This week from CEPR: May 16

Thursday, May 16, 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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    A new CEPR study of chief executives of NHS hospitals in England brings into question the effectiveness of leadership changes to improve performance in the public sector. The authors find little evidence of top managers having an impact on measures of hospital production including inputs, intermediate operational outcomes and clinical outcomes. This is despite big increases in pay relative to other staff (see Figure 1).

    Public hospitals in England are large and complex organizations with multi-million turnover. This research explores the extent to which the people that lead them are differentiated in terms of their pay, as well as a wide range of hospital production measures. Pay differentials suggest that the market perceives chief executives to be differentiated, but the outcomes indicate few differences.

    Figure 1: Annual means of pay for NHS staff by job type

     Note: Adjusted for inflation using Consumer Price Index, base year = 2000

    Structural changes in the Chinese economy are likely to raise the share of private household and government consumption in GDP, turn China’s trade surplus into a trade deficit, reduce China’s share in global exports, raise the share of services in both production and exports, shift the destination markets of Chinese exports from developed to developing countries, and change its pattern of comparative advantage away from sectors like light and heavy manufacturing to electronic and machinery equipment.

    These are the baseline projections up till  2040 of new CEPR research generated with the WTO Global Trade Model. The study also projects that China’s large bilateral trade surplus vis-à-vis the United States will fall to almost zero (see Figure). This will happen as a consequence of structural change, in particular a reduction in the savings rate, an increase in the share of skilled workers, and an increase in productivity in technologically advanced manufacturing sectors targeted by Made in China 2025.

    Figure 18: The bilateral trade surplus of China vis-a-vis the United States in thousands of Dollars

    To preserve the effectiveness of monetary policy in a world increasingly flooded by private digital currencies, central banks will eventually have to issue their own digital currencies. That is the conclusion of a new CEPR study.

    Although a non-negligible number of central banks are actively considering the pros and cons of a central bank digital currency, none has yet issued such a currency on a full scale. This research presents two proposals for the implementation of such a currency: a moderate proposal in which only the banking sector continues to have access to deposits at the central bank; and a radical one in which the entire private sector is allowed to hold digital currency deposits at the central bank.

    The study shows that the radical implementation may pave the way toward a narrow banking system and dramatically reduce the need for deposit insurance in the long run. It also evaluates the relative merits of issuing a currency on a blockchain using a ‘permissionless’ distributed ledger technology in comparison to a centralised (‘permissioned’) blockchain ledger operated by the central bank. The author concludes that the latter dominates the former in more than one dimension.


    Hites Ahir, Nicholas Bloom, Davide Furceri
    11 May 2019

    A sharp increase in the uncertainty in the world economy in the first quarter of 2019 could be enough to knock up to 0.5% of global growth over the course of the year. That is the conclusion of analysis by Hites Ahir, Nicholas Bloom and Davide Furceri, who have developed the World Uncertainty Index.
    According to the latest projections by the International Monetary Fund, the global economy is now projected to grow at 3.3% in 2019, down from 3.6% in 2018. This is partly due to rising uncertainty in many parts of the world. The new analysis, summarised at Vox, shows how these statements are in line with the latest reading of the World Uncertainty Index. 


    Marco Buti, Oliver Dieckmann, Björn Döhring, Bertrand Marc, Andreas Reuter
    7 May 2019

    The sharper-than-expected economic slowdown in the euro area last year was driven by a confluence of weaker export demand plus sector- and country-specific factors within the euro area. Writing at Vox, Marco Buti and colleagues at the European Commission introduce their Spring 2019 forecast, which projects a moderate rebound over the course of this year as global demand bottoms out and some temporary negative factors fade.

    The authors note that this outcome will depend on domestic demand holding up despite the stark slowdown in manufacturing. They add that the baseline scenario is subject to downside risks, some of which could be triggered by misguided economic policies. Economic policy should therefore stand ready to react to a sharper and more protracted slowdown should it occur.


