This week from CEPR: March 14

Thursday, March 14, 2019

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

    • GREENING MONETARY POLICY: How the Eurosystem could support EU objectives on the transition to a low-carbon economy

    Greening Monetary Policy
    Dirk Schoenmaker
    CEPR DP No. 13576  8 March 2019 

    While price stability should naturally remain the primary priority of the Eurosystem, a modest tilting to steer its asset and collateral framework towards low carbon assets could reduce carbon emissions in its corporate and bank bond portfolio by over 40%. Such an approach could also lower the cost of capital of low carbon companies in comparison with high carbon companies by 4 basis points. The low carbon allocation can be done without undue interference with the transmission mechanism of monetary policy.

    These are the conclusions of new CEPR research. But as the study concludes, that is all technical. The real question is whether central bankers are prepared to ‘cross the Rubicon’ in support of EU climate policies. Similar deliberations have taken place in other sectors. Should auditors examine a company’s integrated report with social and environmental indicators? Or should they stick with the financial part, which is within their professional realm? Should institutional investors include sustainability considerations in their investment policies?

    The 2018 report of the European Commission’s High Level Expert Group on Sustainable Finance recommended incorporating sustainability in the fiduciary duty of investors, which is now put into proposed legislation by the Commission. More generally, the required political space for the European Central Bank to adopt low-carbon criteria seems to be present. The European Council, the Commission and the European Parliament are all committed to the transition to a low-carbon economy. 

    If the Eurosystem were to pick up the challenge of greening its monetary policy operations, it would be of utmost importance to do that in full independence. The Eurosystem could adjust the eligibility criteria for assets and collateral in a general way, using a transparent and objective indicator, such as current and future carbon emissions. It should refrain from favouring specific projects or setting sectoral targets, which is an issue for government policy. The EU and the member states can use their multilateral development bank (the European Investment Bank) and national development banks to steer financing towards specific green projects, if they so wish.

    Figure 1. Average carbon intensity by industry

    Note: The graph depicts the average carbon intensity of sectors, measured as average of emissions in metric ton CO2 divided by sales in millions euro. Scope 1, 2 and 3 emissions are included for the 60 largest corporates in the euro area. The Annex provides a detailed breakdown.
    Source: Author calculations based on ASSET4 ESG Scores in Datastream (Thomson Reuters) and company report

    • CHANGING BUSINESS CYCLES: The role of women’s employment

    Changing Business Cycles: The Role of Women’s Employment
    Stefania Albanesi
    CEPR DP No. 13578  9 March 2019

    The growth in women’s labour supply and relative productivity contributed substantially to US productivity growth from the early 1980s. That is one of the conclusions of a new CEPR study of the impact of gender differences in labour supply and productivity. 

    The authors also show that the lower cyclicality of women’s hours and their growing share in aggregate hours accounts for a large fraction of the decline in the cyclicality of aggregate hours during the Great Moderation, as well as the decline in the correlation between average labour productivity and hours.

    Finally, the researchers show that the discontinued growth in women’s labour supply after the 1990s played a substantial role in the jobless recoveries that followed the 2001 and 2007-09 recessions. Moreover, it also depressed aggregate hours and output growth during the late 1990s and mid-2000s expansions and it reduced men’s wages.

    These results suggest that continued growth in women’s hours since the early 1990s would have significantly improved economic performance in the United States.

    • THE DYNAMICS OF FAMILY SYSTEMS: Lessons from past and present times

    The Dynamics of Family Systems: Lessons from Past and Present Times
    Catherine Guirkinger and Jean-Philippe Platteau
    CEPR DP No. 13570 6 March 2019

    Parents in Rajasthan, India, have a strong preference for delaying a daughter’s marriage until the age of 18 but no further. That is the central conclusion of a new CEPR study, which uses using hypothetical vignettes to elicit average parental preferences over a daughter’s education and age of marriage, and subjective beliefs about the evolution of her prospects in the marriage market.

    The researchers find that conditional on a marriage match, parents place little intrinsic value on a daughter’s education. But they believe that the probability of receiving a good marriage offer increases strongly with a daughter’s education but deteriorates quickly with her age on leaving school


    Laurence Boone, Antoine Goujard
    04 March 2019

    Redistribution through taxes and social transfers is insufficient to curb inequality of opportunity in France, which is mostly linked to the educational system and perpetuates economic and social situations from one generation to the next. That is the conclusion of OECD chief economist Laurence Boone and her colleague Antoine Goujard, writing at Vox.

    The ‘gilets jaunes’ demonstrations in France appear, at least in part, to be another example of the anti-globalisation sentiment that has emerged in a number of OECD countries. These authors argue that the movement is also rooted in what they call the country’s ‘broken social elevator’.



