Working Papers

Authors: Seán Kenny, Jason Lennard and Kevin Hjortshøj O’Rourke

Oct 2020

We construct an annual index of Irish industrial output for 1800-1921, the period during which the entire island was in a political Union with Great Britain. We also construct a new industrial price index. Irish industrial output grew by an average of 1.4 per cent per annum over the period as a whole, and by 1.8 per cent per annum between 1800 and the outbreak of World War I. Industrial growth was more rapid than previously thought before the Famine, and slower afterwards. While Ireland did not experience deindustrialization either before the Famine or afterwards, its industrial growth was disappointing when considered in a comparative perspective.

JEL Codes: E01, N13, N14

Keywords: Ireland, Industrial production, Famine, Historical national

Reference: 185

Individual View

Authors: Jemima Peppel-Srebrny

Oct 2020

We find that bond markets charge significantly higher interest rates for deficits due to higher government current spending than for deficits due to higher government investment. Thus, from a sovereign risk perspective, not all government budget deficits are created equal. To show this, we use a panel regression approach on European Commission data for 31 advanced economies from 1990 onwards. Econometrically, we address potential endogeneity by using forecasts of fiscal variables and by instrumental variable methods. Based on our preferred specifications, a higher deficit solely due to higher government investment would in fact decrease long-term government bond yields. These findings suggest that the policy debate about fiscal sustainability and fiscal rules should, at the very least, distinguish budget deficits that are the result of investment from those that are not.

Revised September 2020

JEL Codes: E44, E62, H54, H62

Keywords: Government budget deficits, government investment, fiscal policy, long-term interest rates, OECD countries

Reference: 827

Individual View

Authors: Howard Smith, Walter Beckert, Yuya Takahashi

Oct 2020

In many markets the buyer pays an individually-negotiated price. Theo­retically, relative to uniform-pricing, this has an ambiguous impact on market power and the effects of merger. To analyze competition in the UK brick industry—where individually-negotiated pricing is used, and the market is highly concentrated—we develop a model of negotiated pricing and discrete-choice demand which permits alternative specifications for how the buyer's runner-up product affects price negotiations. We derive a likelihood for observed choices and prices and estimate the model using transaction-level data. We use the model to re­ject the hypothesis of price-taking buyers, calculate the distribution of markups, and measure the effect on markups of multi-product ownership and buyer loca­tion. A counterfactual policy of uniform pricing increases average markups by about one-third, harms most buyers, and magnifies the price-increasing effect of merger. Average markups increase because uniform pricing is intrinsically less competitive and because it imposes buyer price-taking.

Keywords: individualized pricing, bargaining, price discrimination, spatial dif¬ferentiation, merger analysis, construction supplies

Reference: 921

Individual View

Authors: Willemien Kets, Alvaro Sandroni

Oct 2020

We identify a new mechanism through which cultural diversity affects economic out­comes, based on a model of culture as shared cognition. Under this view, cultural diversity matters because it increases strategic uncertainty. The model can help better understand a variety of disparate evidence, including why homogeneous societies can be more con­formist, why diverse societies may get stuck in a low-trust trap, why companies with a strong culture may fail to adopt superior work practices, and why autocratic rulers in diverse societies may overinvest in state capacity.

Reference: 920

Individual View

Authors: David S. Jacks, Kevin Hjortshøj O’Rourke, Alan M. Taylor

Oct 2020

We introduce a new dataset on British exports at the bilateral, commodity-level from 1700 to 1899. We then pit two primary determinants of bilateral trade against one another: the trade-diminishing effects of distance versus the trade-enhancing effects of the British Empire. We find that gravity exerted its pull as early as 1700, but the distance effect then attenuated and had almost vanished by 1800. Meanwhile the empire effect peaked sometime in the late 18th century before significantly declining in value. It was only after 1950 that distance would once again exert the same influence that it has today.

JEL Codes: F1, N7

Keywords: Distance, empire, gravity

Reference: 184

Individual View

Authors: David Escamilla-Guerrero, Edward Kosack, Zachary Ward

Oct 2020

The first mass migration of Mexicans to the United States occurred in the early twentieth century: from smaller pre-Revolutionary flows in the 1900s, to hundreds of thousands during the violent 1910s, to the boom of the 1920s, and then the bust and deportations/repatriations of the 1930s. We show that despite these large shifts, the rate of economic assimilation was remarkably similar across arrival cohorts. We find that the average Mexican immigrant held a lower-paying job than US-born whites near arrival and further fell behind in the following decade. However, Mexican assimilation was not uniquely slow since we also find that the average Italian immigrant fell behind at a similar rate. Yet, conditional on geography, human capital, and initial earning score, Mexicans had a slower growth rate than both US-born whites and Italians. We argue that Mexican-specific structural barriers help to explain why Mexican progress was slower than other groups and why different Mexican arrival cohorts had limited variation in outcomes despite the large shocks to migration.

