Writing at Vox, Dani Rodrik and colleagues explore the correlation between growth-promoting economy-wide structural change and labour-productivity growth within non-agricultural sectors in 18 African countries.

    Using data from Ethiopia and Tanzania, the findings show that it was the share of employment in small and informal firms – rather than in the formal sector – that expanded during periods of growth acceleration. For such countries, competing in world markets may only be possible by adopting technologies that make it virtually impossible for significant amounts of employment to be generated. This is not to say that manufacturing cannot play an important role in the development of these countries. But tempering expectations is important, especially in politically fragile countries like Ethiopia.


    Florin Bilbiie, Gauti Eggertsson, Giorgio Primiceri               
    01 March 2021

    A new study by Florin Bilbiie, Gauti Eggertsson and Giorgio Primiceri discusses three reasons why US excess savings do not seem excessive, and hence are unlikely to generate a surge in demand post-pandemic:

    1. Excess savings are the approximate counterpart of the $2 trillion spent by the US government to fight the COVID-19 recession, most of it financed with debt.
    2. Excess savings are held by… savers, i.e. by agents with a bit of a buffer in their budgets. This is presumably what allowed them to save part of the support they received. These agents are more likely to be “Ricardian” and hence to continue holding on to these savings.
    3. Available estimates of the propensity to consume out of the CARES Act transfers are in line with those based on previous transfers of this kind. Therefore, the pandemic does not seem to have limited households’ ability to spend the support that they received.


    Roberto Iacono, Elisa Palagi                 
    27 February 2021

    A study by Roberto Iacono and Elisa Palagi uses rich micro-data from Norway to show that wealthy households enjoy higher rates of return relative to growth, while the opposite is true for poorer household and the lower-middle-income class. It discusses policy implications of these findings for capital and wealth taxation in order to curb the rise of inequality.

    A crucial element in the study of wealth inequality is the difference between the rate of return and the growth rate of income. However, the focus on these measures at the aggregate level belies important heterogeneities along the wealth distribution. 


    José-Luis Cruz, Esteban Rossi-Hansberg                   
    02 March 2021

    A new study by José-Luis Cruz and Esteban Rossi-Hansberg uses an integrated assessment model with rich spatial data that looks at interactions between regions to show how the effects of global warming on production and migration are large, worrying, and unequal. Policies such as carbon taxes are effective delaying tools, but prevention of global warming will require greater and more localised policies. Among the findings: 

    • On average, the world is expected to lose 6% in terms of welfare.
    • The hottest regions in South America, Africa, India and Australia experience welfare losses of 15%.
    • Clean energy subsidies have only a modest effect on carbon emissions and the corresponding evolution of global temperature since, although they generate substitution towards clean energy, they also lead to a reduction in the price of energy which results in more production and ultimately more energy use.
    • Carbon taxes delay consumption of fossil fuels and help flatten the temperature curve but are much more effective when an abatement technology is forthcoming. 

    ARTIFICIAL INTELLIGENCE AND JOBS: Evidence from US vacancies

    Daron Acemoğlu, David Autor, Jonathon Hazell, Pascual Restrepo             
    03 March 2021


    Writing at Vox, Daron Acemoğlu, David Autor, Jonathon Hazell and Pascual Restrepo use data on skill requirements in US vacancies posted since 2010 to examine the impact of artificial intelligence on the US labour market. Among the findings: 

    • The use of Artificial Intelligence has grown in the United States since 2010, is now relatively widespread, and has started to replace workers in certain tasks. 
    • However, it does not yet seem to be having effects on the aggregate labour market.
    • Despite the notable surge in AI adoption, the impact of AI is still too small relative to the scale of the US labour market to have had first-order impacts on employment patterns – outside of AI hiring itself. 
    • AI adoption is significantly driven by establishments that have a large fraction of tasks that are AI-suitable.
    • Any positive productivity and complementarity effects from AI are at present small compared to AI's displacement consequences.


    Jon Danielsson             
    26 February 2021

    In a week when bitcoin is setting records with a market value exceeding a trillion dollars, writing at Vox, Jon Danielsson asks – what would it mean if cryptocurrencies succeed? He argues that the internal contradictions and perverse consequences of cryptocurrencies' success mean that they are destined for failure. Until then, it might make sense for speculators to ride the cryptocurrency bubble, so long as they get out in time. 

    ECB MONETARY POLICY COMMUNICATIONS: A spectrum of financial market responses

    Valentin Jouvanceau, Ieva Mikaliunaite                  
    25 February 2021

    The Euro Area Monetary Policy Event-Study Database makes available intraday asset price changes around ECB policy announcements for a wide range of assets, but conceals unrecognised effects of the ECB’s actions and communications.

    Writing at Vox, Valentin Jouvanceau and Ieva Mikaliunaite present three new types of monetary surprises: ‘duration’, ‘sovereign spread’, and ‘save the euro’. These reflect the frequent and significant reactions of long-term sovereign bond yields to ECB monetary policies.


    Gee Hee Hong, Yukiko Saito                   
    25 February 2021

    A study by Gee Hee Hong and Yukiko Saito uses data covering around one million firms in Tokyo, Japan, to show that Japanese firms mainly exit voluntarily, while bankruptcy rates are extremely low. Further, Japanese firms respond to wider economic shocks mainly through adjustments to output instead of exits – as was seen during the Covid-19 crisis. The ‘cleansing effects’ of firm exits vary by exit type, but appear stable during the current crisis.

