DIW Roundup

On the relation between trade and democratization

Mon, 20 Mar 2023 02:21:00 +0200

Abstract:

Whether trade can achieve societal change is a contested topic and difficult to investigate. This round-up aims at summarizing recent empirical research on this topic while focusing on democracy and democratization as an important part of societal change. No robust results for change arising from trade can be found, but there exists an inverse causality, i.e., democratization leading to more trade. Further, reciprocal causality between democratic consolidation and trade agreements is found, meaning an influence of democratic instability on free trade agreements and vice versa.

How Shocks Affect Stock Market Participation

Fri, 02 Dec 2022 11:00:00 +0200

Abstract:

While there is a broad consensus in the literature that stock ownership is associated with individual characteristics, such as wealth, income, risk preferences, and financial literacy, less is known about the dynamics of stock market participation (SMP). Major fluctuations in SMP are oftentimes related to political events, economic shocks, and technological disruptions. We discuss the literature that investigates some of these shocks, as well as personal life circumstances that determine SMP across various demographic groups. Consolidating the literature allows us to identify systematic drivers into and out of stock ownership, along with its distributional consequences. Major forces behind SMP fluctuations are changes in participation costs and benefits, risk exposure, economic policy uncertainty, income uncertainty, peer effects, and windfall gains.

The Impact of the War on the Economic Development of Ukraine

Mon, 04 Jul 2022 03:15:00 +0200

Abstract:

As of summer 2022, the war in Ukraine has lasted more than three months, caused the deaths of thousands of people, and ruined the lives of millions. It has impacted the world economy and affected Ukraine severely, ruining industries as well as causing massive migration, a decrease in household income, and an increase in the budget deficit and government debt. As the war continues, it will deepen the negative effects on the economy. We think that one of the reasons for Russia’s aggression is Ukraine’s desire to integrate into the Western world and its economic development over the last years. We believe that joint efforts of the Ukrainian government, European institutions, and civil society will help end the war and rebuild the country.

The Impact of Price Display on Financial Decisions

Fri, 07 Jan 2022 10:00:00 +0200

Abstract:

Credit decisions play an important role for the economic wellbeing of households. However, the complexity of products and varying price information display makes it hard for consumers to navigate this field. Empirical evidence has important implications for consumer protection policies, as many people fail to make optimal choices for themselves and struggle to understand credit cost information. Presenting additional information on absolute fees can help consumers to make more informed choices. This article reviews the literature on the impact of price display on financial decisions. Research from marketing and other fields provides related evidence.

Rent control effects through the lens of empirical research

Fri, 07 Jan 2022 10:00:00 +0200

Abstract:

Rent control is a highly debated social policy that has been omnipresent since World War I. Since 2010s, it has been experiencing a true renaissance, for many cities and countries facing housing shortage are desperately looking for solutions of the chronic housing shortage and direct their attention to controlling housing rents and to other restrictive policies. Is rent control useful or does it create more damage than utility? In order to answer this question, we need to know what are the effects of rent control. This study overviews a large empirical literature looking at various aspects of rent controls. We come to conclusion that rent controls are quite effective in terms of lowering housing rents or slowing down their growth, but they also lead to a wide range of adverse effects impacting both landlords and tenants.

Why are we eating so much meat?

Mon, 02 Mar 2020 04:17:00 +0200

Abstract:

There are various reasons why humans may want to reduce their consumption of meat and other animal products. In the following, we lay out important stylized facts about individual meat consumption, and then discuss the challenges and puzzles surrounding effective behavior change toward more sustainable, plant-based diets.

The Impact of Mobile Money in Developing Countries

Tue, 16 Jul 2019 11:00:00 +0200

Abstract:

Mobile money is a success story in terms of facilitating account ownership and payments in developing and emerging countries. Today, telecommunication companies offer mobile money services across more than 90 countries. The most popular services are deposits and instant digital money transfers between users. Widespread mobile money adoption is boosting financial inclusion, reducing in transaction costs and facilitating successful consumption smoothing and risk sharing among users. Nonetheless, mobile money is also associated with heterogeneous effects and risks among the poor and vulnerable populations. This article reviews the recent literature on the impact of mobile money in developing countries.

