This week from CEPR: November 07

Thursday, November 7, 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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    Emily Blanchard, Chad P. Bown, Davin Chor  
    CEPR DP No. 14091 | 01 November

    Republican candidates lost support in the 2018 United States congressional election in counties more exposed to trade retaliation, but saw no commensurate electoral gains from US tariff protection.  

    These are among the findings of a new CEPR study by Emily Blanchard and colleagues, which determines that electoral losses were driven by retaliatory tariffs on agricultural products, and were only partially mitigated by the agricultural subsidies announced in the summer of 2018 by the US government.

    The results show that the Republican Party also fared worse in counties that had seen recent gains in health insurance coverage, affirming the importance of healthcare as an election issue. A counterfactual calculation suggests that the trade war can account for five of the Republicans' lost House seats, while health care was responsible for eight lost seats.

    Figure A.2: Estimated Decline in 2018 House Republican Vote Share associated with the Trade War and Health Care Policy

    A) Trade War 

    B) Health 

     


    • UNEQUAL COUNTRY WEIGHTING IN EUROZONE MONETARY POLICY: New analysis shows Germany and Greece at opposite ends of the scale

    EXTRACTING IMPLICIT COUNTRY WEIGHTS IN ECB'S MONETARY POLICY
    Márcia Pereira, José Tavares    
    CEPR DP No. 14090 | 31 October

    A CEPR study by Márcia Pereira and José Tavares proposes a new method to estimate implicit country weights in the conduct of monetary policy by the European Central Bank (ECB). 

    The study estimates linear and non-linear Taylor rules for 11 countries in the pre-euro period, and then uses the estimated response to produce counterfactual reference interest rates for those same countries in the post-euro period. The distance between counterfactual interest rates and the ECB's reference rate provides an estimate of a country's implicit weight in euro area monetary policy, in which the sum of weights adds up to 1. The concept of monetary weight draws on that of monetary stress. 

    The results show that Germany, Belgium and the Netherlands are persistently assigned the largest weights, whereas Greece and Ireland, closely followed by Portugal and Italy, secure the smallest. This is especially so during the sovereign debt crisis. The estimated country weights increase with the degree of co-movement between each country's and Germany's business cycle.

    Figure 3: Average weight and maximum-minimum range of weight estimates  

    Source: Authors' calculations, Eurostat, and OECD.
    Notes: The average weight estimate consists of the average of the five different implicit weight estimates, whereas the maximum-minimum range corresponds to the maximum and minimum weights of those estimated. The population and GDP series presented consist of the country-specific averages from 2010 to 2016.


    • SCHOOL TRACKING AND MENTAL HEALTH: Potentially adverse effects for women from highly educated families   

    SCHOOL TRACKING AND MENTAL HEALTH
    Rikhard Petri Bôckerman, Mika Haapanen, Christopher Jepsen, Alexandra Roulet  
    CEPR DP No. 14086 | 28 October

    A new CEPR study by Rikhard Bôckerman and colleagues examines the effects of a comprehensive school reform on mental health. The reform postponed the tracking of students (separating students by academic ability) into vocational and academic schools from age 11 to age 16. The reform was implemented gradually across Finnish municipalities between 1972 and 1977. 

    The results show that there is no discernible effect on mental health-related hospitalisations on average. Yet after the reform, young women from highly-educated families were more likely to be hospitalised for depression. Thus, increasing the tracking age may come at the cost of negative mental health effects for some groups.

    Figure 1: The Structure of the Finnish Education System Before and After the Comprehensive School Reform in the 1970s 



    HIGHER PUBLIC RISK PERCEPTIONS RAISE RATES OF PRODUCT INNOVATION: Evidence from the health sector 

    Alberto Galasso, Hong Luo      
    30 October 2019

    When public perceptions of the riskiness of a product rise, so too do the demand for safety and the incentives for firms to innovate. That is the central finding of a new study by Alberto Galasso and Hong Luo of over-radiation accidents involving CT scanners and the susbsequent development of risk-mitigating technologies.

    The researchers use media coverage of the accidents to investigate the impact of risk perceptions on firm innovation and increased R&D investment. The results show that higher public risk perceptions increased patent applications and the rate of new product innovation, even without changes in liability or regulation.


