Cambridge Working Papers in Economics (CWPE)

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Cambridge Working Papers in Economics (CWPE) is a new series of papers from the Faculty of Economics and the Department of Applied Economics. It supersedes the DAE Working Paper series.

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Please note the Working Papers often represent early stages in the presentation of research findings, and should not be quoted without permission.

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Now showing 1 - 20 of 1805
  • ItemOpen Access
    The Effects of the LIBOR Scandal on Volatility and Liquidity in LIBOR Futures Markets
    (Faculty of Economics, University of Cambridge, 2023-01-09) Bachmair, K.
    In 2008, first suspicions arose that the London Interbank Offered Rate (LIBOR) had been systematically manipulated by financial institutions involved with its fixing; in June 2012, several major international banks officially admitted to this. The regulatory response could not have been stronger: the LIBOR was not just reformed but discontinued altogether.

    By studying 3-months LIBOR futures, this paper evaluates the consequences four scandal-related events have had on liquidity and volatility in LIBOR markets. The goal is to document the market disruption, or lack thereof, caused by the manipulation and discontinuation and to draw the relevant policy lessons. One finding is that the liquidity outflows necessitated by the discontinuation and the associated volatility increases were confined to a period of a few weeks before the discontinuation, easing potential concerns that market transitions of the scale of LIBOR could only be done at the cost of major and prolonged disruption.
  • ItemOpen Access
    Short and Variable Lags
    (Faculty of Economics, University of Cambridge, 2023-03-02) Buda, G.; Carvalho, V. M.; Corsetti, G.; Duarte, J. B.; Hansen, S.; Moura, A. S.; Ortiz, A.; Rodrigo, T.; Rodríguez Mora, J. V.; Alves da Silva, G.
    We study the transmission of monetary policy shocks using daily consumption, corporate sales and employment series. We find that the economy responds at both short and long lags that are variable in economically significant ways. Consumption reacts in one week, reaches a local trough in one quarter, recovers, and declines again after three quarters. Sales follow a similar pattern, but the initial drop, while delayed (one month), is deeper. In contrast, employment falls monotonically for five quarters albeit with a smaller impact reaction. We show that these short lags are masked by time aggregation at lower —quarterly— frequencies.
  • ItemOpen Access
    Tails of Foreign Exchange-at-Risk (FEaR)
    (Faculty of Economics, University of Cambridge, 2023-06-07) Ostry, D. A.
    I build a model in which speculators unwind carry trades and hedgers fly to relatively liquid U.S. Treasuries during global financial disasters. The net effect of these flows produces an amplified U.S. dollar appreciation against high-yield currencies in disasters and a dampened depreciation, or even an appreciation, against low-yield ones. I verify this prediction by examining deviations from uncovered interest parity (UIP) within a novel quantile-regression framework. In the tail quantiles, I show that interest differentials predict high-yield currencies to suffer depreciations ten times as large as suggested by UIP, while spikes in Treasury liquidity premia meaningfully appreciate the dollar regardless of the U.S. relative interest rate. A complementary analysis of speculators’ and hedgers’ currency futures positions substantiates my model’s mechanism and highlights that hedging agents imbue the U.S. dollar with its unique safe-haven status.
  • ItemOpen Access
    Heterogeneous Autoregressions in Short T Panel Data Models
    (Faculty of Economics, University of Cambridge, 2023-05-06) Pesaran, M. H.; Yang, L.
    This paper considers a first-order autoregressive panel data model with individual specific effects and a heterogeneous autoregressive coefficient. It proposes estimators for the moments of the cross-sectional distribution of the autoregressive coefficients, with a focus on the first two moments, assuming a random coefficient model for the autoregressive coefficients without imposing any restrictions on the fixed effects. It is shown that the standard generalized method of moments estimators obtained under homogeneous slopes are biased. The paper also investigates conditions under which the probability distribution of the autoregressive coefficients is identified assuming a categorical distribution with a finite number of categories. Small sample properties of the proposed estimators are investigated by Monte Carlo experiments and compared with alternatives both under homogenous and heterogeneous slopes. The utility of the heterogeneous approach is illustrated in the case of earning dynamics, where a clear upward pattern is obtained in the mean persistence of earnings by the level of educational attainments.
  • ItemOpen Access
    The Historical Importance of Growth and Inflation in Reducing High UK Public Debt Ratios
    (Faculty of Economics, University of Cambridge, 2023-05-23) Brooks, D.; Needham, D.
