The New Paradigm Papers of the Month of June

Narratives about the Macroeconomy

Peter Andre, Ingar Haaland, Christopher Roth, Johannes Wohlfart.

A new study finds that narratives about the economy vary considerably between households and economists. Over 8.000 US-American households and 100 economists were surveyed about their explanations for and expectations of inflation in the US between November 2021 and April 2022. Households tended to answer with supply-side explanations (e.g., energy prices, supply chains, labor shortage) more frequently than with demand-side factors (e.g., pent-up demand due to lockdowns, loose monetary policy, government spending). Overall, they also seemed more prone to politicized narratives such as government mismanagement and price gouging by companies. Experts responded in a more multi-faceted way and pointed to monetary and fiscal policy more frequently than households. The study also shows how narratives about inflation, e.g., in media, can shape future expectations. To gauge this effect, the researchers asked about inflation expectations after having presented different inflation narratives. In a control group, there was no such inflation framing, leading to statistically significant different outcomes. According to the authors, the experiment showed that: “Different narratives induce people to draw different conclusions from the same evidence.”

Advancing the Monetary Policy Toolkit through Outright Transfers

Sascha Buetzer

How can monetary policy become both more effective and more equitable? Sascha Buetzer proposes outright transfers (OT) as a form of helicopter money. He argues that OT could be useful in a stagnating economy when monetary policy has reached the zero-lower bound and when the transmission channels are impaired. This is particularly relevant for a currency union lacking fiscal coordination such as the European Union. Buetzer’s calculations suggest that a permanent transfer in the order of 1.5% of the ECB’s balance sheet would have the potential to boost nominal GDP by 1% (assuming a fiscal multiplier of 1 and a marginal propensity of consume of 0.8). Apart from direct transfers, OT could also take the form of central bank issued digital currencies (CBDC) or perpetual zero-coupon lending. In any case it should be contingent on the inflation rate and only be pursued by central bank which can preclude undue political influence.

Wealth and Its Distribution in Germany, 1895-2018

Thilo N. H. Albers, Charlotte Bartels, Moritz Schularick

Albers et al. provide new insights about wealth inequality in Germany for the past 125 years drawing on historical national accounts, micro data from household surveys as well as journalistic wealth rankings. The study finds a considerably higher wealth-income ratio than in official statistics. Both business wealth and real estate wealth seem to be systematically underestimated in official accounts. In parallel with the sharp increase in real estate wealth, business assets doubled in the last decade. While the real estate boom has partly benefited some of the middle-class households owning residential property during the last three decades, the share of total wealth held by the lower half of the population fell from 5% in 1978 to 2.8% in 2018. This leads the authors to conclude that “the gap between the ‘haves’ and the ‘have-nots’ has widened significantly” during the last three decades. Furthermore, the authors point out that the data quality of German aggregate household wealth data and micro data still needs to be improved.

The international comparison shows that the wealth share of the top 1% and the wealth-income ratio followed a largely similar pattern as in other Western countries: hyperinflation in the interwar period and the two World Wars acted as ‘great equalizers’. In the case of Germany, this was compounded by a wealth tax implemented as part of a larger redistribution agenda (‘Lastenausgleich’) after World War II. Since then, the top 1% wealth share has remained at around 20-25%. The wealth-income ratio also broadly followed a U-shaped evolution as in other Western countries.

The Great Carbon Arbitrage

Tobias Adrian, Patrick Bolton und Alissa M. Kleinnijenhuis

At the heels of the recent pledge of the G7 countries to phase out coal, a new study by INET Oxford suggests that switching to renewables would be economically sensible for all countries, leading to net gains in the order of 1.2% of global GDP (nearly $78 trillion). The researchers arrive at this net present value of the transition (dubbed the ‘carbon arbitrage’) by subtracting the costs, including the required expenditure into renewable energy plus compensations to coal companies for lost future earnings, from the benefits which stem from a social cost of carbon of $ 75 per ton (an estimate based on IMF 2019). In their calculations, the researchers assume a coal phase-out schedule based on the Network for Greening the Financial System’s Net Zero 2050 scenario. Furthermore, they assume that half of current global coal production will be replaced by solar and the other half by off- and on-shore wind energy.

Beyond the CO2 price, the authors argue for comprehensive state and private investment in renewables. They propose a ‘Coasian Coalition’ of governments, investors, and coal companies which should seek to ramp up global climate finance, including through public-private partnerships. Advanced economies should provide the lion’s share in line with their higher historic responsibility for global warming and companies may need to be compensated for stopping coal extraction as in the case of Germany’s coal exit. Greater awareness of the immense social costs of climate change can possibly help to solve the political economy problems that currently hinder ambitious global climate policy.

The Race Between Tax Enforcement and Tax Planning: Evidence From a Natural Experiment in Chile

Sebastian Bustos, Dina D. Pomeranz, Juan Carlos Suárez Serrato, José Vila-Belda, Gabriel Zucman

A new case study takes a closer look at how Chile implemented the OECD guidelines on transfer pricing. By adopting a new law against profit shifting by multinationals in 2011, the country went „from a laggard to a leader“ on international taxation. However, the analysis of corporate tax and customs data suggests that profit shifting was not affected by the tax reform. The authors suggest that multinationals were not incentivized to alter their tax structure and continued with tax-minimization strategies: the practice of intra-group payments for royalties, interest and services for the purpose of tax optimization did not fundamentally change despite the new law. Moreover, in interviews with transfer pricing experts, Bustos et al. found that the number of tax consultants employed by the Big 4 had experienced a 12-fold increase after 2011. The authors therefore conclude that tax authorities should factor in the role of the tax-planning industry and design reporting requirements accordingly.