This week from CEPR: May 9

Thursday, May 9, 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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    Gareth Campbell, Richard Grossman and John Turner
    CEPR DP No. 13717 | 5 May

    A new CEPR study presents monthly capital gains, dividend yield and total return indices for common equities quoted on British stock exchanges from 1829 to 1929. As well as creating an all-share index, the authors create a blue-chip index of the 30 largest companies, which they splice to the Financial Times 30 index to create what is nearly a two-century-long monthly share index for the period 1829-2018 (see Figure). 

    The researchers use the new indices to examine the timing of British business cycles and compare the returns on home and foreign UK investment. They also construct indices for 22 domestic sectors, and calculate CAPM betas for each sector.

    • LAGGING REGIONS IN EUROPE: New evidence that improving the quality of government is a powerful driver of development

    Institutional Change and the Development of Lagging Regions in Europe 
    Tobias Ketterer and Andrés Rodríguez-Pose 
    CEPR DP No. 13712 | 3 May

    A new CEPR study assesses whether both the levels and degree of change in government quality influence regional economic performance in the lagging regions of the EU (see Figure). The results, which cover 249 NUTS2 regions for the period 1999-2013, suggest that:

    •    Government quality matters for regional growth.
    •    Relative improvements in the quality of government are a powerful driver of development.
    •    ‘One-size-fits-all’ policies for lagging regions are not the solution.
    •    Government quality improvements are essential for low-growth regions.

    The study also shows that in lagging regions, basic endowment shortages are still the main barrier to development. In particular, low-growth regions in Southern Europe stand to benefit the most from improvements in government quality; while in low-income regions of Central and Eastern Europe, investments in the traditional drivers of growth remain the main factors behind successful economic trajectories.

    Figure 1. Low income and low growth regions in Europe


    Trade Blocs and Trade Wars during the Interwar Period 
    David Jacks and Dennis Novy
    CEPR DP No. 13716 | 4 May

    The trade disputes of today share some common features with the 1930s, according to new CEPR research. In particular, there is the prospect that a formerly dominant multilateral trading system is in danger of being replaced by a set of bilateral ‘deals’. 

    The 1930s witnessed the unravelling of an informal but longstanding agreement among most nations in which commercial relations were guided by the distinctly multilateral principles laid out in the Cobden-Chevalier treaty of 1860. But during the better part of 20 years it took to rediscover and institutionalise these features in the form of the GATT, many of these same nations first scrambled to erect protectionist walls against all-comers and then to punch holes through them via bilaterally negotiated systems of preferences. 

    At the moment, we have not witnessed a wholesale collapse of the modern trading system. This is partly because policy-makers seem to have learned some of the lessons of interwar history by not responding in a general fashion to unilateral moves toward protectionism. This does, however, raise the prospect that today’s trade wars may serve the same purpose of those in the 1930s, that is, the intensification of existing and nascent trade blocs.

    It requires no great imagination to see a future in which consumers’ preferences, firms’ perceptions of uncertainty, and states’ apprehensions of one another endogenously lead to a reorientation of world trade around China- and US-centric trade blocs. 

    Of course, one particularly telling difference between the present and the interwar period comes from the composition of trade. Then, the world was still dominated by inter-industry trade with only 43% of world exports being classified as manufactured goods.

    In contrast, manufactured goods now constitute the overwhelming majority of world exports, and the subsequent fragmentation of production has given rise to both a heightened sensitivity of trade flows to protectionist measures and a heightened sense of mutual interdependence across countries. Thus, the extent to which global value chains can be unravelled arguably places limits on how far this prospective bloc-based trajectory for world trade might proceed.


    Wolfram Schlenker, Charles Taylor
    02 May 2019

    Anyone who doubts the scientific consensus on the global warming trend could make a significant profit by betting against it in futures markets, according to a study by Wolfram Schlenker and Charles Taylor, which uses weather derivatives in financial markets to assess beliefs about climate change

    Understanding beliefs about climate change is important, but most of the measures used are unreliable. Instead, this research uses prices of financial products whose payouts are tied to future weather outcomes in the United States. These market expectations correlate well with climate model outputs between 2002 and 2018 and observed weather data across eight US cities, and show significant warming trends. When money is at stake, agents are accurately anticipating warming trends in line with the scientific consensus of climate models.


    Franck Portier
    03 May 2019

    Even in the absence of a sudden adverse shock, a US recession is most likely to happen in the next one to two years, according to analysis by Franck Portier. That risk is higher now than what it was two years ago, he concludes.

    Business economists argue that the length of an expansion is a good indicator of when a recession will hit. Using both parametric and non-parametric measures, this research finds strong support for the theory from post-WWII data on the US economy.