JEL Codes: J15, J61, J62, N31, N32

Keywords: assimilation, immigration, Mexico, mobility, mob violence

Reference: 183

Individual View

Authors: Hamish Low, Thomas F. Crossley, Paul Fisher

Sep 2020

Using new data from the Understanding Society COVID-19 Study collected in two waves in April and in May 2020 in the UK, we make three contributions. First, Understanding Society is based on probability samples and the Covid-19 Study is carefully constructed to support valid population inferences. Second, the panel allows a long-run measure of income to characterise regressivity. Third, we have novel data on the mitigation strategies that households use. Our key findings are that those with precarious employment, under 30 and from minority ethnic groups face the biggest labour market shocks. Almost 50% of individuals have experienced declines in household earnings of at least 10%, but declines are most severe in the bottom income quintiles. Methods of mitigation vary substantially across groups: borrowing and transfers from family and friends are most prevalent among those most in need.

JEL Codes: C83, D31, J63

Keywords: COVID-19, job loss, inequality, mitigation, financial distress

Reference: 919

Individual View

The economic shocks experienced by the UK economy in the 1970s brought major changes in the spatial distribution of employment rates in the UK. This paper traces out the long run implications of these changes, suggesting that they were highly persistent and to a large extent shape current UK regional disparities. Most of the Local Authority Districts that experienced large negative shocks in the 1970s have high deprivation rates in 2015, and they constitute two-thirds of all districts with the highest deprivation rates. We conclude that neither economic adjustment processes nor policy measures have acted to reverse the effect of negative shocks incurred nearly half a century ago.

JEL Codes: R11; R12; O47; O50

Keywords: Regional inequality, de-industrialisation, employment

Reference: 918

Individual View

Authors: Francesco Zanetti, Christoph Görtz, Wei Li, John Tsoukalas

Sep 2020

This paper uses VAR analysis to identify monetary policy shocks on U.K. data using surprise changes in the policy rate as external instruments and imposing block exogeneity restrictions on domestic variables to estimate parameters from the viewpoint of the domestic economy. The results show large and persistent effects of monetary policy shocks on the domestic economy and point to the critical role of exchange rates and term premia. The analysis resolves important empirical puzzles of traditional recursive identification methods.

Revised September 2020

JEL Codes: E44, E52, F41

Keywords: Monetary Policy Transmission, Structural VAR, Small Open Economy, External Instruments Identification

Reference: 812

Individual View

Authors: Francesco Zanetti, Masashige Hamano

Sep 2020

This study provides new insights on the allocative effect of monetary policy. It shows that contractionary monetary policy exerts a non-trivial reallocation effect by cleansing unproductive firms and enhancing aggregate productivity. At the same time, however, reallocation involves a reduction in the number of product variety that is central to consumer preferences and hurts welfare. A contractionary policy prevents the entry of new firms and insulates existing firms from competition, reducing aggregate productivity. Under demand uncertainty, the gain of the optimal monetary policy diminishes in firm heterogeneity and increases in the preference for product variety. We provide empirical evidence on US data, which corroborates the relevance of monetary policy for product variety that results from firm entry and exit, and provides limited support to the cleansing effect of monetary policy.

JEL Codes: E32; E52; L51; O47

Keywords: Monetary policy; firm heterogeneity; product variety; reallocation

Reference: 917

Individual View

Authors: John Muellbauer

Aug 2020

Macroeconomic policy models should track the different channels of monetary transmission, providing a framework for Monetary Policy Committees. They should also be useful for assessing risks to financial stability, including for designing macroprudential stress tests and instrument settings in the new macroprudential toolkits. Current policy models, including the ‘semi-structural’ non-DSGE econometric models such as FRB-US, are seriously deficient in these respects, failing to capture the credit channel and the role of real estate in the financial accelerator that operated in the global financial crisis, and in key transmission channels in the recovery. Furthermore, developments in economic theory, greatly encouraged by new evidence, have rendered redundant the previously accepted micro-foundations for household behaviour in these policy models.

