Working Papers

Authors: Simon Cowan

Aug 2017

Monopoly third-degree price discrimination raises social welfare above the level with a uniform price when direct demand functions have constant curvatures that differ across markets and are below 1, and the maximum willingness to pay is identical across markets.

JEL Codes: D42, L12, L13

Reference: 829

Individual View

Authors: David Ronayne, Daniel Sgroi

Aug 2017

We apply a classical economic categorization of preferences to identify the motivations of dual-users of electronic and traditional cigarettes. The responses of 2,406 U.S. adults (including 413 dual-users) in 2015 were collected using a novel online survey along with a follow-up in 2016 of 143 of these adults (68 dual-users). A sizeable minority of 37% of dual-users reported viewing electronic and conventional cigarettes primarily as complements. Of those who had never smoked or used electronic cigarettes, only 27% thought the complementarity motive would be primary. Dual-user motivations were associated with quit-attempt, cessation methods, gender and age. One year on, there was a positive relationship between the level of complementarity in the dual-user’s motives and their change in self-reported cigarette consumption. It is concluded that the application of a canonical economic classification of preferences may reveal important heterogeneities among the dual-user population.

JEL Codes: I12, I18, D12

Reference: 830

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Authors: James Cust, David Mihalyi

Jul 2017

Oil discoveries can constitute a major positive and exogenous shock to economic activity, but the resource curse hypothesis would suggest they might also be detrimental to growth over the long run. This paper utilizes a new methodology for estimating growth underperformance to examine the extent to which discoveries depress the growth path of a country following a discovery and prior to production starting. The study finds causal evidence of a significant negative effect on short-run growth and growth relative to counter-factual forecast growth in countries with weak institutions;creating growth disappointments prior to private and public resource windfalls. This effect is termed the presource curse. For a giant oil or gas discovery, between 1988 to 2010, the study estimates an average growth disappointment effect of 0.83 percentage points, measured as the average annual gap between forecast and actual growth over the five years following a discovery. Further,the estimate defect varies by the size of the discovery, increasing to a 1.77 percentage points gap in the case of super giant discoveries. The estimated effect is inversely related to the quality of political institutions, and driven by countries with lower institutional quality at the time of the discovery, consistent with the similar long-run results documented in the resource curse literature. For countries with below-threshold institutional quality, the growth disappointment effect is larger, measured as 1.35 percentage points in annual terms.  There is no measured growth disappointment effect for countries with strong institutions. Using the synthetic control method we confirm our findings for a selection of countries above and below the institutional quality threshold. The findings suggest that studies of the resource curse that focus only on the effects of resource exploitation or examine only long-run growth effects may overlook important short-run growth disappointments following discoveries, and the way countries respond to news shocks.

JEL Codes: O40, O43, Q33, Q35

Keywords: rousource curse, economic growth, forecasting, forecast errors, news shocks, institutions

Reference: 193

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Authors: John Vickers

Jun 2017

 

Abstract

The paper synthesizes and develops the welfare analysis of regulating relative prices, for example price differences, of which banning price discrimination is a special case. Welfare results are derived directly by convexity arguments using functions of welfare levels. The method is also used to obtain results about e¤ects on consumer surplus.

JEL Codes: D42, L12

Keywords: Price discrimination

Reference: 828

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Authors: H Peyton Young, Mark Paddrik

Jun 2017

 

Abstract

We propose a general framework for estimating the vulnerability to default by a central counterparty (CCP) in derivatives markets. Unlike conventional stress testing approaches, which estimate the ability of a CCP to withstand nonpayment by its two largest counterparties, we study the direct and indirect e ects of nonpayment by members and/or their clients through the full network of exposures. We illustrate the approach for the U.S. credit default swaps market under shocks that are similar in magnitude to the Federal Reserve's stress tests. The analysis indicates that conventional stress testing approaches may underestimate the potential vulnerability of the main CCP for this market.

