Discussion Papers

DP18643 Global Factors in Non-core Bank Funding and Exchange Rate Flexibility

Luís Catão, Jan Ditzen, Daniel Marcel te Kaat — 2023-11-27T00:00:00+0000

We show that fluctuations in the ratio of non-core to core funding in the banking systems of advanced economies are driven by a handful of global factors of both real and financial natures, with country-specific factors playing no significant roles. Exchange rate flexibility helps insulate the non-core to core ratio from such global factors but only significantly so outside periods of major global shocks, as in 2007-2009 and 2020.

DP18644 The Theory of Reserve Accumulation, Revisited

Giancarlo Corsetti, Fred Seunghyun Maeng — 2023-11-27T00:00:00+0000

Uncertainty about a government willingness to repay its outstanding liabilities upon auctioning new debt creates vulnerability to belief-driven hikes in borrowing costs. We show that optimizing policymakers will eliminate such vulnerability by accumulating reserves up to ensuring post-auction debt repayment in all (off-equilibrium) circumstances. The model helps explaining why governments hold significant amounts of reserves and appear reluctant to use them to smooth fundamental shocks. Quantitatively, the model explains reserve holdings up to 3% of GDP if debt is short term, 2.4% with long-term debt—as long bond maturities mitigate vulnerability to belief-driven crises.

DP18642 Local Determinacy in Incomplete-Markets Models

Marcus Hagedorn — 2023-11-25T00:00:00+0000

This paper proposes the first methodology for assessing local determinacy in incomplete markets models. My simple determinacy criterion yields theoretical results and can be verified numerically. It merely requires calculating aggregate marginal propensities to consume (MPC) and aggregate elasticities of asset demand.

I find that the policy rules ensuring determinacy can be quite different in incomplete as opposed to complete markets models. My methodology can thus avoid the current (flawed) practice of referring to complete markets results to assess determinacy in incomplete markets models. The main findings are:

If bonds are nominal, the economy is always determinate for a constant nominal interest rate or for price level targeting if prices are sufficiently rigid. The model is indeterminate if fiscal policy is too expansionary, requiring a monetary policy response to reestablish determinacy.

If bonds are real, whether or not the Taylor principle induces determinacy depends non-linearly on MPCs, the degree of price rigidities and whether interest rates respond to output. I also find the determinacy properties of active and passive fiscal rules (Leeper, 1891) to be different in incomplete and complete markets models. I explain the shortcomings in Kaplan, Nikolakoudis and Violante (2023), which are the reason for their different and thus invalid findings.

DP18639 Search Platforms: Big Data and Sponsored Positions

Maarten Janssen, Thomas Jungbauer, Marcel Preuss, Cole Williams — 2023-11-24T00:00:00+0000

Search platforms that possess abundant consumer-specific information are ubiquitous in today's economy. We study a search platform's incentives to rank firms' products on their website in response to a consumer query taking the strategic incentives of both firms and consumers into account. Rankings are important to help consumers direct their search efforts and, as a result, affect firms' sales. We adapt tools from the social learning literature to characterize the platform’s optimal behavior if the number of firms to rank is large. If the platform’s objective is to maximize revenues from selling a sponsored position, then it fully obfuscates organic slots, while increasing the informational content of the sponsored slot. The welfare effect of sponsored positions crucially varies with the platform's additional objectives. For example, if the platform maximizes revenue earned from sponsored positions and sales commissions, then the consumer benefits from sponsored positions.

DP18641 Becoming Political: How Marching Suffragists Facilitated Women’s Electoral Participation in England

Mona Morgan-Collins, Valeria Rueda — 2023-11-24T00:00:00+0000

Previous research identifies that women politicians facilitate other women’s political participation. Can women’s political activism also spur women’s electoral participation? Through the study of the British suffragists, we argue that women activists paved the way for other women’s political participation at a time when women politicians were virtually absent. Constructing a novel micro-level dataset of geocoded data from electoral registers, we leverage a unique historical case of the 1913 Women’s Suffrage Pilgrimage. Using a Differences-in-Differences strategy that compares polling divisions based on the proximity to the Pilgrimage across England, we provide evidence that exposure to the suffragists marching for parliamentary suffrage increased the registration of women eligible to vote in local elections. Analyzing contemporary news articles, we then document the pathways through which the suffragists incited other women’s political interest and therefore electoral participation. These findings have implications for the realization of substantive representation after suffrage.

DP18638 The Dynamics of Social Identity, Inequality and Redistribution

Christian Ghiglino, Andreas Müller — 2023-11-24T00:00:00+0000

We provide a politico-economic theory of income redistribution with endogenous social identity of voters. Our analysis uncovers a non-monotonic relationship between market income inequality and redistributive taxation in line with the mixed evidence on the sign of their empirical relationship: taxation first increases with wage inequality as all voters identify with others, but then drops sharply as affluent voters switch to identify in-group. We further add ethnicity as an identification attribute. Consistent with existing empirical evidence, our model predicts that the presence of ethnic minorities and across ethnic group inequality reduce redistribution, while within ethnic group wage inequality increases it.

