This week from CEPR: March 21

Thursday, March 21, 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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    Countries against which Donald Trump has declared a trade war have responded with retaliatory tariffs directly targeted at parts of the United States that swung to the president in the 2016 election (but not to other Republican candidates running for office that year). What’s more, this retaliation has been effective: in areas exposed to retaliation, Republican candidates fared worse in the 2018 midterm elections; and presidential approval ratings have declined, especially among Democrats.

    These are among the conclusions of new CEPR research by Thiemo Fetzer and Carlo Schwarz, which explores whether retaliatory tariffs are politically targeted and, if so, how effective they are. Focusing on the recent trade escalation between the United States, the other NAFTA countries (Canada and Mexico), China and the European Union, the study examines the trade-off for countries designing a retaliatory response between maximising political targeting and mitigating domestic economic harm.

    For China and particularly, for Mexico and Canada, the chosen retaliation seems to be sub-optimal: there are alternative retaliation bundles that would have produced a higher degree of political targeting, while posing a lower risk of damage to their own economies. Nevertheless, retaliation has produced substantial economic shocks: US exports of goods subject to retaliation declined by up to $15.28 billion in 2018 and export prices have dropped significantly.

    Figure 2: Distribution of share of county level export trade volumes affected by retaliation measures by the EU, China, Canada, Mexico, Turkey and India.


    Notes: Map plots the quintiles of the county level exposure measure to retaliation from all retaliating countries combined.The construction of the exposure measure is described in more detail in Section 2.2

    Access to intra-family medical expertise has far-reaching health consequences at all ages, according to a new CEPR study by Yiqun Chen, Petra Persson and Maria Polyakova. Their research, which looks at data for Sweden, finds that the presence of a health professional in the extended family raises longevity, reduces the occurrence of lifestyle-related disease in adulthood, raises vaccination rates in adolescence and reduces tobacco exposure in utero.

    Unequal access to health-related expertise accounts for as much as 18% of the strong socioeconomic gradients between income and health, even in a country where there is no inequality in formal access to healthcare. The effects of differential access to expertise through informal family channels may thus play a significant role in sustaining health inequality. What’s more, the effects of expertise are larger at the lower end of the income distribution, precisely where access to expertise is scarcer.

    New CEPR research documents a trend towards greater social mobility in China over time. The analysis by Carol Hua Shiue examines temporal changes in mobility over approximately 20 generations and six centuries to shed light on the sources of social mobility. Socioeconomic data on status and links at the individual level come from historical biographies of seven extended families (dynasties as based on the male surname) that lived in one region in China.

    The study focuses on whether inequality within the family plays a significant role in explaining mobility patterns from one generation to the next. Times of greater inequality between fathers, especially educational inequality, are times of lower social mobility. Moreover, geographical location strengthens the role of inequality for social mobility. 

    But decomposing inequality into between- versus within-dynasty components shows that not all inequality is associated with persistence. While inequality between dynasties is conducive to persistence, inequality within the dynasty is associated with higher mobility. This is true both upward and downward. Furthermore, among members of even closer kin in the dynasty, the positive relationship of inequality and mobility is stronger still.

    White Americans born in the 1960s who didn’t go to college face shorter life expectancies, higher medical expenses and lower wages per unit of human capital compared with those born in the 1940s. What’s more, the wages of men of this generation have declined more than those of women.

    These are among the conclusions of new CEPR research by Margherita Borella, Mariacristina De Nardi and Fang Yang. After documenting the changes, their study analyses the lifecycle of couples and singles to evaluate their effects. The drop in wages depressed the labour supply of men and increased that of women, especially in married couples. Their shorter life expectancy reduced their retirement savings but the increase in out-of-pocket medical expenses increased them by more.

    Welfare losses, measured as a one-time asset compensation, are 12.5%, 8% and 7.2% of the present discounted value of earnings for single men, couples and single women, respectively. Lower wages explain 47-58% of these losses, shorter life expectancies 25-34% and higher medical expenses account for the rest.

    FINANCIAL CRISES FAN THE FLAMES OF FANATICISM: Evidence from Germany in the 1930s

    Sebastian Doerr, José-Luis Peydró, Hans-Joachim Voth
    15 March 2019

    Polarised politics in the wake of financial crises echo throughout modern history, but evidence of a causal link between economic downturns and populism is limited. New research by Hans-Joachim Voth and colleagues shows that the context of economic collapse was an important mechanism through which the Nazi Party gained popularity. 

    While unemployment did not affect Nazi votes, income declines driven by exposure to two major banks strongly increased support for the Nazis. Where anti-Semitism had no deep historical roots, the only effect of the banking collapse on Nazi voting was through direct economic effects.


    Agata Maida, Andrea Weber
    15 March 2019

    Mandated gender quotes in Italy have been successful at increasing the number of women on boards, but the relevant law is temporary and affects only a small number of firms.

    New research by Agata Maida and Andrea Weber uses evidence on employment and earnings to show that there has been no increase in female representation at the top executive level or among top earners. This may be because norms and perceptions take time to change, or because newly appointed women in senior roles wield limited power.


    Isamu Yamamoto
    14 March 2019

    Adoption of artificial intelligence in the workplace contributes to both greater job satisfaction and increased stress, according to a study of around 10,000 workers in Japan. The research by Isamu Yamamoto goes on explore how to maximise the positives of adopting new technologies while minimising the negative side effects.

    THE GEOPOLITICS OF BILATERAL TRADE AGREEMENTS: Evidence from the first era of globalisation

    Barry Eichengreen, Arnaud Mehl, Livia Chiţu
    14 March 2019

    Were the United States to alienate its geopolitical allies, the likelihood and benefits of successful bilateral agreements would diminish significantly. Expected trade creation from an agreement with EU countries would decline by 0.6% of total US exports.

