This week from CEPR: October 10

Thursday, October 10, 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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    Guntram B. Wolff, Konstantinos Efstathiou
    CEPR DP No. 14032 | 30 September

    A new CEPR study by Guntram Wolff and Konstantinos Efstathiou investigates whether and why European Union members implement the economic policy recommendations they receive from the EU. Their findings include the greater likelihood of recommendations on financial services being implemented, while those on broadening the tax base, the long-term sustainability of public finance and pension systems, and competition in services are much less likely to be implemented. 

    The research shows that implementation rates are modest and they have worsened at a time when the economic environment has improved and market pressure on sovereigns has subsided. Implementation has deteriorated in particular among countries designated as having 'excessive' macroeconomic imbalances. 

    The study tests three factors that could influence implementation rates: (i) the macroeconomic environment; (ii) pressure from financial markets; and (iii) the strength of EU-level macroeconomic surveillance. Among the findings:

    • Larger fiscal and current account deficits and a higher probability of sovereign default increase the likelihood of implementation. 
    • But stronger surveillance under the Macroeconomic Imbalances Procedure (MIP) does not seem to drive implementation rates. 
    • The quality of governance, the fragmentation of government coalitions and fewer recommendations received are connected to increased implementation, whereas for countries under the MIP, implementation slows during election years.

    Overall, economic fundamentals and political economy factors provide only a small part of the answer to the question of why countries reform.

    Figure 3: Average implementation score 2013-18, by country 

    Note: The countries shown have at least 10 subparts under each legal basis. Scores: no progress=0, limited progress=25, some progress=50, substantial progress=75, fully implemented=100).

    • THE DOLLAR DURING THE GREAT RECESSION: Why expansionary US monetary policy surprisingly led to a currency appreciation 

    THE DOLLAR DURING THE GREAT RECESSION: US Monetary Policy Signalling and The Flight To Safety
    Vania Stavrakeva, Jenny Tang   
    CEPR DP No. 14034 | 05 October

    Conventional wisdom holds that lowering a home country's interest rate relative to another's will depreciate the domestic currency. Yet as a new CEPR study by Vania Stavrakeva and Jenny Tang explores, US monetary policy easing actually had the opposite effect during the Great Recession. Surprisingly, expansionary US monetary policy shocks caused the dollar to appreciate against a basket of advanced economy currencies. 

    The authors show that this effect can be attributed to calendar-based forward guidance that signalled economic weakness, which resulted in a flight-to-safety effect and lower expected inflation in the United States. The results imply that accusations that the Federal Reserve engaged in a ‘competitive devaluation’ over the Great Recession were unfounded.


    VIDEO KILLED THE RADIO STAR? Online Music Videos and Recorded Music Sales
    Tobias Kretschmer, Christian Peukert 
    CEPR DP No. 14038 | 06 October

    A new CEPR study by Tobias Kretschmer and Christian Peukert makes use of two natural experiments in Germany to identify the effect of free sampling on sales of recorded music. The first experiment identifies the effect of removing free access to online music videos on YouTube (in April 2009), while the second identifies the effect of making social music videos available on the proprietary platform VEVO (in October 2013). Among the findings: 

    • Online videos are complementary to record sales. 
    • Restricting (enabling) access to online videos decreases (increases) sales of recorded music on average by about 5-10%. 
    • The effect operates independently of the nature of video content, suggesting that user-generated content is as effective as official content. 
    • Online music videos disproportionately benefit sales of new artists and sales of mainstream music.

    In reference to a song by The Buggles, which happens to be the first music video shown on MTV in 1981, the authors conclude that their study does not provide much evidence that ‘video killed the radio star’. If anything, the results imply the opposite.

    HERD BEHAVIOUR IN ASSET MARKETS: The role of monetary policy

    Stefano Micossi  
    08 October 2019

    New analysis of the root causes of speculative fevers in asset markets and related financial booms and busts finds empirical evidence that stories based on the idea of ‘irrational exuberance’ may have overlooked the role that lax monetary policy played in triggering financial bubbles in the 2000s by offering investors a perverse promise of ever-increasing asset prices.

    Writing for Vox, Stefano Micossi introduces a new CEPR Policy Insight, which is sceptical of the conclusion of Nobel laureate Robert Shiller’s influential 2015 book, ‘Irrational Exuberance’, that bubbles are random exogenous phenomena that cannot be foreseen and do not depend on macroeconomic policies

    You can download the Policy Insight here.

    LOW PRODUCTIVITY GROWTH IN SOUTHERN EUROPE: The damage caused by slow adoption of information technology and inefficient management

    Fabiano Schivardi, Tom Schmitz  
    01 October 2019

    A new study by Fabiano Schivardi and Tom Schmitz argues that productivity growth in southern Europe has been lower than in other developed countries over the last two decades, due in large part by slow adoption of information technology (IT), compounded by inefficient management. These trends represent a challenge for the survival of Europe’s monetary union. Without improvements in management practices, increased IT spending will not close the productivity gap.