DP18640 Microdata for Economic Research in Europe: Challenges and Proposals

2023-11-24T00:00:00+0000

While access to high-quality microdata is essential for economic research and policy evaluation, effective access to such data remains limited in Europe. It varies from country to country, with uneven information on access procedures. This is a major obstacle to social science research, including research on European competitiveness and the effects of climate change, inequality, globalization, and digitalization. The objective of this paper, which is based on a brainstorming exercise coordinated by CEPR and CompNet, is to assess the status quo and discuss a series of proposals for improving access to Microdata for economic research. We underline the need for developing the relevant tools for extended access to and use of European business statistics microdata. Building such tools entails both establishing the requested microdata and creating a body facilitating cross-country access to the established databases with harmonized content.

DP18637 Tickets to the Global Market: First US Patent Awards and Chinese Firm Exports

Robin Gong, Yao Amber Li, Kalina Manova, Stephen Teng Sun — 2023-11-23T00:00:00+0000

We investigate how international patent activity enables firms from emerging economies to thrive in the global marketplace. We match Chinese customs data to US patent records, and leverage the quasi-random assignment of USPTO patent examiners to identify the causal effect of a US patent grant on the subsequent export performance of Chinese firms. Successful first-time patent applicants achieve significantly higher export growth, compared to otherwise similar first-time applicants that failed. This effect operates only in small part through market protection for technologically patent-related products in the US, and is largely driven by expansion in other markets. The response across destinations and products reveals that a US patent award signals the Chinese firm's capacity to produce high-quality products and credibility to honor contracts, mitigating information frictions in international trade. There is little evidence for the relaxation of financial constraints or the promotion of follow-on innovation.

DP18635 Fickle Fossils. Economic Growth, Coal and the European Oil Invasion, 1900-2015

Miriam Fritzsche, Nikolaus Wolf — 2023-11-23T00:00:00+0000

Fossil fuels have shaped the European economy since the industrial revolution. We use new long-run panel data to analyse the effect of both, coal and oil on economic growth between 1900 and 2015, exploiting variation at the level of European NUTS2 and NUTS3 regions. We show that the reversal of fortune of coal regions resulted from the second energy transition. Specifically, an “oil invasion” in the early 1960s turned regional coal abundance from a blessing into a curse. Human capital accumulation contributed to this reversal of fortune and fully explains the negative effects until today. Moreover, we find substantial heterogeneity between former coal regions that is in line with Glaeser’s “reinvention hypothesis”: regions with a higher skill-level adjusted much better to the decline of coal. In particular, we show that coal regions with a higher urban density before 1800 were much more resilient than others.

DP18636 Public Service Delivery, Exclusion and Externalities: Theory and Experimental Evidence from India

Alex Armand, Britta Augsburg, Antonella Bancalari, Maitreesh Ghatak — 2023-11-23T00:00:00+0000

This study explores the interaction between the quality of public services, the implementation of user fees, and the resulting potential for exclusion, that can lead to negative externalities. Our theoretical framework takes account of the possible externalities that result from excluded users accessing alternative options in the context of sanitation, i.e., open defecation, and challenges the conventional wisdom that higher quality unequivocally leads to increased use. Instead, it highlights the ambiguity that results from a simultaneous increase in usage due to improved services (quality effect) and a decrease caused by the fees (price-elasticity effect). We then provide empirical evidence from a randomized controlled trial, where we incentivized the quality of water and sanitation services in the two largest cities of Uttar Pradesh, India. We show that higher service quality increases fee compliance but excludes some users, leading to unintended negative health externalities. Our detailed data provides evidence that results are driven by changes in caretaker behaviour. This finding highlights the need to be cautious regarding user fees, especially for public services involving significant externalities, and in settings where the users are very poor.

DP18633 The main rift in the macro policy debate is between Neoclassicals and Neo-Austrians

Coen Teulings — 2023-11-23T00:00:00+0000

The secular decline in real interest rates over the past four decades has invoked a fierce debate on macro policy. The distinction between Keynesians and Monetarist is no longer useful. It is more meaningful to distinguish between those who explain this decline from shifts in supply and demand of capital (referred to as Neoclassicals) and those who blame central banks (referred to as Neo-Austrians). Paradoxically, where Neo-Austrians are viewed as the ultimate believers in the blessings of free markets, their position requires a strong scepticism on efficacy of capital markets. Both views have widely different policy implications, both for the past decade of QE as well as for central banks’ subsequent response to the burst in inflation since 2022. The confusion among the public is partly due to the disciplines adherence in its teaching to the quantity theory of money, which is inconsistent with modern payment systems based on cash-accounts.

DP18632 The War of Attrition under Uncertainty: Theory and Robust Testable Implications

Jean-Paul Décamps, Fabien Gensbittel, Thomas Mariotti — 2023-11-23T00:00:00+0000

We study a generic model of the war of attrition with symmetric information and stochastic payoffs that depend on a homogeneous linear diffusion. We first show that a player's mixed Markov strategy can be represented by an intensity measure over the state space together with a subset of the state space over which the player concedes with probability 1. We then show that, if players are asymmetric, then, in all mixed-strategy Markov-perfect equilibria, these intensity measures must be discrete, and characterize any such equilibrium through a variational system for the players' value functions. We illustrate these findings by revisiting the standard model of exit in a duopoly under uncertainty and construct a mixed-strategy Markov-perfect equilibrium in which attrition takes place on path despite firms having different liquidation values. We show that firms' stock prices comove negatively over the attrition zone and exhibit resistance and support patterns documented by technical analysis.