    Peter Egger, Katharina Erhardt
    03 May 2019

    The likely damage to trade from recent US tariff increases is being severely underestimated, according to research by Peter Egger and Katharina Erhardt. 

    When economists model changes in tariffs, their models make assumptions about the impact of those changes. Their study argues that those assumptions are often contradicted in the real world and proposes an approach that relaxes these restrictions. Estimates using this approach show that customary models may severely underestimate the impact of recent tariff increases.


    Nicholas W. Papageorge, Victor Ronda, Yu Zheng
    04 May 2019

    Some socio-emotional skills associated with poor school outcomes are productive in the labour market, according to research by Nicholas Papageorge, Victor Ronda and Yu Zheng. Their study, which analyses British and US longitudinal datasets, finds evidence that externalising behaviour (linked to aggression and hyperactivity) lowers educational attainment but is associated with higher earnings for both genders.

    BUILDING SCHOOLS AS A POLICY FOR REDUCING ARMED CIVIL CONFLICT: Evidence from a large-scale construction programme in Indonesia in the 1970s

    Dominic Rohner, Alessandro Saia
    05 May 2019

    It is widely believed that education is a crucial factor in curbing political violence, but establishing causal evidence of this notoriously difficult. Research by Dominic Rohner and Alessandro Saia uses a large-scale school construction programme in Indonesia in the 1970s and newspaper reports of violence to tackle this problem. The results show that the construction of primary schools led to significant reductions in conflict that grew larger over time. 

    HOUSING MARKET AND BANK LENDING: US evidence of effects on young firms and local economies

    Steven Davis, John Haltiwanger 05 May 2019


    House price changes have particularly pronounced effects on new and younger firms, according to a US study by Steven Davis and John Haltiwanger. They note that young firms live a financially precarious life, often dependent on self-funding tied to the value of the business owners’ homes.

    Their research shows that housing market fluctuations play a major role in driving medium-term changes in young firm employment shares. As young firms hire a disproportionate number of younger and less-educated workers, these groups are disproportionately affected by house price fluctuations.


    Thorsten Beck, Liliana Rojas-Suarez
    04 May 2019

    Basel III aims to strengthen the regulation, supervision and risk management of large banks around the world. A new report by Thorsten Beck and Liliana Rojas-Suarez examines how to make it work best for emerging markets and developing economies.


    Jaime de Melo, Alessandro Nicita
    04 May 2019

    Developing countries' effective participation in world markets ultimately depends on their capacity to comply with the requirements of non-tariff measures. Writing at VoxEU, Jaime de Melo and Alessandro Nicita of UNCTAD explore those policy measures and options for integrating them into developing countries' strategies. 

    Developing countries often struggle to access international markets. One reason is that trade regulatory frameworks are becoming more complex, and that contemporary economic integration strategies need to confront policy measures that are well beyond the scope of traditional trade policy.

    EURO AREA ARCHITECTURE: What reforms are still needed

    Agnès Bénassy-Quéré, Markus K Brunnermeier, Henrik Enderlein, Emmanuel Farhi, Marcel Fratzscher, Clemens Fuest, Pierre-Olivier Gourinchas, Philippe Martin, Jean Pisani-Ferry, Hélène Rey, Isabel Schnabel, Nicolas Véron, Beatrice Weder di Mauro, Jeromin Zettelmeyer
    02 May 2019

    In January 2018, CEPR published a Policy Insight recommending euro area reforms that received broad support as well as some criticism. In their latest analysis, the group of top economists – Agnès Bénassy-Quéré, Markus Brunnermeier, Henrik Enderlein, Emmanuel Farhi, Marcel Fratzscher, Clemens Fuest, Pierre-Olivier Gourinchas, Philippe Martin, Jean Pisani-Ferry, Hélène Rey, Isabel Schnabel, Nicolas Véron, Beatrice Weder di Mauro and Jeromin Zettelmeyer – argue that the problems that prompted their report are still there, new problems are on the horizon and the current state of the policy conversation on reform is disappointing. They also identify priorities that should be at the centre of discussions on reform.

    FISCAL TRANSFERS: Evidence from Brazil

    Raphael Corbi, Elias Papaioannou, Paolo Surico
    01 May 2019

    Fiscal transfers can play a valuable stabilisation role in a currency union, according to analysis of a Brazilian federal transfer scheme by Raphael Corbi, Elias Papaioannou and Paolo Surico.

    The recent political crisis in the euro area has brought the design of fiscal policy to the forefront of public debate, with many arguing that EU-level transfers are necessary for the ‘completion’ of EMU. This column uses extensive data from the Fundo de Participação dos Municípios in Brazil to show the potential of transfers.

