Discussion Papers

DP19173 Classical Right, New Right, and Voting Behavior: Evidence from a Quasi-Natural Experiment

Jesús Fernández-Villaverde, Carlos Sanz — 2024-06-21T23:00:00+0000

Due to a last-minute fight among the candidates, Vox, a party at the right end of the Spanish political spectrum, could not run in Santa Cruz de Tenerife, a relatively representative electoral constituency, in the general election of July 23, 2023. Since this fight was a power struggle within Vox unrelated to any fundamental in the constituency or ideological differences among the candidates, we can exploit this event as a quasi-natural experiment to measure the effects of new parties on electoral outcomes. Using three different but complementary research designs (matching, synthetic controls, and a triple-difference analysis), we get to the same main result: Vox's presence significantly increases votes for the right as a whole. The increase in votes for the right caused by Vox's presence is particularly strong in areas with high unemployment. The presence of Vox also reduces protest votes but, on the other hand, votes for the left are unaffected.

DP19172 Inflation is always and everywhere Not Conflict

Marcus Hagedorn — 2024-06-21T23:00:00+0000

According to Lorenzoni and Werning (2023a), “Conflict is the most general and proximate cause of inflation”. I show that this view involves both theoretical and conceptual shortcomings. My critique is based on two main arguments.
Firstly, equilibrium conflict inflation is indeterminate, and thus does not provide a well-defined theory of inflation. The primary reason for the indeterminacy is that it is a theory based on relative prices and not on the price level.
Secondly, I argue that in almost all models, inflation is determined by monetary and/or fiscal policy. Conflict, on the other hand, plays no role in determining the steady-state inflation rate, in contrast to the claim in Lorenzoni and Werning (2023a). Similarly to the New Keynesian Phillips Curve, it merely describes a relationship between output and inflation without determining either of them.
To support my arguments, I use four standard frameworks for price-level determination: The New Keynesian model in which monetary policy sets the nominal interest rate, a money-in-utility model in which the central bank sets the money supply, the Lagos and Wright (2005) model and the Demand Theory of the Price Level (Hagedorn, 2016).

DP19171 Fragmented Monetary Unions

Luca Fornaro, Christoph Grosse Steffen — 2024-06-19T23:00:00+0000

We provide a theory of financial fragmentation in monetary unions. Our key insight is that currency unions may experience endogenous breakings of symmetry: that is episodes in which identical countries react differently when exposed to the same shock. During these events part of the union suffers a capital flight, while the rest acts as a safe haven and receives capital inflows. The central bank then faces a difficult trade-off between containing unemployment in capital-flight countries, and inflationary pressures in safe-haven ones. By counteracting private capital flows with public ones, anti-fragmentation monetary programs mitigate the impact of financial fragmentation on employment and inflation, thus helping the central bank to fulfill its price stability mandate.

DP19170 The Optimal Inflation Target: Bridging the Gap Between Theory and Policy

Klaus Adam, Henning Weber — 2024-06-19T23:00:00+0000

Many central banks worldwide announce numerical inflation targets, typically ranging from zero to two percent in advanced economies and higher in developing countries. Historically, a significant gap existed between the inflation targets pursued by central banks and those recommended by academic studies. This paper reviews traditional economic forces advocating for zero or negative inflation targets and surveys new forces justifying positive targets. Key factors include (i) trends in relative prices, (ii) the lower bound constraint on nominal interest rates, (iii) (downward) wage rigidity, and (iv) effects of product entry and aggregation. By examining these forces, we assess whether current inflation targets are optimal or require adjustment, and identify areas for future research on optimal inflation targets.

DP19169 Health Insurance Coverage and Personal Bankruptcy Reform

Paolo Nicola Barbieri, Laura Bottazzi, Giuseppe di Giacomo — 2024-06-18T23:00:00+0000

Bankruptcy provides American households with an implicit financial insurance by allowing for debt clearance. We use the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which has reduced the effectiveness of this protection, to study how this reform has impacted individuals’ decisions regarding health insurance coverage, healthcare usage, and medical expenditures. The findings indicate that households hindered from filing for bankruptcy under the new law increased their average health insurance coverage, particularly among white families not at risk of asset seizure. This increase in insurance coverage led to higher healthcare utilization and lower out-of-pocket expenses, consistent with previous studies.

DP19168 Political Selection in Local Elections: Evidence from Rural Uganda

Siwan Anderson, Martina Björkman Nyqvist, Andrea Guariso — 2024-06-17T23:00:00+0000

Political selection is crucial to the quality of governance. Yet our general knowledge of individual characteristics that correlate with the political selection process is scant. Our paper contributes to this knowledge gap by collecting detailed data on the quality, perceptions, attitudes, and promises of candidates involved in a recent local election in 100 rural villages of Uganda. We complement candidates’ data with comparable data from a representative sample of male and female voters from the same villages. Our context is unique - with two separate governing bodies for males and females. The paper demonstrates that male and female political selection into these two parallel institutions share important similarities but also differ along several dimensions. A core takeaway is how crucial are measures beyond the more standard economic and demographic characteristics. Subjective views as well as policy priorities are important determinants of the different stages of the political selection process.