DP18634 Top Wealth Is Distributed Weibull, Not Pareto

Coen Teulings, Simon Toussaint — 2023-11-23T00:00:00+0000

We study the shape of the global wealth distribution, using the Forbes List of Billionaires. We develop simple statistics based on ratios of log moments to test the default assumption of a Pareto distribution, which is strongly rejected. Hazard rates show that the log-transformed data instead follow a Gompertz distribution, which means that the data in levels follow a truncated-Weibull distribution. We further apply our model to the U.S. city size distribution and the U.S. firm size distribution. These distributions also show a rejection of Pareto in favor of (truncated-)Weibull. We discuss some theoretical and practical implications of our results.

DP18631 Trade Uncertainty and U.S. Bank Lending

Ricardo Correa, Julian di Giovanni, Linda S. Goldberg, Camelia Minoiu — 2023-11-22T00:00:00+0000

This paper uses U.S. loan-level credit register data and the 2018–2019 Trade War to test for the effects of international trade uncertainty on domestic credit supply. We exploit cross-sectional heterogeneity in banks’ ex-ante exposure to trade uncertainty and find that an increase in trade uncertainty is associated with a contraction in bank lending to all firms irrespective of the uncertainty that the firms face. This baseline result holds for lending at the intensive and extensive margins. We document two channels underlying the estimated credit supply effect: a wait-and-see channel by which exposed banks assess their borrowers as riskier and reduce the maturity of their loans and a financial frictions channel by which exposed banks facing relatively higher balance sheet constraints contract lending more. The decline in credit supply has real effects: firms that borrow from more exposed banks experience lower debt growth and investment rates. These effects are stronger for firms that are more reliant on bank finance.

DP18630 Foreign Competition and Innovation

Elhanan Helpman — 2023-11-21T00:00:00+0000

Empirical studies have found that enhanced foreign competition can encourage or discourage innovation. To address this relationship, I examine a market structure in which a small number of large multi-product oligopolists compete with a large number of small single-product firms in the same industry. The single-product firms are short-lived while the multi-product firms live forever, and the large firms invest in innovation in order to enlarge their product spans. All firms export. I show that an increase in the competitiveness of foreign firms can increase or reduce innovation efforts of a large multi-product firm. Moreover, changes in the incentives to innovate can be different for more-productive and less-productive oligopolists. As a result, aggregate sectoral innovation may rise or decline, depending on the productivity distribution of the oligopolists. I also show that changes in short-term operating profits may not be aligned with changes in the incentives to invest in innovation.

DP18629 Shame, Guilt, and Motivated Self-Confidence

Roberta Dessí, Junjie Ren, Xiaojian Zhao — 2023-11-21T00:00:00+0000

The available evidence from anthropology, economics, and psychology suggests that sensitivity to the emotions of shame and guilt varies across cultures. So does (over)confidence in ability and skills. Is there a connection between these observations? We address this question theoretically and empirically. We
find significant evidence, consistent with our model, of a negative
relationship between the cultural importance of shame relative to guilt and individual confidence. The relationship holds across countries, and for U.S. immigrants relative to their culture of origin.

DP18625 Regulating Artificial Intelligence

João Guerreiro, Sérgio Rebelo, Pedro Teles — 2023-11-20T00:00:00+0000

We consider an environment in which there is substantial uncertainty about the potential negative external effects of AI algorithms. We find that subjecting algorithm implementation to regulatory approval or alternatively holding developers accountable for adverse external impacts of their algorithms is insufficient to implement the social optimum. When testing costs are low, a combination of mandatory beta testing for external effects and making developers liable for the negative external effects of their algorithms implements the social optimum even when developers have limited liability.

DP18623 Do banks practice what they preach? Brown lending and environmental disclosure in the euro area

Leonardo Gambacorta, Salvatore Polizzi, Alessio Reghezza, Enzo Scannella — 2023-11-20T00:00:00+0000

This study examines whether the level of environmental disclosure in banks’ financial reports matches less brown lending portfolios. Using granular credit register data and detailed information on firm-level greenhouse gas emission intensities, we find a negative relationship between environmental disclosure and brown lending. However, this effect is contingent on the tone of the financial report. Banks that express a negative tone, reflecting genuine concern and awareness of environmental risks, tend to lend less to more polluting firms. Conversely, banks that express a positive tone, indicating lower concern and awareness of environmental risks, tend to lend more to polluting firms. These findings highlight the importance of increasing awareness of environmental risks, so that banks perceive them as a critical and urgent pressing threat, leading to a genuine commitment to act as environmentally responsible lenders.

DP18628 Pandemic-Era Inflation Drivers and Global Spillovers

Julian di Giovanni, Sebnem Kalemli-Özcan, Alvaro Silva, Muhammed A. Yıldırım — 2023-11-20T00:00:00+0000

We estimate a multi-country multi-sector New Keynesian model to quantify the drivers of domestic inflation during 2020–2023 in several countries, including the United States. The model matches observed inflation together with sector-level prices and wages. We further measure the relative importance of different types of shocks on inflation across countries over time. The key mechanism, the international transmission of demand, supply and energy shocks through global linkages helps us to match the behavior of the USD/Euro exchange rate. The quantification exercise yields four key findings. First, negative supply shocks to factors of production, labor and intermediate inputs, initially sparked inflation in 2020–2021. Global supply chains and complementarities in production played an amplification role in this initial phase. Second, positive aggregate demand shocks, due to stimulative policies, widened demand-supply imbalances, amplifying inflation further during 2021–2022. Third, the reallocation of consumption between goods and service sectors, a relative sector-level demand shock, played a role in transmitting these imbalances across countries through the global trade and production network. Fourth, global energy shocks have differential impacts on the US relative to other countries’ inflation rates. Further, complementarities between energy and other inputs to production play a particularly important role in the quantitative impact of these shocks on inflation.

