This week from CEPR: May 21

Thursday, May 21, 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


    Cheti Nicoletti, Kjell G Salvanes, Emma Tominey                  
    CEPR DP No. 14749  | May 2020 

    Mothers who work during a child’s pre-school years my invest less time in child development, which could lead to a negative effect on mid-childhood and teenage outcomes. But as mothers' work hours increase, income will rise – and new research suggests that this rise in household income fully compensates in the long run for any reduction in mothers’ time investments. The negative effect of an increase in mothers’ hours worked on child outcomes at age 11 is at least partially compensated by the increase in household income, while by age 15, it is fully compensated.

    These are the central conclusions of a new CEPR study by Cheti Nicoletti, Kjell Salvanes and Emma Tominey, who use data from every first-born child in Norway between 1997 and 2001 to analyse how an increase in mothers’ labour hours, a reduction in her time investments, and rising income effect long-term child outcomes. 

    The study finds that an increase in mothers’ hours worked during pre-school years leads to changes in the time allocation of children by replacing the time a mother spends with her child with alternative childcare time. This may create a potential decrease in the total time that the child spends in educational, playing and other activities that are important for child development. Such changes in time investments, conditional on household income, cause a decrease in child’s test scores at age 11 and 15 by around 30-36% of a standard deviation. 

    But this negative coefficient on mothers’ hours cannot be interpreted as a negative total effect of mothers’ working in pre-school hours. The reason is that household income is a mediator to the effect of mothers’ hours. An increase in mothers’ pre-school hours raises household income, which in turn raises child test score outcomes. In fact, this mediator effect fully compensates for any reduction in mothers’ time investments leading to a total effect of mothers’ hours that is essentially zero. 

    Although there are differences in the causal effects of hours and household income on child outcomes across child gender, or across mothers’ education, in all cases the total effect of an increase in mothers’ hours is not statistically different to zero.


    Mario Daniele Amore, Valerio Pelucco, Fabio Quarato          
    CEPR DP No. 14759 | May 2020

    Firms with controlling family shareholders have fared significantly better than other firms during the pandemic. This effect is particularly pronounced among firms in which a family is both the controlling shareholder and holds the CEO position. 

    These are the findings of a new CEPR study by Mario Daniele Amore, Valerio Pelucco and Fabio Quarato, who test how the involvement of families in ownership and governance positions influences the financial performance of Italian listed firms during the spread of Covid-19. Based on the analysis of daily stock return data for listed firms in Italy, the results demonstrate that family firms have fared better than non-family firms during the Covid-19 pandemic.

    The study notes that family firms have several features that can prove valuable to overcome a crisis. In particular, family owners often exhibit long time horizons in decision-making, high reputational concerns and a strong attachment to the business. Family ties grant a better access to resources from banks and the political sector. Family firms also exhibit higher employee productivity, thanks to their ability to enforce implicit contracts with the workforce. 

    These results expand existing knowledge on the determinants of organisational resilience in the wake of adverse events.

    • CAREERS IN FINANCE: New evidence on pay premia relative to other sectors   

    Andrew Ellul, Marco Pagano, Annalisa Scognamiglio         
    CEPR DP No. 14767 | May 2020

    Employees in finance are known to have earned higher wages and returns to talent than non-finance workers since the 1990s, suggesting that finance may have attracted talent at the expense of other industries. But the allocation of talent is likely to respond to differences in career paths across industries, not in wages at a given date. 

    Comparing various aspects of careers – levels, slopes, PDV and risk of pay profiles – a new CEPR study by Andrew Ellul, Marco Pagano and Annalisa Scognamiglio shows that finance as a whole offers a career premium compared with manufacturing and high-tech, through higher and steeper pay profiles. 

    But this masks significant diversity within finance: while asset managers enjoy a large career premium and no commensurate career risks, the opposite applies to banking and insurance employees. Furthermore, relative to manufacturing, the asset management career premium has risen for cohorts entering soon before and during the financial crisis, even after controlling for career risk, while the high-tech career premium has become commensurately large for the latest cohorts.

