This week from CEPR: March 19

Thursday, March 19, 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

    • REAL-TIME WEAKNESS OF THE GLOBAL ECONOMY: A first assessment of the coronavirus crisis  

    REAL-TIME WEAKNESS OF THE GLOBAL ECONOMY: A first assessment of the coronavirus crisis
    Danilo Leiva, Gabriel Pérez-Quirós, Eyno Rots      
    CEPR DP No. 14484  | March 2020 

    The coronavirus crisis is heading towards a potentially global synchronised slowdown. A new CEPR study by Danilo Leiva, Gabriel Pérez-Quirós and Eyno Rots proposes an econometric framework able to provide timely and accurate real-time insights about the state of the world economy.

    The framework relies on nonlinear factor models designed to infer recessionary episodes of heterogeneous deepness, and fitted to the largest advanced economies (the US, the euro area, Japan, the UK, Canada and Australia) and emerging markets (China, India, Russia, Brazil, Mexico and South Africa). 

    The estimated regional inferences are summarised into a Global Weakness Index (GWI), which is able to provide daily real-time updates of the global economy’s strength, its underlying sources and risk assessments, as new information across the regions is released. The results show that allowing for heterogeneous recessions turns out to be crucial in accurately inferring periods of weak real activity growth associated with both advanced and emerging economies, outperforming previous frameworks.

    • ROBOT ADOPTION: New evidence of the effects on trade patterns, wages and welfare    

    Erhan Artuc, Paulo Bastos, Bob Rijkers       
    CEPR DP No. 14487 |  March 2020

    An increase in robot adoption in the North reduces the cost of production and thereby affects trade in final and intermediate goods with the South. Northern robotisation may lead to higher wages and welfare in the South.

    These are the central findings of a new CEPR paper by Paulo Bastos and colleagues, which examines the effects of robotisation on trade patterns, wages and welfare. It develops a Ricardian model with two-stage production and trade in intermediate and final goods in which robots can take over some tasks previously performed by humans in a subset of industries. The empirical analysis makes use of variation in exposure to robots across countries and sectors to reveal that greater robot intensity in a country’s own production leads to: 

    (i)    A rise in imports sourced from less developed countries in the same industry
    (ii)    An even stronger increase in exports to those countries. 

    Counterfactual simulations indicate that Northern robotisation raises domestic welfare, but initially depresses wages. But this adverse effect is likely to be reversed by further reductions in robot prices. 

    • ELITE CAPTURE OF FOREIGN AID: Evidence from offshore bank accounts   

    ELITE CAPTURE OF FOREIGN AID: Evidence from offshore bank accounts
    Niels Johannesen, Jørgen Juel Andersen, Bob Rijkers       
    CEPR DP No. 14481 | March 2020

    The effectiveness of foreign aid remains controversial. New research finds that aid disbursements to highly aid-dependent countries coincide with sharp increases in bank deposits in offshore financial centres known for bank secrecy and private wealth management, but not in other financial centres. 

    The effectiveness of foreign aid remains controversial. New research finds that aid disbursements to highly aid-dependent countries coincide with sharp increases in bank deposits in offshore financial centres known for bank secrecy and private wealth management, but not in other financial centres. 

    • Aid disbursements to highly aid-dependent countries coincide with sharp increases in bank deposits in offshore financial centres known for bank secrecy and private wealth management, but not in other financial centres.
    • In a quarter where a country receives aid equivalent to 1% of GDP, its deposits in havens increase by 3.4% relative to a country receiving no aid; by contrast, there is no increase in deposits held in non-havens.
    • The estimates are not confounded by contemporaneous shocks such as civil conflicts natural disasters and financial crises, and are robust to instrumenting with predetermined aid commitments.
    • The implied leakage rate is around 7.5% at the sample mean and tends to increase with the ratio of aid to GDP. 
    • The findings are consistent with aid capture in the most aid-dependent countries.

    Aid capture by ruling politicians and bureaucrats is consistent with the totality of observed patterns: it can explain why aid does not trigger flows to non-havens, why the capital outflows occur precisely in the same quarter as the aid in flows and why the estimated effects are larger for more corrupt countries.