DP18624 Borrower Technology Similarity and Bank Loan Contracting

Mingze Gao, Yunying Huang, Steven Ongena, Eliza Wu — 2023-11-20T00:00:00+0000

Do banks accumulate knowledge about corporate technology, and does it matter for their lending? To answer this question, we combine corporate innovation with syndicated loan data. We find that loans to firms sharing similar technologies with banks’ prior borrowers obtain lower loan spreads. We can rule out product market competition, the value of their technology and ability to innovate, and/or numerous other firm characteristics as alternative explanations. By exploiting the adoption of intellectual
property protection laws and the consummation of bank mergers and acquisitions, we can show that shocks to banks’ technology knowledge causally affect loan spreads.

DP18620 Wealth Tax Mobility and Tax Coordination

David Agrawal, Dirk Foremny, Clara Martinez-Toledano — 2023-11-20T00:00:00+0000

We study the effects of decentralized wealth taxation on mobility and the effectiveness of tax coordination at mitigating tax competition. We exploit the reintroduction of the Spanish wealth tax, after which all regions except Madrid levied positive tax rates. We find the mobility responses to wealth taxes are within the range of prior estimates with respect to income taxes. However, wealth tax mobility responses generate losses to personal income tax revenues that are six times larger than the direct losses to wealth taxes. Madrid could achieve higher total regional revenues by agreeing to a harmonized positive tax rate.

DP18627 Demand and Supply Side Linkages in Exporting Multiproduct Firms

Carsten Eckel, Lisandra Flach, Ning Meng — 2023-11-20T00:00:00+0000

Products produced by a multiproduct firm can be linked through demand linkages or supply linkages. On the demand side, changes in the price of one product can affect the demand for a firm's other products through shifts in consumer expenditures. This is commonly referred to as the cannibalization effect. On the supply side, joint inputs can create a dependency of one product's marginal costs on the output of other products. The existence of these linkages is important for how firms respond to shocks and has major implications for several performance measures, such as productivity and markups. This paper provides first empirical evidence for the existence of cannibalization linkages in presence of supply linkages, which is implied evidence for market power.

DP18622 Platform Lending and Innovation

Leonardo Gambacorta, Leonardo Madio, Bruno Parigi — 2023-11-20T00:00:00+0000

We analyse the impact of platform lending on innovation and e-commerce vendors’ surplus. The platform generates revenues from both lending and marketplace fees, and can use lending to price discriminate vendors, thereby leading to higher marketplace fees and below-market interest rates. Prohibition of platforms lending may stifle innovation, not because of lack of platform funding, but because the high fee policy of the platform deters banks from financing innovators. Allowing platforms to lend may encourage innovation by providing access to subsidised credit, but it can also harm vendors who do not have financial needs. A sufficient condition for platform lending to be welfare-enhancing is that innovators would not receive funding from banks otherwise. However, if innovators would receive funding from banks, platform lending may reduce the overall vendor surplus. Cream skimming arises when the platform has better information than the bank about the prospects of the innovators’ projects. To address the potential negative effects of platform lending on vendors’ surplus, we also explore the impact of different regulatory instruments.

DP18621 The Wealth of Working Nations

Jesús Fernández-Villaverde, Gustavo Ventura, Wen Yao — 2023-11-20T00:00:00+0000

Due to population aging, GDP growth per capita and GDP growth per working-age adult have become quite different among many advanced economies over the last several decades. Countries whose GDP growth per capita performance has been lackluster, like Japan, have done surprisingly well in terms of GDP growth per working-age adult. Indeed, from 1998 to 2019, Japan has grown slightly faster than the U.S. in terms of per working-age adult: an accumulated 31.9% vs. 29.5%. Furthermore, many advanced economies appear to be on parallel balanced growth trajectories in terms of working-age adults despite important differences in levels. Motivated by this observation, we calibrate a standard neoclassical growth model in which the growth of the working-age adult population varies in line with the data for each economy. Despite the underlying demographic differences, the calibrated model tracks output per working-age adult in most economies of our sample. Our results imply that the growth behavior of mature, aging economies is not puzzling from a theoretical perspective.

DP18626 Biodiversity Risk

Stefano Giglio, Theresa Kuchler, Johannes Ströbel, Xuran Zeng — 2023-11-20T00:00:00+0000

We explore the effects of physical and regulatory risks related to biodiversity loss on economic activity and asset values. We first develop a news-based measure of aggregate biodiversity risk and analyze how it varies over time. We also construct and publicly release several firm-level measures of exposure to biodiversity risk, based on textual analyses of firms' 10-K statements, the holdings of biodiversity-related funds, and a large survey of finance professionals, regulators, and academics. Exposures to biodiversity risk vary substantially across industries in a way that is economically sensible and distinct from exposures to climate risk. We find evidence that biodiversity risks already affect equity prices: returns of portfolios that are sorted on our measures of biodiversity risk exposure covary positively with innovations in aggregate biodiversity risk. However, our survey indicates that market participants do not perceive the current pricing of biodiversity risks in equity markets to be adequate. We also construct several measures of biodiversity risk exposure across U.S. counties, but find little evidence that those exposures are priced in municipal bond markets.