    MEASURING EXCESS MORTALITY: England is the European outlier in the Covid-19 pandemic

    Janine Aron, John Muellbauer               
    18 May 2020

    Excess mortality data overcome two problems in reporting Covid-19-related deaths: miscounting from misdiagnosis or under-reporting of Covid-19-related deaths is avoided. Excess mortality data include ‘collateral damage’ from other health conditions, left untreated if the health system is overwhelmed by Covid-19 cases. England eclipses all 24 countries covered by EuroMOMO in excess mortality scores. England’s peak rate of excess deaths for the most vulnerable age group, the over-65s, is also the highest. 

    Writing at Vox, Janine Aaron and John Muelbauer argue that research is needed into these divergent patterns. They suggest that national statistical offices should publish P-scores (excess deaths divided by ‘normal’ deaths) for states and sub-regions, and permit EuroMOMO to publish P-scores as well as their less transparent Z-scores. This would aid comparability, better inform pandemic policy, and allow lessons to be drawn across heterogeneous regions and countries. 

    Generally, there was a collective failure in preparedness across the public health system, especially for testing capability and adequate supplies and distribution logistics of personal protection equipment (PPE) for health workers. The late recognition of the need to provide care-homes with PPE and tests has received recent attention. Regions outside London mostly fared better, though the West Midlands and the North West, the next largest conurbations, eventually had the next highest excess death rates. This underlines the roles of timing and urban density. Infection rates outside London may have been at lower levels, so when social distancing and lock-down measures were introduced, they were the more effective. 

    For male transport workers, above-average mortality rates are pronounced for taxi drivers followed by bus drivers. Security guards and male care workers fare even worse. Among women, care workers have around 2.4 times the average death rates for working age women. For nurses, the ratio is 1.3, suggesting that staff in care-homes were particularly badly protected.

    THE COST OF THE COVID-19 CRISIS: Lockdowns, macroeconomic expectations, and consumer spending

    Olivier Coibion, Yuriy Gorodnichenko, Michael Weber              
    12 May 2020

    What are the economic costs of US lockdowns in terms of spending, labour market outcomes and macroeconomic expectations? A study by Yuriy Gorodnichenko and colleagues finds overall spending drops of more than 30%, unemployment expectations climbing more than 10%, inflation expectations falling, uncertainty rising, and plans to purchase large durables plummeting. 

    The declines in employment and spending can be largely attributed to lockdowns rather than to the share of the population infected by the coronavirus. Low expectations for inflation and mortgage interest rates will likely limit the power of monetary policy and many households could default on their debt payments and rents which may start a wave of bankruptcies and evictions and thus delay the recovery. 

    To avoid adverse hysteresis-like scenarios, the authors suggest that policy-makers consider less conventional measures such as extended periods of fiscal stimulus, debt forgiveness, taking stakes in businesses (including financial institutions), and more aggressive quantitative easing.


    Guglielmo Briscese, Nicola Lacetera, Mario Macis, Mirco Tonin             
    16 May 2020

    Many governments have enacted stringent ‘stay-at-home’ policies to mitigate the spread of the Covid-19 pandemic. A new study by Mario Macis and colleagues reports evidence from a series of surveys of representative samples of the Italian population on their willingness to comply with the lockdown. 

    The results indicate that people are less compliant if self-isolation measures are extended for longer than expected, which suggests that managing expectations is critical. The study suggests the public grew impatient with having to bear longer isolation periods over time, and started reacting more negatively to extensions if these were longer than they expected. This finding could be valuable if new waves of infections force governments to re-introduce lockdowns.


    William Maloney, Temel Taskin               
    15 May 2020

    Writing at Vox, William Maloney and Temel Taskin argue that in developed countries, mandatory policies matter less than voluntary demobilisation in reducing mobility and enabling social distancing, critical to reducing the propagation of Covid-19. Their analysis, using Google mobility data, reveals significant declines in restaurant reservations in the United States and movie theatre revenues in Sweden before the imposition of government non-pharmaceutical interventions (NPIs). While this behaviour will help reduce mobility and the spread of the virus, it may also slow the economic recovery that follows. 

