This week from CEPR: September 24

Thursday, September 24, 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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    GLOBALIZATION AND PANDEMICS
    Pol Antràs, Stephen J. Redding, Esteban Rossi-Hansberg        
    CEPR DP No. 15297 | September 2020

    Throughout human history, globalisation and pandemics have been closely intertwined – the word quarantine originates from the Italian word for a forty-day period of isolation required of ships and their crews during the Black Death pandemic. A new CEPR study by Pol Antràs, Stephen Redding and Esteban Rossi-Hansberg studies the interplay between human interactions – motivated by an economically integrated world – and the prevalence and severity of pandemics. Among the findings:

    • Globalisation influences the dynamics of the disease, because it changes patterns of human interaction.
    • There are cross-country epidemiological externalities, such that whether a global pandemic breaks out depends critically on the disease environment in the country with the highest rates of domestic infection. 
    • A deepening of global integration can either increase or decrease the range of parameters for which a pandemic occurs, and can generate multiple waves of infection when a single wave would otherwise occur in the closed economy. 
    • If agents do not internalise the threat of infection, larger deaths in a more unhealthy country raise its relative wage, thus generating a form of general equilibrium social distancing. 
    • Once agents internalise the threat of infection, the more unhealthy country typically experiences a reduction in its relative wage through individual-level social distancing. 
    • Incorporating these individual-level responses is central to generating large reductions in the ratio of trade to output and implies that the pandemic has substantial effects on aggregate welfare, through both deaths and reduced gains from trade.

    • PANDEMIC RESPONSE POLICIES AND BANK LENDING CONDITIONS IN THE EURO AREA    

    THE GREAT LOCKDOWN: Pandemic response policies and bank lending conditions
    Carlo Altavilla, Francesca Barbiero, Miguel Boucinha, Lorenzo Burlon        
    CEPR DP No. 15298 | September 2020

    The unprecedented policy response to the Covid-19 crisis, in the form of new and more targeted measures, has been crucial for counteracting the adverse economic consequences associated with the outbreak and intensification of the crisis and mitigated for substantial credit losses for banks. 

    A new CEPR study by Carlo Altavilla and colleagues analyses the policy measures taken in the euro area in response to the outbreak of Covid-19, with a focus on those directly targeted at improving bank lending conditions. The study uses data on participation in central bank liquidity operations, high-frequency reactions to monetary policy announcements, and confidential supervisory information on bank capital requirements. The study reaches three mains conclusions: 

    1. The results show that in the absence of the funding cost relief and capital relief associated with the pandemic response measures, banks' ability to supply credit would have been severely affected.
    2. The coordinated intervention by monetary and prudential authorities amplified the effects of the individual measures in supporting liquidity conditions and helping to sustain the flow of credit to the private sector. 
    3. In absence of monetary and prudential policies, the pandemic would lead to a significantly larger decline in firms' employment.

    • IMPLICATIONS OF CHEAP OIL FOR EMERGING MARKETS IN THE WAKE OF COVID-19        

    IMPLICATIONS OF CHEAP OIL FOR EMERGING MARKETS
    Alain Kabundi, Franziska Ohnsorge        
    CEPR DP No. 15296 | September 2020

    The Covid-19-triggered collapse in oil prices in March and April 2020 was the seventh, and by far the most severe, in a series of such collapses since 1970. Steep oil price collapses have been associated with significant and lasting output losses in energy-exporting EMDEs but no meaningful output gains in energy-importing EMDEs. Based on past experience, this oil price collapse is unlikely to provide much of a sustained buffer for global growth. 

    A CEPR paper by Alain Kabundi and Franziska Ohnsorge compares this most recent collapse and its drivers with previous collapses and estimates the implications of demand- and supply-driven oil price collapses for growth in emerging markets and developing economies (EMDEs). Among the findings:  

    • The current crisis is associated with an exceptionally severe plunge in oil demand and prices. 
      • The oil price fell by 85% between January 22, when the first human-to-human transmission of Covid-19 was announced, and its trough on April 21. 
    • Past demand-driven oil price collapses did not materially lift EMDE growth, not even in energy-importing EMDEs.
    • If anything, the preceding oil price collapse in 2014-15 eroded energy-exporting EMDEs’ ability to support their economies through the 2020 collapse (Wheeler et al. 2020). Being largely supply-driven, the 2014-15 collapse was considerably more damaging to EMDE energy exporters than demand-driven collapses. Many implemented large-scale fiscal stimulus and drew down reserves in an effort to dampen the immediate impact on their economies. This left them in a more vulnerable position when the 2020 collapse struck. 
    • The ability to emerge from the 2020 oil price collapse with as little lasting damage as in past demand-driven collapse may depend on the continued ability to muster policy support. 
    • Greater economic and fiscal diversification may also help dampen the impact of oil price plunges.


