Working Papers

Authors: Roland Hodler, Anna Bruderle

Sep 2017

Oil spills can lead to irreversible environmental degradation and pose hazards to human health.  We are the first to study the causal effects of onshore oil spills on neonatal and infant mortality rates.  We use spatial data from the Nigerian Oil Spill Monitor and the Demographic and Health Surveys, and rely on the comparison of siblings conceived before and after nearby oil spills.  We find that nearby oil spills double the neonatal mortality rate. These effects are fairly uniform across locations and socio-economic backgrounds. We also provide some evidence for negative health effects of nearby oil spills on surviving children.

JEL Codes: I10, I18, J13, Q53

Keywords: Nigeria, infant mortality, child health

Reference: 196

Individual View

Authors: Martin Browning, Ian Crawford, Laura Blow

Sep 2017

Abstract

This paper provides a revealed preference characterisation of quasi-hyperbolic discounting which is designed to be applied to readily-available expenditure surveys. We describe necessary and sufficient conditions for the leading forms of the model and also explore the consequences the restrictions on preferences popularly used in empirical lifecycle consumption models. Using data from a household consumption panel dataset we explore the prevalence of time-inconsistent behaviour. The sophisticated quasi-hyperbolic model provides a signi ficantly more successful account of behaviour than the alternatives considered. We estimate the joint distribution of time preferences and the distribution of discount functions at various time horizons.

JEL Codes: D11, D12, D90

Keywords: Quasi-hyperbolic discounting, revealed preference

Reference: 835

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Authors: Kevin Hjortshøj O'Rourke

Sep 2017

Preliminary version of a paper prepared for IMF-BNM-IMFER Conference on Globalization in the Aftermath of the Crisis and the IMF Economic Review. The research on which this paper is based was in part funded by the European Research Council under the European Union's Seventh Framework Programme (FP7/2007-2013) / ERC grant agreement no. 249546. The paper draws on many collaborations, and I am extremely grateful to my co-authors: Miguel Almunia, Agustin Bénétrix, Roberto Bonfatti, Alan de Bromhead, Barry Eichengreen, Alan Fernihough, Ronald Findlay, William Hynes, David Jacks, Markus Lampe, Gisela Rua, and Jeffrey Williamson. The usual disclaimer applies.

Reference: 159

Individual View

Authors: Ferdinand Rauch, Guy Michaels, Dzhamilya Nigmatulina, Tanner Regan, Neeraj Baruah, Amanda Dahlstrand-Rudin

Sep 2017

Abstract

What are the long run consequences of planning and providing basic infrastructure in neighborhoods, where people build their own homes? We study "Sites and Services" projects implemented in seven Tanzanian cities during the 1970s and 1980s, half of which provided infrastructure in previously unpopulated areas (de novo neighborhoods), while the other half upgraded squatter settlements. Using satellite images and surveys from the 2010s, we find that de novo neighborhoods developed better housing than adjacent residential areas (control areas) that were also initially unpopulated. Specifically, de novo neighborhood are more orderly and their buildings have larger footprint areas and are more likely to have multiple stories, as well as connections to electricity and water, basic sanitation and access to roads. And though de novo neighborhoods generally attracted better educated residents than control areas, the educational difference is too small to account for the large difference in residential quality that we find. While we have no natural counterfactual for the upgrading areas, descriptive evidence suggests that they are if anything worse than the control areas.

JEL Codes: R31, O18, R14

Keywords: Urban Economics, Economic Development, Slums, Africa.

Reference: 834

Individual View

Authors: Martin Ellison, Andrew Scott

Sep 2017

Abstract

We construct a new monthly dataset for UK government debt over the period 1694 to 2017 based on price and quantity data for each individual bond issued. This enables us to examine long run fiscal sustainability using the theoretically  relevant variable of the market value of debt, and investigate the historical importance of debt management. We find the general implications of the tax smoothing literature are replicated in our data, especially around financing wars, although we find major shifts over time in how fiscal sustainability is achieved. Before the 20th century, governments continued to pay bond holders a high rate of return and achieved sustainability through running fiscal surpluses but since then governments have relied on low growth adjusted real interest rates. The optimal debt management literature tends to favour the use of long bonds but we find the government would have been better off over the 20th century issuing short bonds. The contrast with the literature occurs because of an upward sloping yield curve and long bonds rarely providing fiscal insurance. This is particularly true during periods of financial crises when falling interest rates lead to sharp rises in the price of long bonds, making them an expensive form of finance. We examine the robustness of our conclusions to liquidity e¤ects, rollover risks, buyback operations and leverage. In general, these do suggest a greater role for long bonds but do not overturn an issuance strategy based mainly on short term bonds.