    These findings offer both good and bad news. On the good side, they imply that for many countries in the world, self-enforcing dynamics and NPIs can reduce mobility substantially without much state capacity. On the bad side, the results suggest that releasing constraints may not have the expected economically rejuvenating effect. If the populace is not convinced that ‘the coast is clear’, then continued uncertainty is more likely to dictate a longer recovery period. 


    Asger Lau Andersen, Emil Toft Hansen, Niels Johannesen, Adam Sheridan                
    15 May 2020

    The Covid-19 pandemic has had drastic effects on consumer spending across the world. Writing at Vox, University of Copenhagen economists present evidence based on bank account transaction data from Denmark showing that total card spending was reduced by 25% during the early phase of the crisis. The drop was mostly concentrated on goods and services whose supply is directly restricted by government interventions, suggesting a limited role for spillovers to non-restricted sectors through demand in the short term.

    What would have happened if the Danish government had not shut down large parts of the economy on 11 March? On the one hand, the fact that spending reductions are so concentrated in the closed sector – and that economic risks such as income and wealth losses appear to play a modest role – is consistent with the idea that the shutdown was the direct cause behind the drop in spending.

    On the other hand, it is also possible that the health risks that motivated the shutdown would have suppressed spending on goods and services produced in the closed sector, even without any government intervention. Under this interpretation, the authors note that re-opening the economy will not restore economic activity to pre-crisis levels so long as the health risks associated with the COVID-19 epidemic remain.

    TOP TALENT LOST IN DISTRESSED FIRMS: New evidence from Swedish bankruptcies

    Ramin Baghai, Rui Silva, Viktor Thell, Vikrant Vig               
    18 May 2020

    Businesses worldwide are reeling from the fallout caused by the pandemic, and a surge in bankruptcies is expected. Writing at Vox, Vikrant Vig and colleagues use micro-data and a large sample of Swedish bankruptcies from 2003 to 2011, to document how firms lose workers with the highest cognitive and non-cognitive skills as they approach bankruptcy. Historical analysis suggests that the current high levels of leverage, combined with the reliance on skilled labour in modern firms, will pose unique challenges to businesses trying to weather the storm ahead.


    Alina Bartscher, Moritz Kuhn, Moritz Schularick          
    18 May 2020

    Household debt-to-income has quadrupled in the United States since the Second World War. Writing at Vox, Moritz Schularick and colleagues present historical evidence suggesting that debt-to-income ratios have risen most dramatically for middle-class households with low income growth. The results suggest that middle-class households have increasingly tapped into rising housing wealth to finance spending in excess of income. Home-equity-based borrowing accounts for 50% of the increase in US housing debt and turned the middle-class into the epicentre of financial fragility. 


    Sascha O. Becker, Erik Hornung               
    17 May 2020

    The Prussian three-class franchise is a classic example of a system that politically over-represented the economic elite. Contrary to the predominant and simplistic view that the system allowed the landed elites to capture most political rents, a study by SaschaBecker and Erik Hornung finds that, conditional on land ownership inequality, MPs from constituencies with a higher vote inequality support more liberal policies, gauging their political orientation from the universe of roll call votes cast in parliament during Prussia’s rapid industrialisation in the second half of the 19th century.


    Jean-Philippe Platteau, Vincenzo Verardi             
    16 May 2020

    Writing at Vox, Jean-Philippe Platteau and Vincenzo Verardi argue that differences in the way people, and in particular different age groups, interact can explain why there is such large variation in infection and death rates of Covid-19 both across as well as within countries.

    Simulations show that the measures Belgium would need to take when re-opening its economy would be more moderate if it had the same interaction patterns as Germany, and more strict if it had Italy’s interaction patterns. These results suggest that there is no one-size-fits-all solution that could be applied to all countries, or even to all regions within a country.


    Charles Goodhart, Duncan Needham         
    16 May 2020

    The Covid-19 crisis presents a multi-faceted challenge to policy-makers. A combination of declining commodity prices, the rise in unemployment, and emergency state spending are all set to create challenging economic conditions, even as the pandemic itself subsides. 