    Gilles Saint-Paul
    7 March 2019

    Although macroeconomic populism typically leads to higher levels of public debt, public spending, deficits and crises, it is rational for groups of voters to vote for populists who reflect their interests, because they will be favoured in a fiscal adjustment. The greater the adjustment, the more likely they are to elect a populist who will discriminate between groups. These are the conclusions of a new study by Gilles Saint-Paul.


    LOW INTEREST RATES AND LOW INVESTMENT: Accounting for macro-finance trends

    Emmanuel Farhi, Francois Gourio
    10 March 2019

    Most developed economies have experienced large declines in risk-free interest rates and lacklustre investment over the past 30 years, while the profitability of private capital has increased slightly. New research by Emmanuel Farhi and Francois Gourio identifies what accounts for these developments. They find that rising market power, rising unmeasured intangibles and rising risk premia play a crucial role, over and above the traditional culprits of increasing savings supply and technological growth slowdown.


    MONETARY POLICY: Another victim of population ageing

    Marcin Bielecki, Michał Brzoza-Brzezina, Marcin Kolasa
    5 March 2019

    Population ageing is likely to affect many areas of life – from pension system sustainability to housing markets. New research by Marcin Bielecki, Michał Brzoza-Brzezina and Marcin Kolasa shows that monetary policy can be considered another victim.

    Low fertility rates and increasing life expectancy substantially lower the natural rate of interest, their study notes. As a consequence, central banks are more likely to hit the lower bound constraint on the nominal interest rate and face long periods of low inflation, especially if they fail to account for the impact of demographic trends on the natural interest rate in real time.



    Olivier Dessaint, Thierry Foucault, Laurent Frésard, Adrien Matray
    5 March 2019

    Stock prices respond to fundamental shocks (‘news’) and non-fundamental shocks (‘noise’). Using US data from 1996 to 2011, new research by Olivier Dessaint and colleagues argues that stock prices are a ‘faulty informant’ for corporate managers because managers have limited ability to separate information from noise when using prices as signals about their prospects. The ensuing losses of capital investment and shareholders’ wealth are large and even affect firms that are not facing severe financing constraints or agency problems.



    Olivier Coibion, Yuriy Gorodnichenko, Tiziano Ropele
    5 March 2019


    With nominal short-term interest rates close to their effective lower bound, monetary policies partly operate through changing inflation expectations. New research by Olivier Coibion, Yuriy Gorodnichenko and Tiziano Ropele analyses the effect of inflation expectations on firms’ economic decisions in Italy.

    They find that higher inflation expectations on the part of firms leads them to raise their prices, increase their use of credit and reduce their employment. But when policy rates are constrained by the effective lower bound, expansionary effects are stronger, leading firms to raise their prices more and no longer reduce their employment.



    Natasha Kalara, Lu Zhang, Karen van der Wiel
    9 March 2019

    The Global Crisis has profoundly changed the financial landscape, including firm financing. New research by Natasha Kalara, Lu Zhang and Karen van der Wiel examines the development of various channels of firm financing before and after the crisis among four groups of EU countries, Japan and the United States. While bank finance and, to some extent, equity finance are under pressure, alternative finance, although small, seems to be on the rise.



    Christian Keuschnigg, Michael Kogler
    4 March 2019

    Only strong banks can fulfil their Schumpeterian role by reallocating credit efficiently, according to research by Christian Keuschnigg and Michael Kogler. Their study argues that high capital standards, efficient bankruptcy laws and a lower cost of bank equity improve credit reallocation and thereby support the productive specialisation of the economy. An efficient banking sector also magnifies the gains from trade liberalisation by easing the process of capital reallocation.



    Michael Brei, Giovanni Ferri, Leonardo Gambacorta
    7 March 2019

    There is mounting evidence that income inequality and disparities in wealth have been rising in advanced economies in the recent decades. Using data on advanced and emerging economies, new research by Michael Brei, Giovanni Ferri and Leonardo Gambacorta investigates the link between an economy’s financial structure – that is, the mix of bank-provided versus market-provided funds – and income inequality. 

    Their results show that the relationship is not monotonic. More finance reduces income inequality up to a point, but beyond that point, inequality rises, especially if finance is expanded via market-based financing.



    Ofer Malamud, Santiago Cueto, Julian Cristia, Diether W. Beuermann
    8 March 2019

    Many governments and NGOs have invested substantial resources in expanding internet access to children in developing countries. A study by Ofer Malamud and colleagues reports on an experiment in Peru in which laptops and access to the internet were provided to schoolchildren. While those selected to receive a laptop did improve their digital skills, the results suggest that increased access to the internet at home did not improve academic achievement, cognitive or socio-emotional skills, which are arguably the more important outcomes of such interventions.


