This week from CEPR: October 28

Thursday, October 28, 2021

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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  • FINANCE, MONEY AND CLIMATE CHANGE: New research report on green finance and green monetary policy   

As fighting climate change becomes the world’s top post-pandemic priority, financial intermediaries, their regulators and central banks have all been called to contribute. A major new research report exploring the scope and limits of green finance and the possibility of ‘greening’ monetary policies will be launched at an online panel discussion hosted by Europe’s leading economic policy journal on Thursday 21 October 2021.

Markus Brunnermeier of Princeton University and CEPR, who has co-authored the study with former top French and international policy-maker Jean-Pierre Landau of Sciences Po, will present a new framework for thinking about finance, money and climate change – identifying the trade-offs and key choices to be made. Among the researchers’ conclusions: 

  • Climate should be a part of central banks’ risk assessments.
  • There may be large quantities of so-called ‘stranded assets’ – those whose value suddenly drops. These losses in value can occur due to climate change directly, but more likely and earlier due to shifts in policy. For example, sites for the extraction of non-renewable sources of energy might turn into stranded assets if energy policy curbs the relevant markets. This, in turn, generates questions about the role of markets for insurance against such transformations, and that of decision-makers in limiting costly policy uncertainty.
  • A large fraction of climate risk comes from policy uncertainty. These uncertainties act like a Pigouvian ‘tax’, but unlike textbook Pigouvian taxes, they do not generate revenues and hence are highly inefficient. Bank regulation should take these risks into account.
  • There is the possibility of a positive feedback loop between private actions and future policy. If private institutions provision for the impact of future climate policies, they will grow more resilient when measures are taken. In turn, increased preparation in the private sector may make it easier and politically more feasible for public decision-makers to adopt the necessary policies.
  • In contrast, in the absence of preparedness of private actors, a ‘climate risk dominance’ phenomenon could arise. In essence, if no provisions are taken, implementing strict climate regulation becomes too risky and costly to undertake.
  • There are important questions around who should decide whether a sector or specific asset is ‘green’ or ‘brown’. Ratings of environmental, social and governance (ESG) sustainability are not yet reliable: there is low correlation with each other and low correlation with actual emissions levels.
  • Central banks may want to take account of several climate change-related aspects when designing and implementing monetary policies. For example, climate policy initiatives might increase r* – the interest rate at which monetary policy is neither expansionary nor contractionary.
  • At the same time, central banks should retain absolute discretion to interrupt any action if their first-priority objective of price stability were to be compromised.

The study notes differences in the climate change challenge facing central banks such as the US Federal Reserve (‘the Fed’) and the European Central Bank (ECB) given differences in their mandates. For example, potential climate-related controversies surround the ECB’s corporate bond purchases as part of its programme of quantitative easing.

Download the full Economic Policy Journal paper here >>>.


  • New Discussion Papers


  • ACQUISITIONS HAVE SIGNIFICANT NEGATIVE EFFECTS ON THE MENTAL HEALTH OF EMPLOYEES   

HOW DO ACQUISITIONS AFFECT THE MENTAL HEALTH OF EMPLOYEES?
Laurent Bach, Ramin P. Baghai, Marieke Bos and Rui C. Silva  
CEPR Discussion Paper No. 16657 | October 2021 

A new CEPR study by Laurent Bach, Ramin P. Baghai, Marieke Bos and Rui C Silva shows that the incidence of stress, anxiety, depression, psychiatric medication usage, and even suicide increase following acquisitions. In absolute terms, the effects are of similar magnitude to the (positive) mental health impact of marriage. 

While the effects are felt by workers in target as well as acquiring firms and leavers as well as stayers, the negative effects of mergers are most pronounced for women, ’blue-collar’ workers, employees with lower levels of cognitive and noncognitive skills, and employees who see their employment status change in the aftermath of the merger.