    INCREASED MOBILE INTERNET ACCESS REDUCES CONFIDENCE IN GOVERNMENT AND BOOSTS SUPPORT FOR POPULIST PARTIES 

    Sergei Guriev, Nikita Melnikov, Ekaterina Zhuravskaya      
    31 October 2019

    The proliferation of mobile technology reduces citizens’ confidence in their current governments, especially in places where news broadcasting is censored but the internet is not. That is one of the findings of a new study by Sergei Guriev, Nikita Melnikov and Ekaterina Zhuravskaya finds that 

    The research also shows that by reducing the cost of reaching voters, the internet has led to increased support for both left-wing and right-wing populist movements.


    THE 1964 CIVIL RIGHTS ACT: The impact on US racial fertility gaps 

    Owen Thompson      
    01 November 2019

    African Americans born in the years immediately after the US Civil Rights Act in 1964, when the relative fertility of black southern women declined markedly, exhibited rapid improvements in test scores and adult outcomes. That is one of the findings of research by Owen Thompson that investigates the relationship between racial inequality and fertility differentials.

    The study notes that fertility rates among African American women have exceeded those of white women since fertility statistics started, while disparities in the economic outcomes of black and white Americans have persisted. The fertility choices of African American women were extraordinarily responsive to changes in discriminatory policies made during the Civil Rights era.


    DANGERS OF INCREASED AUTOMATION: Lessons from the Industrial Revolution 

    Carl Benedikt Frey, Ebrahim Rahbari      
    04 November 2019

    Mechanisation during the Industrial Revolution accelerated economic growth and prosperity in the long term, but it was fiercely opposed by workers who did not share in its short-term gains. Similar forces are at play today: a new revolution in automation is eliciting resistance since it threatens to render jobs redundant.

    These are the conclusions of Carl Benedikt Frey and Ebrahim Rahbari, who propose policy interventions to raise productivity and prosperity in the short term, to reap the benefits of the new technologies in the long term. They propose that this can be achieved by revamping education, boosting training and employment support, supporting business dynamism by removing barriers to job switching (such as occupational licenses), expanding housing supply where new jobs are emerging, connecting expanding and contracting regions through smart infrastructure investments, and promoting inclusion and participation.


    REFORMING THE EUROZONE PRAGMATICALLY: Towards sustainable fiscal policy and a revamped Eurosystem that can perform its proper role as a central bank

    Heikki Oksanen       
    01 November 2019

    The euro area can be reformed via a pragmatic reorientation without high-profile changes to the EU Treaty, according to Heikki Oksanen writing at Vox. He argues that the reforms must cover a reorientation of fiscal policy towards a long-term vision and entail revamping the Eurosystem to allow it to perform its proper role as a central bank.


    US-CHINA TRADE WAR IS HURTING JAPANESE MULTINATIONALS

    Chang Sun, Zhigang Tao, Hongjie Yuan, Hongyong Zhang       
    03 November 2019


     

    The operations of Japanese multinational corporations in China have been negatively affected by the US-China trade war, especially when their Chinese affiliates rely heavily on trade with North America That is the conclusion of research by Chang Sun and colleagues, which finds evidence of a reduction in the stock prices of these firms. 

    These findings demonstrate the impact of the trade war beyond US-China borders and suggests hidden impacts on the global economy, trade and multinational production linkages across countries.


    MULTILATERAL DEVELOPMENT BANKS HELP FILL THE INVESTMENT GAP IN DEVELOPING COUNTRIES

    Giulia Lotti, Andrea Presbitero     
    04 November 2019

    With more private sector investment needed to make progress on the Sustainable Development Goals, multilateral development banks can play a key role by 'crowding in' bank credit to sectors to which they lend, mobilising $7 for each $1 invested.

    This is the conclusion of a new study by Giulia Lotti and Andrea Presbitero, which uses data on syndicated lending to a large set of developing countries. They show that multilateral development banks are important for attracting additional private capital flows towards investments in developing countries.


    IDENTIFYING THE ULTIMATE INVESTORS OF CAPITAL INFLOWS FROM ABROAD: A new approach

    Bruno Casella      
    30 October 2019

    National strategies to attract foreign direct investment (FDI) need to know where decisions are really made. Writing at Vox, Bruno Casella presents a new approach to identifying the ultimate investors of flows channelled through conduit jurisdictions and offshore financial centres.

    He notes that a large and growing proportion of global investment flows is channelled through these centres, making it difficult to track the real origin and ownership of FDI. He outlines an innovative approach to estimating FDI positions by ultimate investors and discusses some implications in key policy areas such as trade and investment, development, and international taxation. 