    That is the conclusion of new research by Barry Eichengreen and colleagues, which analyses the economics and geopolitics of trade agreements in the period 1871-1913. They find that defence pacts raised the probability of a trade agreement between a pair of countries by as much as 20 percentage points.


    Sanjiv Das, Kris Mitchener, Angela Vossmeyer
    11 March 2019

    When the distribution of risk is more concentrated at the top of the system, as it was in 1929, fragility and the propensity for risk to spread increases. That is the conclusion of research by Kris Mitchener and colleagues, which uses data from the Great Depression to study risk in the commercial banking network leading up to the crisis and how the network structure influenced the outcomes. They draw lessons for the Global Crisis, which brought attention to how connections among financial institutions may make systems more prone to crises.

    BALANCE SHEET POLICIES OF THE EUROPEAN CENTRAL BANK: A re-evaluation of their effectiveness

    Adam Elbourne, Kan Ji, Bert Smid
    13 March 2019


    The effectiveness of the balance sheet policies of the European Central Bank (ECB) is still unproven, according to a study by Adam Elbourne and colleagues. 

    Previous research has shown that changes to the size of the ECB’s balance sheet were followed by meaningful changes in macroeconomic aggregates. The new research argues that the econometric technique these studies employed does not provide reliable estimates. Impulse responses to purported balance sheet shocks are statistically indistinguishable from those from nonsensical identification schemes. 


    Ester Faia, Vincenzo Pezone
    12 March 2019

    Central banks' interest rate announcements policy have stronger effects on firms' stock market valuations when the average time left until renewal of employees’ collective agreements is longer. That is the central finding of a study of monetary policy and wage rigidity in Italy by Ester Faia and Vincenzo Pezone.

    They note that policy-makers are concerned about effecting real change with monetary policy, particularly in the context of wage rigidity. Their study uses extensive Italian data to analyse the extent to which wage rigidity induced by collective bargaining amplifies the effects of monetary policy. The volatility of stock market returns reacts more to monetary policy announcements when the average time left before the renewal of the employees’ collective agreement is large.


    Jan Hannes Lang, Peter Welz
    11 March 2019

    When is the ratio of household credit to GDP excessive? A study by Jan Hannes Lang and Peter Welz of the European Central Bank provides evidence on long credit cycles in 12 European countries. Their findings suggest that household credit cycles should be carefully monitored by macroprudential policy-makers to ensure financial stability.

    Financial crises are often preceded by credit excesses, but how do we know when credit is excessive? The new research shows that deviations of household credit from levels that are justified by economic fundamentals exhibit long cycles of 15 to 25 years with large amplitudes of around 20%.

    Household credit excesses build up many years ahead of financial crises and only gradually unwind thereafter. Most importantly, higher levels of household credit imbalances are associated with larger declines in real GDP once a financial crisis hits.


    Mengjia Ren, Lee Branstetter, Brian Kovak, Daniel Armanios, Jiahai Yuan
    16 March 2019

    Despite leading the world in clean energy investment in recent years, China continues to engage in massive expansion of coal power thanks to policies that effectively subsidise and provide incentives for coal power investment.

    A new study by Lee Branstetter and colleagues examines the effects of the 2014 devolution of authority from the central government to local governments on approvals for coal power projects. They find that the approval rate for coal power projects is about three times higher when the approval authority is decentralised, and provinces with larger coal industries tend to approve more coal power.


    Jaime de Melo, Jean-Marc Solleder
    13 March 2019

    Developing countries have not participated in the WTO-led negotiations aimed at bringing down barriers to trade in environmental goods. If negotiations conclude, would the win for trade and for the environment be extended to a win for developing countries?

    Research by Jaime de Melo and Jean-Marc Solleder draws insights from a newly assembled comprehensive dataset on barriers to trade in environmental goods and provides evidence that tariffs and non-tariff barriers are still an impediment to trade while similar regulations stimulate it. A larger list of environmental goods would entice developing countries to participate, but this will also require protecting them from challenges at the WTO.


    Emanuele Borgonovo, Stefano Caselli, Alessandra Cillo, Donato Masciandaro, Giovanni Rabitti
    12 March 2019

    Alongside liquidity and store of value, is privacy an important attribute of money? Lab experiments by Emanuele Borgonovo and colleagues suggest that it increases the overall appeal of money. They conclude that future competition between alternative currencies will depend on how the three properties are mixed.


    David Andolfatto
    17 March 2019

    The idea of a central bank digital currency has prompted a mixed reaction among economists. A study by David Andolfatto uses a simple theoretical framework to investigate the impact of such a currency on a monopolistic banking sector.

    There are two main results. First, the introduction of an interest-bearing digital currency increases financial inclusion, diminishing the demand for physical cash.

    Second, while an interest-bearing digital currency reduces monopoly profit, it need not disintermediate banks in any way. A central bank digital currency may, in fact, lead to an expansion of bank deposits if the resulting competition compels banks to raise their deposit rates.

    Taken from the VoxEU eBook The Economics of Fintech and Digital Currencies, available to download here


    LOVE, MONEY AND PARENTING: Insights from economics

    Fabrizio Zilibotti interviewed by Tim Phillips, 15 March 2019

    We all want happy and successful kids, so how can economics help? Fabrizio Zilibotti of Yale talks to Tim Phillips about the research that he and his peers have done into parenting and what it tells us.



    Michaela Pagel

    Borrowing on credit cards is expensive, yet people continue to accrue credit card debt. Michaela Pagel looks at evidence on credit card debt from a popular Icelandic financial aggregation app. Standard economic theory says that you will borrow more in bad times than in good, but her research shows that the opposite is true. This implies that periods of recession are deepened since people enter them already in debt and unwilling to increase borrowing and boost the economy.