DP19166 Civil society: Tracking 100 years of economic research beyond markets and states

Samuel Bowles, Wendy Carlin, Sahana Subramanyam — 2024-06-16T23:00:00+0000

Using topic modeling on the corpus of papers published in seven leading economics journals since 1900, we study the evolving emphasis in research on themes relating to the state, markets, and civil society, the latter referring to families, firms and other private organizations, neighborhoods, and identity groups. We document a shift between 1900 and 1970 away from research on state-related topics towards the market, even as the economic importance of the state was growing. This was followed by a substantial movement away from market topics towards topics related to civil society. We associate the first shift with the mathematical formalization of the Marshallian paradigm. The subsequent increased attention to civil society coincided with novel empirical methods and research questions, including experiments and the use of large datasets. Advances in game theory and the economics of asymmetric information since the middle of the last century also facilitated the extension of economists’ research agendas to encompass themes central to economic behavior in civil society, including other-regarding preferences and social norms as well as strategic interactions not covered by complete contracts.

DP19167 Household Inflation Expectations: An Overview of Recent Insights for Monetary Policy

2024-06-16T23:00:00+0000

This paper discusses the recent wave of research that has emphasized the importance of measures of consumers’ inflation expectations. In contrast to other measures of expected inflation, such as for experts or financial market participants, consumers’ inflation expectations capture the broader distribution of societal beliefs about inflation. This research has revealed very significant deviations from traditional assumptions about rationality in consumers’ expectations formation. However, households do act on their beliefs about inflation, though in heterogeneous ways that can depart from the predictions of conventional economic models. Recent euro area experiences highlight the importance of tracking the degree of anchoring in consumers’ inflation expectations in a way that considers their inherent complexity, heterogeneity, and subjectivity. On average, consumers’ medium and longer-term expectations deviate noticeably in levels from central bank targets and, in contrast with expert expectations, often co-move more closely with shorter-term inflation news. By stepping up their engagement with the wider public, central banks may be able to influence expectations by building up greater knowledge and trust and thereby support more effective monetary transmission. Communication efforts need to be persistent because central banks must compete with many other demands on consumers’ attention.

DP19165 Supply Chain Disruption and Reorganization: Theory and Evidence From Ukraine’s War

Vasily Korovkin, Alexey Makarin, Yuhei Miyauchi — 2024-06-15T23:00:00+0000

How do supply chain disruption and reorganization shape the impact of large-scale shocks, such as wars? Using firm-to-firm Ukrainian railway-shipment data during the 2014 Russia-Ukraine conflict, we document that firms with prior supplier or buyer linkages to the conflict areas substantially decreased their output. Simultaneously, firms with prior supplier linkages increased the number of suppliers in nonconflict areas, those with prior buyer linkages decreased them, and both firm types saw a reduction in the number of buyers in nonconflict areas. Our production-network disruption model accurately explains the observed firm-level output decline once we account for this network reorganization. The model predicts a 10% reduction in aggregate welfare in nonconflict areas through production-network disruption and reorganization, underscoring that localized conflicts have detrimental, far-reaching economic costs.

DP19163 Unconventional Monetary Policy Shocks and their Distributional Implications

David Bügel, Albert Hidalgo, Ralph Luetticke — 2024-06-13T23:00:00+0000

We identify a novel series of unconventional monetary policy shocks for the U.S. by combining Romer and Romer’s narrative identification strategy with Wu and Xia’s shadow federal funds rate. This yields a unified metric of monetary shocks during the zero-lower bound period. We find that unconventional monetary policy is effective in stimulating the economy, but comes at the cost of higher wealth inequality. In particular, stock prices rise more than house prices, benefiting wealthier households over the middle class.

DP19162 Trust and Complexity in Vertical Relationships

2024-06-13T23:00:00+0000

We investigate the role of mutual trust in long-term vertical relationships involving trades of complex goods. High complexity is associated with high contract incompleteness and hence the increased relevance of trust-based relational contracts. Contrary to expectations, we find that changes in trust do not impact the quality of highly complex objects. Instead, higher trust improves the quality of less complex objects. Even more surprisingly, trust is associated with more competition in procurement, again for low tech objects. This complexity-based difference persists even when the same supplier provides both types of objects, suggesting relational contracting may be object-specific. These findings are derived from a comprehensive survey of buyers and critical suppliers in the German automotive industry. We explain these results with a relational contracting model, where the cost of switching suppliers is technology-specific and increases with object complexity, shifting bargaining power and altering the effects of trust on each party's incentives.

DP19161 SAFE to Update Inflation Expectations? New Survey Evidence on Euro Area Firms

2024-06-13T23:00:00+0000

This paper provides new survey evidence on firms’ inflation expectations in the euro area. Building on the ECB’s Survey on the Access to Finance of Enterprises (SAFE), we introduce consistent measurement of inflation expectations across countries and shed new light on the properties and causal effects of these expectations. We find considerable heterogeneity in firms’ inflation expectations and show that firms disagree about future inflation more than professional forecasters but less than households. We document that differences in firms’ demographics, firms’ choices and constraints, and cross-country macroeconomic environments account for most of the variation in inflation expectations by roughly equal shares. Using an RCT approach, we show that firms update their inflation expectations in a Bayesian manner. Moreover, they revise their plans regarding prices, wages, costs and employment in response to information treatments about current or future inflation.

DP19164 Climate Change, Firms, and Aggregate Productivity

Andrea Caggese, Andrea Chiavari, Sampreet Goraya, Carolina Villegas-Sanchez — 2024-06-13T23:00:00+0000

This paper employs a general equilibrium framework to analyze how temperature affects firm-level demand, productivity, and input allocative efficiency, informing aggregate productivity damages due to climate change. Using data from Italian firms and detailed climate data, it uncovers a sizeable negative effect of extreme temperature on firm-level productivity and revenue-based marginal product of capital. Based on these estimates, the model generates aggregate productivity losses higher than previously thought, ranging from 0.60 to 6.82 percent depending on the scenario and the extent of adaptation. Additionally, climate change exacerbates Italian regional disparities.

