DIW Roundup

Politik im Fokus

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The Dilemma or Trilemma Debate: Empirical Evidence
26 April 2016, Pablo Anaya, Michael Hachula
Roundup 95

One of the central results in international economics is that an economy cannot have at the same time independent monetary policy, free capital flows, and a fixed exchange rate. Over the last few years, however, this so-called Mundell-Flemming ‘trilemma’ has increasingly been challenged. It is argued that given the rising importance and synchronization of capital and credit flows across countries and their underlying common driving forces, the ‘trilemma’ has morphed into a ‘dilemma’: an economy cannot have at the same time independent monetary policy and an (...)

Corporate taxation, leverage, and macroeconomic stability
12 April 2016, Franziska Bremus
Roundup 93

A key challenge for economic policy today is to make the financial system more resilient. The literature finds that high indebtedness (or: leverage), both in the financial and in the real sectors, is a danger to macroeconomic stability and growth. Moreover, the design of the corporate tax system is an important determinant of leverage: in many countries interest paid on debt is tax-deductible while the return on equity is not, such that tax systems incentivize debt-type financing and, hence, leveraging. This article summarizes the debate about the implications of corporate taxation for (...)

Economic effects of uncertainty
7 April 2016, Michele Piffer
Roundup 92

This Roundup discusses the literature on the effects of uncertainty on economic activity. Uncertainty will be generally referred to as the agents’ inability to form clear expectations about the future path of relevant economic variables. After motivating the analysis from a policy perspective, the Roundup outlines the key channels through which uncertainty exerts an impact on the economy. It then discusses in an intuitive manner the challenges in empirically estimating such effect, and the recent developments in the literature.

The Paris Climate Agreement: Is It Sufficient to Limit Climate Change?
15 February 2016, Philipp M. Richter
Roundup 91

“The Paris Agreement is a monumental triumph for people and our planet” (UN News Centre, 2015). Statements, like this one from UN Secretary-General Ban Ki-Moon, represent the global excitement shortly after the acceptance of the Paris Agreement and describe the outcome of the COP21 in December 2015 primarily as ‘historical’. Twenty years after the UN’s first COP (Conference of the Parties), the international community reached “the first universal agreement in the history of climate negotiations” (French Government, 2015). Euphoria about the diplomatic (...)

Can central banks successfully lean against global headwinds?
22 December 2015, Malte Rieth
Roundup 88

Despite expansionary central bank action, inflation remains low in the euro area. How much can we expect from the additional stimulus in face of anaemic global growth and declining oil prices? More generally, have central banks lost the ability to steer inflation in a globalised world where external factors have powerful effects on domestic inflation? This roundup summarises the evidence in the literature and concludes that central banks retain influence on domestic inflation.  

Leaving coal unburned: Options for demand-side and supply-side policies
14 December 2015, Roman Mendelevitch
Roundup 87

Climate policy consistent with the 2°C target needs to install mechanisms that leave most current coal reserves unburned. Demand-side policies have been argued to be prone to adverse carbon leakage and “green paradox” effects. A growing strain of literature argues in favor of supply-side policies in order to curb future coal consumption. Various concepts with analogies in other sectors are currently discussed. Future empirical research on both demand- and supply-side policy is vital to be able to design efficient and effective policy instruments for climate change mitigation.

Climate Negotiations: What can be expected from the climate summit in Paris?
26 November 2015, Philipp M. Richter
Roundup 86

Shortly before the upcoming UN climate summit, Angela Merkel wrote in a German newspaper: “With good reason, it is expected from governments and politicians, that they do not longer close their eyes to the pressing scientific results that climate protection requires rapid and vigorous action.” She further calls for a clear negotiation outcome: “The greenhouse gas emissions do not only have to be stabilized, but have to be reduced as quickly as possible.” These words could well have been written today, however, they were actually published on March 26, 1995 (FAS, 1995); (...)

Productivity Growth, Investment, and Secular Stagnation
16 November 2015, Guido Baldi
Roundup 83

In many advanced economies, the economic recovery from the financial crisis has been sluggish. In light of these developments, it has been argued by various economists that economic growth per capita has already been on a downward trend since the 1980s. Studies suggest that this is largely due to low productivity growth. While factors of production such as labor and capital are being used more productively than ever, growth has been slow in the past years by historical standards. In parallel to this low productivity growth, corporate investment in many countries has been subdued, especially (...)

Increasing Father Involvement in Child Care: What Do We Know about Effects on Child Development?
29 September 2015, Pia S. Schober
Roundup 79

The time fathers spend and the activities they perform with children have risen continuously in most Western countries. Increasing father involvement in child care has also been an explicit policy objective with many European countries implementing individual parental leave entitlements for fathers. Whereas these policies mainly aimed at facilitating reconciliation of market work and family care and promoting maternal employment, consequences for child development have received less attention in the policy debate. This DIW Roundup describes potential mechanisms how increased father (...)

Population Ageing and Its Effects on the German Economy
22 September 2015, Dirk Ulbricht
Roundup 78

The latest long-term projection of Germany’s population implies a clear trend: even though slight growth is expected over the next decade, a decline in the future is almost inevitable. Furthermore, an ageing society combined with a low fertility rate will lead to massive shrinkage of the working-age population. What are the social and economic consequences of these developments? Is a decline in economic growth unavoidable? We present the results of the long-term population projection and summarize the various effects population ageing may have on Germany.

