This week from CEPR: September 17

Thursday, September 17, 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’.

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    • New Discussion Papers

    • HOW THE 1970S SHAPED REGIONAL INEQUALITY IN THE UNITED KINGDOM: The persistent impact of economic shocks and the inadequacy of regional assistance policies     

    THE PERSISTENT CONSEQUENCES OF ADVERSE SHOCKS: How the 1970s shaped UK regional inequality
    Patricia Rice, Anthony Venables        
    CEPR DP No. 15261 | September 2020

    Regional inequalities in the United Kingdom are amongst the largest in high-income countries, fuelling social deprivation and political discontent. A large part of this inequality is associated with shocks experienced more than 40 years ago. This suggests that regional assistance policies, conducted by the UK and by the EU throughout the entire period, have been far from sufficient. 

    These are the central findings of a new CEPR study by Patricia Rice and Anthony Venables, which examines the long-run implications of economic shocks experienced by the UK economy in the 1970s, which brought major changes in the spatial distribution of employment rates in the UK.

    The findings suggest that these shocks were highly persistent and to a large extent shape current UK regional disparities. Most of the Local Authority Districts that experienced large negative shocks in the 1970s have high deprivation rates in 2015, and they constitute two-thirds of all districts with the highest deprivation rates. 

    Neither economic adjustment processes nor policy measures have acted to reverse the effect of negative shocks incurred nearly half a century ago. this historical experience provides a stark warning about the risks associated with losing jobs in sectors which are geographically concentrated; the losses are not readily reversed, and their implications are persistent and pernicious.


    Ruben Durante, Andrea Fabiani, José Luis Peydró        
    CEPR DP No. 15260 | September 2020

    A new CEPR study by Ruben Durante, Andrea Fabiani, and José Luis Peydró finds evidence that links between media companies and the banking sector through credit can significantly influence news content, and threaten media editorial independence when it comes to reporting on financial issues. The study maps the connections between banks and the top newspapers in several European countries and studies how they affect news coverage of two important financial issues:  

    • First, newspapers are significantly more likely to cover bank earnings announcements by their lenders, relative to those by other banks, when they report profits than when they report losses. 
      • Such pro-lender bias applies to both general-interest and financial newspapers, and is stronger for newspapers and banks that are more financially vulnerable. 
      • Moreover, pro-lender bias is relatively stronger among newspapers in financial distress, which are more dependent on their creditors. 
      • It also operates more markedly in favour of banks with lower capitalization, which, given their minor loss absorbing capacity, have greater incentives to avoid an extensive coverage of their losses.
    • Second, Bank-media connections also appear to shape the way newspapers report about more general public-interest issues like the Eurobond crisis. The findings show that newspapers connected to banks more exposed to stressed sovereign bonds are more likely to promote a narrative of the crisis favourable to banks and to oppose debt-restructuring measures detrimental to creditors.

    Importantly, the connections with banks do not merely affect the way newspapers report about bank-specific events, but can have broader ramifications for the public debate on more general and policy-relevant issues.

    • SHOULD YOU HIRE SOMEONE SMARTER THAN YOU? Evidence from Swedish data on cognitive ability and employee mobility       

    COGNITIVE ABILITY AND EMPLOYEE MOBILITY: Evidence from Swedish Microdata
    Pooyan Khashabi, Tobias Kretschmer, Ali Mohammadi, Joseph Raffiee        
    CEPR DP No. 15265 | September 2020

    It is commonly recommended that managers hire people smarter than themselves, with cognitive ability and intelligence highlighted as the primary personnel measures used for hiring decisions. However, the sustainability of such hiring strategies depends on the ability to retain gifted employees. 

    A new CEPR study examines the relationship between cognitive ability and employee mobility, taking advantage of unique microdata from Sweden. The results show that:

    •  Higher cognitive ability is negatively associated with turnover, implying that cognitively-gifted employees settle with better employment options internally, compared to the external labour market. 
    • Nevertheless, when the employee has a significantly higher cognitive ability than their manager, employees are more likely to leave the firm. 

    The results shed light on the relationship between cognitive ability and mobility, and highlight the role of managers for the success of hiring strategies based on cognitive ability. 


    Natalia Fabra, Massimo Motta, Martin Peitz  
    16 September 2020

    Why were European states so unprepared for the Covid-19 pandemic, lacking both a coherent strategy and adequate preventative measures? And what can be done to ensure the necessary cooperation, preparation, and resilience for future adverse shocks? 

    A new Policy Insight by CEPR Research Fellows Natalia Fabra, Massimo Motta and Martin Peitz considers the private and state incentives to take adequate measures before and during a crisis triggered by an adverse shock. They argue that private initiatives are often insufficient to be prepared for rare events with a large negative effect. Instead, governments and international institutions should implement mechanisms which ensure that prevention, detection and mitigation measures are taken.


