This week from CEPR: September 02

Wednesday, September 2, 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’.

**** You can sign up to our journalist mailing list here

**** Journalists can also apply for access to CEPR's Discussion Paper series via email


    Nicola Fuchs-Schündeln, Dirk Krueger, Alexander Ludwig, Irina Popova          
    CEPR DP No. 15227 August 2020 

    A new CEPR study by Dirk Krueger and colleagues examines the long-term impact of school closures during the Corona crisis on children affected at different ages and coming from households with different parental characteristics. The study speculates on both the long-term earnings consequences on children from a Covid-19 induced loss of schooling, as well as the associated welfare losses.

    Public investment through schooling is combined with parental time and resource investments in the production of child human capital at different stages in the children's development process. Among the findings: 

    • Due to self-productivity in the human capital production function, skill attainment at a younger stage of the life cycle raises skill attainment at later stages, and thus younger children are hurt more by the school closures than older children. 
    • We find that parental reactions reduce the negative impact of the school closures, but do not fully offset it. 
    • The negative impact of the crisis on children's welfare is especially severe for those with parents with low educational attainment and low assets. 
    • The school closures themselves are primarily responsible for the negative impact of the Covid-19 shock on the long-run welfare of the children, with the pandemic-induced income shock to parents playing a secondary role.
    • Nicola Fuchs-Schündeln, Dirk Krueger, Alexander Ludwig, Irina Popova


    WHICH FIRMS BENEFIT FROM CORPORATE QE DURING THE COVID-19 CRISIS? The case of the ECB’s Pandemic Emergency Purchase Program
    Asli Demirguc-Kunt, Balint Horvath, Harry Huizinga
    CEPR DP No. 15224 | August 2020

    The Pandemic Emergency Purchase Program (PEPP) is a key element of the European policy response to the Covid-19 pandemic. The PEPP enables the European Central Bank (ECB) to spend an additional €750 billion to purchase debt securities including corporate bonds. By increasing demand for corporate bonds, the ECB makes it easier for corporations to issue additional bonds, thereby improving firms’ chances of surviving the pandemic.

    A new CEPR study by Asli Demirguc-Kunt, Balint Horvath and Harry Huizinga investigates which European firms benefited more from the PEPP as evidenced by a more positive share price response and a greater decline in the CDS spread, signaling lower expected credit losses on a firm’s debts. Among the findings: 

    • Firms with an investment-grade rating benefit relatively more as evidenced by higher share prices and lower CDS spreads, which reflects that the ECB is restricted to purchasing investment-grade corporate debt securities. 
    • However, non-investment grade firms benefit from the PEPP as well relative to firms without a credit rating, due to spillovers of anticipated ECB purchases to the non-investment grade bond market. 
    • Firms in euro as well as non-euro area countries were positively affected by the PEPP, providing evidence of PEPP spillovers to non-euro area countries.
    • The gains to shareholders relative to the total gains of shareholders and debtholders are negatively related to firm leverage, consistent with the existence of debt overhang. 
    • Firms more heavily impacted by the pandemic benefit relatively little from the PEPP, which could reflect that the business models of some of these firms are heavily damaged by the pandemic. 
    • Monetary policy in the form of the PEPP and national fiscal responses to the pandemic are shown to be complements in the sense that a strong pre-PEPP fiscal response enhances the potential for the PEPP to positively affect equity and debt valuations.


    Philippe Aghion, Sofia Amaral-Garcia, Mathias Dewatripont, Michel Goldman             
    01 September 2020

    While EU countries have been able to rely on a more resilient social model and a science-based approach in managing the Covid crisis more successfully so far than the US, Europe has fallen short in matching the US effort to incentivise Covid vaccine innovation. This is due to a lower level of financial investment and also an inability to ensure coordination across different (national and European) funding schemes. 

    Writing at Vox, Philippe Aghion and colleagues call for the creation of a European equivalent to the US Biomedical Advanced Research and Development Authority to tackle these problems, thereby strengthening European industries' leadership in vaccine research and innovation.

    HORRIBLE TRADE-OFFS IN A PANDEMIC: Analysis and policy implications

    Ricardo Hausmann, Ulrich Schetter           
    29 August 2020

    In countries where many people already live at or close to subsistence, the trade-off in responding to Covid-19 is lives vs lives: save their populations from the pandemic or from deprivation. This trade-off fundamentally changes the main margin for optimal policy, and that a threat of deprivation to vulnerable parts of society imposes strong bounds on the optimal lockdown. A study by Ricardo Hausmann and Ulrich Schetter consider ways to alleviate these trade-offs, as well as their implications for policy – both national and international.