DP19157 Regime Changes and FDI: A Tale of Two Countries – Poland and Israel

Assaf Razin, Andrzej Cieślik — 2024-06-12T23:00:00+0000

This essay highlights the effects of radical transformations in the liberal characteristics of the regimes on foreign direct investors. To focus on the common patterns in the effects on foreign direct investment, of liberal vs. illiberal regime change, the essay spotlights the tale of two countries: Poland and Israel. The liberalization of the Polish economy and market reforms in the late 1980s and early 1990s boosted Poland's attractiveness to international companies. However, ra decade long of illiberal policies under the PiS regime has reduced Poland's appeal to foreign investors. Similarly, Israel's GNP and especially the high-tech sector saw significant growth from the 1990s to the 2010s, driven by liberalization of capital and finance surges, and the global IT boom immigration. Fundamental forces, such as the workforce skill boost, advances in education and research, Were crucial for Israel's high-tech industry development. As a more- or- -less a laboratory experiment for the real-economy impact of an abrupt transition to an illiberal regime, early steps of a comprehensive judicial overhaul have disrupted Israel's growth, causing a sharp decline in foreign direct investment.

DP19159 Spillovers in Criminal Networks: Evidence from Co-Offender Deaths

Matthew Lindquist, Eleonora Patacchini, Michael Vlassopoulos, Yves Zenou — 2024-06-12T23:00:00+0000

We study spillover effects within co-offending networks by leveraging deaths of co-offenders for causal identification. Our results demonstrate that the death of a co-offender significantly reduces the criminal activities of other network members. We observe a decaying pattern in the magnitude of these spillover effects: individuals directly linked to a deceased offender experience the most significant impact, followed by those two steps away, and then those three steps away. Moreover, we find that the death of a more central co-offender leads to a larger reduction in aggregate crime. We also provide evidence consistent with a new theoretical prediction suggesting that the loss of a co-offender shrinks the future information set of offenders, altering their perceptions of the probability of being convicted and consequently affecting their criminal behavior. Our findings highlight the importance of understanding spillover effects for policymakers seeking to develop more effective strategies for crime prevention.

DP19156 Long Term Effects of Political Violence on Attitudes: Evidence from the Second Intifada

Esteban Klor, Shahar Lahad, Asaf Zussman — 2024-06-12T23:00:00+0000

This paper studies the long-term effects of politically motivated violence on individuals’ political attitudes focusing on the Second Intifada (2000 – 2005). We conduct a large-scale survey that measures Israelis’ attitudes today and elicits their places of residence since 1985. The survey allows us to measure individuals’ direct exposure to terrorism and to account for potential selective migration. This, in combination with the fact that individuals’ characteristics are balanced with respect to their exposure to terrorism, enables us to overcome identification concerns and provide credible estimates of the causal effects of the Intifada on attitudes. The results indicate that exposure to terrorism during the Second Intifada caused a persistent and substantial shift toward right-wing attitudes that is still observable two decades later. Thus, our analysis provides systematic empirical evidence supporting the view that the Second Intifada soured a generation of Israelis on the idea of peace.

DP19160 The Chronic Disease Index: Analyzing Health Inequalities Over the Lifecycle

Kaveh Danesh, Jonathan Kolstad, William Parker, Johannes Spinnewijn — 2024-06-12T23:00:00+0000

The rich live longer than the poor, but relatively little is known about the evolution of health inequality across the lifecycle. Using rich administrative data from the Netherlands, we develop an index of chronic disease burden based on the projected contribution to old-age mortality. Chronic conditions account for one-third of the mortality gap in old age. Using our index we demonstrate that health inequality arises much earlier in life; by age 35, the bottom half of the income distribution has the same disease burden as those aged 50 in the top half. Approximately 60% of the divergence across income groups is due to low-income individuals developing chronic illness at a faster rate, rather than chronically ill individuals sorting into lower-income groups. Using linked health survey data, we then examine the contributions of various mediators to the incidence of chronic diseases over the life-cycle. Socio-economic and geographic factors explain most of the variation, while individual health behaviors play a moderate role. Our findings align with calls to target health policies toward early-life social determinants of health.

DP19158 Teacher Value-Added and Gender Gaps in Educational Outcomes

Andres Barrios Fernandez, Marc Riudavets Barcons — 2024-06-12T23:00:00+0000

This paper uses rich administrative data from Chile to estimate teacher value added (TVA) on test scores and on an educational attainment index. We allow each teacher to have a different TVA for male and female students and show that differences in TVA explain an important part of the gender gaps we observe in test scores and postsecondary education trajectories. The gaps in gender-specific teaching effectiveness are especially pronounced in mathematics. Indeed, eliminating within-teacher differences in math test score VA would reduce the gender gap in math performance by 67\%. We explore what could be behind these gaps in gender-specific TVA and find no significant differences in what makes teachers effective for male and female students. We do find, however, significant associations between teacher characteristics---e.g., gender and performance in the college admission exam---and practices---e.g., paying attention to low-performing students, congratulating students who improve, and having a good relationship with students---with teacher effectiveness.
Finally, we also show that math teachers tend to be biased in favor of male students and that teachers with smaller gender biases are more effective for both, male and female students.

