June 2018

Kocherlakota, 18 June 2018, 2272 reads

Modern macro models offer insights into the outcomes of adopting entire policy regimes, but in reality, policymakers are rarely required to make such broad-ranging policy decisions. This column suggests how theoretical and applied microeconomics can be used to develop a framework for modern macroeconomic policymaking, and demonstrates how game-theoretic principles could be used to make series of sequential policy decisions. While this approach requires large amounts of data, it would allow academic macroeconomists to refocus on important policy questions.

Maggiori, Neiman, Schreger, 18 June 2018, 1851 reads

Home country bias – the tendency of investors to disproportionately hold securities issued by domestic firms – is one of the most robust patterns in global portfolios. This column explores whether the same pattern is evident in international bond portfolios. Results show that investors exhibit a strong bias toward securities denominated in their home currency, even when investing in bonds issued by developed countries. An implication is that the majority of foreign firms that do not issue foreign-currency bonds typically do not borrow from abroad directly.

Foster, Grim, Haltiwanger, Wolf, 17 June 2018, 2470 reads

Measuring innovative activity itself, rather than proxies such as R&D expenditures or patent volumes, is difficult. This column shows how patterns of economic activity can be used to measure increased innovative activity within firms. This ‘searching for black holes’ approach can be used to better understand the connection between innovation and productivity dispersion and growth.

Fouka, Mazumder, Tabellini, 17 June 2018, 2016 reads

The ability of a state to accommodate diverse populations depends on how successfully immigrant groups can assimilate. The column use data from the south-north migration of 1.5 million African Americans between 1910 and 1930 to show that the appearance of other low-status groups can promote assimilation among pre-existing immigrants. The new low-status group makes existing immigrants appear less socially distant to natives. This suggests that assimilation policies that target native attitudes might as promising as interventions directed at immigrants.

Cravino, Lan, Levchenko, 16 June 2018, 2247 reads

Monetary policy shocks can affect different types of agents differently. These distributional effects can have important consequences for policy effectiveness. Using US data, this column explores how shocks differentially affect the prices faced by households with different incomes. The results suggest that middle-income households’ consumption baskets have more volatile prices than those of high-income households, and they are therefore more exposed to monetary policy shocks.

Furman, Powell, 15 June 2018, 4473 reads

The fraction of Americans employed fell between 2007 and 2017, during which time employment rates rose in many other advanced economies despite these countries also facing a similar headwind of an ageing population. This column shows how the biggest driver of this was employment among women, which stagnated in the US while increasing in most of the other advanced economies.

Danielsson, 15 June 2018, 4609 reads

Are cryptocurrencies the future of money, Ponzi schemes, speculators’ dreams, or just a prosperity gospel? While there is money to be made in the short run, this column argues that cryptocurrencies are lousy investments and will eventually reach a price of zero.

Doménech, Otero Iglesias , Steinberg, 15 June 2018, 2985 reads

Deepening of EMU cannot wait until all countries have carried out all their domestic reforms, both risk sharing and risk reduction need to proceed simultaneously. In fact, all euro area countries are exposed to the risk of an incomplete monetary and economic union but with very asymmetric costs. This column, part of the VoxEU debate on euro area reform, argues that this risk can only be tackled with common instruments and policies at the European level, whose mere existence will reduce not only its magnitude but also its asymmetric consequences. 

De Feo, 15 June 2018, 1465 reads

The presence of a local criminal organisation can be linked to slower economic and social growth, and this holds true of the Sicilian Mafia. Giuseppe De Feo discusses his recent research on how the Mafia came to be, and its impact on Sicilian growth since its inception. The threat of Peasant Fasci organisations in the 1890s led landholders and politicians to turn to the Mafia to combat pressure from the peasant class. Since then, the Mafia's existence seems to have reduced literacy and health outcomes, and limited the provision of a variety of local public goods.

Mai, 14 June 2018, 4676 reads

The rise in global debt has continued unabated following the Global Crisis. This column argues that elevated debt levels will continue to put downward pressure on equilibrium interest rates across the world’s major economies, constraining central bank efforts to normalise rates and supporting the thesis that global equilibrium interest rates have fallen.

Aksoy, Carpenter, Frank, Huffman, 13 June 2018, 2730 reads

Earnings gaps and ‘glass ceilings’ have been extensively documented for women and racial minorities. This column explores whether similar limits to advancement are present for sexual minorities, using data from the UK. Although gay men are found to be more likely than similar heterosexual men to report managerial authority, they seem to be restricted to low-level managerial positions, with little representation at higher levels. Similar glass ceiling effects are found for lesbians and bisexual adults, and the evidence is suggestive of discrimination playing a role. 

Monnet, 13 June 2018, 3499 reads

In the Bretton woods system, capital controls ensured the independence of monetary policy. This column argues that it is impossible to understand how they worked without understanding their role in supporting credit controls at the time, which were used to fight inflation without raising the domestic interest rate. This may be relevant today in emerging markets in which central bank instruments still resemble those used under Bretton Woods. 