The research suggests that labour market outcomes (employment and wages), which are the typical measures of worker welfare used in studies in economics and finance, may not capture the full impact of corporate actions on employees’ well-being. The anxiety and stress that workers face during corporate restructuring processes, such as in the case of a merger, may lead to detrimental effects on workers’ mental health.


  • NEW INSIGHTS INTO FINTECH LENDING  

FINTECH LENDING
Tobias Berg, Andreas Fuster, Manju Puri
CEPR Discussion Paper No. 16668 | October 2021

A new CEPR study by Tobias Berg, Andreas Fuster and Manju Puri reviews the growing literature on FinTech lending - the provision of credit facilitated by technology that improves the customer-lender interaction or lenders' screening and monitoring of borrowers. The research provides a snapshot of where FinTech lending stands as of now. Key takeaways include: 

  • FinTech lending has grown rapidly, though in developed economies like the United States it still only accounts for a small share of total credit. 
  • FinTech lending has gained double-digit market share in the mortgage market. FinTech lending growth rates are particularly high in the buy-now-pay-later market, while marketplace consumer lending was important early on, but has not displayed much growth in recent years.
  • Key competitive advantages of FinTech lenders are faster processing times and an improved user experience. On the one hand, FinTech lenders can thus provide loans more elastically when credit demand changes. On the other hand, instant borrowing via FinTech lenders has the potential to induce overborrowing by naïve consumers.
  • An increase in convenience and speed appears to have been more central to FinTech lending's growth than improved screening or monitoring, though there is certainly potential for the latter, as is the case for increased financial inclusion. 
  • There is little evidence so far, at least in developed economies, that FinTech lenders have extended credit to borrowers previously underserved by banks, except in specialised niche segments.
  • The COVID-19 pandemic has shown potential vulnerabilities of FinTech lenders, although in certain segments they have displayed rapid growth.


WOMEN'S WELLBEING, MENTAL HEALTH AND FOOD SECURITY SUFFERED DURING COVID: Evidence from India

Natalie Bau, Gaurav Khanna, Corinne Low, Manisha Shah, Sreyashi Sharmin, Alessandra Voena            
22 October 2021

How did the pandemic and its containment policies affect women’s wellbeing? A study by Natalie Bau and colleagues shows that stricter containment policies, while potentially crucial to stem the spread of COVID-19 cases, are associated with worse female mental health and increased food insecurity, particularly for the most vulnerable women.

 

ECONOMISTS HAVE NEEDLESSLY PRODUCED A CLIMATE WAR

Laurence Kotlikoff, Felix Kubler, Andrey Polbin, Simon Scheidegger               
27 October 2021

The replacement of positive with normative economics has left climate policy in its sorry state – as a fight between generations, across regions, and even among economists over climate justice. 

This study by Laurence Kotlikoff, Felix Kubler, Andrey Polbin and Simon Scheidegger uses a multi-region, overlapping generations model of climate change to study climate policy as an externality whose resolution can uniformly and equally benefit all humankind, regardless of year or place of birth. 

The research suggests a time-varying global carbon tax plus region- & generation-specific net transfers can materially limit global emissions, dramatically shorten the use of fossil fuels & raise wellbeing of current and future generations.


WHY LOCATION MATTERS FOR OIL PRICE SHOCKS AND CONFLICT ESCALATION

Andrea Tesei, Jørgen Juel Andersen, Frode Martin Nordvik                                     
26 October 2021

A study by Andrea Tesei, Jørgen Juel Andersen and Frode Martin Nordvik explores how the location of oil reserves can affect the likelihood of a particular tension descending into widespread civil violence or war. The authors show that the presence of onshore oil has a greater effect than offshore oil in driving conflict. Where a resource is relatively straightforward to access (i.e. on land as opposed to out at sea), rebel groups will be more easily able to reap the benefits of taking control through violence. 


WHAT COULD HAPPEN WHEN CENTRAL BANKS WAKE UP TO MORE PERSISTENT INFLATION?