JEL Codes: D85, G01, G17, L14

Keywords: Credit default swaps, central counterparties, stress testing, systemic risk, financial networks

Reference: 826

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Authors: Rick Van der Ploeg, Bas Jacobs

Jun 2017

This paper analyses optimal corrective taxation and optimal income redistribution. The Pigouvian pollution tax is higher if pollution damages disproportionally hurt the poor due to equity weighting of pollution damages. Moreover, optimal pollution taxes should be set below the Pigouvian tax if the poor spend a disproportionate fraction of their income on polluting goods if preferences for commodities are not of the Gorman (1961) polar form. However, optimal pollution taxes should follow the first-best rule for the Pigouvian corrective tax if preferences for commodities are of the Gorman polar form even if the government wants to redistribute income and the poor spend a disproportional part of their income on polluting goods. The often-used quasi-linear, CES and Stone-Geary utility functions all belong to the Gorman polar class. If pollution taxes are not optimized, Pareto-improving green tax reforms exist that move the pollution tax closer to the Pigouvian tax if preferences are Gorman polar. Simulations demonstrate that optimal corrective taxes should be Pigouvian if the demand for polluting goods is derived from a LES demand system, but optimal corrective taxes deviate from the Pigouvian taxes if demand for polluting goods demand is derived from a PIGLOG demand system.

JEL Codes: H21, H23, Q54

Keywords: redistributive taxation, corrective pollution taxation, Gorman polar form, Stone-Geary preferences, PIGLOG preferences, green tax reform

Reference: 191

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Authors: James Cust, Torfinn Harding, Pierre-Louis Vezina

Jun 2017

Oil and gas extraction may lead to the Dutch disease, i.e. the crowding ot of the manufacturing sector due to rising wages when labor is drawn to the expanding extraction and services sectors. In this paper we exploit the fact that oil and gas discoveries contain an element of chance as well as oil price fluctuations to capture random variation in oil and gas windfalls across Indonesia and identify their effects on manufacturing firms. We find that oil and gas windfalls cause wage growth but that the firm exit rate is unaffected. Firms’ output and labor productivity increase along with wages suggesting where firms are able to respond to booming local demand, and raise productivity in response to upward wage pressures, they can overcome the crowding-out effects from resource windfalls.

JEL Codes: O13, O14, Q32

Keywords: Dutch disease, firm level, Indonesia, manufacturing firms, oil and gas

Reference: 192

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Authors: Jemima Peppel-Srebrny

Jun 2017

Jemima Peppel-Srebrny

The reasons why a government may be running a budget deficit – and hence, the underlying composition of such a deficit – are often disregarded, it seems, both by the policy debate about fiscal sustainability and by the academic literature about the links between fiscal policy and interest rates. We find that, from the perspective of bond markets, not all budget deficits are created equal: markets charge significantly higher interest rates for deficits due to government current spending than for those due to government investment. To show this, we use a panel regression approach on European Commission data for 31 OECD countries from 1990 to 2014. Our findings suggest that austerity policies should focus more on government current spending than government investment, and that fiscal rules in individual countries and monetary unions should distinguish budget deficits that are the result of investment from those that are not.

Revised August 2018

JEL Codes: E44, E62, H54, H62

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

Reference: 827

Individual View

May 2017

The literature exploring the effects of technological change on the labour market often relies on a very particular understanding of the capabilities of machines - known as the 'ALM hypothesis'. However, this hypothesis has often led this literature to underestimate these capabilities. Tasks that were believed to be out of reach of automation can now be automated. I set out two explanations for this underestimation - one that is explored in the recent literature and maintains the ALM hypothesis, and a new explanation that challenges it. I propose a new hypothesis that contains the ALM hypothesis as a special case.

Revised: April 2018

JEL Codes: J20; J21; J23; J24; J30; J31; 031; 033

Keywords: Technological Change; Computerization; Automation; Job Tasks; Wages

Reference: 825

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Authors: Ewout Depauw, Deborah Oxley

May 2017

Does adult stature capture conditions at birth or at some other stage in the growth cycle? Anthropometrics is lauded as a method for capturing net nutritional status over all the growing years. However, it is frequently assumed that conditions at birth were most influential. Was this true for historical populations? This paper examines the heights of Belgian men born between 1800-76 to tease apart which moments of growth were most sensitive to disruption and reflected in final heights. It exploits two proximate crises in 1846-49 and 1853-56 as shocks that permit age effects to be revealed. These are affirmed through a study of food prices and death rates. Both approaches suggest a shift of the critical moment away from the first few years of life and towards the adolescent growth spurt as the most influential on terminal stature. Furthermore, just as height is accumulated over the growing years, conditions influencing growth need to be understood cumulatively. Economic conditions at the time of birth were not explanatory, but their collective effects from ages 11 to 18 years were strongly influential. Then, both health and nutrition mattered, in shifting degrees. Teenagers, not toddlers, should be our guides to the past.