    Transfers are critical for mitigating this trade-off, and they also help fight the pandemic by increasing compliance with lockdowns. But many developing countries lack the fiscal space needed for such transfers, with devastating consequences. The dire forecasts of the World Food Programme and others show that such humanitarian tragedies are not just theoretical possibilities. The international community has the means to avoid them by providing additional financial support to developing countries.


    Luc Laeven           
    31 August 2020

    Social distancing policies are necessary from a public health perspective but can have negative effects on economic activity. Using a newly constructed dataset of sectoral dependence on the use and sale of intermediate goods, a study by Luc Laeven investigates whether social distancing policies can have negative spillover effects on sectors that are not directly targeted due to input-output linkages. It finds that firms that depend on the sale of intermediate goods to sectors affected by social distancing measures are more affected by the crisis.

    WHY PANDEMICS BECOME ENDEMIC: The role of behaviour

    Joshua Gans           
    31 August 2020

    Standard epidemiological models that show how infection rates in the population rise and then fall assume that people do not understand what’s going on. When people react to infection rates by changing behaviour, the model’s predictions are no longer valid. 

    Writing at Vox, Joshua Gans explains why that can mean that pandemics don’t rage out of control but become something more endemic. In particular, epidemiological models that incorporate rational economic agents tend to predict that pandemics may move towards a steady state for a significant period of time.

    COVID-19 AND CORPORATE BANKRUPTCIES IN SWITZERLAND: Too early to give the all-clear

    Florian Eckert, Heiner Mikosch, Markus Stotz             
    31 August 2020

    The corona crisis has hit the Swiss economy hard, corporate profits and demand expectations collapsed and uncertainty about future business prospects has risen sharply, increasing the risk of a rise in corporate bankruptcies. Writing at Vox, economists from ETH Zurich assess the current bankruptcy trend in Switzerland and find that although the corona crisis is not causing a wave of bankruptcies for the time being, it is still too early to give the all-clear.

    THE FEDERAL RESERVE AND QUANTITATIVE EASING: A boost for investment, a burden on inflation

    Gregor Boehl, Gavin Goy, Felix Strobel             
    30 August 2020


    A new study by Felix Strobel and colleagues provides insights from a structural investigation of the macroeconomic effects of the Federal Reserve’s quantitative easing programme during the Global Crisis. In line with the general consensus, the results suggest that asset purchases substantially eased borrowing conditions and facilitated new investment. The rise in investment led to an increase in the productive capacity which, in turn, lowered firms’ marginal cost. There were, however, inflationary effects as well.

    LOCKDOWN ACCOUNTING: New insights 

    Charles Gottlieb, Jan Grobovšek, Markus Poschke, Fernando Saltiel            
    29 August 2020

    A study by Charles Gottlieb and colleagues discusseses the potential GDP and employment effects of lockdown policies for a broad cross-section of countries ranging in income per capita from Niger to Luxembourg. It shows that the employment and GDP effects of lockdown policies are U-shaped in income per capita. While workers in rich countries have a substantially higher ability to work from home, which mitigates declines in employment and GDP, poor countries concentrate employment and value-added in essential sectors that are not shut down. Middle-income countries see the largest declines as they feature relatively large employment shares in non-essential sectors and relatively low work from home ability. 


    Thorsten Beck, Mohammad Hoseini            
    28 August 2020

    The high degree of informality in developing countries means most low-income workers have not been able to work from home during the Covid crisis or benefit from employment protection. Despite limited fiscal space and limited access to international financial markets, many developing country governments have implemented support programmes for households and firms. 

    A study by Thorsten Beck and Mohammad Hoseini assesses the impact of an emergency household loan programme in Iran on consumption. The results show that the loans are positively related with higher consumption of non-durable and semi-durable goods, with no significant effect on the consumption of durables or asset purchases, suggesting that the emergency loans were predominantly used for their intended purpose.

    PRIVATE AND JOINT ACTIVITIES IN THE HOUSEHOLD: The evolving costs and benefits of togetherness

    Sam Cosaert, Alexandros Theloudis, Bertrand Verheyden              
    28 August 2020

    A study by economists at the Luxembourg Institute of Socio-Economic Research summarise sa theoretical framework that allows us to value togetherness (joint leisure between spouses & joint care of children) and discuss how certain aspects of current Covid-19 crisis, such as lockdowns, may affect togetherness. Joint leisure and childcare generate a loss of flexibility in the labour market, and joint childcare prevents specialisation, generating tension between parental childcare quality and quantity. 