    This paper employs an extended accounting framework to estimate the role of real GDP growth and inflation in reducing the UK public debt to GDP ratio following the Napoleonic Wars and the two World Wars. Traditional debt accounting methods do not quantify the impact of growth on the budget balance and therefore underestimate the importance of growth. The extended accounting framework captures the impact of growth on the budget balance. Applying the extended approach to the UK shows that growth matters more than previously acknowledged in reducing the historical public debt ratio, especially following the Second World War. Inflation following the Second World War had a sizable but lesser impact on the debt ratio compared to real growth.
  • ItemOpen Access
    Industrial cyberespionage in research and development races
    (Faculty of Economics, University of Cambridge, 2023-04-27) Stupak, O.
    This paper examines a dynamic R&D race in which competitors can conduct cyberespionage against each other. We develop a framework that analyses the influence of cyberespionage on innovative incentives, companies’ payoffs and the quality of the end product. We demonstrate that industrial espionage has an ambiguous influence on the overall investments exerted in the race and companies’ expected payoffs and might even be beneficial for the quality of innovative end-products under certain circumstances.
  • ItemOpen Access
    On the Black-White Gaps in Labor Supply and Earnings over the Lifecycle in the US
    (Faculty of Economics, University of Cambridge, 2023-04-17) Rauh, C.; Valladares-Esteban, A.
    In the US economy, Black men, on average, receive lower wages than White men, and the difference increases over the working life. The employment rate and the number of hours worked are also lower for Blacks, but the gap is nearly constant. Together these facts suggest that on-the-job human capital accumulation might explain the diverging wages. However, the wage gap and its evolution over the lifecycle cannot be explained by differences in accumulated experience or educational attainment for the cohort we analyze. Instead, the combination of experience and test scores measured at ages 17-22 accounts for the wage gap and its growth. We propose an on-the-job human capital accumulation model with heterogeneity in the initial human capital endowment and the lifelong ability to accumulate human capital, and endogenous labor supply at the extensive and intensive margins to explain the evolution of the Black-White wage gap over the lifecycle. We discipline the distribution of the ability to accumulate human capital using the power of test scores to predict earnings growth in the data. We find that if the pre-market distributions were the same for Blacks and Whites, the racial gap in hourly earnings would be closed by 84%, with the remaining gap opening throughout life due to higher labor supply amongst White men. That is, the unequal conditions with which men in the two groups enter the labor market are likely to be the key determinant of the differences over the lifecycle.
  • ItemOpen Access
    Cointegration without Unit Roots
    (Faculty of Economics, University of Cambridge, 2023-04-12) Duffy, J.; Simons, J.
    It has been known since Elliott (1998) that standard methods of inference on cointegrating relationships break down entirely when autoregressive roots are near but not exactly equal to unity. We consider this problem within the framework of a structural VAR, arguing this it is as much a problem of identification failure as it is of inference. We develop a characterisation of cointegration based on the impulse response function, which allows long-run equilibrium relationships to remain identified even in the absence of exact unit roots. Our approach also provides a framework in which the structural shocks driving the common persistent components continue to be identified via long-run restrictions, just as in an SVAR with exact unit roots. We show that inference on the cointegrating relationships is affected by nuisance parameters, in a manner familiar from predictive regression; indeed the two problems are asymptotically equivalent. By adapting the approach of Elliott, Müller and Watson (2015) to our setting, we develop tests that robustly control size while sacrificing little power (relative to tests that are efficient in the presence of exact unit roots).
  • ItemOpen Access
    The Impact of Qualitative Reviews on Racial Statistical Discrimination: Evidence from Airbnb
    (Faculty of Economics, University of Cambridge, 2023-03-22) Morris, J.
    This paper analyses the effect of qualitative reviews on racial statistical discrimination. Using a fine-tuned Bidirectional Encoder Representations from Transformers (BERT) language model that was developed specifically for this task, I include the effects of recent qualitative reviews on the log listing price difference between Black and White hosts on Airbnb. For properties without guest reviews, I find a 4% log listing price difference between Black and White hosts for comparable properties. Once review information becomes available, this pricing difference reduces to 1%, providing evidence against the persistence of racial listing price differences on Airbnb, and furthermore, suggesting that race is used as the primary signal of property quality only in the absence of better information. Beyond its applications within the context of Airbnb, this paper aims to explain how the early provision of detailed qualitative information can reduce the effects of statistical discrimination against minorities.
  • ItemOpen Access
    Understanding Program Complementarities: Estimating the Dynamic Effects of Head Start with Multiple Alternatives
    (Faculty of Economics, University of Cambridge, 2023-03-20) Chan, M.; Dalla-Zuanna, A.; Liu, K.
    We use experimental data from the Head Start Impact Study to examine the effect of sequential participation in childcare programs on cognitive outcomes. Using a sequential threshold model, which accounts for selection beyond initial randomization, we estimate causal returns to program sequences, including joint and cross returns across skill investment programs. We then estimate a dynamic structural model as a juxtaposition and evaluate a counterfactual policy reform which limits individuals to one year of Head Start. Our results support Head Start implementation earlier in life, and support engaging low-ability children with center-based care and high-ability children with some home care.