DP19154 Environmental Damage News and Stock Returns: Evidence from Latin America

Eduardo Cavallo, Ana Cepeda, Ugo Panizza — 2024-06-11T23:00:00+0000

This paper studies the interplay between environmental performance and financial valuation of firms in Latin America and the Caribbean. We provide insights into how environmental considerations are integrated into financial decision-making and investor behavior by analyzing the stock market reaction to environmental news of firms with different levels of carbon emission intensity. We find that high emission intensity firms tend to underperform after the release of environmental damage news. Our baseline estimates indicate that, after the release of such news, firms at the 75th percentile of the distribution of emission intensity experience stock returns that are 17% lower than those of firms at the 25th percentile of the distribution of emission intensity. These results suggest that investors care about and price carbon risk, but only when this risk is salient.

DP19155 Brown Capital (Re)Allocation

Olivier Darmouni, Yuqi Zhang — 2024-06-11T23:00:00+0000

This paper studies capital reallocation in the fossil fuel industry by investigating who owns coal power plants -- the largest single source of global greenhouse gas emissions. We build a bottom-up measure of the ownership of these brown assets by merging asset-level data on firms' plant ownership (real capital) in Europe with firms' shareholder data (financial capital). We document a sharp increase in private firms' coal ownership since 2015, accompanied by a large decline in public equity ownership. A formal decomposition shows that the large decline in public equity ownership was however not due to capital reallocation ("exit") but to capital utilization: these investors scaled down plants, not sold them. Instead, state investors played a crucial role: they sold to private firms, while being the slowest at scaling down their plants. We illustrate the economics of brown capital allocation by calibrating a model in which asset owners vary in how they value externalities. The possibility of nationalization of coal plants by state investors that value social factors (e.g. jobs, "energy security") is an important limit to the ability of "green finance" to decrease aggregate emissions, in line with recent episodes in Germany and Poland.

DP19153 Corporate Climate Lobbying

Markus Leippold, Zacharias Sautner, Tingy Yu — 2024-06-10T23:00:00+0000

A common concern is that ambitious climate policy is---at least in parts---obstructed by corporate lobbying activities. We quantify corporate anti- and pro-climate lobbying expenses, identify the largest corporate lobbyists and their motives, establish how climate lobbying relates to corporate business models, and document whether and how climate lobbying is priced in financial markets. Firms spend on average \$277k per year on anti-climate lobbying (\$185k on pro-climate lobbying). Recently, firms have tried to camouflage their climate lobbying activities. Large anti-climate lobbyists have more carbon-intensive business models and face more climate-related incidents in the future. Firms that spend more on anti-climate lobbying earn higher returns, probably because of a risk premium. Their stock prices went up when the Waxman-Markey Cap-and-Trade Bill failed, and down when the Inflation Reduction Act was announced.

DP19152 Climate Transition Risks of Banks

Felix Martini, Zacharias Sautner, Sascha Steffen, Carola Theunisz — 2024-06-10T23:00:00+0000

We develop a bottom-up measure of U.S. banks' exposures to climate transition risks from the carbon footprint of their syndicated loan portfolios. Transition risk exposures have declined over time, especially since the Paris Agreement. This effect results from a re-balancing of bank loan portfolios, with more lending to low-emission borrowers rather than a reduction in lending to high-emission borrowers. Banks with higher transition risk provide more climate-related disclosures in their earnings calls only when probed by analysts, but not voluntarily in their Form 10-Ks. Banks engage in more anti-climate lobbying after their risk exposures increased. Our measure of transition risk correlates with bank-level climate betas, which reflect the sensitivity of bank returns to the returns of a stranded asset index.

DP19150 Labor Supply Response to Windfall Gains

Dimitris Georgarakos, Tullio Jappelli, Geoff Kenny, Luigi Pistaferri — 2024-06-10T23:00:00+0000

Using a large survey of euro area consumers, we design an experiment in which respondents report how they would change the decision to participate in the labor market, the hours worked, and their search effort (if not employed) in response to randomly assigned windfall gain scenarios. Windfall gains reduce labor supply, but only if they are significant in size. At the extensive margin, we find no effect for gains below €25,000, and a decline in the probability of working of 3 percentage points for gains between €25,000 and €100,000. At the intensive margin, there is no effect for small gains, and a drop of roughly one weekly hour for gains above €50,000. Women and workers closer to retirement respond more strongly to windfall gains. Finally, the proportion of those who stop searching for a job or search less intensively falls by 1 percentage point for each €10,000 gain, and the effect is more pronounced for older individuals receiving €100,000.

DP19151 Optimal Fiscal Policy in a Climate-Economy Model with Heterogeneous Households

Thomas Douenne, Albert Jan Hummel, Marcelo Pedroni — 2024-06-10T23:00:00+0000

We study optimal fiscal policy to address climate change and inequality. We theoretically characterize optimal carbon and income taxes and quantify them for the US economy with a climate model calibrated to DICE. In contrast to the representative-agent setting, we find that (i) tax distortions have a negligible effect on the optimal carbon tax; (ii) inequality only slightly reduces it; (iii) the revenue from carbon taxes is optimally split halfway between reducing tax distortions and increasing transfers. Unlike the double-dividend policy, optimal carbon taxation has progressive welfare effects and low-income households benefit even in the short run.

DP19147 The Irrelevance of Intergenerational Altruism for Social Discounting

Maya Eden — 2024-06-09T23:00:00+0000

Should people’s concern for the wellbeing of their descendants affect policy decisions? I consider a model in which people’s dynastic utilities depend on the consumption of their descendants. The social welfare function is a discounted sum of past, present and future dynastic utilities. I establish that, when population growth is constant, intergenerational altruism has no effect on the social ranking, and can be ignored for the purpose of policy decisions. The reason is that, given constant population growth, each generation’s concern for its children cancels out with their parents’ concern for them. Quantitatively, despite the variation in humanity’s growth rates, intergenerational altruism has only negligible effects on the social welfare function.