DP18619 Climate change and bank deposits

H. Özlem Dursun-de Neef, Steven Ongena — 2023-11-20T00:00:00+0000

Abnormally warm temperatures are associated with an increase in people’s beliefs about climate change. Using branch-level deposit data from the United States, we find that depositors move their money away from fossil-fuel-financing banks when experiencing warmer-than-usual temperatures. This effect is more pronounced in counties with more climate change deniers, measured by the percentage of Republican voters in each county. Our results shed light on people’s responses to the impacts of global warming by studying the relationship between households’ beliefs about climate change and their non-financial preferences in their choice of bank for deposits.

DP18618 An Economic Model of Deliberative Democracy

Tim Besley — 2023-11-17T00:00:00+0000

This paper develops a canonical model of deliberative democracy as part of a policy process. It studies how deliberation affects incentives and behavior in three contexts: (i) compliance with policies (ii) equilibrium policy choices in a representative democracy and (iii) incentives to protest. The paper explores whether there are welfare gains from increased deliberation and how these depend on changes in equilibrium behavior.

DP18617 One-Sided Limited Commitment and Aggregate Risk

Yoshiki Ando, Dirk Krueger, Harald Uhlig — 2023-11-17T00:00:00+0000

In this paper we study the neoclassical growth model with idiosyncratic income risk and aggregate risk in which risk sharing is endogenously constrained by one-sided limited commitment. Households can trade a full set of contingent claims that pay off depending on both idiosyncratic and aggregate risk, but limited commitment rules out that households sell these assets short. The model results, under suitable restrictions of the parameters of the model, in partial consumption insurance in equilibrium. With log-utility and idiosyncratic income shocks taking two values one of which is zero (e.g., employment and unemployment) we show that the equilibrium can be characterized in closed form, despite the fact that it features a non-degenerate consumption- and wealth distribution. We use the tractability of the model to study, analytically, inequality over the business cycle and asset pricing, and derive conditions under which our model has identical, as well as conditions under which it has lower/higher risk premia than the corresponding representative agent version of the model.

DP18616 Demographics and Real Interest Rates Across Countries and Over Time

Carlos Carvalho, Andrea Ferrero, Felipe Mazin, Fernanda Nechio — 2023-11-16T00:00:00+0000

We explore the implications of demographic trends for the evolution of real interest rates across countries and over time. To that end, we develop a tractable three-country general equilibrium model with imperfect capital mobility and country-specific demographic trends. We calibrate the model to study how low-frequency movements in a country's real interest rate depend on its own and other countries' demographic factors, given a certain degree of financial integration. The more financially integrated a country is, the higher the sensitivity of its real interest rate to global developments is, and the less its own real rate determinants matter. We then estimate panel error-correction models relating real interest rates to many of its possible determinants—demographics included—imposing some restrictions motivated by lessons from our structural model. Results corroborate the importance of accounting for time-varying financial integration, and show global factors and life expectancy are relevant determinants of real interest rates.

DP18615 The persistent effect of competition on prosociality

Fabian Kosse, Ranjita Rajan, Michela Tincani — 2023-11-15T00:00:00+0000

We present the first causal evidence on the persistent impact of enduring competition on prosociality. Inspired by the literature on tournaments within firms, which shows that competitive compensation schemes reduce cooperation in the short-run, we explore if enduring exposure to a competitive environment persistently attenuates prosociality. Based on a large-scale randomized intervention in the education context, we find lower levels of prosociality for students who just experienced a 2-year competition period. 4-year follow-up data indicate that the effect persists and generalizes, suggesting a change in traits and not only in behavior.

DP18612 Estimating the Effects of Political Pressure on the Fed: A Narrative Approach with New Data

Thomas Drechsel — 2023-11-15T00:00:00+0000

This paper combines new data and a narrative approach to identify shocks to political pressure on the Federal Reserve. From archival records, I build a data set of personal interactions between U.S. Presidents and Fed officials between 1933 and 2016. Since personal interactions do not necessarily reflect political interference and can arise endogenously, I use a narrative identification strategy. To get re-elected, President Nixon pressured Fed Chair Burns to ease monetary policy 1971. I exploit this episode through narrative sign restrictions in a SVAR that includes the personal interaction data and typical macro data. I find that political pressure shocks (i) increase inflation strongly and persistently, (ii) lead to statistically weak negative effects on activity, (iii) contributed to other inflationary episodes outside of the Nixon era, and (iv) transmit differently from standard expansionary monetary policy shocks, in particular by having a stronger effect on inflation expectations. While the benefits of central bank independence have previously been shown using cross-country data, my estimates cover one economy through time and are quantitative: increasing political pressure 50% as much as Nixon, for six months, raises the U.S. price level by more than 8%.

DP18610 The Medical Expansion, Life-Expectancy and Endogenous Directed Technical Change

Leon Huetsch, Dirk Krueger, Alexander Ludwig — 2023-11-15T00:00:00+0000

We build a quantitative theory of income growth, the increase in life expectancy in the last two centuries, and the emergence and expansion of a modern health sector in the 20th century. To do so, we develop a two-sector overlapping generations model with endogenous and directed technical change in which income growth, life expectancy, technological progress in the health and the final goods sector, as well as the size of the health sector and the quality and price of the goods it produces are jointly determined in general equilibrium. The model interprets the facts as three phases of a dynamic equilibrium in which households are initially poor and the quality-adjusted price of health goods is prohibitively high so that demand for health goods is zero, life is short and life expectancy stagnant. As income grows, fueled by technological progress, households start consuming basic health goods, life expectancy starts to rise, and directed technological progress eventually, with a delay of ca. 100 years, leads to the emergence and expansion of a modern health sector.