JEL Codes: E43, E62, H63

Keywords: Debt Management, Fiscal Deficits, Fiscal Policy, Government Debt, Inflation, Maturity, Yield Curve

Reference: 833

Individual View

Authors: Rick Van der Ploeg

Sep 2017

Cumulative emissions drive peak global warming and determine the safe carbon budget compatible with staying below 2oC or 1.5oC. The safe carbon budget is lower if uncertainty about the transient climate response is high and risk tolerance low. Together with energy costs this budget determines the constrained welfare-maximizing carbon price and how quickly fossil fuel is replaced by renewable energy and how much of it is abated. This price is the sum of a gradual damages component familiar from the unconstrained optimal carbon price highlighted in economic studies and a Hotelling component for the additional price needed to ensure that the safe carbon budget is never violated familiar from IAM studies. If policy makers ignore damages, as in the cost-minimizing temperature constraint literature, a more rapidly rising carbon price results. The alternative of adjusting damages upwards to factor in the peak warming constraint leads initially to a higher carbon price which rises less rapidly.

Keywords: peak warming target, climate uncertainty, risk tolerance, Pigouvian damages, Hotelling rule, carbon price

Reference: 195

Individual View

Authors: David Hendry, John Muellbauer

Sep 2017

The adoption as policy models by central banks of representative agent New Keynesian dynamic stochastic general equilibrium models has been widely criticised, including for their simplistic micro-foundations. At the Bank of England, the previous generation of policy models is seen in its 1999 medium-term macro model (MTMM). Instead of improving that model to correct its considerable flaws, many shared by other non-DSGE policy models such as the Federal Reserve’s FRB/US, it was replaced in 2004 by the DSGE-based BEQM. Though this clearly failed during and after the global financial crisis, it was replaced in 2011 by the DSGE COMPASS, complemented by a ‘suite of models’. We provide a general critique of DSGE models for explaining, forecasting and policy analyses at central banks, and suggest new directions for improving current empirical macroeconomic models based on empirical modelling broadly consistent with better theory, rather than seeking to impose simplistic and unrealistic theory.

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

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

Reference: 832

Individual View

Authors: Thomas McGregor

Sep 2017

This paper investigates the link between commodity price movements and risk premiums in resource-dependent,developing economies. I develop a stochastic general equilibrium model of a small open economy that receives a stream of resourc erevenues.The government sells bonds to foreign investors which it can renege on in the future, at some cost, whilst international investors form expectations on the likelihood of sovereign default. This delivers an endogenous risk premium which is inversely related to the price of oil.The model is able to explain a large proportion of the business cycle fluctuations in interest-rate spreads in resource dependent developing economies. I then ask how specific structural features of developing economies affect the relationship between commodity prices and the optimal price of sovereig ndebt, including:a higher dependence on natural resource revenues, impatient consumers and governments,a higher degree of risk-aversion, and a lower ability to substitute consumption inter-temporally. Including them in the model significantly improves the ability of the model to explain the key macroeconomic co-movements in a resource rich, developing economy context. Model simulations reveal an interesting policy insight. An endogenous risk premium that is driven by falling oil prices, provides an additional rationale for a volatility fund in which liquidity buffers are accumulated to manage debt repayments. These buffers should be larger the stronger the link between oil prices and the domestic economy is, the more impatient policymakers are and the more willing they are to substitute current for future consumption.

JEL Codes: E13, E32, E44, F34, O11, O13, O16, H63

Keywords: Pricing sovereign debt, default, natural resources, BBC, volatility fund

Reference: 194

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Our ability to adapt to extreme weather is increasingly relevant as the frequency and intensity of these events alters due to climate change. It is important to understand the effectiveness of adaptation given the uncertainty associated with future climate events. However, there has been little analysis of short-term adaptation efforts. We propose a novel approach of using errors from hurricane forecasts to evaluate short-term hurricane damage mitigation efforts. We construct a statistical model of damages for all hurricanes to strike the continental United States since 1955. While we allow for many possible drivers of damages, using model selection methods we find that a small subset explains most of the variation. We also find evidence supporting short-term adaptation effects prior to a hurricane landfall. Our results show that the 67 percent improvement in hurricane forecasts over the past 60 years is associated with damages being 16-63 percent lower than they otherwise would have been. Accounting for outlying observations narrows this range to 16-24 percent.

JEL Codes: C51, C52, Q51, Q54

Reference: 831

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Authors: Robert Allen, Ekaterina Khaustova

Aug 2017

The paper measures real wages in St Petersburg, Moscow, and Kursk between 1853 and 1937 and compares them to real wages in Boston, Manchester, Bombay, and Cairo. Russian living standards grew little between 1853 and 1913 and were like Egypt and India. Wages in the UK and USA were 2.5 - 5 times greater. Real wages in Russia almost doubled between 1913 and 1928. When seen in a Russian perspective, this looks like a big advance; when seen internationally, it is much less so. Real wages dropped to their pre-War level between 1928 and 1937 during the industrialization drive.

JEL Codes: D33, J30, N93, N94, P22, P23

Keywords: Russia, real wages, economic development, inequality, revolution

Reference: 158

Individual View

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

Individual View

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

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Authors: Daniel Susskind

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

Authors: Daniel Susskind

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

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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

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