DP19146 Authoritarian Institutions

Georgy Egorov, Konstantin Sonin — 2024-06-09T23:00:00+0000

Political institutions of authoritarianism are designed to ensure the elite's lasting hold of power. They might be growth-enhancing at certain stages of a country's development and become a major obstacle to economic progress in other stages, but their primary role is to keep the elite unaccountable. Thirty years ago, the economic collapse of the USSR-led communist system gave a hope for the ``end of history'', the convergence of all political systems to a democracy. Since then, the share of non-democracies has stabilized after a dramatic fall; their share of the world's GDP has been increasing, largely due to China's enormous contribution. In this essay, we focus on institutional connections between the monopoly on political power and the monopolistic, centralized organization of economic life under authoritarianism.

DP19148 Dynamic Models, New Gains from Trade?

Christoph Boehm, Andrei Levchenko, Nitya Pandalai-Nayar, Hiroshi Toma — 2024-06-09T23:00:00+0000

Yes. We state closed-form expressions for steady state gains from trade that apply in a class of dynamic trade models that includes dynamic versions of the Krugman (1980), Melitz (2003), and customer capital (e.g., Arkolakis, 2010) models. The gains are a function of the domestic trade share and the long-run elasticity of trade with respect to iceberg trade costs, similar to Arkolakis, Costinot, and Rodríguez-Clare (2012). In contrast to static settings, in a dynamic world this long- run elasticity cannot be estimated in one step by relying on tariff variation as shifters of trade costs. We show, instead, that this object can be recovered by combining two tariff elasticity estimates: the long-and the short-run. Thus, the short-run tariff elasticity indirectly enters the formula for the steady state gains from trade. Our main substantive finding is that the gains from trade are large. They depend crucially on the short-run tariff elasticity, and can be arbitrarily large even if the long-run tariff elasticity is high. Accounting for the transition path has a minor impact on the magnitude of the gains from trade, relative to simply comparing steady states.

DP19145 Trade, Skills and Productivity

Giordano Mion, Joana Silva — 2024-06-09T23:00:00+0000

We examine how firms adjust their production and technology in response to exogenous trade shocks. We develop a model in which revenue TFP can be distinguished from quantity TFP, and where skill upgrading is explicitly embedded into the firm's technology choice. Within our framework, firms respond to export and import shocks by adjusting their trade-off between quantity and quality, as well as the skill composition of their workforce. Ultimately, these decisions impact firms' quantity and revenue TFP, marginal costs, prices, and markups. We quantify the model using detailed firm and product data from Brazil and show how export and import shocks, instrumented using exogenous changes in exchange rates, GDP, and tariffs, affect a wide array of firm margins. Our results indicate both skill and quality upgrading in response to export shocks, while import shocks foster technology upgrading and productivity improvements.

DP19149 International Policy Coordination in a Multisectoral Model of Trade and Health Policy

Viral Acharya, Zhengyang Jiang, Robert Richmond, Ernst-Ludwig von Thadden — 2024-06-09T23:00:00+0000

We analyze international trade and health policy coordination during a pandemic by developing a two-economy, two-sector trade model integrated into a micro-founded SIR model of infection dynamics. Disease transmission intensity can differ by goods (manufactured versus services and domestic versus foreign). Governments can adopt containment policies to suppress infection spread domestically, and levy import tariffs to prevent infection from abroad. The globally coordinated policy dynamically adjusts both policy instruments heterogeneously across sectors. The more-infected country aggressively contains the pandemic, raising tariffs and tilting the terms of trade in its favor, while the less-infected country lowers tariffs to share its economic pain. In contrast, in the Nash equilibrium of uncoordinated policies the more infected country does not internalize the global spread of the pandemic, lowering tariffs and its terms of trade, especially in the contact-intensive services sector, while the less infected country counters the spread by raising tariffs. Coordination therefore matters: the health-cum-trade war leads to less consumption and production, as well as smaller health gains due to inadequate global diversification of infection curves.

DP19144 The Negligible Effect of Free Contraception on Fertility: Experimental Evidence from Burkina Faso

Pascaline Dupas, Seema Jayachandran, Adriana Lleras-Muney, Pauline Rossi — 2024-06-08T23:00:00+0000

We conducted a randomized trial among 14,545 households in rural Burkina Faso to test the oft-cited hypothesis that limited access to contraception is an important driver of high fertility rates in West Africa. We do not find support for this hypothesis. Women who were given free access to medical contraception for three years did not have lower birth rates; we can reject even modest effects. We cross-randomized additional interventions to address possible inefficiencies leading to low demand for free contraception, specifically misperceptions about the child mortality rate, limited exposure to opposing views about family size and contraception, and social pressure. Free contraception did not influence fertility even in combination with these other interventions.