DP18613 Labor Market Stability and Fertility Decisions

Joan Monras, Eduardo Polo-Muro, Javier Vázquez-Grenno — 2023-11-15T00:00:00+0000

This paper studies how fertility decisions respond to an improvement in job stability using variation from the large and unexpected regularization of undocumented immigrants in Spain implemented during the first half of 2005. This policy change improved substantially the labor market opportunities of affected men and women, many of which left the informality of house keeping service sectors toward more formal, stable, and higher paying jobs in larger firms (Elias et al. 2023). In this paper, we estimate the effects of the regularization on fertility rates using two alternative difference-in-differences strategies that compare fertility behavior of "eligible" and "non-eligible" candidate women to obtain the legal status, both on aggregate and at the local level. Our findings suggests that gaining work permits leads to a significant increase in women fertility. Our preferred estimates indicate that the regularization increased fertility rates among affected women by around 5 points, which is a 10 percent increase.

DP18611 Who Bears the Costs of Inflation? Euro Area Households and the 2021–2022 Shock

2023-11-15T00:00:00+0000

We measure the heterogeneous welfare effects of the recent inflation surge across households in the Euro Area. A simple framework illustrating the numerous channels of the transmission mechanism of surprise inflation to household welfare guides our empirical exercise. By combining micro data and aggregate time series, we conclude that: (i) country-level average welfare costs –expressed as a share of 2021–22 income– were larger than a typical recession, and heterogeneous, e.g., 3% in France and 8% in Italy; (ii) this inflation episode resembles an age-dependent tax, with the elderly losing up to 20%, and roughly half of the 25–44 year-old winning; (iii) losses were quite uniform across consumption quantiles because rigid rents served as a hedge for the poor; (iv) nominal net positions are the key driver of heterogeneity across-households; (v) the rise in energy prices generated vast variation in individual-level inflation rates, but unconventional fiscal policies were critical in shielding the most vulnerable households.

DP18614 How Do Households Respond to Income Shocks?

Dirk Krueger, Egor Malkov, Fabrizio Perri — 2023-11-15T00:00:00+0000

We use panel data from the Italian Survey of Household Income and Wealth from 1991 to 2016 to document empirically what components of the household budget constraint change in response to shocks to household labor income, both over shorter and over longer horizons. We show that shocks to labor income are associated with negligible changes in transfers and non-labor income components, modest changes in consumption expenditures, and large changes in wealth. We then split the sample in households which do not own business or real estate wealth, and households who do. For the first group, we find that consumption responses are more substantial (and increasing with the horizon of the income shock) and wealth responses are much smaller. We show that, for this group, a version of the standard PIH framework that allows for partial insurance against even permanent income shocks can explain well the consumption and wealth responses, both at short and long horizons. For the second group the standard framework cannot explain the large changes in wealth associated with income shocks. We conclude that models which include shocks to the value of household wealth are necessary to fully evaluate the sources and the consequences of household resource risk.

DP18606 Aggregation and Closed-Form Results for Nonhomothetic CES Preferences

Clement Bohr, Marti Mestieri, Emre Yavuz — 2023-11-14T00:00:00+0000

We provide four novel results for nonhomothetic Constant Elasticity of Substitution preferences (Hanoch, 1975). First, we derive a closed-form representation of the expenditure function of nonhomothetic CES under relatively flexible distributional assumptions of demand and price distribution parameters. Second, we characterize aggregate demand from heterogeneous households in closed-form, assuming that household total expenditures follow an empirically plausible distribution. Third, we leverage these results to study the Euler equation arising from standard intertemporal consumption-saving problems featuring within-period nonhomothetic CES preferences. Finally, we show that nonhomothetic CES expenditure shares arise as the solution of a discrete-choice logit problem.

DP18608 The Atlas of Local Jurisdictions of Ancien Régime France

Victor Gay, Paula Eugenia Gobbi, Marc Goñi — 2023-11-14T00:00:00+0000

This article describes the construction and content of an atlas of local jurisdictions of Ancien Régime France: bailliages. Bailliages were at the center of the Ancien Régime’s jurisdictional apparatus: they administered the ordinary royal justice, delimited the area of influence of different customary laws, and served as electoral constituencies for the Estates General of 1614 and 1789. Based on Armand Brette’s Atlas des Bailliages et Juridictions Assimilées published in 1904, we develop a historical geographic information system that contains shapefiles and associated data files of bailliage courts at the time of the convocation of the Estates General of 1789.

DP18609 The Customary Atlas of Ancien Régime France

Victor Gay, Paula Eugenia Gobbi, Marc Goñi — 2023-11-14T00:00:00+0000

Customary law regulated most European societies during the middle ages and the early modern period. To better understand the roots of legal customs and their implications for long-run development, we introduce an atlas of customary regions of Ancien Régime France. We also describe the historical origins of French customs, their role as source of law, and their legal content. We then provide various insights into avenues of research opened by this database.