A multi-purpose policy model needs to include a household-housing sub-system. This should contain a consumption function broadly consistent with the micro-evidence with equations for permanent income, for the balance sheet drivers, and for residential investment. To capture the credit channel, this block of the model needs to embed common credit conditions in the equations. Sub-system estimation is required to impose the cross-equation restrictions implied by these common factors.

JEL Codes: E17, E21, E44, E51, E52, E58, G01

Keywords: macroeconomic policy models, micro foundations, consumption, finance and the real economy, financial crisis, credit constraints, household portfolios, asset prices

Reference: 916

Individual View

Authors: Subhasish M. Chowdhury, Patricia Esteve-González, Anwesha Mukherjee

Aug 2020

The heterogeneous abilities of the players in various competitive contexts often lead to undesirable outcomes such as low effort provision, lack of diversity, and inequality. A range of policies are implemented to mitigate such issues by enforcing competitive balance, i.e., leveling the playing field. While a number of such policies are aimed at increasing competition, affirmative action (AA) policies are historically practiced in an ethical response to historical discrimination against particular social groups among winners. This survey summarizes the rapidly growing literature of contest theory on AA and other policies that level the playing field. Using a general theoretical structure, we outline research on player and contest designer behavior under a multitude of policy mechanisms; and discuss the theoretical, experimental, and empirical results in relation to some of the common debates surrounding AA.

JEL Codes: A31; C72; D74; D82

Keywords: Survey; Affirmative Action; Contest; Heterogeneity

Reference: 915

Individual View

Authors: Meredith M. Paker

Aug 2020

The brief recession from 1980–1981 in the UK led to a prolonged employment downturn, with the unemployment rate continuing to increase through 1984. A large literature has developed around the concept of jobless recoveries and their possible causes, focused primarily on the US from the 1990s. This paper argues that the employment recovery from the 1980–1981 recession in the UK can be considered an early example of a jobless recovery.

Then, taking the US as a comparison case, possible causes of this jobless recovery are evaluated. Labor reallocation across industries, regional effects, and job polarization are considered in depth for the UK. Industry labor reallocation emerges as the major difference between the UK and the US during the early 1980s recession and recovery period, suggesting this was the key factor driving the UK’s jobless recovery.

JEL Codes: N14, N34, J64, J21, E24

Keywords: jobless recovery; industry labor reallocation; structural change; job polarization

Reference: 182

Individual View

Authors: Hamish Low, Patrick Moran, Agnes Kovacs

Jul 2020

This paper estimates the importance of temptation (Gul and Pesendorfer, 2001) for consumption smoothing and asset accumulation in a structural life-cycle model. We use two complementary estimation strategies: first, we estimate the Euler equation of this model; and second we match liquid and illiquid wealth accumulation using the Method of Simulated Moments. We find that the utility cost of temptation is one-quarter of the utility benefit of consumption. Further, we show that allowing for temptation is crucial for correctly estimating the elasticity of intertemporal substitution: estimates of the EIS are substantially higher than without temptation. Finally, our Method of Simulated Moments estimation is able to match well the life-cycle accumulation profiles for both liquid and illiquid wealth only if temptation is part of the preference specification. Our findings on the importance of temptation are robust to the different estimation strategies.

Revised July 2020

JEL Codes: D12; D91; E21; G11; R21

Keywords: life-cycle; temptation preferences; housing; estimating Euler equations

Reference: 796

Individual View

Authors: Rick Van der Ploeg

Jul 2020

The social rate of discount is a crucial driver of the social cost of carbon (SCC), i.e. the expected present discounted value of marginal damages resulting from emitting one ton of carbon today. Policy makers should set carbon prices to the SCC using a carbon tax or a competitive permits market. The social discount rate is lower and the SCC higher if policy makers are more patient and if future generations are less affluent and policy makers care about intergenerational inequality. Uncertainty about the future rate of growth of the economy and emissions and the risk of macroeconomic disasters (tail risks) also depress the social discount rate and boost the SCC provided intergenerational inequality aversion is high. Various reasons (e.g. autocorrelation in the economic growth rate or the idea that a decreasing certainty-equivalent discount rate results from a discount rate with a distribution that is constant over time) are discussed for why the social discount rate is likely to decline over time. A declining social discount rate also emerges if account is taken from the relative price effects resulting from different growth rates for ecosystem services and of labour in efficiency units. The market- based asset pricing approach to carbon pricing is contrasted with a more ethical approach to policy making. Some suggestions for further research are offered.