    Writing at Vox, Charles Goodhart and Duncan Needham argue that one mechanism that could help control long-run inflation levels is the issuance of long-dated gilts. This would also help to protect the young and unborn generations from the threat of resurgent inflation, which could lead to a massive rise in their future debt service requirements. 

    PREDICTING THE SUPPLY AND DEMAND SHOCKS OF THE COVID-19 PANDEMIC: An industry and occupation perspective

    R. Maria del Rio-Chanona, Penny Mealy, Anton Pichler, François Lafond, J. Doyne  
    16 May 2020

    A new study by Doyne Farmer and economists from the University of Oxford provides estimates of occupation- and industry-specific effects of both the supply and the demand shock for the United States. The results show that GDP is predicted to decline by 22% compared to the pre-Covid-19 period, and 24% of US jobs are likely to be vulnerable. The adverse effects are further estimated to be strongest for low-wage workers who might face employment reductions of up to 42% while high-wage workers are estimated to experience a 7% decrease.

    THE HAMMER AND THE DANCE: Health and economic objectives are not mutually exclusive

    Tiziana Assenza, Fabrice Collard, Martial Dupaigne, Patrick Feve, Christian Hellwig, Sumudu Kankanamge, Nicolas Werquin               
    15 May 2020


    How should governments balance controlling the Covid-19 pandemic with limiting its economic costs? Writing at Vox, economists from the Toulouse School of Economics argue that health policy and economic policy objectives in pandemic control are not that far apart, and that the epidemiological strategies adopted by many countries – described as a ‘hammer and dance’ – are also based on sound economic principles. By paying close attention to behavioural responses and externalities, the authors offer concrete prescriptions for lockdown and recovery policies.


    Shigeru Fujita, Giuseppe Moscarini, Fabien Postel-Vinay             
    15 May 2020

    Current government policies addressing the Covid-19 crisis protect the hardest-hit workers and jobs. The world economy, however, is already experiencing needs for employment reallocation towards certain essential activities. 

    Writing at Vox, Shigeru Fujita and colleagues propose a policy framework to resolve the trade-off between protecting valuable match-specific capital and restoring the desired pace of healthy reallocation. The scheme leverages the distinct age profile of Covid-19 health risks, matching capital, and worker reallocation, by tailoring furlough subsidies, wage subsidies, and unemployment insurance to worker age.

    Are people going back to dine in restaurants and fly around, until the health crisis is resolved? Current estimates put that goalpost at 8-24 months from now. The authors argue that keeping on life support, through furlough subsidies, sectors and occupations that are likely to suffer demand declines for many quarters is not socially desirable.


    Marcus Hagedorn, Kurt Mitman            
    15 May 2020

    Heterogeneous-Agent New Keynesian models offer new perspectives on fiscal and monetary policy interaction in the euro area. The current question is whether European Central Bank measures are predominantly motivated to ensure price stability (with fiscal consequences a side effect), or whether they are motivated by an overriding economic policy objective. 

    Writing at Vox, Marcus Hagedorn and Kurt Mitman present evidence that, according to the HANK models, there is no distinct separation between fiscal and monetary policy. Fiscal policy is an important determinant of inflation at the zero lower bound, and properly designed asset purchases are an effective instrument to satisfy the price stability mandate. 


    Giancarlo Corsetti, Aitor Erce, Antonio Garcia Pascual             
    14 May 2020

    Prominent voices propose financing the European Recovery Fund using joint perpetual debt. Writing at Vox, Giancarlo Corsetti, Aitor Erce and Antonio Garcia Pascual argue that there are gains from using European borrowing and lending as two separate policy levers. In a world of ultra-accommodative monetary policy, financing the Fund issuing debt at shorter maturities and passing those low interest rates onto member states through loans with low margin and with very long maturities is financially cheaper. Supporting the recovery through this maturity transformation would reinforce debt sustainability across the European Union.