    VOLUNTARY OR GOVERNMENT-ENFORCED SOCIAL DISTANCING? 

    Yoseph Getachew   
    22 September 2020

    Voluntary social distancing may not be the single most effective way of controlling the spread of the COVID-19 outbreak. Nevertheless, it has the desirable (albeit moderate) effects of delaying and flattening the infection curve while minimising the economic damage from the outbreak. In contrast, government-enforced social distancing is highly effective in flattening the infection curve but it comes at a great cost to the economy. 

    These are the findings of a new study by Yoseph Getachew of the University of Pretoria, which integrates individual economic decision-making and voluntary social distancing into standard epidemiology models. Thus, when such trade-offs are present, policymakers may need to act more judiciously. Particularly, the timing of their intervention could be crucial, both in terms of saving lives and mitigating the economic damage.

     

    THE SHECESSION (SHE-RECESSION) OF 2020: Causes and consequences

    Titan Alon, Matthias Doepke, Jane Olmstead-Rumsey, Michèle Tertilt   
    22 September 2020

    Unlike any other modern recession, the downturn triggered by the Covid-19 pandemic has created larger employment losses for women than for men. The fact that job losses are much higher for women not only matters for gender equality, but will also reduce families’ ability to offset income losses, producing a deeper and more persistent recession.  

    Based on data from all US recessions since 1949, a study by Michèle Tertilt and colleagues shows that the 2020 recession deviates most sharply from the historical norm in its disparate gender impact. 


    RISING WAGE INEQUALITY DURING COVID-19 AND THE EFFECTIVENESS OF PUBLIC TRANSFERS: Evidence Spain

    Oriol Aspachs, Ruben Durante, José García-Montalvo, Alberto Graziano, Josep Mestres, Marta Reynal-Querol  
    22 September 2020

    Wage inequality in Spain increased by almost 30% during the Covid-19 crisis, mainly due to job losses and wage cuts for low-income workers. However, public transfers were very effective at offsetting most, though not all, of this increase. 

    A study by Ruben Durante and colleagues constructs a high-frequency measure of income inequality using anonymised data from bank records on the wages and public transfers of over three million account holders in Spain, to measure how the Covid-19 pandemic disproportionately affects the most vulnerable. 


    LAX LOCKDOWN POLICIES IN THE SOME US STATES TRANSLATE INTO MILLIONS OF ADDITIONAL COVID-19 INFECTIONS NATIONWIDE

    Jacek Rothert, Ryan Brady, Michael Insler  
    22 September 2020

    A study by economists at the United States Naval Academy finds that epidemiological spillovers across US states are substantial and lax policies in the most lenient states translate into millions of additional infections in other parts of the country in the long run. 

    While individual states in the US decide their own lockdown policies, they are not able to restrict travel across their borders. A lax policy in some states can thus exacerbate the outbreak in other states.


    AN AGE OF RISING INEQUALITY? No, but yes

    Ravi Kanbur   
    21 September 2020

    Are we living in an age of rising inequality? The public discourse suggests so, however, common measures of income and consumption inequality disguise a more nuanced pattern of inequality change across the world. 

    Writing at Vox, Ravi Kanbur argues that inequality within countries has not been rising everywhere and that inequality between countries has decreased. At the same time, technological progress is increasingly displacing basic labour in favour of skilled labour and capital, across borders, and widening the wage gap. The overall effect is unclear. National policies to mitigate inequality are needed but, in the absence of international cooperation, are constrained by cross-border spillovers.


    EUIPO TRADEMARK APPLICATIONS WITHSTOOD THE FIRST WAVE OF THE COVID-19 PANDEMIC

    Kyriakos Drivas   
    21 September 2020


     

    European trademark applications are an indicator of business confidence. While they have not dropped during the first wave of Covid-19 in aggregate, some countries and types of business are more affected than others. 

    A new study by Kyriakos Drivas uses data on applications to explore the detail, showing applications by Chinese firms, new firms, and firms in certain product sectors have risen. Services firms have made fewer applications.