    Alison Booth, Jungmin Lee
    11 May 2019

    A comparison of the performance of high-ability adolescent girls and boys who participated in a long-running Korean TV quiz show finds a gender gap in performance – in favour of boys – across episodes of the show. To investigate underlying mechanisms that might explain this, the study by Alison Booth and Jungmin Lee explores how male and female performance varies under different rules of the game.

    They find that there are no gender gaps when stress is kept to a minimum -- that is, in games without fastest-finger buzzers, knockouts or penalties. But in games with these features, there are significant gender gaps. There are also larger gender gaps in performance in the second rounds of the show, which is consistent with girls being increasingly hindered by psychological stress and risk aversion when competition is higher.

    HOW STRESS TESTS FAIL: New insights on post-crisis bank regulation

    Jeremy Bulow
    9 May 2019

    Thousands of pages of post-crisis bank regulation have largely ignored perhaps the two most needed reforms, according to Jeremy Bulow, writing at Vox: measuring asset values and risks in an economically realistic way.

    He notes that bank stress tests in the United States were an important tool for bailing out banks in the Great Recession. But because the tests use regulatory rather than market measures of asset values and risk, they have almost nothing to do with whether a bank will be economically solvent under test conditions. Professor Bulow concludes that reforming the stress tests is necessary for clearly and credibly placing responsibility for future banking losses in the private sector and for improving incentives for both managing old risks and for investing in new ones. 


    Jeffrey Frankel
    9 May 2019

    Pressure from Republicans on the US Federal Reserve to ease monetary policy when they are in the White House is a pattern that goes back half a century, notes a Vox column by Jeffrey Frankel. His piece analyses the monetary policy positions of Stephen Moore, one of President Trump’s picks for the Federal Reserve Board, who has recently withdrawn his candidacy.

    Moore has been pro-cyclical in his recommendations for monetary policy, opposing stimulus when the economy needed it and favouring stimulus when the economy did not. Professor Frankel argues that Moore’s switch to urging monetary stimulus when Trump took office fits into a wider pattern among of pro-cyclical positions among leading Republicans, not just in monetary policy, but also fiscal and regulatory policy.


    Janine Aron, John Muellbauer
    7 May 2019


    Mobile money has transformed the landscape of financial inclusion in developing and emerging market countries, leapfrogging provision of formal banking services and ameliorating areas of market failure, such as savings, insurance and women’s empowerment.

    In a new study, Janine Aron and John Muellbauer illustrate these effects using examples from a burgeoning body of empirical research. They conclude that the system-wide effects of mobile money may be even greater than current studies suggest.


    Richard Freeman, Wei Huang, Teng Li
    7 May 2019

    Incentive systems that pay bonuses to workers based on performance targets are widely used to increase productivity, but they can also incur costs to firms from workers gaming the system. In a new study, Richard Freeman, Wei Huang and Teng Li examine the introduction of one such non-linear incentive system by a major Chinese insurance firm.

    Their results show that steep non-linear incentives increased insurance agents’ productivity and lowered their turnover rates sufficiently to outweigh the gaming costs and benefit both workers and the firm.

    EUROPEAN REGIONAL SUPPORT FUNDS: Evidence from Latvia of the impact on firms’ performance

    Naomitsu Yashiro, Konstantins Benkovskis, Olegs Tkacevs
    6 May 2019

    EU regional support funds boost capital investment and employment in the recipient firms, but their effect on productivity is more variable. According to research by Naomitsu Yashiro, Konstantins Benkovskis and Olegs Tkacevs, which looks at the impact of such funds on Latvian firms’ performance, larger and more productive firms are more likely to receive support funds, but it is not clear if their productivity improves as a result. The impact is bigger for recipients with initially low productivity.

    EU cohesion policy aims to narrow gaps in economic development through large regional support funds. These results suggest that access to such funds must be facilitated to allow smaller and less productive firms, which have a great need for investment and a larger room for productivity catch-up, to be included in the pool of potential recipients.


    Bernt Bratsberg, Andreas Moxnes, Oddbjørn Raaum, Karen-Helene Ulltveit-Moe
    9 May 2019

    In the aftermath of the eastern enlargement of the EU, Norway experienced one of the largest immigration shocks of the twenty-first century. Research by Bernt Bratsberg, Andreas Moxnes, Oddbjørn Raaum and Karen-Helene Ulltveit-Moe uses data from the episode to examine the response of wages, labour costs and industry employment.