JEL Codes: D81, D90, G12, H43, Q51, Q54, Q58

Keywords: cost-benefit analysis, climate policy, carbon pricing, social discount rate, term structure, Keynes-Ramsey rule, risk and uncertainty, disasters, expert opinions

Reference: 244

Individual View

Authors: Rajssa Mechelli, Andrea Colciago

Jul 2020

This paper links the debate on the decrease in competitiveness and busi- ness dynamism with that on rising inequality. We build a framework withentry, imperfect competition, heterogeneous households, and incompletemarkets. Recent trends in markups, factors’share, and business dynamismare explained through an increase in barriers to entry for new …rms, whichrestrict competition. Those trends account for 11% to 22% of the increasein income inequality observed between 1989 and 2007 and for 10% of the in-crease in wealth inequality. Just 16% of the population experiences a welfaregain during the transition from a high to a low competition environment.These are either the wealthy, or agents with low productivity relative to their asset holdings.

Keywords: inequality, entry, oligopoly, markups, incomplete markets

Reference: 914

Individual View

Authors: Daniel C. Hardy

Jul 2020

The role of the euro in financial markets is limited by the scarcity of euro- denominated liquid short-term safe instruments to serve as “near money” and high-quality collateral—a role fulfilled by US Treasury bills in the US dollar financial “ecosystem.” It is argued that the ECB could eliminate this scarcity by issuing a large volume of its own debt certificates, and thereby expand and stabilize demand for the euro. The initiative is shown to be easy to implement and consistent with the monetary implementation framework. The main objections are likely to be political rather than economic.

Reference: 913

Individual View

Authors: Elizabeth Baldwin, Paul Klemperer, Alex Teytelboym, Omer Edhan
Ravi Jagadeesan

Jun 2020

We show that, with indivisible goods, the existence of competitive equilibrium fundamentally depends on agents’ substitution effects, not their income effects. Our Equilibrium Existence Duality allows us to transport results on the existence of competitive equilibrium from settings with transferable utility to settings with income effects. One consequence is that net substitutability—which is a strictly weaker condition than gross substitutability—is sufficient for the existence of competitive equilibrium. We also extend the “demand types” classification of valuations to settings with income effects and give necessary and sufficient conditions for a pattern of substitution effects to guarantee the existence of competitive equilibrium.

JEL Codes: C62, D11, D44

Reference: 912

Individual View

Authors: Andrea Bernini

Jun 2020

Although the 1960s race riots have gone down in history as America’s most violent and destructive ethnic civil disturbances, a single common factor able to explain their insurgence is yet to be found. Using a novel data set on the universe of radio stations airing black-appeal programming, the effect of media on riots is found to be sizable and statistically significant. A marginal increase in the signal reception from these stations is estimated to lead to a 7% and 15% rise in the mean levels of the likelihood and intensity of riots, respectively. Several mechanisms behind this result are considered, with the quantity, quality, and the length of exposure to radio programming all being decisive factors.

JEL Codes: J15, N92, L82, D74

Keywords: Minority Rights, Media, Conflict, Enfranchisement

Reference: 181

Individual View

Authors: Vellore Arthi, Markus Lampe, Ashwin Nair, Kevin Hjortshøj O’Rourke

Jun 2020

Research on the quantitative impact of interwar protection on trade flows remains scarce, and much of it has concluded that the impact was surprisingly small. In this paper we ask: Did Indian interwar protection hurt UK manufacturers, by raising tariffs on manufactured imports? Or did it favour UK interests, by discriminating against “foreign” (i.e. nonBritish) producers? We answer this question by quantifying the impact of trade policy on the value and composition of Indian imports, using novel disaggregated data on both trade policies and imports for 114 commodity categories coming from 42 countries. Indian trade elasticities were generally larger than those in the United Kingdom at the same time. We find that even though Indian protection lowered total imports, it substantially boosted imports from the UK. Trade policy had a big impact on trade flows.

Reference: 180

Individual View

Authors: Hamish Low, Michaela Benzeval, Jon Burton, Thomas F. Crossley, Paul Fisher, Annette Jäckle, Brendan Read

Jun 2020

Using new data from the Understanding Society: COVID 19 survey collected in April 2020, we show how the aggregate shock caused by the pandemic affects individuals across the distribution. The survey collects data from existing members of the Understanding Society panel survey who have been followed for up to 10 years. Understanding society is based on probability samples and the Understanding Society Covid19 Survey is carefully constructed to support valid population inferences. Further the panel allows comparisons with a pre-pandemic baseline. We document how the shock of the pandemic translates into different economic shocks for different types of worker: those with less education and precarious employment face the biggest economic shocks.Some of those affected are able to mitigate the impact of the economic shocks: universal credit protects those in the bottom quintile, for example. We estimate the prevalence of the different measures individuals and households take to mitigate the shocks. We show that the opportunities for mitigation are most limited for those most in need.