Do Default Assignments Increase Savings of the Poor? Empirical Evidence

Fri, 12 Jul 2019 11:00:00 +0200

Abstract:

Although households in developing and emerging countries are relatively poor, there is potential to save. For example, one study estimates that up to 8.1% of a poor household’s budget in such countries is spent on so-called temptation goods, like alcohol, tobacco, and festivals (Banerjee and Duflo, 2007). At the same time, many households are aware of the fact that they do not save enough. They name factors like self-control problems and family obligations as reasons why they cannot save more. In high income countries, default assignments already facilitate decision making in many areas of life. Among others, these could not just successfully increase organ donation rates (Johnson and Goldstein, 2003) but also retirement savings (Thaler and Benartzi, 2004). With the increased supply of formal financial services in the developing world, default assignments are also a promising and cost-effective tool for these households. Prominent studies on whether and how default assignments increase the savings of the poor are summarized below.

Stability Implications of Financial Interconnectedness under the Capital Markets Union

Tue, 30 Apr 2019 12:00:00 +0200

Abstract:

In the run-up to the European elections in May 2019, the European Commission is trying to advance the initiatives laid out in its action plan for a European Capital Markets Union (CMU). In order to diversify financing sources and to increase private risk sharing, the CMU aims at deepening the integration of European equity and debt markets. While there are benefits associated with more cross-border investments, the intensification of connectedness between financial market participants in the Eurozone and beyond can also engender systemic risks. This article reviews the debate about the link between capital market integration and financial stability from the perspective of interconnectedness.

Measuring the effect of foreign exchange intervention policies on exchange rates

Thu, 25 Apr 2019 11:00:00 +0200

Abstract:

Central bank intervention in foreign exchange markets is a common tool to influence exchange rates. Although central bankers are convinced of their policy’s effectiveness, econometric estimates of precise effects differ across studies. The difficulties with estimations mostly result from a lack of adequate data. This article highlights different econometric approaches that aim to mitigate estimation problems. Techniques comprise control and matching approaches, event studies, as well as the use and imputation of high-frequency data. Their comparison reveals a trade-off between clear identification of the effect and establishing its validity over a sustained period.

Innovative Business Models for Clean-techs

Wed, 14 Nov 2018 08:30:00 +0200

Abstract:

The energy transition plays a critical role in climate change mitigation, yet it is not occurring at a speed that effectively meets greenhouse gas reduction targets (IPCC, 2018). Policy makers are confronting the challenge to unlock flexibility and efficiency of energy systems. Among others, the European Commission (2016a, 2016b, 2017a, 2017b), the German Ministry of Economics and Energy BMWI (2017) and the former British Department of Energy and Climate Change DECC (2015) call for new business models (BMs) to overcome the inertia prevalent in the system.

Environmental Regulations: Lessons from the Command-and-Control Approach

Tue, 04 Sep 2018 11:00:00 +0200

Abstract:

Policy makers have long favored command-and-control (CAC) methods to tackle environmental damage. The number of CAC policies devoted to environmental protection has increased steadily since the 1950s and have been a large part of the overall portfolio of environmental laws and regulation in the industrialized world. Schmitt and Schulze (2011) document that between 1970 and 2011 the two most prevalent EU air-pollution control instruments were CAC in nature. Over 50% of the policy instruments were of the CAC type (regulatory, interventionist, and top-down), with emission limits and technical requirements playing the role of the top two. In China and India, most of the environmental legislation also take the form of explicit directives that levy restrictions on both mobile (vehicular) and stationary sources (factories and combustion plants) of pollution (see Tanaka 2014, Greenstone and Hanna 2014).

In the last two decades, there has been a notable increase in research evaluating policy and programs for environmental protection. The design of empirical studies emphasizes causal inference by comparing group of regulated (treated) firms with a comparable control group of firms that were not subject to the treatment. As a result, we now have an improved perspective on the causal effects of environmental policy instruments that address industrial pollution. This review discusses some of the implementation details of prominent CAC type regulations and highlights the lessons learned from the empirical evaluation of these initiatives.

Linking Cap-and-Trade Systems

Tue, 03 Jul 2018 12:00:00 +0200

Abstract:

Linking cap-and-trade systems promises gains in cost effectiveness and signals a strong commitment to carbon policy. Linking is also seen as one possible way of converging from regional climate policy initiatives toward a global climate policy architecture. Two linked systems have been established recently, one in Europe and one in North America. However, linking also comes with challenges, such as increased exposure to shocks originating in other parts of the linked system and a greater need for policy coordination. We first consider the benefits and challenges of linking conceptually. We then present some of the main features of the European and North American linked systems and outline the process that led to their establishment. Finally, we consider preliminary evidence on the workings of each linked system.