    CHINA’S MASK DIPLOMACY: Political and business ties facilitate access to critical medical goods during the coronavirus pandemic

    Andreas Fuchs, Lennart Kaplan, Krisztina Kis-Katos, Sebastian S. Schmidt, Felix Turbanisch, Feicheng Wang  
    16 September 2020

    China assumed an important role during the worldwide outbreak of Covid-19 as the main exporter of critical medical goods such as face masks and disinfectants. However, shipments of medical goods have been turned into propaganda campaigns by Chinese state media, raising the question if access to medical goods is granted upon political goodwill. 

    A study by Andreas Fuchs and colleagues shows that both existing trade linkages and political ties to Chinese provinces can help to attract Chinese medical goods. Since China is likely to remain the primary supplier of medical goods, these findings imply that countries that fail to diversify their sources are well advised to develop closer relations with China. 


    Mitsuo Inada, Naoto Jinji 
    10 September 2020

    A study by Mitsuo Inada and Naoto Jinji provides some of the first empirical evidence that uncertainty regarding future policies implemented by governments discourages Foreign Direct Investment. The study identifies the impact of a change in policy uncertainty on FDI at the sector level. 

    The results show that policy uncertainty will continue to rise in the post-Covid-19 era, and highlights the importance of aligning globalisation with the mitigation of public health threats by implementing policies to reduce uncertainty.


    João Guerreiro, Sérgio Rebelo, Pedro Teles 
    09 September 2020

    Correctly configuring fiscal policy so as to capture the benefits of both high- and low-skill immigrant (and native) workers is at the heart of optimal policy design and may help to address the swelling anti-immigrant sentiment that continues to exist in many countries today. 

    Immigration policy has become a hot-button issue in both Europe and the United States, with questions concerning optimal policy as well as the welfare state dominating discussions. A study by Pedro Teles and colleagues revisits the idea of the immigration surplus, exploring a number of possible scenarios in terms of how policymakers should address the challenge. 


    Debopam Bhattacharya, Renata Rabovic  
    15 September 2020

    There is robust evidence of higher University admissions standards for men in STEM and economics. In the non-STEM but competitive fields of law and medicine, with gender parity in enrolment, these gaps are non-existent. On the other hand, the evidence of a higher admission bar for private school applicants is at best weak across subjects and years.

    A study by Debopam Bhattacharya and Renata Rabovic uses a novel, outcome-based test of merit-based admissions at Cambridge University. The results contrast sharply with the aggregate admission success rates, which are equal across gender but significantly higher for private school applicants.


    Giovanni Immordino, Maria Berlin, Francesco Flaviano Russo, Giancarlo Spagnolo  
    13 September 2020


    Could dwindling prostitution markets during lockdown be partly responsible for the surge of domestic violence across Countries during Covid-19? 

    Analysing the effects of the one-sided criminalisation of prostitution introduced in Sweden in 1999, a study by Giancarlo Spagnolo and colleagues finds that the law reduced street prostitution but increased domestic violence against women outside the prostitution market. This evidence suggests that the freeze of sex markets caused by the Covid-19 crisis might have contributed to the observed spike in domestic violence. 

    CAPITAL MARKETS, COVID-19, AND POLICY MEASURES: Analysis from IMF economists 

    Khalid ElFayoumi, Martina Hengge 
    14 September 2020

    The Covid-19 pandemic and associated policy responses triggered a historically large wave of capital reallocation between markets, asset classes, and industries. A study by IMF economists uses high-frequency data to show that capital market dynamics were not exclusively driven by undiscriminating global factors. Instead, the degree of the spread of the virus, the stringency of the lockdown, and the fiscal policy response played key roles in explaining the wide heterogeneity in international portfolio flows across countries, particularly for emerging markets.

    PROFITS VS INTEGRITY: Can we trust registered clinical trials for a Covid-19 vaccine? 

    Jérôme Adda, Christian Decker, Marco Ottaviani  
    16 September 2020

    Registered clinical trials of Covid -19 vaccines: A study by economists at Bocconi University finds reassuring evidence of their reliability but also subtle patterns that regulators should monitor with care, paying particular attention to enforcing the transparency of trials sponsored by smaller companies. 

    There is much riding on the clinical trials currently in search of a Covid-19 vaccine. But for a vaccine to do more good than harm, researchers must remain free from conflicts of interest that could undermine their integrity. 


    Ignazio Angeloni  
    14 September 2020

    The long-awaited outcome of the Federal Reserve’s monetary strategy review is finally out. Writing at Vox, Ignazio Angeloni argues that while the ‘Powell doctrine’ responds to a genuine need to address issues in the Fed’s policy framework, it also introduces complexities in the interpretation and implementation of monetary policy which are likely to become more apparent over time. 