    LABOUR MARKET SPEED-DATES: Promoting temporary work for the unemployed 

    Bas van der Klaauw, Lennart Ziegler
    02 May 2019

    Labour market ‘speed-dates’ for unemployed workers with temporary work agencies have an initially positive impact on job finding but the temporary work does not serve as a stepping stone towards regular employment. That is the conclusion of research by Bas van der Klaauw and Alexandre Ziegler.

    Although temporary jobs are often characterised by lower pay, advocates of temporary work argue that taking up such jobs can increase the chances of finding regular work in the long run. This study reviews evidence on the effectiveness of a labour market ‘speed-date’ programme in the Netherlands, where unemployed jobseekers are matched with temporary work agencies.


    Samara Gunter, Daniel Riera-Crichton, Carlos Vegh, Guillermo Vuletin
    01 May 2019

    In the developing world, higher taxes may be an effective way to raise revenues without reducing GDP, especially in commodity-dependent countries or those with low provision of public goods. That is the conclusion of research by Samara Gunter, Daniel Riera-Crichton, Carlos Vegh and Guillermo Vuletin

    Based on evidence from the industrial world, and particularly Europe, tax hikes have a significant negative effect on economic activity. This study shows that this empirical finding does not hold for a broader sample.

    NEWS AGGREGATORS: Evidence from Spain brings into question recent European copyright legislation

    Joan Calzada, Ricard Gil
    30 April 2019

    News aggregators can have a positive impact on outlets’ traffic, particularly those with more casual readers, those with a low national rank and those with fewer international visitors. That is the conclusion of research by Joan Calzada and Ricard Gil. 

    The new European copyright directive prohibits online aggregators from linking to news outlets or publications without the prior authorisation of the publisher. This study uses the 2014 shutdown of Google News in Spain to demonstrate the benefits of news aggregators. The results suggest that publishers and aggregators may wish to negotiate their own specific compensation terms for content use.


    Cheng Chen, Claudia Steinwender
    30 April 2019

    Family owned and managed firms improve their productivity most in response to import competition, according to research by Cheng Chen and Claudia Steinwender. The managers of these firms care more about long-term survival, prompting extra effort when faced with increased bankruptcy risk.

    Firms around the world are facing increased import competition, especially from low-wage countries like China, but the effect on the productivity of affected firms remains unclear. Using data from Spain, this study looks at how firms under different types of management respond to an increase in competition. Less productive firms that are both family owned and managed see the greatest improvement in productivity.


    David Bloom, Alyssa Lubet
    29 April 2019

    The United States faces particularly acute problems of pensions and healthcare provision arising from its ageing population, high healthcare costs and high inequality in maternal mortality and other health indicators. That is the conclusion of analysis by David Bloom and Alyssa Lubet. They say that it will take deep social policy and health system reforms to address these inequalities.

    MAKING SANCTIONS BITE: The EU-Russian sanctions of 2014

    Matěj Bělín, Jan Hanousek
    29 April 2019

    The annexation of the Crimean peninsula by the Russian Federation in 2014 led to sanctions by the United States and the EU, among others, and counter-sanctions by Russia. Research by Matěj Bělín and Jan Hanousek estimates that the value of trade lost due to Western sanctions over 2014-16 amounts to $1.3 billion, while trade lost due to the Russian counter-sanctions amounts to $10.5 billion. There appears to be no evidence that Russian importers switched between suppliers from sanctioning countries to competitors from non-sanctioning countries.



    MariaCristina De Nardi interviewed by Tim Phillips, 3 May 2019

    MariaCristina De Nardi tells Tim Phillips that non-college-educated Americans born in the 1960s are dying younger, earning less and paying more for healthcare than in their parents' generation.


    Diane Coyle, 3 May 2019

    Reliance on GDP as a measure of economic progress fails to take into account the shift to a service economy. In this short film, Diane Coyle of Cambridge University proposes a better metric built around how people use their time.


    TRAPPED BY MISPERCEPTIONS: Women, work and social norms in Saudi Arabia

    David Yanagizawa-Drott, 7 May 2019

    Employment rates for women in Saudi Arabia are very low. By custom, they cannot decide for themselves whether to work or not – they need the consent of their male guardian (either their husband or father). Whether men permit their wives or daughters to work depends crucially on social norms. 

    David Yanagizawa-Drott of the University of Zurich discusses his UBS Center Policy Brief, which reports evidence that most Saudi men privately believe that women should be allowed to work, but that they underestimate the extent to which other men share their views.

    Experiments reveal that when men are informed that other men agree about women and work, they are more willing to let their wives take a job. This has real-life consequences: wives of men whose misperceptions about the acceptability of female employment have been corrected are more likely to apply and be interviewed for a job