Keywords: child growth, crisis effects, early-life health, height, nutrition, prisoners, puberty

Reference: 157

Individual View

May 2017

Abstract

In the past 15 years a ‘task-based’ literature has emerged, exploring the consequences of technological change on the labour market. This literature supports an optimistic view about the threat of automation. In this paper I build a task-based model based on different reasoning about how machines operate. This leads to a far more pessimistic account of the prospects for labour. In a static model, increasingly capable machines drive down relative wages and the labour share of income and force labour to specialise in a shrinking set of tasks. In a dynamic version of the model, labour is driven out the economy at an endogenously determined rate, forced to specialise in a shrinking set of types of tasks, and wages steadily decline to zero. In the limit, labour is fully immiserated and ‘technological unemployment’ follows.

Revised July 2017.

JEL Codes: J20; J21; J23; J24; J30; J31; 031; 033

Keywords: Technological Change; Computerization; Automation; Job Tasks; Wages

Reference: 819

Individual View

Authors: Stephen Broadberry, John Wallis

Apr 2017

Abstract

Using annual data from the thirteenth century to the present, we show that improved long run economic performance has occurred primarily through a decline in the rate and frequency of shrinking, rather than through an increase in the rate of growing. Indeed, as economic performance has improved over time, the short run rate of growing has typically declined rather than increased. Most analysis of the process of economic development has hitherto focused on increasing the rate of growing. Here, we focus on understanding the forces making for a reduction in the rate of shrinking, drawing a distinction between proximate and ultimate factors. The main proximate factors considered are (1) structural change (2) technological change (3) demographic change and (4) the changing incidence of warfare. We conclude with a consideration of institutional change as the key ultimate factor behind the reduction in shrinking.

Reference: 154

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Authors: Stephen Broadberry, Hanhui Guan, David Daokui Li

Apr 2017

Abstract

Chinese GDP per capita fluctuated at a high level during the Northern Song and Ming dynasties before trending downwards during the Qing dynasty. China led the world in living standards during the Northern Song dynasty, but had fallen behind Italy by 1300. At this stage, it is possible that parts of China were still on a par with the richest parts of Europe, but by 1750 the gap was too large to be bridged by regional variation within China and the Great Divergence had already begun before the Industrial Revolution.

JEL Codes: E100, N350, O100

Keywords: GDP Per Capita; Economic Growth; Great Divergence; China; Europe

Reference: 155

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Authors: Stephen Broadberry, Jean-Pascal Bassino, Kyoji Fukao, Bishnupriya Gupta, Masanori Takashima

Apr 2017

Abstract

Japanese GDP per capita grew at an annual rate of 0.08 per cent between 730 and 1874, but the growth was episodic, with the increase in per capita income concentrated in two
periods, 1450-1600 and after 1721, interspersed with periods of stable per capita income. There is a similarity here with the growth pattern of Britain. The first countries to achieve modern economic growth at opposite ends of Eurasia thus shared the experience of an early end to growth reversals. However, Japan started at a lower level than Britain and grew more slowly until the Meiji Restoration.

JEL Codes: N10, N30, N35, O10, O57

Keywords: Japan, Great Divergence, GDP per capita, growth reversals, Britain

Reference: 156

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Authors: Francesco Zanetti, Philip Liu, Haroon Mumtaz and Konstantinos Theodoridis

Apr 2017

Abstract

This paper develops a change-point VAR model that isolates four major macroeconomic regimes in the US since the 1960s. The model identi es shocks to demand, supply, monetary
policy, and spread yield using restrictions from a general equilibrium model. The analysis discloses important changes to the statistical properties of key macroeconomic variables and their responses to the identi ed shocks. During the crisis period, spread shocks became more important for movements in unemployment and in ation. A counterfactual exercise evaluates the importance of lower bond-yield spread during the crises and suggests that the Fed's largescale asset purchases helped lower the unemployment rate by about 0.6 percentage points, while boosting in ation by about 1 percentage point.

JEL Codes: E42, E52

Keywords: change-point VAR model, global nancial crisis, large-scale asset purchases

Reference: 824

Individual View

Global warming can be curbed by pricing carbon emissions and thus substituting fossil fuel with renewable energy consumption. Breakthrough technologies (e.g., fusion energy) can reduce the cost of such policies. However, the chance of such a technology coming to market depends on investment. We model breakthroughs as an irreversible tipping point in a multi-country world, with different degrees of international cooperation. We show that international spill-over effects of R&D in carbon-free technologies lead to double free-riding, strategic over-pollution and underinvestment in green R&D, thus making climate change mitigation more difficult. We also show how the demand structure determines whether carbon pricing and R&D policies are substitutes or complements.