DP19142 Team production on the battlefield: Evidence from NATO in Afghanistan

Thiemo Fetzer, Oliver Vanden Eynde, Austin L. Wright — 2024-06-07T23:00:00+0000

Managing military operations across and between teams of partner nations remains a first-order challenge to security and development during conflict. NATO, under the umbrella of the International Security Assistance Force (ISAF), brought together troops from 28 countries to help enhance security provision in Afghanistan. ISAF units were given responsibility for specific operational units. The assignment of responsibilities to different national armed forces could lead to coordination problems. We explore whether the provision of security is affected by horizontal frictions (when different countries are responsible for different sides of borders) or vertical frictions (when different countries control different levels of the operational hierarchy). We find that both horizontal frictions and vertical frictions reduce military support activities, including aid projects. They are also associated with higher levels of insurgent violence. These findings indicate that misalignment between units within military organizations can undermine the effectiveness of security and development interventions during war, with broader implications for managing complex teams under risk.

DP19139 A Presence of Absence: The Benign Emergence of Monetary Stability

Asher Rose, Andrew Rose — 2024-06-06T23:00:00+0000

Using a panel of over 200 countries and 30 years of annual data since 1990, we find evidence of increasing durability in national monetary regimes. There are now three types of long-lived monetary systems. There have long been stable multilateral currency unions in the developing world, most notably in the Caribbean and both Western and Central Africa; the advent of EMU has (re-)introduced monetary union to the rich countries of Western Europe. A large number of mostly small countries continue to have durably fixed exchange rates. Most dramatically, inflation-targeting has emerged as a third stable monetary regime. We document the decline in monetary instability across countries and discuss some of the slowly evolving causes. Rising monetary stability and the spread of inflation targeting has had benign consequences for business cycles, inflation, real exchange rate volatility, openness, and the incidence of financial crises.

DP19140 Corporate Reorganization and the Reallocation of Labor in Bankruptcy

Diana Bonfim, Gil Nogueira — 2024-06-06T23:00:00+0000

We analyze how corporate reorganization and liquidation change labor reallocation during bankruptcy using randomized judge assignments and linked Portuguese employer-employee and firm data. Reorganization reduces the negative effect of bankruptcy on employee earnings, even with most workers leaving reorganized firms. We examine plausible mechanisms and find evidence that the retention of general skills and improved job-match quality contribute meaningfully to this effect. The average cost of labor misallocation caused by reorganization is small. However, for some workers in the least productive filers, this cost can be large, outweighing the effect on earnings.

DP19134 Heterogeneity and Aggregate Fluctuations: Insights from TANK models

Davide Debortoli, Jordi Galí — 2024-06-05T23:00:00+0000

We analyze the merits and limitations of simple tractable New Keynesian models (RANK and TANK) in accounting for the aggregate predictions of Heterogenous Agent New Keynesian models (HANK). By means of comparison of a number of nested HANK models, we investigate the role played by (i) idiosyncratic income risk, (ii) a binding borrowing constraint, and (iii) a portfolio choice between liquid and illiquid assets. We argue that the effects of household heterogeneity can be largely understood looking at the differential behavior of two types of households: hand-to-mouth and unconstrained. We find that a suitably specified and calibrated TANK model (which abstracts from idiosyncratic income risk) can capture reasonably well the aggregate implications of household heterogeneity and the main channels through which it operates. That ability increases in the presence of a policy rule that emphasizes inflation stability. In the limiting case of a strict inflation targeting policy, heterogeneity becomes irrelevant for the determination of aggregate output.

DP19135 Artificial Intelligence in the Knowledge Economy

Enrique Ide, Eduard Talamas — 2024-06-05T23:00:00+0000

This paper provides a new framework for studying the impact of Artificial Intelligence (AI) on the organization of knowledge work. We incorporate AI into an economy where humans endogenously form hierarchical firms: Less knowledgeable agents become “workers” solving routine problems, while more knowledgeable agents become “solvers” handling exceptions. We model AI as an algorithm that uses compute to mimic humans. We compare the equilibrium before and after AI’s introduction, distinguishing between “basic” AI (with knowledge equivalent to pre-AI workers) and “advanced” AI (with knowledge equivalent to pre-AI solvers). We show that basic AI increases the knowledge content of human work, leading to smaller, less productive, and less decentralized firms. In contrast, advanced AI decreases the knowledge content of human work, resulting in larger, more productive, and more decentralized firms. In any case, the most knowledgeable humans benefit from AI, while the least knowledgeable benefit only when AI is sufficiently advanced. We discuss how these effects depend on AI’s autonomy and the availability of compute.

DP19133 Keeping Up With The Jansens: Causal Peer Effects On Household Spending, Beliefs And Happiness

2024-06-04T23:00:00+0000

How strong are peer effects on the beliefs and behavior of individuals? We use a representative survey of households in the Netherlands to first elicit respondents’ perceptions about the income and debt of their peers. We then implement a randomized control trial (RCT) in which treated respondents are told about either average income or debt of individuals like them and was successful at moving respondents’ beliefs about their relative standing. We find that individuals with exogenously higher perceived relative income become more opposed to redistribution and increase the amount of time they spend socializing with peers. While we find some evidence of reallocative “keeping up with the Joneses” on spending, the quantitative magnitude is small in the months following the information experiment. When workers learn that their peers earn more than they thought, they become more likely to be employed in subsequent months. Finally, believing that one earns more than peers causally leads to large positive effects on happiness, above and beyond effects coming from spending more time with peers, changing beliefs about redistribution, or changes in spending patterns.

DP19132 The Political Economy of Industrial Policy

Réka Juhász, Nathaniel Lane — 2024-06-03T23:00:00+0000

We examine the ways in which political realities shape industrial policy through the lens of modern political economy. We consider two broad “governance constraints”: i) the political forces that shape how industrial policy is chosen and ii) the ways in which state capacity affects implementation. The framework of modern political economy suggests that government failure is not a necessary feature of industrial policy; rather, it is more likely to emerge when countries pursue industrial policies beyond their governance capacity constraints. As such, our political economy of industrial policy is not fatalist. Instead, it enables policymakers to constructively confront challenges.