Global Food Security
3 August 2015, Isabel Teichmann
Roundup 76

According to the current report on the Millennium Development Goals (UN 2015), the share of undernourished people living in the developing world has fallen from 23.3% in 1990-1992 to 12.9% in 2014-2016 (projection). Despite this progress towards global food security, about 795 million people worldwide (or 780 million people in developing regions) will remain undernourished in 2014-2016 (UN 2015). Put differently, more than 10% of the world population still suffers from chronic hunger (FAO et al. 2015). Moreover, globally, one in seven children under age five are projected to be underweight in (...)

Monetary Policy and the Risk-Taking Channel
28 July 2015, Michele Piffer
Roundup 75

Before the 2007 crisis, the trade-off between output and inflation played a leading role in the discussion of monetary policy. Instead, issues relating to financial stability played a less pronounced role in shaping the stance of monetary policy and were limited to asset price dynamics. This Roundup argues that the great interest that emerged after the 2007 crisis in the effects of monetary policy on financial stability reflects the shift in attention from asset price dynamics to risk-taking incentives of financial intermediaries. The Roundup reviews the economic literature that contributed to (...)

Europe’s Mechanism for Countering the Risk of Carbon Leakage
9 July 2015, Aleksandar Zaklan
Roundup 72

The EU’s Emissions Trading System (EU ETS) is a regional cap-and-trade program in a world with no binding international climate agreement. This climate regulation may induce a relocation of production away from Europe, with potentially negative consequences for the European economy. This relocation could lead to carbon leakage, i.e. a shift of greenhouse gas emissions from Europe into regions with less stringent climate policy. In response, installations in sectors deemed to be vulnerable receive compensatory free emissions allowances. The European Commission compiles a carbon leakage (...)

Foreign Direct Investment and Economic Growth
2 July 2015, Guido Baldi, Jakob Miethe
Roundup 71

Various proposals are currently being suggested to encourage higher foreign direct investment in countries within the euro area, particularly between individual member states. The intended goal is to assist in stimulating economic growth in the euro area. Against this background, this article provides an overview of the large and heterogeneous academic literature on the influence of direct investment on economic growth. The results of the existing studies indicate that direct investment often acts as a kind of catalyst and that a positive influence on economic growth becomes more probable when (...)

Peers at Work – a Brief Overview of the Literature on Peer Effects at the Workplace and the Policy Implications
4 June 2015, Clara Welteke
Roundup 68

Individuals do not exist in isolation but are embedded within networks of relationships, such as families, coworkers, neighbors, friendships or socio-economic groups. While there is a long tradition in sociology and anthropology focusing on the importance of social structure, norms and culture, economists have long ignored social influences on individual behavior. Even though social influences may play an important role in the evaluation of policies, economic evaluations are typically focused on the central question how individuals independently respond to financial incentives. However, (...)

The Debate about Financing Constraints of SMEs in Europe
21 May 2015, Franziska Bremus
Roundup 66

Small and medium-size enterprises (SMEs) are highly dependent on bank financing, which is why they have been particularly hit by tighter credit conditions in the aftermath of the global financial crisis. Given that SMEs account for about 60% of value added and 70% of employment in the euro area, they are crucial for economic recovery. Consequently, several policy initiatives have been launched to alleviate SMEs’ financing constraints. This Roundup gives an overview of the current debate about financing obstacles of SMEs in Europe and collects policy recommendations from the economic (...)

Health consequences of childhood and adolescence shocks: Is there a “critical period”?
19 May 2015, Valeria Groppo
Roundup 65

Individual health is not only determined by genetic factors, but also by negative or positive events during the life course. For example, children exposed to natural disasters or violent conflicts are more likely to have poor health as adults. Positive external factors, such as nutritional programs, will, instead, improve individual health in the long-term. In turn, health can directly affect education and income opportunities, with macroeconomic consequences for economic growth. In particular, this Roundup investigates the following question: is there an age when shocks or interventions can (...)

Large-Scale Asset Purchases by Central Banks II: Empirical Evidence
8 April 2015, Kerstin Bernoth, Philipp König
Roundup 61

Not just since the European Central Bank announced the large-scale purchase of government bonds a few weeks ago, large-scale asset purchases have always been a controversially discussed topic. This DIW Roundup summarizes the measures that have been taken by central banks in Japan, USA and UK and the empirical evidence about the impacts of these measures on financial markets and the real economy.

Central Bank Asset Purchases I: The Theory
7 April 2015, Philipp König, Kerstin Bernoth
Roundup 60

In the face of interest rates having hit their zero lower bound in major economies, large-scale asset purchases have become an important weapon of central banks in recent years. It is, however, not clear whether and under which circumstances such policy measures produce the desired effects. This DIW Roundup provides a selective overview of theoretical research that has been devoted to understand under what conditions central bank asset purchases lead to reductions in longer-term interest rates and produce stimulating effects on the overall economy.

The Market Stability Reserve: Is Europe serious about the Energy Union?
26 March 2015, , Nils May, Karsten Neuhoff
Roundup 59

The European Union Emission Trading Scheme (EU ETS) has been implemented to provide a common climate policy instrument across European Union countries, to contribute to a credible investment perspective for low-carbon investors and support further European integration of energy markets. Thus the EU ETS is a key element of the European Energy Union. However, given the accumulation of a large surplus in the EU ETS, there is now a consensus between the European Commission, the European Council and the European Union Parliament (ENVI vote) that a Market Stability Reserve (MSR) needs to be (...)


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