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We study risk taking in a panel of subjects in Wuhan, China - before, during the COVID-19 crisis, and after the country reopened. Subjects in our sample traveled for semester break in January, generating variation in exposure to the virus and quarantine in Wuhan. Higher exposure leads subjects to reduce planned risk taking, risky investments, and optimism. Our findings help unify existing studies by showing that aggregate shocks affect general preferences for risk and economic expectations, while heterogeneity in experience further affect risk taking through beliefs about individuals’ own outcomes such as luck and sense of control.
JEL Classification: G50, G51, G11, D14, G41
The authors embed human capital-based endogenous growth into a New-Keynesian model with search and matching frictions in the labor market and skill obsolescence from long-term unemployment. The model can account for key features of the Great Recession: a decline in productivity growth, the relative stability of inflation despite a pronounced fall in output (the "missing disinflation puzzle"), and a permanent gap between output and the pre-crisis trend output.
In the model, lower aggregate demand raises unemployment and the training costs associated with skill obsolescence. Lower employment hinders learning-by-doing, which slows down human capital accumulation, feeding back into even fewer vacancies than justified by the demand shock alone. These feedback channels mitigate the disinflationary effect of the demand shock while amplifying its contractionary effect on output. The temporary growth slowdown translates into output hysteresis (permanently lower output and labor productivity).
Occasionally binding constraints have become an important part of economic modelling, especially since western central banks see themselves (again) constraint by the so-called zero lower bound (ZLB) of the nominal interest rate. A binding ZLB constraint poses a major problem for a quantitative-structural analysis: Linear solution methods do no work in the presence of a non-linearity such as the ZLB and existing alternatives tend to be computationally demanding. The urge to study macroeconomic questions related to the Great Recession and the Covid-19 crisis in a quantitative-structural framework requires algorithms that are not only accurate, but that are also robust, fast, and computationally efficient.
A particularly important application where efficient and fast methods for occasionally binding constraints (OBCs) are needed is the Bayesian estimation of macroeconomic models. This paper shows that a linear dynamic rational expectations system with OBCs, depending on the expected duration of the constraint, can be represented in closed form. Combined with a set of simple equilibrium conditions, this can be exploited to avoid matrix inversions and simulations at runtime for signifcant gains in computational speed.
Central banks sometimes evaluate their own policies. To assess the inherent conflict of interest, the authors compare the research findings of central bank researchers and academic economists regarding the macroeconomic effects of quantitative easing (QE). They find that central bank papers report larger effects of QE on output and inflation. Central bankers are also more likely to report significant effects of QE on output and to use more positive language in the abstract. Central bankers who report larger QE effects on output experience more favorable career outcomes. A survey of central banks reveals substantial involvement of bank management in research production.
Empirical estimates of equilibrium real interest rates are so far mostly limited to advanced economies, since no statistical procedure suitable for a large set of countries is available. This is surprising, as equilibrium rates have strong policy implications in emerging markets and developing economies as well; current estimates of the global equilibrium rate rely on only a few countries; and estimates for a more diverse set of countries can improve understanding of the drivers. The authors propose a model and estimation strategy that decompose ex ante real interest rates into a permanent and transitory component even with short samples and high volatility. This is done with an unobserved component local level stochastic volatility model, which is used to estimate equilibrium rates for 50 countries with Bayesian methods.
Equilibrium rates were lower in emerging markets and developing economies than in advanced economies in the 1980s, similar in the 1990s, and have been higher since 2000. In line with economic integration and rising global capital markets, synchronization has been rising over time and is higher among advanced economies. Equilibrium rates of countries with stronger trade linkages and similar demographic and economic trends are more synchronized.
With the second wave of the Covid-19 pandemic in full swing, banks face a challenging environment. They will need to address disappointing results and adverse balance sheet restatements, the intensity of which depends on the evolution of the euro area economies. At the same time, vulnerable banks reinforce real economy deficiencies. The contribution of this paper is to provide a comparative assessment of the various policy responses to address a looming banking crisis. Such a crisis will fully materialize when non-performing assets drag down banks simultaneously, raising the specter of a full-blown systemic crisis. The policy responses available range from forbearance, recapitalization (with public or private resources), asset separation (bad banks, at national or EU level), to debt conversion schemes. We evaluate these responses according to a set of five criteria that define the efficacy of each. These responses are not mutually exclusive, in practice, as they have never been. They may also go hand in hand with other restructuring initiatives, including potential consolidation in the banking sector. Although we do not make a specific recommendation, we provide a framework for policymakers to guide them in their decision making.
Following the financial crash and the subsequent recession, European policymakers have undertaken major reforms regarding the European Economic and Monetary Union (EMU). Yet, the success rate is mixed. Several reform proposals have either completely failed due to opposition forces or are still pending, sometimes for years. This article provides an overview of reforms in four major policy fields: financial stabilisation, economic governance, fiscal solidarity, and cooperative dissolution. Building on the conceptual foundation of policy analysis, it distinguishes between policy outputs and outcomes. Policy output refers to legislation being adopted or agreement on treaty changes, while policy outcomes depict the result from the implementation process.
This policy white paper shows, using data on European Commission (EC) lobby meetings, that financial institutions and finance trade associations have substantial access to EC policymakers. While lobbying could transfer policy-relevant information and expertise to policymakers, it could also result in the capture of policymakers by the industry, which could harm consumers and taxpayers. How could policymakers prevent regulatory capture, but retain the benefits of the sector expertise in policy decisions? Awareness of regulatory capture by policymakers is one of the most important remedies. This paper provides an overview of the origins of the regulatory capture theory and recent academic evidence. The paper shows that regulatory capture could emerge in a variety of institutions and policy areas but is not ubiquitous and depends on the incentives of policymakers and the policy environment. Subsequently, the paper discusses various measures to prevent regulatory capture, such as more transparency, diverse expert groups, and cooling-off periods.
The working paper reflects on the status that "sciences" have held at different points in time, and on the normative orders found in scientific works, as well as on the normative orders imposed by the sciences of a particular place and time on their environment. The latter is also suggested by recent developments concerning the influence (or lack thereof) of scientists on daily life and politics. The paper touches on several fundamental issues in the history of science as a discipline that have been or are still being intensely debated.
“Right to Buy” (RTB), a large-scale natural experiment by which incumbent tenants in public housing could buy properties at heavily-subsidised prices, increased the UK homeownership rate by over 10 percentage points between 1980 and the late 1990s. This paper studies its impact on crime, showing that RTB generated significant reductions in property and violent crime that persist up to today. The behavioural changes of incumbent tenants and the renovation of public properties were the main drivers of the crime reduction. This is evidence of a novel means by which subsidised homeownership and housing policy may contribute to reduce criminality.