    BEYOND THE PUBLIC CORPORATION: Insights from history

    Timothy Guinnane, Susana Martínez-Rodríguez            
    28 August 2020

    Recent literature argues that the corporation’s role in long-run economic development has been exaggerated. A study by Timothy Guinnane and Susana Martínez-Rodríguez analyses how the menu of the multiowner entreprises has been developed in the last 150 years. Some of the seemingly new patterns in enterprise form may essentially be similar to those already seen in the past, making close analysis of historical data important.


    Dirk Bergemann, Alessandro Bonatti, Tan Gan          
    26 August 2020

    The rise of large digital platforms — from Facebook, Google, and Amazon in the US to JD, Tencent, and Alibaba in China — has led to the unprecedented collection and commercial use of individual data. 

    Writing at Vox, Dirk Bergemann and colleagues argue that a central, underappreciated feature of those data is their social aspect: data captured from an individual user describe not only that individual, but other users with similar characteristics or behaviours. The policy implications of this insight include the need for privacy regulations focused less on personalised prices, and more on group-based price discrimination. The analysis points to the significant welfare effects of group-based price discrimination and of uniform prices that react in real time to changes in market-level demand.


    Robert McCauley             
    26 August 2020

    On 23 March 2020, the Federal Reserve announced that it would buy investment grade corporate bonds, and on 9 April set the amount at up to $250 billion and extended the purchase to junk bonds. 

    Writing at Vox, Robert McCauley shows that these interventions succeeded in stabilising credit markets: prices lifted and dealing spreads narrowed. However, emergency lending powers provide an inadequate basis for Federal Reserve operations in corporate bonds. In light of these findings, congressional authority to buy and to sell corporate bonds alongside US Treasuries would help to align Federal Reserve operations with what has become a capital-market centred financial system.

    THE ACCC’S ‘BARGAINING CODE’: A path towards ‘decentralised regulation’ of dominant digital platforms?

    Cristina Caffarra, Gregory Crawford           
    26 August 2020

    New law for a Mandatory Bargaining Code has been introduced in Australia to implement a decision that publishers should be compensated for use of news content by giant digital platforms. This legislative proposal involves an obligation for the two sides to reach a bargained solution for a payment in favour of publishers, specifying also a particular type of ‘backstop’ (‘final offer arbitration’) should negotiations fail.

    A study by Cristina Caffarra and Gregory Crawford argues this approach by the Australian Competition and Consumer Commission (ACCC) has desirable properties - it leaves implementation of the regulation to the parties involved, not to an agency suffering from extreme asymmetric information. At a time when the design of regulation for ‘gatekeeper’ platforms is very much top of the agenda, this ‘decentralised regulation’ approach should be considered as part of a menu of possibilities in multiple settings.


    Laurent Bossavie, Yoonyoung (Yoon) Cho, Rachel Heath             
    27 August 2020

    The collapse of the Rana Plaza factory building in Bangladesh in April 2013 is widely considered the worst accident in the history of the garment industry. It intensified local and international attention paid to working conditions in the industry and resulted in a series of reforms, including a minimum wage and high-profile but voluntary audits examining safety. Have these reforms been successful?

    A study by World Bank economists examines the effects of those reforms on workers and finds that while working conditions increased after the reforms, women’s wages increased at first but fell in the longer run, as did the likelihood of having a formal work contract.


    Fabienne Ilzkovitz, Adriaan Dierx               
    27 August 2020

    With the increased globalisation and digitalisation of the economy and the challenge of recovery from the Covid-19 crisis, the future of EU competition policy is up for debate. In response, the European Commission is reviewing its enforcement practice and has brought forward new policy initiatives. In an effort to improve the evidence base of its activities, the Commission has become increasingly active in evaluating the economic effects of its competition policy interventions. This column summarises the main lessons learnt from this work and sets out areas for further research.


    Viral Acharya interviewed by Tim Phillips, 28 August 2020

    In a new book based on his time as deputy governor of India's central bank, Viral Acharya warns that India's bloated public sector is strangling growth. The economy urgently needs institutional reform, he tells Tim Phillips - and now is the perfect time to do it.

    Viral's book is called Quest for Restoring Financial Stability in India, and is published by Sage India. 

    THE UK'S FURLOUGHED WORKERS: Who, why, what next?

    Abigail Adams-Prassl           

    Abigail Adams-Prassl (University of Oxford) talks to Tim Phillips about recent research on the UK's furloughed workers, including who exactly has been furloughed, what effect this had on whether they actually continued to work or not and what the likely prospects are for their employment going forward.