Bofinger, 12 June 2018, 7723 reads

The digitalisation of money has the potential to change traditional structures of the financial system. This column discusses four areas in which it may have an impact, and argues that while digitalisation will not erode the importance of central banks, banks could be massively challenged by new forms of intermediation. 

Cooley, Henriksen, 11 June 2018, 4810 reads

Demographic change represents an important contributing factor to the slowdown of long-run growth. This column explores some of the channels through which this occurs and how the effects of demographic change can be mitigated. Policies that target consumption-saving choices, labour-leisure choices, and human capital accumulation over the lifecycle are likely to be most effective.

Goodhart, Hudson, 11 June 2018, 4534 reads

The increasing income and wealth inequalities within countries is one of today’s great social concerns. This column describes how the tendency towards increasing indebtedness in much earlier societies was held in check by debt-cancellation Jubilees, and discusses ways to deal with today’s debt overhang and accompanying wealth inequalities. The funding of a modern Jubilee could come mostly, perhaps entirely, from a land/or property tax.

Gans, 10 June 2018, 6316 reads

Philosophers have speculated that an AI tasked with a task such as creating paperclips might cause an apocalypse by learning to divert ever-increasing resources to the task, and then learning how to resist our attempts to turn it off. But this column argues that, to do this, the paperclip-making AI would need to create another AI that could acquire power both over humans and over itself, and so it would self-regulate to prevent this outcome. Humans who create AIs with the goal of acquiring power may be a greater existential threat.

Bonfiglioli, Crinò, Gancia, 10 June 2018, 3970 reads

To date there has been little systematic evidence on the role of firms in explaining country performance. This column explores how the products of firms from all over the globe fare in competition in the US market. Results show that the countries that capture larger market shares have more exporters, producing higher-quality products, with a more dispersed distribution of firm attributes. Larger and richer markets are characterised by a more dispersed distribution of sales and quality, and a higher incidence of superstar firms.

Caselli, Ciccone, 09 June 2018, 3196 reads

Contributions to the development accounting literature suggest that human capital plays only a modest role in explaining the large income gaps across the world. This column reviews some of these studies to assess the impact of the relative efficiency and relative supply of high- versus low-skilled workers in labour markets. It concludes that differences in skill premia across countries are not due to differences in human capital embodied in skilled workers, but rather to differences in country-specific technological and institutional environments.

Jensen, Lampe, Sharp, Skovsgaard, 08 June 2018, 5933 reads

Denmark is a paragon of economic development because it rapidly modernised its agriculture 150 years ago by using technology and cooperatives. This column argues that Denmark's development story has in fact been misrepresented. Rapid agricultural development was the end of a process begun by landed elites in the 18th century. It may be a mistake to cite the case of Denmark to argue that a country with a lot of peasants and cows can cooperate its way out of underdevelopment.

Cecchetti, Schoenholtz, 08 June 2018, 1637 reads

Global remittances total $600 billion annually - equivalent to about four times the value of development assistance. Yet despite huge innovations in the underlying technology, the cost of remittances remains persistently high, at around 7% on average. Stephen Cecchetti and Kim Schoenholtz discuss the causes of this, and suggest some options available to policymakers to lower costs. The G8, G20 and Sustainable Development Goals targetting lower remittance costs could be realised by a two-pronged approach of educating consumers on the one hand and fostering competition among providers on the other.

Duncan, Martínez García, 08 June 2018, 3411 reads

Understanding what helps forecast inflation is important for any modern economy, but analysis remains limited in the emerging market economy context. This column presents recent findings on inflation forecasting in such economies, showing that a variant of the simple random walk model specification seems difficult to beat. The strong forecasting performance of this model can be observed even though many emerging economies have adopted a de facto or de jure inflation-targeting regime.

Azar, Marinescu, Steinbaum, Taska, 07 June 2018, 3729 reads

The effect of increasing product market concentration on the labour market is sometimes overlooked because the labour market is often assumed to be entirely competitive. This column discusses the definition of labour markets and analyses the circumstances in which employers have monopsonist power to set wages, thus contributing to the growing debate over whether market concentration might be one cause of stagnant wages and other labour trends. 

Olafsson, Pagel, 07 June 2018, 4205 reads

A large literature analyses whether individuals save adequately for retirement and plan properly. This column uses a detailed panel of individual spending, income, account balances, and credit limits from a personal finance management software provider to investigate how expenditures, liquid savings, and consumer debt change around retirement. It finds that, upon retirement, individuals reduce their spending in both work-related and leisure categories. In addition, individuals reduce their consumer debt and increase their liquid savings, which is inconsistent with existing models of insufficient planning. 