    Willem Thorbecke   
    02 October 2019

    Writing for Vox, Willem Thorbecke investigates why Japan lost its comparative advantage in exporting electronic parts and components after the Global Financial Crisis. He argues that capital inflows seeking safe havens during the crisis led to a sharp appreciation of the yen and caused yen export prices to tumble relative to production costs. Plummeting profits then hindered Japanese firms from investing enough in capital and innovation to compete with rivals.


    Rui Costa, Swati Dhingra, Stephen Machin   
    01 October 2019

    A new study by Rui Costa, Swati Dhingra and Stephen Machin analyses the relationship between international trade and worker outcomes in the immediate aftermath of the Brexit referendum, when the value of the sterling fell massively against other currencies. 

    The results show that the rise in import costs from the sterling depreciation significantly hurt wages and training. The relative decline in real earnings of workers has reinforced pre-existing real-wage stagnation; UK workers have not fared well since the referendum price rise.  


    Jon Frost, Leonardo Gambacorta, Yi Huang, Hyun Song Shin, Pablo Zbinden   
    04 October 2019

    A new study by Jon Frost and colleagues assesses the economic forces behind the adoption of Big Tech services in finance. The results demonstrate that Big Tech lenders thrive in countries with less competitive banks and less strict regulation, and that they have an information advantage from the use of big data and machine learning. 

    FinTech firms extend less than 1% of global private sector credit, but their footprint is growing. In Asia, Latin America, Europe and North America, Big Tech firms now lend to millions of small and medium firms. The consequences of this are yet to be fully determined.


    Andrés Rodríguez-Pose, Michael Storper   
    02 October 2019


    A dominant view in urban economics is that the solution to the housing crisis in major cities is to relax zoning and other planning regulations. A new study by Andrés Rodríguez-Pose and Michael Storper challenges this position and argues that there is no clear and uncontroversial evidence that housing regulation is a principal source of differences in home availability or prices across cities and that these issues are more linked to rising inequalities in the geography of employment, wages and skills. 

    The results show that blanket changes in zoning are unlikely to increase affordability for lower-income households in prosperous regions. Instead, they would increase gentrification without appreciably decreasing income inequality.   

    THE OPTIMAL INFLATION TARGET: New evidence on how it should be determined in a world of low interest rates

    Philippe Andrade, Jordi Galí, Hervé Le Bihan, Julien 
    01 October 2019

    Writing for Vox, Philippe Andrade and colleagues study how changes in the steady-state natural interest rate affect the optimal inflation target, using simulation and data from the United States.

    The results show that starting from pre-crisis values, a 1% point decline in the natural rate should be accommodated by an increase in the optimal inflation target of about 0.9-1% point. They also discuss alternatives to adjusting the target, such as non-conventional monetary policies. 


    Basil Halperin, Ben Ho, Ian Muir, John List  
    02 October 2019

    A new study by Basil Halperin, Ben Ho, Ian Muir and John List describes the first large-scale apology experiment on firms done in the field. Using the Uber platform, the study asks why and in what cases apologies help to restore relationships.  

    The study finds that apologies work, but they work because they are costly. It also finds that in certain conditions, apologies can backfire. Apologies followed by further bad (Uber) rides have a more negative impact than not apologising at all.  

    THE CLEAN WATER RULE: New economic analysis of US water pollution regulation

    David Keiser, Joseph S. Shapiro 
    05 October 2019

    A study by David Keiser and Joseph Shapiro finds that regulations governing surface water quality are more likely to fail cost-benefit tests compared with drinking water and air pollution regulations, possibly due to an underestimation of the benefits of surface water pollution control. The implications of this oversight could well have affected the recent repeal of the United States Clean Water Rule, which sought to extend federal water quality protection to cover most rivers and streams.  

    GLOBAL MILITARY SPENDING: Downward convergence has big economic benefits 

    Benedict Clements, Sanjeev Gupta, Saida Khamidova  
    06 October 2019

    Writing for Vox, Benedict Clements, Sanjeev Gupta and Saida Khamidova ask if the decline in worldwide military spending by countries is converging to a common, lower level and what could drive further reductions in these outlays.  

    The results reveal that global military spending is indeed converging, but into three separate groups, two of which are falling at different rates and a third with rapid increases. They also show that external threat levels are a factor in determining military spending, but only in developing economies.

    The results suggest there is a significant peace dividend from reducing internal conflicts. A country that moves from the bottom 25% to the top 25% of developing countries in terms of political stability and the absence of violence/terrorism is likely to reduce military spending by about half a percentage point of GDP. 


    Axel Dreher, Andreas Fuchs, Roland Hodler, Bradley Parks, Paul Raschky, Michael Tierney   
    07 October 2019

    Chinese aid has attracted substantial suspicion within the Western foreign policy establishment. A common criticism is that China has imperial ambitions and it is more interested in purchasing the loyalty of foreign leaders than in promoting the wealth and wellbeing of developing countries. 

    A new study by Axel Dreher and colleagues examines local development outcomes across 47 African countries and the effects of financial support from China between 2001 and 2012. The results not only show that Chinese aid registers positive effects on economic development at the district-level and province-level, but also that political bias in the sub-national distribution of Chinese aid does not substantially undermine local development outcomes.