    Valerie Cerra, Antonio Fatás, Sweta C. Saxena             
    14 May 2020

    Now is not the time to err on the side of caution when it comes to expansionary economic policies argues a new study by Valerie Cerra, Antonio Fatás, Sweta Saxena. Past recessions have left permanent scars on long-term growth, known as hysteresis. Policies should be put in place to minimise any long-term effects of the pandemic recession. Continued macroeconomic stimulus, where policy space exists, is needed using an array of instruments. 


    Ayça Tekin-Koru               
    14 May 2020

    A study by Ayça Tekin-Koru reviews Turkey’s response to Covid-19, where strict and prolonged age-specific containment measures have both reduced infection/death rates and enabled less strict restrictions for the lower-risk groups, and examines the real-time effects of the COVID-19 crisis on production in Turkey. 

    The results suggest that the targeted containment measures appear to have helped reduce a contraction in production that could have been much worse with a uniform lockdown. It also finds that the major brunt of the health crisis in terms of its human costs has been borne by the working class, and service sectors in Turkey will be disproportionally hard-hit by the COVID-19 containment measures.


    Refet Gürkaynak, Deborah Lucas                
    14 May 2020

    The current macroeconomic policy scene in advanced economies is dominated by three interrelated challenges: rapidly meeting the unprecedented spending needs to respond to the COVID-19 crisis, while holding government debt to a sustainable level and avoiding deflation. 

    Writing at Vox, Refet Gürkaynak and Deborah Lucas argue that monetising some of the pandemic-related debt would be the best way to address all three issues simultaneously, even if it risks some future above-target inflation. The authors propose a particular mechanism for debt monetisation, with the proceeds used to fund the partial replacement of lost wages through the banking system. The proposed mechanism effectively monetises the cost of the programme, in contrast to central banks' current debt purchase programmes which, for the most part, have not yet resulted in monetisation.


    Sabrina Howell, Josh Lerner, Ramana Nanda, Richard Townsend 
    14 May 2020

    Governments worldwide have taken steps to bolster their venture capital sectors in response to the Covid-19 crisis. But is venture-backed innovation particularly vulnerable to economic downturns? A new study by Josh Lerner and colleagues finds that early-stage venture investment falls sharply during recessions. The quantity and quality of venture-backed innovation declines particularly for early-stage firms, underscoring the concerns that motivate such policy initiatives. Still, questions remain about the optimal design and public return of these expenditures. 


    Thiess Buettner, Felix Kreidl               
    14 May 2020

    Investors have increasingly used the instrument of withholding taxes to evade dividend taxation, employing ‘cum-ex’ transactions around ex-dividend dates. Writing at Vox, Thiess Buettner and Felix Kreidl argue that withholding-tax non-compliance in the form of cum-ex transactions should not be regarded as some type of financial market arbitrage exploiting a tax loophole but a form of deliberate tax fraud.

    Using German stock trading data, the study provides evidence for these types of transactions, showing that there is a substantial increase in the number of stocks traded immediately before the ex-dividend date, with much stronger increases in ‘over-the-counter’ transactions, where trades are particularly easy to arrange. 

    The large tax-revenue losses related to cum-ex tax fraud indicate that cum-ex buyer and short seller trade in an environment where it is relatively easy to collude. The authors note that this is remarkable, given the close regulation and supervision of financial markets and of the agents participating in these markets including banks. The cum-ex case show that banks are rather imperfect fiscal intermediaries for dividend taxation. To improve compliance, further action is required to make it more difficult to collude. 


    Satoshi Kondo, Daisuke Miyakawa, Kengo Shiraki, Miki Suga, Teppei Usuki                 
    13 May 2020

    Detecting and preventing accounting fraud is a concern for many policy-makers around the world. Writing at Vox, KPMG economists present a framework that incorporates machine learning techniques to detect and forecast fraudulent behaviour by firms when reporting financial information. The framework relies on a larger set of firm information to achieve better detection performance and, unlike previous frameworks, provides forecasts for potential future accounting fraud.