Regulatory differences and international financial integration

Fri, 18 May 2018 11:00:00 +0200

Abstract:

The Capital Markets Union (CMU) – an initiative of the European Commission – aims to unify and deepen capital markets across EU Member States by removing existing barriers to cross-border investment and, in particular, harmonizing financial and business regulations. However, harmonizing institutional frameworks across the EU Member States that historically have different legal traditions is difficult and requires time. This article summarizes important steps to harmonizing business and financial laws in the EU and discusses empirical and theoretical literature on the role of legal harmonization in deepening and better integrating financial markets.

The macroeconomic effects of exchange rate movements

Tue, 20 Feb 2018 02:04:00 +0200

Abstract:

The macroeconomic effects of exchange rate movements have been subject to an extensive debate in international economics. Traditionally, much of the discussion was focused on the relation between the effective exchange rate and the trade balance. However, the process of financial globalization has led to a sharp increase in foreign asset and liability positions across countries and also to a greater dispersion in foreign currency positions, with many countries being either large net creditors or net debtors in foreign currency. This has shifted the focus of the discussion from the trade balance to the external balance sheets of countries. This Roundup provides a brief overview of the literature on the macroeconomic impact of exchange rate movements.

What determines the Costs of Fiscal Consolidations?

Mon, 19 Feb 2018 12:57:00 +0200

Abstract:

Recent studies have proposed several factors that determine how fiscal consolidations affect the economy. This Roundup focuses on several of these determinants. Namely, it discusses how the composition of the consolidation measure, the state of the business cycle, the level of private indebtedness and the amount of fiscal stress during which the measure is implemented influences the consequences of austerity. It seems reasonable to consider these factors more carefully when deciding about the type and timing of fiscal consolidation plans.

Monetary Policy Normalization in the Euro Area

Tue, 30 Jan 2018 11:01:00 +0200

Abstract:

The ECB announced in October 2018 that it would begin to cut back the amount of monthly asset purchases starting January 2018 while extending the duration of the purchases until at least September 2018. At it latest Governor’s Council meeting in January 2019 it decided to remain on this track despite a sharp appreciation of the euro in the meanwhile. These steps were just two on a longer and potentially slippery path back towards standard monetary policy. Market turbulences like the so-called “Taper Tantrum”, which followed the Fed’s 2013 announcement that it was considering to cut back its asset purchasing program, have made central banks wary of the risks of premature or overly explicit announcements of monetary policy normalization. This article provides a short review of quantitative easing (QE) in the euro area since 2015 and of the debate about the right timing for terminating QE.

International Investments and Current Account Imbalances: The Importance of Valuation Changes

Thu, 07 Dec 2017 11:00:00 +0200

Abstract:

Global capital flows have strongly increased from the 1980s until the outbreak of the financial crisis. As a result of this development, Germany's foreign investment has risen to around 250 percent of gross domestic product while foreign investments in Germany have increased to about 200 percent of Germany’s gross domestic product. This positive difference between Germany’s assets and liabilities is a result of the country’s continuous current account surpluses, which represent net financial flows – the difference between outflows and inflows. Investments abroad offer investors the opportunity to diversify their savings and possibly generate higher returns than in Germany. In return, however, foreign investment also entails risks; fluctuations in price and exchange rates can lead to high losses. Potential value fluctuations on international investments are relevant for Germany. German policy advisors controversially discuss whether additional investment in domestic infrastructure or research and development would yield higher and less volatile returns than some of Germany’s foreign investments.

Capital market integration and macroeconomic stability

Fri, 17 Nov 2017 10:54:00 +0200

Abstract:

After the establishment of the Banking Union, the European Commission is working on measures to foster capital market deepening in Europe. Key goals for a European Capital Markets Union are to provide firms with alternative funding sources to bank credit and to make economies more resilient to local shocks through better international risk sharing. While open capital markets can improve portfolio diversification, growth and welfare, the recent financial crisis was a reminder that capital market integration also carries risks in terms of economic stability. This article summarizes pros and cons of capital market openness and discusses stability implications of different forms of capital market integration.

The use of financial market variables in forecasting

Wed, 15 Nov 2017 10:00:00 +0200

Abstract:

Financial market indicators can provide valuable information for forecasting macroeconomic developments. In response to the global financial crisis of 2007/2008, the role of financial variables for forecasting has been revisited, and new empirical and theoretical forecasting methods able to explicitly incorporate financial market information have been developed. This roundup discusses characteristics of financial variable movements and the relation to business cycles. It furthermore summarizes some of the new theoretical and empirical approaches at hand for forecasting macroeconomic variables with financial market information, and highlights main challenges forecasters willing to consider financial market information in forecasting exercises have to face.