    J Michelle Brock, Ralph De Haas   
    07 October 2019

    A new study by Michelle Brock and Ralph De Haas reports on a lab-in-the-field experiment in Turkey, to test for the presence of gender discrimination in small business lending, which often prevents women from exploiting their entrepreneurial potential.

    The results show that while unconditional loan approval rates are the same for male and female applicants, there is a more subtle form of discrimination, with loan officers 30% more likely to make loan approval conditional on the presence of a guarantor when an application appears to come from a female instead of a male entrepreneur. This discrimination is concentrated among young, inexperienced and gender-biased officers.  

    THE ECONOMIC IMPACT OF WOMEN IN THE WORKFORCE: Evidence from the United States 

    Stefania Albanesi   
    07 October 2019

    The US economy has been hampered over the last four decades by three trends: the productivity slowdown, the Great Moderation, and jobless recoveries. Economists seeking to explain these phenomena have generally looked to the impact of technological change on labour demand.

    Writing for Vox, Stefania Albanesi proposes an alternative explanation: the rise and stabilisation of women’s participation in the workforce, one of the most notable developments in the post-war United States. Albanesi argues that excluding gender differences in aggregate models of the US economy obscures our understanding of business cycle behaviour and economic performance.


    Irena Grosfeld, Seyhun Orcan Sakalli, Ekaterina Zhuravskaya    
    03 October 2019

    A new study by Irena Grosfeld and colleagues examines how political and economic factors interact to drive pogroms in an environment of widespread anti-semitism, using data from the Russian Empire of the 19th and early 20th centuries. The results show that pogrom waves took place when and only when economic shocks coincided with political turmoil, and that occupational segregation between the Jews and the majority played an important role in triggering ethnic violence. 


    Pierpaolo Benigno, Linda Schilling, Harald Uhlig    
    03 October 2019

    A study by Pierpaolo Benigno, Linda Schilling and Harald Uhlig looks at the challenges for the world economy of adopting a ‘worldwide currency’. Their analysis uses a two-country world in which each country has its own national currency and national central bank, but where there is also a global currency in circulation, a change that could potentially dampen the domineering influence of the US dollar on global trade. 

    This column is a lead commentary in the VoxEU Debate ‘The Future of Digital Money


    Carlo Altavilla, Luca Brugnolini, Refet Gürkaynak, Roberto Motto, Giuseppe    
    03 October 2019

    Writing for Vox, Carlo Altavilla and colleagues introduce a new database, the Euro Area Monetary Policy Event-Study Database, which makes available intraday asset price changes around European Central Bank policy announcements for a wide range of assets. The high resolution of the intraday data allows for the measurement of asset price changes separately for the press release and press conference windows.


    Spyros Alogoskoufis, Sam Langfield    
    03 October 2019

    At a leaders’ summit in June 2012, euro area governments recognised the imperative of breaking the doom loop resulting from sovereigns being exposed to bank risk and vice versa. But bank regulation still treats sovereign debt as risk-free and does not penalise concentrated portfolios.

    A recent study by Spyros Alogoskoufis and Sam Langfield, part of the Vox debate on euro area reform, asks whether banks would reduce portfolio concentration in response to reforms, and whether they would reduce exposures to sovereign credit risk. Simulations show that the answer is never an unambiguous and simultaneous ‘yes’ to both questions under reforms envisaged by the Basel Committee on Banking Supervision. 

    WHEN FIRMS AND EMPLOYEES PART COMPANY: New evidence on the efficiency of job separations

    Simon Jäger, Benjamin Schoefer, Josef Zweimüller    
    04 October 2019

    The Coasean theory of job separations argues that all job separations are mutually preferable and efficient, because no bargain could have been struck, however complex, to prevent the separation and preserve the employment relationship.

    Writing for Vox, Simon Jäger, Benjamin Schoefer and Josef Zweimüller use data following the abandonment of a policy in Austria that increased job separation for some ages and regions to test empirically whether the separations had been efficient. The results for post-abolition separation behaviour in all groups was similar, which would be contrary to the Coasean model.


    Nathan Sussman interviewed by Tim Phillips, 04 October 2019

    Economists assume that London's financial and economic development didn't begin until the end of the 17th century. Nathan Sussman tells Tim Phillips about a new trove of contemporary records that stands the conventional wisdom on its head.


    Eliana La Ferrara, 05 October 2019

    'Neglecting the component of what the poor perceive as attainable is a serious shortcoming,' says Eliana La Ferrara, as she talks about her work on inequality. 

    A central focus of Eliana La Ferrara’s work is finding ways to help people escape the poverty trap. She has found that one way to do this is to learn more about people’s aspirations.

    The traditional view, explains La Ferrara, assumes that limited resources are the reason that people get stuck in poverty. Individuals who are poor will have low investment, for example in education, and that will keep them poor. The solution may seem simple: that the way out of poverty is through additional resources and higher income. According to La Ferrara, that view is far too shortsighted.