    THE EU RESPONSE TO THE CORONAVIRUS CRISIS: How to get more bang for the buck

    Massimo Bordignon, Guido Tabellini                 
    13 May 2020

    The subsidiarity principle implies that the European Union should do what member countries cannot do by themselves. In the context of the current crisis, this implies issuing very long-term debt. Writing at Vox, Massimo Bordignon and Guido Tabellini argue that this could be achieved by endowing the new European Union Recovery Fund with genuinely own EU sources of revenue. Providing the EU with revenue from EU own tax bases would also improve the quality of EU expenditures, and could pave the way to the creation of a euro area fiscal capacity.

    MODERN HEALTH CRISES: Recession and recovery

    Chang Ma, John Rogers, Sili Zhou                 
    13 May 2020

    Forecasting the progress and impact of Covid-19 is central to the planning of policy-makers around the world. A new study by Chang Ma, John Rogers and Sili Zhou provides a historical perspective by examining the immediate and ‘bounce-back’ effects from six post-war disease shocks. 

    The results show that GDP growth contractions are immediate and sizeable, but vary across countries. Despite an immediate bounce back, GDP tends to remain below its pre-shock level for several years. The negative effect on GDP is felt less in countries with larger first-year responses in government spending, especially on health care, and the indirect effects on GDP growth from affected trading partners are also important. 


    Francesco Bianchi, Renato Faccini, Leonardo Melosi                 
    13 May 2020

    Fighting the consequences of the Covid-19 pandemic poses a difficult task for fiscal and monetary authorities alike. The current low interest rate environment limits the tools of central banks while the record high debt levels curtail the efficacy of fiscal interventions. 

    Writing at Vox, Francesco Bianchi and colleagues propose a coordinated policy strategy aimed at creating a controlled rise of inflation and an increase in fiscal space in response to the Covid-19 shock. The strategy consists of the fiscal authority introducing an emergency budget while the monetary authority tolerates an increase in inflation to accommodate this emergency budget.


    Katie Parry, Oriana Bandiera, Michael Best, Adnan Khan, Andrea Prat              
    13 May 2020

    Could the appropriate response to inefficiency and corruption sometimes be less monitoring, not more? A new study by Oriana Bandiera and colleagues examines the behaviour of 600 procurement officers in Pakistan, and finds that the savings realised through giving them greater autonomy were considerably greater than from pay-for-performance incentive schemes, though this result did depend on the relative efficiency of the procurement officers and their monitors. 

    Overall, this study indicates that we need to check our instinct to react to government inefficiency and corruption with increased monitoring. In many places, the elaborate system of pre-audit monitoring facing bureaucrats is probably doing more harm than good. Greater autonomy (and rigorous post-audit of purchases) may, counter-intuitively, be a key part of the solution.

    COVID-19: Government interventions and the economy

    Xiaohui Chen, Ziyi Qiu              
    13 May 2020

    A new study by Xiaohui Chen and Ziyi Qiu estimates the impact of various government intervention policies on Covid-19 transmission dynamics and the associated economic consequences, from nine countries across the globe. The results show that centralised quarantine is the most effective measure, followed by lockdown, school closure, and mask wearing. The authors suggest that countries may avoid lockdown by imposing school closures, mask wearing and centralised quarantine simultaneously to reach similar Covid-19 infection mitigation outcomes. 

    The study recommends governments to re-evaluate the intervention approaches by using economically affordable policies to replace the economically costly ones without significantly heightening the epidemic peak 

    COVID-19: How Should Tests Be Distributed?

    Stephanie Schmitt-Grohé       

    In New York City, coronavirus tests, contrary to some public perception, were actually administered more evenly across the population than income is. However, since tests were more likely to come back positive from areas with lower average income, targeting a higher proportion of tests at these areas will give a more accurate picture of incidence. Stephanie Schmitt-Grohé, Columbia University.

    COVID ECONOMICS: Covid-19 in Italy

    Francesco Figari and Carlo Favero         

    Why was the mortality rate from Covid-19 so high in some regions of Italy, and how will the Italian welfare system compensate those who have survived the pandemic but lost their income.

    COVID-19: Is Testing Egalitarian?

    Stephanie Schmitt-Grohé          

    Stephanie Schmitt-Grohé and coauthors found that access to tests for coronavirus in New York City was surprisingly egalitarian: testing distribution was a good match for income distribution across the city.