    One finding is that although real wages in some occupations decline, the aggregate welfare effects on natives are close to zero as they switch to higher-wage occupations. The welfare effect on the existing population of immigrants, on the other hand, is negative as they have a comparative advantage in low-wage occupations.


    Rémi Jedwab, Noel Johnson, Mark Koyama
    8 May 2019

    The Black Death killed 40% of Europe’s population between 1347 and 1352, but on average, cities got back to their pre-plague populations within two centuries. That is the central finding of research by Rémi Jedwab, Noel Johnson and Mark Koyama. Their study, which explores the short- and long-run effects of the Black Death on city growth, finds that the rate of urban recovery depended on advantages that favoured trade.


    Alessandra Bonfiglioli, Rosario Crinò, Gino Gancia
    8 May 2019

    Recent studies documenting the increase of industrial concentration have raised concerns about an era of monopolies, growing profit shares and low economic dynamism. Using US data, research by Alessandra Bonfiglioli, Rosario Crinò and Gino Gancia investigates the concentration of import sales by country of origin.

    The results show that among foreign firms selling to the United States, the concentration of sales has remained stable by origin country, but it has fallen when pooling firms from all origins. This suggests that intensified competition in international markets co-exists with growing concentration among national producers.

    HOW HOST-COUNTRY FINANCIAL CONDITIONS INFLUENCE THE GLOBAL OPERATIONS OF MULTINATIONAL FIRMS: New evidence on financial development, foreign direct investment and the competitiveness of local firms

    Kamran Bilir, Davin Chor, Kalina Manova
    6 May 2019

    Understanding how host-country financial conditions influence the global operations of multinational firms is important for encouraging foreign direct investment. Using US data, research by Kamran Bilir, Davin Chor and Kalina Manova shows that more financially developed economies have more entry by multinational affiliates and higher aggregate affiliate sales to the local market, back to the United States and to third destinations, particularly in more financially vulnerable sectors. Yet at both aggregate and affiliate levels, the share of local sales in total sales is smaller, while the shares of US and third-country sales are bigger. 

    HIV PHARMACEUTICALS: Implications of price discrimination across countries

    Michael Kremer, Christopher Snyder, Fanele Mashwama
    10 May 2019

    Consumers pay more for many pharmaceuticals in the United States than in most other countries. Research by Michael Kremer, Christopher Snyder and Fanele Mashwama investigates the welfare implications of such price discrimination using demand curves for HIV pharmaceuticals. They find that a ban on price discrimination exacerbates the potentially large deadweight loss in the market for either a drug or a vaccine. But this loss is ameliorated by a small government subsidy.


    Çağatay Bircan, Orkun Saka
    10 May 2019

    Turkey’s central government may use commercial lending by state-owned banks to support allies and punish opponents in local elections. That is the conclusion of research by Çağatay Bircan and Orkun Saka.

    They note that government ownership of banks can help solve credit market failures and stabilise the supply of credit over the business cycle. But it can also end up serving political interests and lead to a misallocation of financial resources. This study provides new evidence that state-owned banks systematically engage in tactical redistribution of credit in line with the political incentives of those in power. 


    Francesco Giavazzi, Richard Portes
    7 May 2019

    The late Alberto Giovannini was an influential macroeconomist and financial economist who thought about financial markets with a unique combination of sound theory and deep practical experience. He was also an early CEPR Research Fellow appointment and had great enthusiasm for the mission of CEPR.

    A Vox column by Francesco Giavazzi and Richard Portes pays tribute to a much-loved man who combined intellectual gravity with great energy and a positive outlook that he communicated to all.



    Chad Bown interviewed by Tim Phillips, 10 May 2019

    Who will be the biggest loser in the trade war between China and the United States? Chad Bown tells Tim Phillips why it could be the WTO’s dispute resolution system, and why we should worry if this happens.



    Hélène Rey, 10 May 2019

    Hélène Rey of London Business School and CEPR discusses economic challenges for Europe.