    CITIES WITHOUT SKYLINES: The environmental, affordability, and congestion implications of shunning high-rise towers

    Rémi Jedwab, Jason M. Barr, Jan K. Brueckner            
    28 February 2021

    Housing prices in many countries are growing faster than incomes. Much of this affordability problem can be explained by regulatory barriers to new construction. A study by Rémi Jedwab, Jason Barr and Jan Brueckner calculates countries’ ‘building-height gaps’ – the difference between the total height of a country’s stock of tall buildings and what the total height would have been if building height regulations were relatively less stringent, based on parameters from a benchmark set of countries. These gaps are larger for richer countries and for residential buildings rather than for commercial buildings, and they correlate strongly with housing prices, sprawl, congestion, and pollution. 

    HOW THE GEOGRAPHY OF BANKING IS CHANGING: Evidence from across Europe 

    Shusen Qi, Ralph De Haas, Steven Ongena, Stefan Straetmans              
    03 March 2021

    A study by Shusen Qi, Ralph De Haas, Steven Ongena and Stefan Straetmans explores the effect of digitalisation on the geography of banks, testing the effects of digital information-sharing on branch locations in Europe. Digitalisation, the advance of FinTech and the expansion of mobile banking are putting pressure on banks to prune their bricks-and-mortar branch networks – and to do so in a strategic way.

    The research suggests that information sharing has a strong positive effect on branch clustering, with banks more likely to open new branches in areas where they do not yet operate but where other banks are already present. It is becoming much more important for banks to be close to each other than to be close to their borrowers. While the public availability of hard information leads to further clustering of banks in well-served locations, other (smaller) locations lose out as access to credit deteriorates further.

    FRIEDMAN VS PHILLIPS: A historic divide

    Manoj Pradhan, Charles Goodhart                 
    26 February 2021

    Milton Friedman and Bill Phillips most likely assumed that their separate methods for predicting inflation would lead to much the same outcomes. Recently, however, monetary aggregates and the Phillips curve have provided extremely disparate signals.

    Writing at Vox, Manoj Pradhan and Charles Goodhart discuss recent economic developments leading to these disparate signals, concluding that inflation will most likely end up somewhere between the predictions of the two models – which is almost certainly higher than what central banks and the IMF are expecting.


    Christina Boll, Till Nikolka                  
    02 March 2021

    While previous studies have suggested a link between intergenerational contact and infection rates, new findings from Christina Boll and Till Nikolka cast doubt on these ‘simplistic narratives’. The authors use data from Germany to show that the statistical significance of the positive relationship between the frequency of regular grandparental childcare and Covid infection rates breaks down as soon as potentially confounding factors, in particular the local Catholic population share, are controlled for.


    Simeon Djankov, Eva (Yiwen) Zhang                 
    03 March 2021

    Steep falls in entrepreneurial activity were recorded in early 2020 across G7 economies. In the United States, however, the creation of startups shot up by 24% relative to the previous year, the largest annual increase since business statistics started being collected in the US.

    A study by Simeon Djankov and Eva (Yiwen) Zhang uses data on new company applications in the US since 2004 to show that firm birth generally accelerates in the aftermath of economic crises and that this pattern was particularly pronounced in 2020, fuelled by the government assistance provided to small businesses. It also shows that US firm births are estimated to have surpassed firm deaths in 2020, unlike in the aftermath of the previous financial crisis.

    DOES OPENING SCHOOLS SPREAD COVID-19? New evidence from Sicily

    Michele Battisti interviewed by Tim Phillips, 24 February 2021

    Are schools triggering diffusion of Covid19? Michele Battisti talks to Tim Phillips about research that uses geolocalised microdata from Sicily to show schools contribute to a significant & positive increase in area cases.

    You can find the full paper, Schools opening and Covid-19 diffusion: evidence from geolocalized microdata by Emanuele Amodio, Michele Battisti, Andros Kourtellos, Giuseppe Maggio and Carmelo Massimo Maida, in this free issue of CEPR's Covid Economics Papers.

    LOCAL LOCKDOWN AND REGIONAL RECOVERY: What can real-time consumption data tell us?

    Ben Guttman-Kenney interviewed by Tim Phillips, 23 February 2021

    The UK's recovery is heavily weighted towards the “home counties” around outer London and the South. Utilising Fable Data: a real-time source of consumption data that is a highly correlated, leading indicator of Bank of England and Office for National Statistics data, Ben Guttman-Kenney and colleagues observe a stark contrast between strong online spending growth while offline spending contracts with patterns of regional difference in spending matching lockdown tier levels. To prevent such COVID-19-driven regional inequalities from becoming persistent they propose governments introduce temporary, regionally-targeted interventions in 2021.

    You can read the full paper behind this research here: A Levelling Down and the COVID-19 Lockdowns: Uneven Regional Recovery in UK Consumer Spending John Gathergood, Fabian Gunzinger, Benedict Guttman-Kenney, Edika Quispe-Torreblanca, and Neil Stewart