Working Papers

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

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

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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

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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

Individual View

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

Individual View

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

Individual View

Authors: Orazio Attanasio, Krisztina Molnar

Jan 2017

Abstract

In this paper, we make three substantive contributions: first, we use elicited subjective income expectations to identify the levels of permanent and transitory income shocks in a life-cycle framework; second, we use these shocks to assess whether households' consumption is insulated from them; third, we use the shock data to estimate an Euler equation for consumption. We find that households are able to smooth transitory shocks, but adjust their consumption in response to permanent shocks, albeit not fully. The estimates of the Euler equation parameters with and without expectational errors are similar, which is consistent with rational expectations. We break new ground by combining data on subjective expectations about future income from the Michigan Survey with micro data on actual income from the Consumer Expenditure Survey.

JEL Codes: C13; D12; D84; D91; E21

Keywords: life cycle models, estimating Euler Equations, survey expectations

Reference: 820

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Authors: H Peyton Young, Mark Paddrik, Sriram Rajan

Jan 2017

Abstract

This paper analyzes counterparty exposures in the credit default swaps market and examines the impact of severe credit shocks on the demand for variation margin, which are the payments that counterparties make to offset price changes. We employ the Federal Reserve's Comprehensive Capital Analysis and Review (CCAR) shocks and estimate their impact on the value of CDS contracts and the variation margin owed. Large and sudden demands for variation margin may exceed a firm's ability to pay, leading some firms to delay or forego payments. These shortfalls can become amplified through the network of exposures. Of particular importance in cleared markets is the potential impact on the central counterparty clearing house. Although a central node according to conventional measures of network centrality, the CCP contributes less to contagion than do several peripheral firms that are large net sellers of CDS protection. During a credit shock these firms can suffer large shortfalls that lead to further shortfalls for their counterparties, amplifying the initial shock.

JEL Codes: D85, G01, G17, L14

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

Reference: 821

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Authors: James Duffy, David Hendry

Jan 2017

 

Abstract

Data spanning long time periods, such as that over 1860–2012 for the UK, seem likely to have substantial errors of measurement that may even be integrated of order one, but which are probably cointegrated for cognate variables. We analyze and simulate the impacts of such measurement errors on parameter estimates and tests in a bivariate cointegrated system with trends and location shifts which reflect the many major turbulent events that have occurred historically. When trends or shifts therein are large, cointegration analysis is not much affected by such measurement errors, leading to conventional stationary attenuation biases dependent on the measurement-error variance, unlike the outcome when there are no offsetting shifts or trends.

JEL Codes: C51, C22

Keywords: Integrated Measurement Errors; Location Shifts; Long-run Data; Cointegration

Reference: 818

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Authors: Kevin Hjortshøj O'Rourke

Jan 2017

 

Abstract

This paper surveys independent Ireland’s economic policies and performance. It has three main messages. First, the economic history of post-independence Ireland was not particularly unusual. Very often, things that were happening in Ireland were happening elsewhere as well. Second, for a long time we were hampered by an excessive dependence on a poorly performing UK economy. And third, EC membership in 1973, and the Single Market programme of the late 1980s and early 1990s, were absolutely crucial for us. Irish independence and EU membership have complemented each other, rather than being in conflict: each was required to give full effect to the other. Irish independence would not have worked as well for us as it did without the EU; and the EU would not have worked as well for us as it did without political independence.

JEL Codes: N14, N74

Keywords: Ireland, economic history, trade policies, growth, Brexit

Reference: 150

Individual View

Authors: Fedrico Torrachi

Jan 2017

I examine the impact of credit supply conditions on the labor market via a bank credit channel. Using a Bayesian likelihood approach with US data, I build and estimate a New-Keynesian dynamic stochastic general equilibrium model that incorporates a labor market with search frictions and a banking sector subject to moral hazard. Including a banking sector improves the empirical fit with the data. Financial frictions amplify the response of TFP shocks and add persistence to exogenous disturbances. Financial intermediaries’ net worth plays a crucial role in the transmission of aggregate shocks. The banking sector is also a crucial source of business cycle fluctuations. Shocks to the net worth of the banking sector drive the volatility of labor market tightness, the unemployment rate, and the vacancy stock.

JEL Codes: E24, E32, E37, E43, E44, J20

Keywords: Financial Intermediation, Banking Sector, Labor Market Frictions, DSGE, Bayesian Estimation

Reference: 817

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Authors: Avner Offer

Jan 2017

Social democracy and market liberalism offered different solutions to the same problem: how to provide for life-cycle dependency. Social democracy makes lateral transfers from producers to dependents by means of progressive taxation. Market liberalism uses financial markets to transfer financial entitlement over time. Social democracy came up against the limits of public expenditure in the 1970s. The ‘market turn’ from social democracy to market liberalism was enabled by easy credit in the 1980s. Much of this was absorbed into homeownership, which attracted majorities of households (and voters) in the developed world. Early movers did well, but easy credit eventually drove house prices beyond the reach of younger cohorts. Debt service diminished effective demand, which instigated financial instability. Both social democracy and market liberalism are in crisis.

JEL Codes: H55, E51, R21, R31

Keywords: Welfare state, housing, credit and debt

Reference: 149

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Authors: John Knight, LI Shi, WAN Haiyuan

Dec 2016

The inequality of wealth in China has increased rapidly in recent years. Prior to 1978 all Chinese households possessed negligible wealth. China therefore presents a fascinating case study of how inequality of household wealth increases as economic reform takes place, marketisation occurs, and capital accumulates. Wealth inequality and its growth are measured and decomposed using data from two national sample surveys of the China Household Income Project (CHIP) relating to 2002 and 2013. Techniques are devised and applied to measure the sensitivity of wealth inequality to plausible assumptions about under-representation of and under-reporting by the wealthy. An attempt is made to explain the rising wealth inequality in terms of the relationships between income and wealth, house price inflation, differential saving, and income from wealth.

JEL Codes: C80; D31

Keywords: China; wealth inequality and its decomposition; top-tail income c

Reference: 816

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