JEL Codes: D2, D90, H23, Q35, Q38, Q54, Q58

Keywords: global warming, carbon pricing, renewable R&D, tipping point, international cooperation, non-cooperative policies, feedback Nash equilibrium

Reference: 190

Individual View

Authors: Pablo Astorga Junquera

Mar 2017

Abstract

This paper discusses and documents a new dataset of real wages for unskilled, semi-skilled, and relatively skilled labour in Argentina, Brazil, Chile, Colombia, Mexico, and Venezuela (LA-6) over the period 1900-2011. Three interrelated aspects are examined: the wage growth record associated with periods dominated by a particular development strategy; wage convergence across the LA-6; and changes in wage skill premiums and their links with fundamentals. The key findings are: i) the region’s unskilled wage rose by 147% in the period compared to rises of 243% in the average wage and 440% in income per worker (including both property and labour income); ii) there is a limited process of wage convergence across the LA-6; and weak persistence in the country hierarchy; iii) skill premiums tended to peak during the middle decades of the 20th century, coinciding with the acceleration of industrialisation and the timing of the demographic transition. Movements in the terms of trade are broadly associated with both fluctuations and trends in wage premiums, though the direction of the link is country and time specific.

JEL Codes: J31, O1, N36

Keywords: wage levels and differentials, economic development, Latin America

Reference: 153

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Authors: Nemera Mamo, Sambit Bhattacharyya, Alexander
Moradi, Rabah Arezki

Mar 2017

What are the economic consequences of mining in Sub-Saharan Africa? Using a panel of 3,635 districts from 42 Sub-Saharan African countries for the period 1992 to 2012 we investigate the effects of mining on living standards measured by night-lights. Night-lights increase in mining districts when mineral production expands (intensive margin), but large effects approximately equivalent to 16% increase in GDP are mainly associated with new discoveries and new production (extensive margin). We identify the effect by carefully choosing feasible but not yet mined districts as a control group. In addition, we exploit giant and major mineral discoveries as exogenous news shocks. In spite of the large within district effects, there is little evidence of significant spillovers to other districts reinforcing the enclave nature of mines in Africa. Furthermore, the local effects disappear after mining activities come to an end which is consistent with the ’resource curse’ view.

JEL Codes: O11, O13, Q32

Keywords: Mineral discovery, Mineral production, Night-time lights

Reference: 189

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Authors: Thorsten Beck, Steven Poelhekke

Mar 2017

The need to absorb windfalls gains and manage them appropriately has been discussed extensively by academics and policy makers alike. We explore the role of the financial sector in intermediating these windfalls. Controlling for the level of financial development, inflation, GDP growth and country fixed-effects, we find a relative decline in financial sector deposits in countries that experience an unexpected natural resource windfall as measured by shocks to exogenous world prices. Moreover, we find a similar relative decline in lending, which is mostly due to the decrease in deposits. The smaller role for the financial sector in intermediating resource booms is accompanied by a stronger role of governments in channeling resources into the economy, mostly through higher government consumption.

JEL Codes: E20, F41,G20, O10, Q32, Q33

Keywords: natural resources, financial development, banking

Reference: 188

Individual View

Authors: Francesco Zanetti, Masashige Hamano

Feb 2017

 

Abstract

How do product variety and quality affect the aggregate price bias? We develop a general equilibrium model that accounts for the joint interaction of product quality and variety. Our findings show that the aggregate price bias is pro-cyclical and the contribution of product variety is persistent whereas the contribution of product quality becomes counter-cyclical in the medium to long run. We show that accounting for product quality and variety has critical implications on the measure of cyclical fluctuations. Measurements of cyclical fluctuations derived using the consumption deflator, which abstracts from changes in product quality and variety, underestimate the variables' true volatility.

JEL Codes: D24, E23, E32, L11, L60

Keywords: Firm's entry and exit, product quality, product variety

Reference: 823

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Authors: Kevin Hjortshøj O'Rourke, Alan de Bromhead, Alan Fernihough, Markus Lampe

Feb 2017

Abstract

International trade became much less multilateral during the 1930s. Previous studies, looking at aggregate trade flows, have argued that discriminatory trade policies had comparatively little to do with this. Using highly disaggregated information on the UK’s imports and trade policies, we find that policy can explain the majority of Britain’s shift towards Imperial imports in the 1930s. Trade policy mattered, a lot.