DP19131 Survey-based Monetary Policy Uncertainty and its Asymmetric Effects

Tatjana Dahlhaus, Tatevik Sekhposyan — 2024-06-03T23:00:00+0000

We present empirical evidence revealing a notable asymmetry in the evolution of expectations regarding the federal funds rate. Specifically, our findings indicate that these expectations are more firmly anchored during periods of monetary tightening than episodes of monetary easing. Furthermore, we observe a gradual improvement in this anchoring phenomenon over time. We show that macroeconomic fundamentals cannot entirely explain this behavior. We then map the observed asymmetry of the forecast errors to interest rate and monetary policy uncertainty measures. We explore the macroeconomic consequences of monetary policy uncertainty. Our analysis reveals that these effects are not linear and depend on whether the economy is undergoing monetary easing or tightening. In monetary easing regimes, heightened uncertainty surrounding monetary policy tends to have a recessionary impact. Conversely, monetary policy uncertainty does not exert significant economic effects in periods of monetary tightening.

DP19130 The Inflation Accelerator

Andres Blanco, Corina Boar, Callum Jones, Virgiliu Midrigan — 2024-06-02T23:00:00+0000

We develop a tractable sticky price model in which the fraction of price changes evolves endogenously over time and, consistent with the evidence, increases with inflation. Because we assume that firms sell multiple products and choose how many, but not which, prices to adjust in any given period, our model admits exact aggregation and reduces to a one-equation extension of the Calvo model. This additional equation determines the fraction of price changes. The model features a powerful inflation accelerator – a feedback loop between inflation and the fraction of price changes – which significantly increases the slope of the Phillips curve during periods of high inflation. Applied to the U.S. time series, our model predicts that the slope of the Phillips curve ranges from 0.02 in the 1990s to 0.20 in the 1970s and 1980s.

DP19129 Risky Oil: It's All in the Tails

Christiane Baumeister, Florian Huber, Massimiliano Marcellino — 2024-06-02T23:00:00+0000

The substantial fluctuations in oil prices in the wake of the COVID-19 pandemic and the Russian invasion of Ukraine have highlighted the importance of tail events in the global market for crude oil which call for careful risk assessment. In this paper we focus on forecasting tail risks in the oil market by setting up a general empirical framework that allows for flexible predictive distributions of oil prices that can depart from normality. This model, based on Bayesian additive regression trees, remains agnostic on the functional form of the conditional mean relations and assumes that the shocks are driven by a stochastic volatility model. We show that our nonparametric approach improves in terms of tail forecasts upon three competing models: quantile regressions commonly used for studying tail events, the Bayesian VAR with stochastic volatility, and the simple random walk. We illustrate the practical relevance of our new approach by tracking the evolution of predictive densities during three recent economic and geopolitical crisis episodes, by developing consumer and producer distress indices that signal the build-up of upside and downside price risk, and by conducting a risk scenario analysis for 2024.

DP19128 How Far Can Inclusion Go? The Long-term Impacts of Preferential College Admissions

Michela Carlana, Enrico Miglino, Michela Tincani — 2024-06-02T23:00:00+0000

Affirmative action and preferential admission policies play a crucial role in fostering social mobility by bolstering the prospects of disadvantaged groups. In this paper, we analyze the long-term effects of a Chilean policy (PACE) that targets students in underprivileged schools, offering guaranteed admission to selective colleges to those graduating in the top 15 percent of their high school class. Leveraging both the randomized expansion of PACE and the admission discontinuity, our analysis reveals that PACE yields positive labor market effects for the average targeted student, especially women, driven by the selectivity of the attended colleges. However, for marginally eligible students, higher dropout rates and negative labor market outcomes emerge, suggesting PACE may induce a mismatch between their skills and the academic rigor of selective programs. Finally, we find that students in the bottom 85 percent of their schools experience positive effects on labor market outcomes. We identify equilibrium effects on local labor markets as a potential mechanism. The results suggest that there is a limit to how far preferential admissions can go while delivering on their promises.

DP19127 Negative Control Falsification Tests for Instrumental Variable Designs

Oren Danieli, Daniel Nevo, Itai Walk, Bar Weinstein, Dan Zeltzer — 2024-06-02T23:00:00+0000

We develop theoretical foundations for widely used falsification tests for instrumental variable (IV) designs. We characterize these tests as conditional independence tests between negative control variables — proxies for potential threats — and either the IV or the outcome.
We find that conventional applications of these falsification tests would flag problems in exogenous IV designs, and propose simple solutions to avoid this. We also propose new falsification tests that incorporate new types of negative control variables or alternative statistical tests. Finally, we illustrate that under stronger assumptions, negative control variables can also be used for bias correction.

DP19126 Optimal Contracts and Inflation Targets Revisited

Torsten Persson, Guido Tabellini — 2024-06-01T23:00:00+0000

We revisit the optimal-contract approach to the design of monetary institutions, in the light of the Zero Lower Bound (ZLB) on interest rates and the resort to Quantitative Easing (QE) in recent years. Four of our lessons have not yet been incorporated in the practices of inflation targeting central banks. First, the optimal contract and the implied inflation-targeting regime should condition on being at the ZLB or out of it. Second - as already argued by others - the optimal inflation target should be raised to deal with the possibility of being at the ZLB, and more so the greater the risk of being there. But this qualitative lesson does not appear to warrant major quantitative changes of inflation targets. Third, the relevance of the ZLB suggests that it may be desirable to expand central-bank mandates to encompass financial stability, broadly defined, besides price and output stability. Fourth, accountability for inflation performance is a central mechanism in a successful monetary-policy framework. How exactly to change those mechanisms in practice is a new and difficult challenge, which is at least as important as the search for optimal policy rules that has attracted so much recent attention.