DP18607 Revolutionary Transition: Inheritance Change and Fertility Decline

Victor Gay, Paula Eugenia Gobbi, Marc Goñi — 2023-11-14T00:00:00+0000

We test Le Play's (1875) hypothesis that the French Revolution contributed to France’s early fertility decline. In 1793, a series of inheritance reforms abolished local inheritance practices, imposing equal partition of assets among all children. We develop a theoretical framework that predicts a decline in fertility following these reforms because of indivisibility constraints in parents' assets. We test this hypothesis by combining a newly created map of pre-Revolution local inheritance practices together with demographic data from the Henry database and from crowdsourced geneaologies in Geni.com. We provide difference-in-differences and regression discontinuity estimates based on comparing cohorts of fertile age and cohorts too old to be fertile in 1793 between municipalities where the reforms altered and did not alter existing inheritance practices. We find that the 1793 inheritance reforms reduced completed fertility by half to one child, closed the pre-reform fertility gap between different inheritance regions, and sharply accelerated France’s early fertility transition.

DP18605 The Effects of Mandatory Profit-Sharing on Workers and Firms: Evidence from France

Elio Nimier-David, David Sraer, David Thesmar — 2023-11-13T00:00:00+0000

Since 1967, all French firms with more than 100 employees have been required to share a fraction of their excess profits with their employees. Through this scheme, firms with excess profits distribute on average 10.5% of their pre-tax income to workers. In 1990, the eligibility threshold was reduced to 50 employees. We exploit this regulatory change to identify the effects of mandated profit-sharing on firms and their employees. The cost of mandated profit-sharing for firms is evident in the significant bunching at the 100-employee threshold observed prior to the reform, which completely disappears post-reform. Using a difference-in-difference strategy, we find that, at the firm level, mandated profit-sharing (a) increases labor share by 1.8 percentage points, (b) reduces the profit share by 1.4 percentage points, and (c) does not affect investment or productivity. At the employee level, mandated profit-sharing increases low-skill workers’ total compensation and leaves high-skill workers' total compensation unchanged. Overall, mandated profit-sharing redistributes excess profits to lower-skill workers in the firm, without generating significant distortions or productivity effects.

DP18600 Duration Dependence in Finding a Job: Applications, Interviews, and Job Offers

2023-11-13T00:00:00+0000

The job finding rate declines with the duration of unemployment. While this is a well established fact, the reasons are still disputed. We use monthly search diaries from Swiss public employment offices to shed new light on this issue. Search diaries record all applications sent by job seekers, including the outcome of each application – whether the employer followed up with a job interview and a job offer. Based on more than 600,000 applications sent by 15,000 job seekers, we find that job applications and job interviews decrease, but job offers (after an interview) increase with duration. A model with statistical discrimination by firms and learning from search outcomes by workers replicates these empirical duration patterns closely. The structurally estimated model predicts that 55 percent of the decline in the job finding rate is due to “true” duration dependence, while the remaining 45 percent is due to dynamic selection of the unemployment pool. We also discuss further drivers of the observed duration patterns, such as human capital depreciation, stock-flow matching, depletion of one’s personal network, and changes in application targeting or quality.

DP18604 The Skyscraper Revolution: Global Economic Development and Land Savings

Gabriel Ahlfeldt, Nathaniel Baum-Snow, Remi Jedwab — 2023-11-13T00:00:00+0000

Tall buildings are central to facilitating sustainable urbanization and growth in cities worldwide. We estimate average elasticities of city population and built area to aggregate city building heights of 0.12 and -0.17, respectively, indicating that the largest global cities in developing economies would be at least one-third smaller on average without their tall buildings. Land saved from urban development by post-1975 tall building construction is over 80% covered in vegetation. To isolate the effects of technology-induced reductions in the cost of height from correlated demand shocks, we use interactions between static demand factors and the geography of bedrock as instruments for observed 1975-2015 tall building construction in 12,877 cities worldwide, a triple difference identification strategy. Quantification using a canonical urban model suggests that the technology to build tall generates a potential global welfare gain of 4.8%, of which only about one-quarter has been realized. Estimated welfare gains from relaxing existing height constraints are 5.9% in the developed world and 3.1% in developing economies.

DP18598 Trade, Innovation and Optimal Patent Protection

David Hémous, Simon Lepot, Thomas Sampson, Julian Schaerer — 2023-11-13T00:00:00+0000

This paper provides a first comprehensive quantitative analysis of optimal patent policy in the global economy. We introduce a new framework, which combines trade and growth theory into a tractable tool for quantitative research. Our application delivers three main results. First, the potential gains from international cooperation over patent policies are large. Second, only a small share of these gains has been realized so far. And third, the WTO’s TRIPS agreement has been counterproductive, slightly reducing welfare in the Global South and for the world. Overall, there is substantial scope for policy reform.

DP18603 Imperfect Price Information, Market Power, and Tax Pass-Through

Felix Montag, Robin Mamrak, Alina Sagimuldina, Monika Schnitzer — 2023-11-13T00:00:00+0000

Pass-through determines how consumers respond to taxes. We investigate the impact of imperfect price information on pass-through of commodity taxes. Our theoretical model predicts that the pass-through rate increases with the share of well-informed consumers. Pass-through is higher for the minimum price, paid by well-informed consumers, than for the average price, paid by uninformed consumers. Moreover, pass-through to the average price is non-monotonic with respect to the number of sellers. An empirical analysis of multiple recent tax changes in the German and French retail fuel markets confirms our theoretical predictions. Our results have implications for tax policy and shed light on the relative effectiveness of Pigouvian taxes versus regulation.