JEL Codes: F13, F14, N74

Keywords: trade policy, interwar period

Reference: 152

Individual View

Temperature responses and optimal climate policies depend crucially on the choice of a particular climate model. To illustrate, the temperature responses to given emission reduction paths implied by the climate modules of the well-known integrated assessments models DICE, FUND and PAGE are described and compared. A dummy temperature module based on President Trump’s climate sceptic view is added. Using a simple growth model of the global economy, the sensitivity of the optimal carbon price, renewable energy subsidy and energy transition to each of these climate models is discussed. The paper then derives max-min, max-max and min-max regret policies to deal with this particular form of climate uncertainty and with climate scepticism. The max-min or min-max regret climate policies rely on a non-sceptic view of global warming and lead to a substantial and moderate amount of caution, respectively. The max-max leads to no climate policies in line with the view of climate sceptics.

JEL Codes: H21, Q51, Q54

Keywords: carbon price, renewable energy subsidy, temperature models, climate model uncertainty, climate sceptics, max-min, max-max, min-max regret

Reference: 187

Individual View

The current debate about the optimal management of foreign exchange windfalls is highly relevant to low income countries such as Uganda, having recently discovered vast hydrocarbon reserves. Using a Computable General Equilibrium (CGE) model for Uganda this paper analyses three broad policy options for the use of oil revenues, increasing i) private consumption, ii) private investment, and iii) public infrastructure investment. The model allows for learning-by-doing in tradables, increasing returns to public infrastructure and the use of an Oil Fund held abroad. The fund allows government to smooth expenditure programs over the medium-term. When public infrastructure is biased towards tradables, a smooth expenditure profile yields higher economic growth than high expenditure skewed to the present. The government’s discount rate plays a key role in determining the optimal use and management of oil revenues. More impatient governments will be inclined to increase current expenditure at the cost of future generations’ welfare and negative distributional implications for poor households. Lower discount rates align the political incentives with respect to inter-temporal welfare and the long-run growth path of the economy.

JEL Codes: E62, O11, O13, O23, Q32

Keywords: Fiscal Policy, natural resources, economic development, Dutch-disease, CGE model, Uganda

Reference: 186

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Authors: Michalis Rousakis, Romanos Priftis

Jan 2017

Abstract

This paper presents an analytical narration of the later stages of the Greek crisis, focusing on two key events that unfolded during 2014-2015 and set Greece apart from other episodes of sovereign debt crises: the risk of Grexit and the imposition of capital controls on the banking sector. To account for them both, we extend the standard small open economy environment along three dimensions. First, we allow for an informal sector. Second, we allow for a richer menu of assets that include cash, which is needed for informal consumption and is costly to hold. Third, we introduce a banking sector that turns households' deposits into capital. We show that a risk of Grexit leads households to run down their deposits to the detriment of bank balance sheets, increase their demand for cash, and increase their consumption whilst reallocating it towards formal goods. As evidenced by the data capital controls mitigate the deposit ight and reinforce the switch of consumption to formality.

JEL Codes: E2, E4, F41, G11, G28

Keywords: Capital controls, small open economy, exit from a currency union, cash, informal economy, financial intermediaries, Greece

Reference: 822

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Authors: Gregori Galofré-Vilà, Andrew Hinde, Aravinda Guntupalli

Jan 2017

Abstract

This paper uses a dataset of heights calculated from the femurs of skeletal remains to explore the development of stature in England across the last two millennia. We find that heights increased during the Roman period and then steadily fell during the ‘Dark Ages’ in the early medieval period. At the turn of the first millennium heights grew rapidly, but after 1200 they started to decline coinciding with the agricultural depression, the Great Famine and the Black Death. Then they recovered to reach a plateau which they maintained for almost 300 years, before falling on the eve of industrialisation. The data show that average heights in England in the early nineteenth century were shorter than those in Roman times, and that average heights reported between 1400 and 1700 were similar to those of the twentieth century. The paper also discusses the ssociation of heights across time with some potential determinants and correlates (real wages, inequality, food supply, climate change and expectation of life), showing that in the long run heights change with these variables, and that in certain periods, notably the thirteenth and fourteenth centuries, the associations are observable over the shorter run as well. We also examine potential biases surrounding the use of skeletal remains.

Keywords: Health, Height, England, Skeletal remains

Reference: 151

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