JEL Codes: C83, D31, G51, I31, J31, J63

Keywords: COVID-19, job loss, inequality, mitigation, financial distress

Reference: 911

Individual View

Authors: Adam Brzezinski, David Van Dijcke, Valentin Kecht

Jun 2020

In combating the spread of COVID-19, some governments have been reluctant to adopt lockdown policies due to their perceived economic costs. Such costs can, however, arise even in the absence of restrictive policies, if individuals’ independent reaction to the virus slows down the economy. This paper finds that imposing lockdowns leads to lower overall costs to the economy than staying open. We combine detailed location trace data from 40 million mobile devices with difference-in-differences estimations and a modification of the epidemiological SIR model that allows for societal and political response to the virus. In that way, we show that voluntary reaction incurs substantial economic costs, while the additional economic costs arising from lockdown policies are small compared to their large benefits in terms of reduced medical costs. Our results hold for practically all realistic estimates of lockdown efficiency and voluntary response strength. We quantify the counterfactual costs of voluntary social distancing for various US states that implemented lockdowns. For the US as a whole, we estimate that lockdowns reduce the costs of the pandemic by 1.7% of annual GDP per capita, compared to purely voluntary responses.

JEL Codes: I12, I18, H12, D04, C33, H51

Keywords: COVID-19, difference-in-differences, SIR model, social distancing, lockdown, big data

Reference: 910

Individual View

Authors: Sander Barendse, Andrew J. Patton

May 2020

We develop tests for out-of-sample forecast comparisons based on loss functions that contain shape parameters. Examples include comparisons using average utility across a range of values for the level of risk aversion, comparisons of forecast accuracy using characteristics of a portfolio return across a range of values for the portfolio weight vector, and comparisons using a recently-proposed “Murphy diagrams” for classes of consistent scoring rules. An extensive Monte Carlo study verifies that our tests have good size and power properties in realistic sample sizes, particularly when compared with existing methods which break down when then number of values considered for the shape parameter grows. We present three empirical illustrations of the new test.

JEL Codes: C53, C52, C12

Keywords: Forecasting, model selection, out-of-sample testing, nuisance parameters

Reference: 909

Individual View

Authors: Gustavo Mellior

May 2020

This paper analyses theoretically and quantitatively the effect that different higher education funding policies have on welfare (on aggregate and at the individual level) and wealth inequality. A heterogeneous agent model in continuous time, which has uninsurable income risk and endogenous educational choice is used to evaluate five different higher education financing schemes. Educational investments can be self financed, supported by government guaranteed student loans - that may come with or without income contingent support - or be covered by the public sector. When educational costs are small, differences in outcomes amongst systems are negligible. On the other hand, when these costs rise to realistic levels we see that there can be large gains in welfare and significant drops in inequality by moving to a system with more public sector support. This support can come in the form of tuition subsidies and/or income contingent student loans. However, as the cost of education and the share of debtors in society gets larger, it is preferable to increase public support in the form of tuition subsidies. The reason is that there is a pecuniary externality of debt that gets magnified when student loans become excessive. While I identify large steady state welfare gains from more public sector financing, I show that the transition costs can be large enough to justify the status quo.

JEL Codes: D52, D58, E24, I22, I23

Keywords: Incomplete markets, Higher education funding, Human capital

Reference: 908

Individual View

Authors: Maximilian Kasy, Alex Teytelboym

May 2020

We show how to efficiently use costly testing resources in an epidemic, when testing outcomes can be used to make quarantine decisions. If the cost of false quarantine and false release exceed the cost of testing, the optimal myopic testing policy targets individuals with an intermediate likelihood of being infected. A high cost of false release means that testing is optimal for individuals with a low probability of infection, and a high cost of false quarantine means that testing is optimal for individuals with a high probability of infection. If individuals arrive over time, the policy-maker faces a dynamic tradeoff: using tests for individuals for whom testing yields the maximum immediate benefit vs. spreading out testing capacity across the population to learn prevalence rates thereby benefiting later individuals. We describe a simple policy that is nearly optimal from a dynamic perspective. We briefly discuss practical aspects of implementing our proposed policy, including imperfect testing technology, appropriate choice of prior, and non-stationarity of the prevalence rate.

Reference: 907

Individual View


Loading Papers...