DP18599 Dark Defaults: How Choice Architecture Steers Political Campaign Donations

Nathaniel Posner, Andrey Simonov, Kellen Mrkva, Eric Johnson — 2023-11-13T00:00:00+0000

In the months before the 2020 U.S. election, several political campaign websites added pre-checked boxes (defaults), automatically making all donations into recurring weekly contributions unless donors unchecked them. Since these changes occurred at different times for different campaigns, we use a staggered difference-in-differences design to measure the causal effects of defaults on donors’ behavior. We estimate that defaults increased campaign donations by over $43 million while increasing requested refunds by almost $3 million. The weekly default only impacted weekly recurring donations, and not other donations, suggesting that donors may not have intended to make weekly donations. The longer defaults were displayed, the more money campaigns raised through weekly donations. Donors did not compensate by changing the amount they donated. We found that the default had a larger impact on smaller donors and on donors who had no prior experience with defaults, causing them to start more chains and donate a larger proportion of their money through weekly recurring donations.

DP18596 Energy cost pass-through and the rise of inflation: Evidence from French manufacturing firms

Raphaël Lafrogne-Joussier, Julien Martin, Isabelle Mejean — 2023-11-13T00:00:00+0000

This paper presents micro evidence on energy price shock transmission to producer prices. We analyze microdata from the French Producer Price Index (PPI) and firms' energy usage. Firms fully pass on positive energy-driven cost shocks to prices but respond more modestly to cost reductions. Despite full pass-through of positive shocks, the recent energy price surge only moderately impacted manufacturing inflation, accounting for approximately 10% of total PPI growth. This limited effect results from the relatively small share of energy in firms' variable costs. The average impact masks significant variations, primarily within industries.

DP18597 Why net worth is the wrong concept for explaining consumption: evidence from Italy

Riccardo De Bonis, Danilo Liberati, John Muellbauer, Concetta Rondinelli — 2023-11-13T00:00:00+0000

Most econometric policy models at central banks and elsewhere use an aggregate consumption function based on textbook theory. This assumes that the ‘representative household’ owns only an aggregate form of wealth, proxied by net worth, and never faces borrowing or liquidity constraints or transactions costs. This is inconsistent with the modern view of heterogeneous agent behaviour under uncertainty in incomplete markets. Based on data from 1980 to 2019, the conventional formulation for an aggregate consumption function for Italy is strongly rejected. The results show that the marginal propensities to consume out of household deposits and semi-liquid financial assets such as T-bills and mutual funds are greater than for less liquid assets. A significant positive effect from housing wealth is substantially offset by the negative effect of affordability measured by the house price-to-income ratio.

DP18602 Does Dual Vocational Education and Training Pay Off?

Samuel Bentolila, Antonio Cabrales, Marcel Jansen — 2023-11-13T00:00:00+0000

This paper analyzes the causal impact of dual vocational education and training (VET) on the labor market insertion of youth. Using matched education and social security records, we estimate the causal impact of a major reform that introduced a new dual track, which combines firm- and school-based training, on the labor market outcomes of the first three dual VET cohorts in the Spanish region of Madrid. The control group is composed of individuals who graduated in the same fields and years in school-based VET. Selection into dual VET is dealt with using a distance-based instrumental variable. Dual VET is found to generate sizable improvements in employment and earnings, but no significant impact on job quality. The results are not driven by pre-reform differences in the quality of the schools that adopted dual VET and the higher retention rate of dual VET graduates only partly explains the dual premium.

DP18601 Modeling the Displacement of Native Workers by Immigrants

Pascal Michaillat — 2023-11-13T00:00:00+0000

Immigrants are always accused of stealing people's jobs. Yet, by assumption, standard immigration models—the neoclassical model and Diamond-Mortensen-Pissarides matching model—rule out displacement of native workers by immigrants. In these models, when immigrants enter the labor force, they are absorbed by firms without taking jobs away from native jobseekers. This paper develops a more general model of immigration, which allows for displacement of native workers by immigrants. Such generalization seems crucial to understand and study all the possible effects of immigration on labor markets. The model blends a matching framework with job rationing. In it, the entry of immigrants increases the unemployment rate of native workers. Moreover, the reduction in employment rate is sharper when the labor market is depressed because jobs are scarcer then. On the plus side, immigration makes it easier for firms to recruit, which improves firm profits. The overall effect of immigration on native welfare depends on the state of the labor market. Immigration always reduces welfare when the labor market is inefficiently slack, but some immigration improves welfare when the labor market is inefficiently tight.

DP18595 Measuring Monetary Policy in the UK: the UK Monetary Policy Event-Study Database

Robin Braun, Silvia Miranda-Agrippino, Tuli Saha — 2023-11-12T00:00:00+0000

This paper introduces the UK Monetary Policy Event-Study Database (UKMPD), a new and rich dataset of high-frequency monetary policy surprises for the United Kingdom. Intraday surprises are computed around the Bank of England’s Monetary Policy Committee’s announcements, as well as around the press conference that accompanies the publication of the quarterly Monetary Policy Report. The dataset also includes factors that allow to disentangle the different dimensions of UK monetary policy. We use the data to provide updated estimates of the causal effects of rate decisions and forward guidance on financial markets and macroeconomic aggregates in the UK, and provide novel insights on how markets have responded to the changes in the communication strategy of the Bank of England.