    LIKELIHOOD OF A CORONAVIRUS RECESSION: Views of leading US and European economists

    Romesh Vaitilingam     
    14 March 2020

    As tumbling stock markets indicated growing fears about the potential economic impact of the coronavirus, the IGM Forum at Chicago Booth invited its panels of leading economists in the United States and Europe to express their views on the likelihood of a major recession. Writing at Vox, Romesh Vaitilingam reveals a broad consensus across the experts that there will be a sharp downturn in the economy, but less agreement on how prolonged the dip is likely to be. Asked about the relative importance of supply and demand shocks damaging the economy, reactions were more mixed. But over two-thirds of the European economists are highly doubtful of the readiness of the economic policy institutions of the euro area to respond effectively to the potential damage from COVID-19.


    KEEPING THE LIGHTS ON: Economic medicine for a medical shock

    Richard Baldwin        
    13 March 2020

    Governments should focus on ‘keeping the lights on’ using costly but quick measures to ensure the circular flow of money continues to circulate. The goal should be to reduce the persistence of the crisis and avoid unnecessary accumulation of ‘economic scar tissue', writes Richard Baldwin, founder of VoxEU and former President of CEPR. 

    The COVID-19 economic crisis is different. It hit the economic giants all at once – the G7 nations and China. And the economic strikes are widely spread, hitting many sectors all at once. It is not a credit crisis, or a banking crisis, or a sudden-stop crisis, or an exchange crisis. Today’s crisis is a bit of all these.


    COVID-19: Governments must avoid creating additional uncertainty

    Henrik Müller       
    14 March 2020

    Writing at Vox, Henrik Müller argues that economic policy responses to the coronavirus crisis - doing too little too late, and spreading confusion on the way, can have lasting effects on the economy as a whole and on the livelihoods of individuals. 

    Müller calls for governments and central banks to present an entire toolbox as soon as possible, preferably in an internationally coordinated fashion, thereby front-loading the crisis response in order to influence expectations of businesses and consumers positively.


    IT’S NOT EXPONENTIAL: An economist’s view of the epidemiological curve

    Richard Baldwin   
    14 March 2020

    Richard Baldwin argues that the spread of COVID-19 is not going to follow an exponential curve – and grave errors will follow if analysts believe it will. The number of new cases rises rapidly, peaks and then declines. It’s called the epidemiological curve. It’s not a theory or hypothesis; it plays out that way every flu season. It is how it has played out in China and Korea for COVID-19. Flattening the peak to avoid overloading the healthcare system is the main medical goal of the seemingly extreme containment policies we have seen to date.



    Johannes Bollen       
    13 March 2020

    New research by Johannes Bollen finds that the European Union could lower the cost of reaching its 2050 emissions-reduction goal by 40% through maximising hydrogen production from wind energy and gasification of biomass, natural gas or coal with carbon capture storage. 


    THE EUROPEAN UNION AND DEMOCRACY MUST DELIVER: A manifesto from Portuguese economists

    Group of concerned economists based in Portugal        
    16 March 2020


    The COVID-19 pandemic is an extreme event that threatens the health and economic wellbeing of populations across the globe. This manifesto from a group of Portuguese economists calls for urgent action from the EU to prevent the suffering of its people and to save itself and the democratic values it stands for. A large-scale emergency programme requires massive emergency funding, and in the face of extraordinary circumstances, the European Central Bank must be allowed to finance such a programme.



    Stefano Ramelli, Alexander Wagner         
    12 March 2020

    The coronavirus is stirring feverish behaviour by investors worldwide. Writing at Vox, Stefano Ramelli and Alexander Wagner show that initially, economic expectations about international trade underlay movements in the stock prices of individual firms; later, concerns about corporate debt began to play a role. 

    In the most recent period (late February and early March), large price moves of the aggregate market occurred. But behind these feverish price moves, some patterns emerge. In particular, the cross-section of stocks reveals that investors started to become concerned about potential amplifications of the COVID-19 shock through financial channels. 


    EXPLAINING THE UK’S PRODUCTIVITY SLOWDOWN: Views of leading economists

    Ethan Ilzetzki      
    11 March 2020

    The UK has seen slow rates of productivity growth over the past decade, with output per hour and real wages no higher today than they were prior to the global financial crisis. Writing at Vox, Ethan Ilzetzki reveals how nearly half of leading economists surveyed by the Centre for Macroeconomics point to low demand due to the financial crisis, austerity policies and Brexit as a major cause for this productivity slowdown. 