Cornelissen, Dustmann, Raute, Schönberg, 07 June 2018, 3454 reads

Many countries operate universal childcare programmes that are open to all pre-school age children. This column analyses data from Germany to show that attending universal childcare at age three improves the school readiness of children from immigrant and disadvantaged family backgrounds far more than of children whose parents have higher socioeconomic status. Yet despite this potential to level the playing field between rich and poor, children who would gain the most from attending childcare early are also those who are least likely to attend. This calls for policies to encourage the enrolment of disadvantaged children in such programmes.

Centeno, Castro Coelho, 06 June 2018, 14123 reads

Portugal has turned a corner. Having gone through a mild boom, a slump, and a severe recession, all packed into less than two decades, the Portuguese economy has re-emerged with a newfound strength. This column examines this recovery in detail, focusing on important structural reforms that have taken place in the last couple of decades in key areas such as skills, investment, export orientation, labour market, financial intermediation, and public finances. The effects of these reforms were compounded by time as well as efforts to reignite demand.

Battisti, Peri, Romiti, 05 June 2018, 3060 reads

Most of the evidence from studies analysing the effect of ethnic concentration on immigrants’ employment and earnings points to a positive effect of network size on labour market outcomes. This column uses data from social security records in Germany to show that a larger co-ethnic network in the location of first settlement can increase the short-run probability of finding a job but can also hinder human capital investment, limiting the benefits of the larger network over the long run.

Ellul, Jotikasthira, Kartasheva, Lundblad, Wagner, 05 June 2018, 3577 reads

Systemic risk analyses have largely focused on the linkages among financial institutions’ funding arrangements, but there are increasing connections between insurers and the rest of the financial system. This column explores how systemic risk can originate from insurers’ business models. In the event of negative asset shocks, insurers’ collective allocation to illiquid bonds leads to an amplification of system-wide fire sales. These dynamics can plausibly erase up to 20-70% of insurers’ aggregate equity capital.

Boulhol, Geppert, 04 June 2018, 8444 reads

As we live longer, the associated rise in the old-age dependency ratio puts pressure on pension systems and perhaps our standard of living. The column argues that, on average in the OECD, stabilising the old-age dependency ratio between 2015 and 2050 requires an increase in retirement age of a stunning 8.4 years. This number far exceeds the projected increase in longevity and increases in retirement age driven by pension reforms alone.

Ito, 03 June 2018, 4239 reads

Support for ‘anti-globalist’ policies across the developed world suggests that many people are concerned about the impact of globalisation on employment and wages. This column examines the wage premium for exporting among firms in Japan, using linked employer-employee data to control for other factors that may affect wages. Exports and wages clearly are correlated in Japan’s manufacturing sector, especially for smaller-scale plants and firms. 

Palma, Reis, 02 June 2018, 3131 reads

Can less democratic forms of government lead to higher literacy rates? This column uses a sample of over 4,000 individuals from military archives in Portugal to show that an autocracy can have greater educational success than a democracy if it has closer cultural alignment with the preferences of the masses. This understanding has implications for development policy in poor countries today. 

de la Escosura, 02 June 2018, 4829 reads

Rising trends in GDP per capita are often interpreted as reflecting rising levels of general wellbeing. But GDP per capita is at best a crude proxy for wellbeing, neglecting important qualitative dimensions. This column explores the long-term trends in global wellbeing inequality using a new dataset. Inequality indices reflecting various aspects of wellbeing are shown to have been declining since WWI, unlike real GDP per capita inequality. 

Gorodnichenko, Pham, Talavera, 02 June 2018, 3182 reads

The rise of social media has profoundly affected how people acquire and process information. Using Twitter data on the Brexit referendum and the 2016 US presidential election, this column studies how social media bots shape public opinion and voting outcomes. Bots have a tangible effect on the tweeting activity of humans, but the degree of their influence depends on whether they provide information consistent with humans’ priors. The findings suggest that effect of bots was likely marginal, but possibly large enough to affect voting outcomes in the two elections.

Qvigstad, Schei, 01 June 2018, 3240 reads

The minutes in which central banks justify their decisions vary considerably in length, and the same also applies to supreme court judgements. This column proposes criteria for ‘good’ justifications and asks whether these criteria are met in practice. It concludes that the Swedish Riksbank could look at the way the UK Supreme Court’s justifications have developed, the European Court of Justice could learn something from Paul Romer’s insistence on clear language, and the European Court of Human Rights Grand Chamber might draw inspiration from the length and clarity of the Central Bank of Iceland’s minutes.

Haliassos, Balasubramaniam, 01 June 2018, 2291 reads

The Third CEPR European Workshop on Household Finance took place on 11 and 12 May in London. This column describes the papers that were presented at the workshop.

Zettelmeyer, Leandro, 01 June 2018, 2578 reads

The euro area lacks a common safe asset, leaving banks to rely on bonds issued by their own countries and thus magnifying fiscal crises and contributing to financial fragmentation. To address this problem, an influential proposal advocates sovereign-bond backed securities, the most senior of which would play the role of safe asset. This column, which introduces a new CEPR Policy Insight, investigates whether criticism of the proposal’s reliance on securitisation is justified and compares it with alternatives that would not require tranching.

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