    THE EFFECTIVENESS OF MANAGED COMPETITION DURING PANDEMICS: Evidence from Covid-19

    Joan Costa-Font, Rosella Levaggi, Gilberto Turati  
    20 September 2020

    Certain kinds of competition between publicly funded hospitals can compromise the necessary stewardship of the healthcare system in a pandemic and give rise to a larger number of fatalities. 

    A study by Joan Costa-Font, Rosella Levaggi, Gilberto Turati presents a regional comparison of the healthcare systems in three Italian regions that were severely hit at the beginning of the Covid-19 pandemic. The analysis suggests that an integrated model can provide a swifter reaction to an outbreak by minimising coordination efforts as well as information costs.


    WIND TURBINES AND SOLAR FARMS DRIVE DOWN HOUSE PRICES: Evidence from the Netherlands

    Hans Koster, Martijn Dröes  
    20 September 2020

    Countries that invest in renewable energy production face frequent opposition from local homeowners. A study by Hans Koster and Martijn Dröes uses evidence from the Netherlands to compare the overall impact that wind turbines and solar farms have on housing prices. It finds that tall wind turbines (over 150 metres) have a negative effect, and solar farms generate losses as well (2-3% for homeowners within a 1km orbit). This evidence should be factored into finding the optimal allocation of renewable energy production facilities.  


    GOD INSURES THOSE WHO PAY: Formal insurance and religious offerings in Ghana

    Emmanuelle Auriol, Julie Lassébie, Amma Panin, Eva Raiber, Paul Seabright   
    19 September 2020

    Do religious believers give money to their churches in the hope of receiving insurance against economic shocks? A study by Emmanuelle Auriol and colleagues tests how formal market-based insurance affects the demand for informal church-based insurance in Accra, Ghana, which makes a strong and explicit link between ‘giving to God’ and future wellbeing; donations can be seen as a form of insurance for the future. 

    The results suggest that religious participation may affect demand for formal insurance, as churches are seen to provide spiritual insurance to their members and are also an important source of direct financial assistance to their members, reducing further the need for formal insurance. However, findings reveal that people who enrolled in a formal insurance policy give less money to their church and to other charitable organisations.


    THE INTERGENERATIONAL TRANSMISSION OF WEALTH INCREASES INEQUALITY IN RICH COUNTRIES: Evidence from Europe and the United States

    Brian Nolan, Juan C. Palomino, Philippe Van Kerm, Salvatore Morelli   
    13 September 2020

    In rich countries, large intergenerational transfers increase overall wealth inequality. Strengthening taxation capacity and instating lifetime capital acquisitions tax for gifts and inheritances may help counter the dis-equalising effect of intergenerational transfers.

    A study by Brian Nolan and colleagues analyses household survey data on inheritance and gifts inter vivos in France, Germany, Great Britain, Ireland, Italy, Spain, and the United States to relate current household wealth levels and inequality to the receipt of intergenerational wealth transfers. 


    THE JOINT PROVISION OF ACTIVE LABOUR MARKET POLICIES AND INCOME SUPPORT CAN BE A POWERFUL SOLUTION FOR IMPROVING WORKERS’ PERSPECTIVES: Evidence from Uruguay and Mauritius 

    Verónica Escudero, Hannah Liepmann   
    19 September 2020

    Active labour market policies have the potential to improve workers’ employability, but a key challenge in developing and emerging countries is that without income support to cover their basic needs, many workers simply cannot afford to participate in such policies. 

    A study by Verónica Escudero and Hannah Liepmann, from the International Labour Organization (ILO), examines the examples of Uruguay and Mauritius to show that approaches combining both active labour market policies and income support are more effective in improving the labour market perspectives of vulnerable workers than the same policies implemented in isolation. However, the success of integrated policies clearly depends on design and implementation characteristics.


    POST-PANDEMIC DEBT SUSTAINABILITY IN THE EU/EURO AREA: This time may (and should) be different 

    Lorenzo Codogno, Giancarlo Corsetti   
    18 September 2020

    The EU Recovery Plan agreed upon in July 2020 supports investment activity through grants and loans to member states at close-to-zero interest rates. Writing at Vox, Lorenzo Codogno and Giancarlo Corsetti suggest that its implementation could give a substantial boost to the economy and fiscal revenues under very conservative assumptions on multipliers. 

