The New Paradigm Papers of the Month of April

Measuring the macroeconomic responses to public investment in innovation: evidence from OECD countries

Giovanna Ciaffi, Matteo Deleidi, Mariana Mazzucato

In this recent paper, Ciaffi et al. delves into the macroeconomic consequences of government investment in Research and Development (R&D) and other fiscal policies by scrutinizing the GDP and business R&D investment multipliers. The paper employs a methodological amalgamation of the Local Projection technique with Structural Vector Autoregressive (SVAR) modeling, focusing on a dataset encompassing 15 OECD countries spanning from 1981 to 2017. The authors find that expansionary fiscal policies, including government investment in R&D, have a positive and persistent impact on GDP levels, surpassing the effects associated with more generic public expenditures. These effects hold even when considering fiscal expectations, indicating the robustness of the findings.

FULL PAPER.

Why do We Dislike Inflation?

Stefanie Stantcheva

This study investigates why people dislike inflation by conducting surveys on representative samples of the US population. The main reasons for the aversion to inflation include the belief that it diminishes purchasing power, leading to costly adjustments in budgets, especially among lower-income groups. Inflation also induces stress and a sense of unfairness, as high-income individuals’ wages are perceived to rise faster. Respondents often believe that firms prioritize profits over raising wages. Positive aspects of inflation, like reduced unemployment, are typically overlooked. Inflation is seen as a major concern, with blame placed on the government and businesses. Attitudes toward inflation vary along partisan lines and income groups.

FULL PAPER.

Long-Term Effects of Equal Sharing: Evidence from Inheritance Rules for Land

Charlotte Bartels, Simon Jäger, Natalie Obergruber

What are the lasting economic impacts of wealth distribution equality? Charlotte Bartels et al. address this question in a recent contribution, focusing on land inheritance rules in Germany. In regions where land was mandated to be equally divided among heirs, they observe higher average incomes and increased entrepreneurship today. Through a geographic regression discontinuity design, the authors find that areas with equal land division were not historically more developed, indicating that other growth drivers are consistent across boundaries. Thus, equal land distribution appears to have facilitated a transition from agrarian to industrial economies by fostering innovative industrial by-employment, ultimately leading to greater entrepreneurship in the long term.

FULL PAPER.

Destabilisation of Bank Deposits Across Destinations – Assessment and Policy Implications

Ulrich Bindseil, Richard Senner

The recent collapses of Credit Suisse, SVB, and other regional US banks have refocused attention on the rapid and substantial outflows of deposits from banks, highlighting concerns for financial stability and prompting discussions on regulatory and policy responses. Additionally, the potential introduction of Central Bank Digital Currency (CBDC) or the success of stablecoins further complicates the future of bank funding through deposits. Unlike traditional bank run analyses that often overlook where deposits may flow, this paper examines the various destinations of deposit leakages to kickstart its analysis. It delves into the mechanics of fund flows across all possible destinations, discussing current and potential future changes contributing to the observed increase in the speed and size of bank runs. The paper also outlines financial stability implications and policy options. While some factors driving deposit volatility can be addressed through policy measures, such as intensified competition among banks, others, like changes in depositor behavior, may persist. The authors conclude that bank balance sheet management and liquidity regulation must adapt to a new reality of somewhat less stable and more costly sight deposits.

FULL PAPER.

Paying Off Populism: How Regional Policies Affect Voting Behavior

Robert Gold & Jakob Lehr

This study examines how regional policies can diminish support for populist movements. It specifically focuses on the “development objective” (Objective-1) of the European Regional Development Fund (ERDF), designed to assist underdeveloped regions. Employing various methods for causal inference, the research utilizes panel data at the NUTS3 level covering elections to the EU parliament from 1999 to 2019. The findings consistently indicate that Objective-1 transfers reduce the vote share of right-wing fringe parties by approximately 2.5 percentage points, while left-wing fringe party support remains unaffected. Additionally, analyses of individual-level survey data from the Eurobarometer reveal that European Regional Policy enhances trust in democratic institutions and decreases dissatisfaction with the EU.

FULL PAPER.