    RUSSIA IN THE GREAT WAR: Mobilisation, grain and revolution

    Andrei Markevich
    9 March 2019

    Prior to the First World War, many authorities believed that countries with substantial agrarian sectors and grain exports, including the Russian Empire, could overcome war hardships more easily than those countries that imported grain. New research by Andrei Markevich asks why the experts got it wrong in the case of Russia, and concludes that the economics and politics of the Russian grain and labour markets provide the answer. It was impossible simultaneously to mobilise 15 million males into the Russian army, procure the grain to feed them as soldiers and avoid revolution.



    Jonathan Dingel, Kyle Meng
    6 March 2019

    Climate change is expected to reshape the global distribution of agricultural productivity. In theory, shifts in the spatial structure of economic conditions will affect international inequality by altering the pattern of international trade. In practice, it is hard to identify natural experiments to validate predictions about global conditions. New research by Jonathan Dingel and Kyle Meng exploits a global climatic phenomenon to estimate the general equilibrium consequences of changes in the spatial correlation of productivities.


    CRYPTOCURRENCIES: The doomsday economics of ‘proof-of-work’

    Raphael Auer
    8 March 2019

    Bitcoin and related cryptocurrencies are exchanged via simple technical protocols for communication between participants, as well as a publicly shared ledger of transactions known as a blockchain. Research by Raphael Auer explores how cryptocurrencies verify that payments are final – that is, that they are irreversible once written into the blockchain.

    The study points to the high costs of achieving such finality via ‘proof-of-work’ and to a crucial externality in the transaction market. It concludes by arguing that with the current technology, the liquidity of cryptocurrencies is set to shrink dramatically in the years to come. 


    CENTRAL BANK DIGITAL CURRENCY: Concepts and trends

    Sayuri Shirai
    6 March 2019

    Recent years have seen the emergence of digital currencies such as Bitcoin as potential private sector money. Central banks are also considering whether to issue their own digital tokens to enable decentralised verification of transactions while maintaining attractive cash-like features.

    Writing at Vox, former Bank of Japan monetary policy-maker Sayuri Shirai lays out the four existing proposals for implementing central bank digital currency. Due largely to technical constraints, central banks in general have not found a compelling reason to issue their own digital currency.



    Antonio Fatás
    5 March 2019

    In recent years, the arrival of new financial technologies has opened a debate about the extent of their implications for the nature of money, the way new ventures are funded, and so on. A new Vox eBook edited by Antonio Fatás summarises the latest research on the impact of these changes and how to manage the possible disruption in financial markets, where governance and regulation are central. Among the conclusions:

    •   Most stress the need for some form of centralised authority to manage the requirements of financial markets. But different technologies have different implications for governance and access rights. There is pessimism about the extent to which the current technology behind open-access ledgers (such as blockchain) is able to satisfy the requirements of financial markets.
    •   Contrary to the fears expressed by some, the introduction of a central bank digital currency has no damaging consequences for lending and it does not increase the instability of the financial system (via the possibility of more frequent bank runs).
    •   Evidence on the potential benefits and risks of initial coin offerings (ICOs) remains mixed: the market has grown very fast but the large failure rate of ICOs combined with some fraudulent schemes raise serious concerns about the long-term viability of this market.
    •   In addition, empirical analysis shows a very high correlation of ICO returns with Bitcoin or Ethereum prices since their prices collapsed, suggesting that the bubble-type behaviour of those cryptocurrencies was also responsible for the hype of ICOs.
    •   Regulating cryptocurrencies risks giving credibility to these new assets. The alternative (‘benign neglect’) is not optimal either because of the negative consequences of an unregulated market that funds illegal activities or tax fraud. A potential solution is to enforce a minimum amount of regulation along the lines of anti-money laundering activities.



    Tim Phillips, 8 March 2019

    The European Community’s FRAME project, of which the CEPR has been a partner, recently held its final conference in London. Tim Phillips talked to some of its key participants, including Román Arjona (Chief Economist, DG Research & Innovation, European Commission) and Jonathan Haskel (Member, Bank of England’s Monetary Policy Committee), about what FRAME’s research into innovation tells us, and how it might be translated into policy.



    Philippe Aghion 

    In a new Vox video, Philippe Aghion (College de France, LSE and CEPR) discusses work on merged datasets from the UK: one detailing occupation and wages; the other looking at R&D and investment. As firms become more innovative they will outsource higher fraction of low-skilled occupations, but they will also invest more in training and retaining low-skilled workers with useful ‘soft’ skills. The success of industries or countries during a period of technological revolution (such as the advance of artificial intelligence) depends on good labour policies and investment in education and training.