Charles Goodhart, Manoj Pradhan                     

25 October 2021

The current mini-surge in inflation is forecast to return to central bank targets towards the end of 2022, or shortly thereafter. However, there is also a risk of inflation remaining persistently high for longer. 

Writing at Vox, Charles Goodhart and Manoj Pradhan discuss the implications of such a contingency for central banks and monetary policy. The authors warn that sudden policy reversals could lead to severe downturns in financial markets and significantly damage public sector balance sheets. Instead, they call on central banks to develop concrete plans for dealing with persistently higher inflation, with a particular focus on their balance sheet policies in a world of rising nominal interest rates. 


A POLICY TRIANGLE FOR BIG TECHS IN FINANCE

Erik Feyen, Jon Frost, Leonardo Gambacorta, Harish Natarajan, Matthew Saal                    15 October 2021

The rise of Big Techs underscores how rapidly digital innovation can disrupt markets and put competitive pressure on incumbents. This brings efficiency and financial inclusion, particularly in emerging market and developing economies, but also new concerns for policy. 

Writing at Vox, Erik Feyen, Jon Frost, Leonardo Gambacorta, Harish Natarajan and Matthew Saal highlight new trade-offs between public policy objectives: (1) financial stability and market integrity, (2) efficiency and competition, and (3) data privacy and consumer protection. Handling these challenges requires more coordination on rules and standards, both between domestic authorities and across international borders. 


ECONOMICS OF SOCIALISM AND TRANSITION: The life and work of János Kornai, 1928-2021

Gérard Roland                                  
23 October 2021


 

The great Hungarian economist János Kornai, who passed away in October 2021, was a pioneering analyst of shortages, socialist economies and the economics of transition to a market economy. Writing at VoxEU, Gérard Roland outlines what made him one of the most important intellectuals of the twentieth century. 


SUBSIDIES AND MARKET ACCESS: New data and findings from the Global Trade Alert

Simon Evenett, Johannes Fritz                                   
25 October 2021

The latest Global Trade Alert report assembles an inventory of 18,137 corporate subsidies awarded by China, the EU, and the US since November 2008 to demonstrate that the cumulative effect of thousands of largely under-the-radar screen corporate subsidies has taken its toll on the competitive conditions faced by foreign manufacturers seeking to sell into the markets of China, the EU, and the US, and in third markets.

STATE AND LOCAL GOVERNMENT FINANCES IN THE TIME OF COVID-19

Sean Dougherty, Pietrangelo de Biase                                   
26 October 2021

Following the global financial crisis, subnational governments engaged in pro-cyclical fiscal policy by reducing investment, drawing out the recovery. Writing at Vox, Sean Dougherty and Pietrangelo de Biase present evidence suggesting that the Covid crisis has impacted the fiscal positions of subnational governments in the OECD far less than the previous crisis, which should mitigate this tendency towards pro-cyclicality. 

This is partly the result of central governments having provided substantial fiscal support, while at the same time subnational governments have relied heavily on relatively stable revenues from recurrent taxes on immovable property which, unlike in the previous crisis, are not expected to decline due to a housing market crash.



NO BRAINERS AND LOW-HANGING FRUIT IN NATIONAL CLIMATE POLICY: Opportunities in national climate policy

Alexander Ludwig 16 October

A new CEPR ebook focuses on climate policies that it calls "no-brainers” and  "low-hanging fruit”. How far do they get us towards net zero and why, if they really are so obvious, are they not being enacted?



PENSION REFORM AND THE INCENTIVE TO WORK

Fabian Kindermann interviewed by Tim Phillips, 22 October 2021

As life expectancy increases, so does the importance of a fair pension system that reflects our contribution but won't leave anyone in poverty. Can we create a progressive pension system that doesn't discourage work? Fabian Kindermann tells Tim Phillips how it could be designed.

Read more about the research presented and download the free Discussion Paper: Kindermann, F and Pueschel, V. 2021. 'Progressive Pensions as an Incentive for Labor Force Participation'. CEPR.