DP19125 In or Out? Xenophobic Violence and Foreigner Integration. Evidence from 19th century France

Mathilde Emeriau, Stephane Wolton — 2024-06-01T23:00:00+0000

How do foreigners respond to xenophobic violence? Do they move out, leaving their home, or do they buy in, assimilating further? We develop a stylized theoretical framework to explain why exposure to violence can yield both more exits and more assimilation. We use an exogenous spike in xenophobic violence in 19th-century France and fine-grained individual data to provide causal evidence of this dual effect. We also study how foreigners' response varies with the degree of exposure to violence and their prior level of integration in the host country, highlighting the importance of thinking of foreigners as a heterogeneous group.

DP19122 Gender-Specific Transportation Costs and Female Time Use: Evidence from India’s Pink Slip Program

Yutong Chen, Kerem Cosar, Devaki Ghose, Shirish Mahendru, Sheetal Sekhri — 2024-05-31T23:00:00+0000

Reducing gender-specific commuting barriers in developing countries has complex and diverse effects on women's labor dynamics. We study a program that offers free bus rides for women in several Indian states (the Pink Slip program) using a synthetic difference-in-differences approach to shed light on labor supply and time use decisions of women. We observe decreased bus expenses and time saved on travel. Skilled employed women increase labor supply, while low-skill married women shift focus to household chores. Unemployed women intensify job searches, yet overall employment rates remain unchanged. Our findings highlight that alleviating commuting costs does not uniformly boost women's labor participation, as gender roles and societal norms continue to shape outcomes.

DP19123 Behavioral Lock-In: Aggregate Implications of Reference Dependence in the Housing Market

Cristian Badarinza, Tarun Ramadorai, Juhana Siljander, Jagdish Tripathy — 2024-05-31T23:00:00+0000

We show both empirically and theoretically that households' attachment to nominal anchors in the housing market creates aggregate nominal rigidities, with material economic consequences. A new statistic, the prevalence of “paper losses” in the stock of residential properties, is remarkably effective at explaining cross-regional variation in a range of important market outcomes. We setup and structurally estimate a dynamic search and matching model with reference-dependent agents, rich heterogeneity, and realistic financial constraints to rationalize the data and study housing-market fiscal policy. Behavioral frictions dampen the effects of transactions taxes, and increase the revenue-maximizing level of the ongoing property tax rate.

DP19124 The Dark Side of Infrastructure: Roads, Repression, and Land in Authoritarian Paraguay

Felipe Gonzalez, Josepa Miquel-Florensa, Mounu Prem, Stephane Straub — 2024-05-31T23:00:00+0000

Transportation infrastructure is associated with economic development, but it can also be used for social control and to benefit the governing elite. We explore the connection between the construction of road networks, state-led repression, and illegal land allocations in the longest dictatorship in South America: Alfredo Stroessner’s military regime in Paraguay. Using novel panel data from the truth and reconciliation commission, we show that proximity to newly constructed roads facilitated state-led repression, illegal allocation of agricultural plots to dictatorship allies, and hindered sustainable economic development in the following decades.

DP19120 Digital access and infectious disease spread

Johannes Kunz, Carol Propper, Trong-Anh Trinh — 2024-05-30T23:00:00+0000

Digital access may bring important health gains, particularly where physical infrastructure is limited. We examine the impact of internet access in Indonesia on health outcomes using the COVID-19 pandemic as a health shock. We utilize sub-national data on mobile broadband, COVID-19 spread, and an instrumental variable approach using lightning strikes as an exogenous shock to connectivity. Access to 3G internet significantly reduced the transmission of COVID-19. Areas with internet access had approximately 45\% fewer cases. Regions with higher literacy and capacity for telework benefited significantly more. These findings offer novel insights into how digital infrastructure affects public health outcomes.

DP19119 Do Politicians Affect Firm Outcomes? Evidence from Connections to the German Federal Parliament

Andre Diegmann, Laura Pohlan, Andrea Weber — 2024-05-30T23:00:00+0000

We study how connections to German federal parliamentarians affect firm dynamics by constructing a novel dataset to measure connections between politicians and the universe of firms. To identify the causal effect of access to political power, we exploit (i) new appointments to the company leadership team and (ii) discontinuities around the marginal seat of party election lists. Our results reveal that connections lead to reductions in firm exits, gradual increases in employment growth without improvements in productivity. The economic effects are mediated by better credit ratings while access to subsidies or procurement contracts are documented to be of lower importance

DP19121 Forecasting International Stock Market Variances

Geert Bekaert, Nancy Xu, Tiange Ye — 2024-05-30T23:00:00+0000

We examine 320 different forecasting models for international monthly stock return volatilities, using high frequency realized variances and the implied option variance as the predictor variables. We evaluate linear and non-linear models, and logarithmic transformed and weighted least squares estimation approaches. A logarithmically transformed Corsi (2009) model combined with the option implied variance (“lm4 log”) is robustly, across countries and time, among the best forecasting models. It also survives tests using panel models and international variables. When alternative models (such as models including negative returns) have better performance, the forecasts they generate are extremely highly correlated with those of the “lm4 log” model.