    HIGH-FREQUENCY TRADING IN MODERN FINANCIAL MARKETS: How asymmetric speed bumps would improve market functioning

    Markus Baldauf, Joshua Mollner     
    31 October 2019

    Financial markets process orders faster than ever before, but while faster speeds are associated with smaller spreads, they may also lead to less informative prices. A new study by Markus Baldrauf and Joshua Mollner makes the case for ‘asymmetric speed bumps’, which delay processing of some but not all order types and would improve market functioning.

    Their analysis captures the trade-off between speed and information within a model of high-frequency trading in modern financial markets. They then use the model to evaluate some potential market design responses to high-frequency trading that are currently in debate. The results show that asymmetric speed bumps improve markets by eliminating an inefficient form of high-frequency trading.


    RE-ANCHORING INFLATION EXPECTATIONS IN THE EUROZONE IS ESSENTIAL

    Francesco Corsello, Stefano Neri, Alex Tagliabracci      
    05 November

    Long-term inflation expectations in the Eurozone have ‘de-anchored’ from the European Central Bank’s (ECB) inflation objective, according to a study by Bank of Italy economists Francesco Corsello, Stefano Neri and Alex Tagliabracci using data from the Survey of Professional Forecasters. They argue that re-anchoring expectations is essential for preserving the credibility of the ECB, which is a necessary condition for ensuring the effectiveness of its monetary policy. 

    The authors show that inflation expectations have not returned to the levels that prevailed before the 2013-14 period of disinflation. What’s more, the distribution of expectations is still skewed towards lower inflation levels, and long-term expectations have become sensitive to short-term ones and to negative inflation surprises. 


    CENTRAL BANKS AND THE STERILISATION OF CAPITAL FLOWS IN THE FIRST ERA OF GLOBALISATION

    Guillaume Bazot, Eric Monnet, Matthias Morys      
    02 November 2019

    The gold standard (1880s-1913) is usually portrayed as the exemplary case of the total submission of central banks’ monetary policy to the constraints of international finance. 

    Writing at Vox, Guillaume Bazot and colleagues challenge this view by showing that central banks’ balance sheets stood as a buffer between their respective domestic economies and global financial markets. By contrast, autonomy was much more limited in the United States, a country with fixed exchange rates but no central bank before 1913.


    LINKAGES IN EUROPEAN SOVEREIGN BOND MARKETS CAN AMPLIFY ECONOMIC SHOCKS

    Daragh Clancy, Peter G Dunne, Pasquale Filiani       
    04 November 2019

    Despite improvements in Eurozone policy and institutional architecture, the 2018 disruptions show that national sovereign bond markets remain susceptible to market-driven amplifications of fundamental shocks that can spread beyond the local market. That is the conclusion of research by Daragh Clancy, Peter Dunne and Pasquale Filiani.

    They note that stable sovereign bond markets are crucial to a well-functioning economy and financial system. But despite the importance of amplifications of sovereign bond market tensions related to flights-to-safety and sudden liquidity contractions, there has been little direct empirical evidence until now of the transmission channels through which such catalysts for amplification operate. 

    The new study documents significant own- and cross-market interdependencies between liquidity and tail risks that amplify shocks likely attributable to economic fundamentals. The findings demonstrate the potential for the provision of liquidity across sovereign markets to be vulnerable to sudden fractures, with possible implications for euro area economic and financial stability.

    ‘WATERBED EFFECTS’ OF MACROPRUDENTIAL POLICIES: Evidence on cross-sector substitution

    Aerdt Houben, Janko Cizel, Jon Frost, Peter Wierts       
    05 November 2019

    Substitution towards non-bank credit in response of macroprudential policies is stronger when measures applied to banks are binding and implemented in countries with well-developed financial markets. That is one of the findings of a new study by Aerdt Houben and colleagues.

    They note that macroprudential policies are being implemented around the globe. A key question is whether these policies prompt substitution toward the non-bank financial sector. Their results on the cross-sector substitution consequences of macroprudential policy implementation, particularly in well-developed financial markets, shows a need for non-banking considerations to be taken into account in macroprudential design.



    THE SYMBOLISM OF MARRIAGE IN SAME-SEX RELATIONSHIPS 

    Shuai Chen interviewed by Tim Phillips, 01 November 2019

    When the law changed to allow same-sex partners to get married, did the symbolism of marriage have any effect on the stability of relationships? Shuai Chen tells Tim Phillips about a surprising result from The Netherlands.



    IS THE GLOBAL COMMUNITY PREPARED FOR ANOTHER FINANCIAL CRISIS? 

    Mario Monti, 29 October 2019

    What would happen if another crisis were to occur? In this video, Mario Monti, former Prime Minister of Italy, discusses potential differences and challenges.