    Despite this diagnosis, only a small minority of the panel believes that the solution lies in demand-side policy. Instead, a majority support promoting productivity growth through investments in education and worker training. Other policies, such as infrastructure investments, and tax and regulatory policies are also proposed.


    DEBT AND FINANCIAL CRISES: Will history repeat itself?

    M. Ayhan Kose, Peter Nagle, Franziska Ohnsorge, Naotaka Sugawara        
    16 March 2020

    The global economy has experienced four waves of rapid debt accumulation in emerging and developing economies over the past 50 years. World Bank economists Ayhan Kose, Peter Nagle, Franziska Ohnsorge and Naotaka Sugawara examine these waves of debt and put the fourth (current) wave in historical context. 

    The current wave of debt, which started in 2010, stands out for its exceptional size, speed and breadth. While the previous three waves all ended with widespread financial crises, policy-makers have a range of options to reduce the likelihood of the current debt wave ending in crisis.

    Download the full CEPR Policy Insight, ‘Understanding the global waves of debt’. 


    PUBLIC SPENDING AT THE EFFECTIVE LOWER BOUND: The significance of sustainability risks

    Niccolò Battistini, Giovanni Callegari       
    16 March 2020

    With monetary policy constrained by the effective lower bound (ELB), the debt sustainability implications of a fiscal expansion are a pressing concern. Writing at Vox, Niccolò Battistini and Giovanni Callegari show that the adverse impact of a fiscal expansion on sustainability is muted at the effective lower bound compared with normal times. Getting the timing of public spending increases right, however, is essential for containing sustainability risks.

    The active use of fiscal policy for stabilisation purposes should always follow a careful assessment of the impact on public debt sustainability. This assessment, however, changes during periods of a binding ELB and depends on the degree of activeness of the central bank.


    Eiichi Tomiura, Banri Ito, Byeongwoo Kang       
    14 March 2020

    Firms realise the potential impacts of new data regulations but may not always be quick to react, according to a new study. Eiichi Tomiura, Banri Ito, and Byeongwoo Kang analyse new survey evidence of Japanese firms to understand the impacts of regulatory changes on international data transfers.

    Their results show that firms react by changing the location of data storage and processing, as well as by tightening data protection. But these responses vary significantly depending on where the regulations originate. 

    UNPLEASANT CONVERGENCE: Country spreads in advanced and emerging economies

    Benjamin Born, Gernot Müller, Johannes Pfeifer, Susanne Wellmann         
    13 March 2020

    The vulnerability of advanced economies to international financial markets has increased. Gernot Müller and colleagues present evidence that countries' interest rate spreads have converged with those of emerging economies since the global crisis in 2008. This is due to both a decline in the volatility of the spreads for most emerging economies and an increase in volatility for advanced economies.


    Martin Hodula         
    16 March 2020

    New research by Martin Hodula on European shadow banking shows that it is highly procyclical, intertwined with insurance corporations and pension funds, and a terminal station for regulatory arbitrage. He also discusses the existence of two main motives that explain the growth of shadow banking, both prior and post-Global Crisis: a funding-cost motive and a search-for-yield motive. 


    Natalie Bau, Adrien Matray          
    16 March 2020

    The misallocation of inputs, and in particular capital, may explain the large disparities in productivity across countries. Natalie Bau and Adrien Matray quantify the effects of foreign capital liberalisation on misallocation and aggregate manufacturing productivity in India.

    They find that as a result of the liberalisation policies, capital-constrained firms expanded their assets by 60%, spent more on labour (+24%), and increased their revenue by 18% relative to non-constrained firms. The effects of liberalisation were largest in areas with less developed local banking sectors.


    Richard Baldwin, Beatrice Weder di Mauro interviewed by Tim Phillips, 10 March 2020

    How big are Covid-19's economic consequences? That's the theme of a new VoxEU book with contributions from many of the world's most experienced policy-makers with expertise in this area. Beatrice Weder di Mauro and Richard Baldwin, the book's editors, give Tim Phillips the (mostly) bad news.


    Richard Blundell    

    How do some workers who left school at a relatively young age with low qualifications go on to succeed in the labour market? Richard Blundell describes ‘good firms’ – that is, firms that are driving technology – paying these workers well. He proposes a shift in the way we think of vocational training to focus on the soft skills that these types of firms value.