    In addition, as the European Central Bank is keeping interest rates and government bond yields low, also through its asset purchase programmes, if it refrains from reacting forcefully to potential upward pressures on prices caused by the massive fiscal stimulus, even a gradual and delayed ‘normalisation’ of interest rates would not undermine debt sustainability.


    SLOWDOWN IN PRODUCTIVITY GROWTH COMPOUNDED BY COVID-19

    Alistair Dieppe   
    18 September 2020

    Writing at Vox, Alistair Dieppe argues that the Covid-19 pandemic is likely to compound the economic slowdown experienced since the 2008 global financial crisis, with profound implications for development outcomes. 

    To rekindle productivity growth, a comprehensive approach is necessary to facilitate investment in physical and human capital, encourage reallocation of resources toward more productive sectors and enterprises, and foster firms’ capabilities to reinvigorate technology adoption and innovation. Well-designed policies and regulations concerning the prudent management of financial institutions, construction, and environmental protection can help reduce the likelihood and impact of adverse shocks.


    A FRAGILE EUROPEAN MONETARY UNION HAS INTERNATIONAL IMPLICATIONS: Evidence from Covid-19

    Demosthenes Ioannou, Maria Sole Pagliari, Livio Stracca  
    18 September 2020

    The debate over the incomplete and fragile nature of Europe’s European Monetary Union (EMU) has been revived by the Covid-19 pandemic. A study by Demosthenes Ioannou, Maria Sole Pagliari and Livio Stracca shows that adverse shocks within EMU can be identified and are transmitted to the rest of the world, with implications for economic activity and trade in advanced and emerging economies. 

    Despite the important steps taken during the pandemic by euro area authorities, the drive to complete EMU with a genuine fiscal and financial union needs to continue for the sake of both the euro area and the rest of the world.


    INTERNATIONAL FRIENDS AND ENEMIES: Modelling the evolution of trade relationships since 1970

    Benny Kleinman, Ernest Liu, Stephen Redding   
    17 September 2020

    The increasingly prominent role of China in the world economy has led to widespread discussions concerning the balance of power, trade relations, and economic development. A study by Benny Kleinman, Ernest Liu and Stephen Redding introduces a new ‘friends and enemies’ model which shows that significant growth and welfare effects have stemmed from China’s shifting role, and that changes in trading clusters have varied across different sectors. 

    The findings also suggest that as countries become less economically friendly in terms of the welfare effects of their productivity growth, they also become less politically friendly in terms of foreign policy. 


    EXTRACTING IMPLICIT COUNTRY WEIGHTS IN THE ECB’S MONETARY POLICY

    Márcia Pereira, José Tavares    
    17 September 2020

    Implicit weights given to the economic context of individual Eurozone member countries inferred from the European Central Bank’s interest rate policy do not differ to a degree that suggests a serious political liability, finds a study by Márcia Pereira and José Tavares. 

    The study uses estimated counter-factual country-specific interest rates to extract the country weights implicit in the ECB’s conventional monetary policy. Germany, Belgium and the Netherlands are associated with the largest weights, and Greece and Ireland with the smallest. Nonetheless, the weights of the larger economies are smaller than their output and population shares. The results change minimally when the crisis period is compared with the period before. In sum, while weights differ across countries, they do not seem to unduly weigh larger economies. Further, estimated country weights are positively correlated with the degree of co-movement between each country’s and Germany’s business cycles.


    IMPORTING INEQUALITY: Immigration and the top 1%

    Arun Advani, Felix Koenig, Lorenzo Pessina, Andy Summers    
    17 September 2020

    A study by Arun Advani and colleagues combines data from UK tax records with new information on migrant status to show that that migrants are highly represented at the top of the UK’s income distribution. Indeed, migration can account for the majority of top-income growth in the past two decades and can help explain why the UK has experienced an outsized increase in top incomes.


    WHAT NEXT FOR THE UK'S FURLOUGHED WORKERS?

    Abigail Adams-Prassl interviewed by Tim Phillips, 15 September 2020

    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. 

    This is an audio-only version of Vox video interview The UK's furloughed workers: Who, why, what next?


    TRUSTWORTHINESS IN THE FINANCIAL SECTOR

    Matthias Heinz interviewed by Tim Phillips, 18 September 2020

    Do scandals happen in banks because they recruit people who can't be trusted? Matthias Heinz tells Tim Phillips about new research with a sobering message for bank HR departments.