    The hurdles involved do not have easy solutions, and other central banks pondering their own monetary policy framework are well advised to take heed.


    David Argente, Chang-Tai Hsieh, Munseob Lee  
    13 September 2020

    Assessing cross-country price indexes using novel barcode-level data on prices and quantities for consumer packaged goods in the United States and Mexico, a study by Chang-Tai Hsieh and colleagues finds that Mexican real consumption relative to the United States is larger than previously estimated. Addressing the biases in isolation could lead to drastically different conclusions when comparing standards of living across Mexico and the United States.

    Consumption data does not always account for heterogeneity in shopping behaviour, the uneven quality of products, and variety availability. This study highlights the importance of addressing sampling, quality, and variety biases in international price comparisons.

    LABOUR MARKET EFFECTS OF COVID-19: Sweden performed better than its Scandinavian neighbours

    Steffen Juranek, Jörg Paetzold, Hannes Winner, Floris Zoutman  
    12 September 2020

    Sweden attracted international attention for not imposing a strict lockdown after the outbreak of Covid-19. A study by Hannes Winner and colleagues analyses the labour market effects of this strategy by comparing unemployment and furlough spells in Sweden to three of its Nordic neighbours. The evidence suggests that the labour markets of all countries were severely hit by the pandemic, but Sweden performed slightly better than its neighbours. 


    Hanna Armelius, Carl Andreas Claussen, André Reslow  
    12 September 2020

    While the ratio of physical cash to GDP has increased in most countries over the last years, it has fallen dramatically in Sweden. 

    A study by economists at the Sveriges Riksbank argues that rather than being ahead of the curve, a unique combination of events and policy measures have led to the falling cash demand in Sweden. Among those are measures to reduce tax evasion and the informal sector, an aggressive notes changeover, the introduction of an electronic payment app, the withdrawal of central bank subsidies to cash distribution, and a track record of protecting commercial bank money during crises

    FALLEN ANGELS AND INDIRECT CONTAGION: Rationale for and lessons from a system-wide analysis

    John Fell, Francesco Mazzaferro, Richard Portes, Eric Schaanning  
    11 September 2020

    On 23 July 2020, the European Systemic Risk Board published a technical note summarising the findings of a cross-sectoral, top-down analysis that sought to quantify the aggregate potential impact of large-scale corporate bond downgrades. 

    Writing at Vox, Richard Portes, Honorary President of CEPR, and colleagues summarise the main findings of the exercise, provide a rationale for such analyses, and suggest repeating such system-wide exercises regularly and on a global level to uncover vulnerable links and improve institutions’ own risk management. 

    INTERNATIONAL TOURISM AND SHORT-RUN GROWTH: Reviewing the trade-off in the age of Covid-19

    Yuxian Chen, Yannis Ioannides 
    15 September 2020

    Covid-19 devastated countries that depend heavily on international tourism, and those countries are confronted with a prolonged dilemma of whether or not to let travel restart. 

    A study by Yuxian Chen and Yannis Ioannides uses international data to explore the relationship between tourism specialisation and short-run economic growth. The results suggest that a 1% increase in tourism specialisation is associated with 0.01 percentage point increase in the growth rate of GDP per capita for OECD countries. This is in line with previous findings but is based on up-to-date panel data.


    Itamar Drechsler, Alexi Savov, Philipp Schnabl  
    11 September 2020

    In a recent speech, Federal Reserve Chair Jerome Powell laid out the Fed’s new monetary policy framework, under which it will allow inflation to run above its 2% target in order to boost employment. 

    A study by economists at New York University presents a historical analysis of US monetary policy, arguing that the new framework marks a departure from the perceived wisdom of the 1970s. It is now argued that the real driver of inflation is centred on the financial system, instead of Fed credibility alone. The zero lower bound is also considered in light of the historical restrictions imposed by inflation ceilings.


    Philipp Ager, Francesco Cinnirella interviewed by Tim Phillips, 11 September 2020

    At the beginning of the 20th century more than 7,000 kindergartens were set up in the US. Philipp Ager and Francesco Cinnirella tell Tim Phillips about the profound effect of preschool on the life chances of a generation of immigrants.

    Race and Covid-19: The long-run impact of discrimination

    Graziella Bertocchi, 9 September 2020         

    Graziella Bertocchi (University of Modena & EIEF) uses a detailed individual-level dataset from Cook County, Illinois, to explore the relationship between COVID-19 mortality and race. Not only are Black Americans disproportionally affected by COVID-19, but they also started to succumb to it earlier than other groups. Such asymmetric effects can be traced back to racial segregation introduced by discriminatory lending practices in the 1930s