  • ItemOpen Access
    The Decline of Routine Tasks, Education Investments, And Intergenerational Mobility
    (Faculty of Economics, University of Cambridge, 2023-03-20) Bennett, Patrick; Liu, Kai; Salvanes, Kjell G
    How does a large structural change to the labor market affect education investments made at young ages? Exploiting differential exposure to the national decline in routine-task intensity across local labor markets, we show that the secular decline in routine tasks causes major shifts in education investments of high school students, where they invest less in vocational-trades education and increasingly invest in college education. Our results highlight that labor demand changes impact inequality in the next generation. Low-ability and low-SES students are most responsive to task-biased demand changes and, as a result, intergenerational mobility in college education increases.
  • ItemOpen Access
    Pulled-in and Crowded-out: Heterogeneous Outcomes of Merit-based School Choice
    (Faculty of Economics, University of Cambridge, 2023-03-20) Dalla-Zuanna, A.; Liu, K.; Salvanes, K.
    We analyze the effect of reforming the high school admission system from a residence based allocation to a merit-based allocation. The merit-based system generates oversubscribed schools, which favor high-GPA students at the expense of displacing low-GPA ones. We use the potential outcomes framework to analyze the effect of the reform, separating the effects for those gaining access to competitive schools from those losing access and identifying these parameters by using the reform as an instrument within subpopulations defined by admission cutoffs and GPA. The small and negative overall effect of the reform hides large negative effects for the crowded-out students.
  • ItemOpen Access
    Health Insurance and Agricultural Investments: Evidence from Rural Thailand
    (Faculty of Economics, University of Cambridge, 2023-03-20) Liu, K.; Prommawin, B.; Schroyen, F.
    Exploiting the 2001 universal health insurance reform in Thailand as a source of identification, we estimate the effects of health insurance coverage on agricultural production decisions and welfare. Our estimates suggest that the reform led to long-run increases in total cultivation investments and output, and that households shifted their cultivation portfolio towards riskier crops. We explain these findings using a model of agricultural investment, highlighting the important roles of health insurance in terms of mitigating background medical expenditure risk and improving health. We also find that the reform improved households’ welfare by reducing debts and defaults on loans.
  • ItemOpen Access
    Ricardo was surely right: the abundance of “easy” rents leads to greedy and lazy elites. Rentier-capitalism as an exercise in “non-creative” destruction. A tribute to Geoff Harcourt
    (Faculty of Economics, University of Cambridge, 2023-03-17) Palma, J. G.
    Paul Krugman once said that two of the greatest analytical challenges of economic theory today (comparable to those faced by Keynes in the 1930s) were the huge deterioration of market inequality in high-income countries, and Latin America’s underperformance. The main aim of this paper is to tackle simultaneously both challenges, while adding a third: the post-1980 underperformance of advanced Western economies. This article tries to answer these three puzzles returning to the classics, especially Ricardo. For him, the original sin of capitalism is that it will always have rentiers lurking around in search of “easy” rents; and that under certain conditions, in a laissez-faire economy they are bound to get the upper hand. If so, they would transform capitalism into a self-destructing rentier paradise. In other words, what has happened in the West (North and South of the Equator) since their 1980s neo-liberal reforms are basically facets of one and the same phenomenon: the inequality augmenting, investment weakening and productivity-growth retarding impact of a specific type of rentier-based accumulation. And the key link between them is the negative impact that a rentier-based increased in inequality can have on investment. If so, Krugman’s puzzle would not really be much of a mystery after all! So, perhaps what’s needed now is to develop a “post”-Ricardian perspective, where the “post” is about devising mechanisms that could “compel” rentiers to use their rents productively ―something unthinkable in Ricardo’s time! Otherwise, the current process of “rentierisation” ―of which financialisation is just one (although leading) aspect― is bound to continue being as toxic for inequality, investment and productivity growth as for our democracy.
  • ItemOpen Access
    Status Substitution and Conspicuous Consumption
    (Faculty of Economics, University of Cambridge, 2023-03-13) Ghiglino,C.; Langtry, A.
    This paper adapts ideas from social identity theory to set out a new framework for modelling conspicuous consumption. Notably, this approach can explain two stylised facts about conspicuous consumption that initially seem at odds with one another, and to date have required different families of models to explain each: (1) people consume more visible goods when their neighbours’ incomes rise, but (2) consume less visible goods when incomes of those with the same race in a wider geographic area rise. The first fact is typically explained by ‘Keeping up with the Joneses’ models, and the second by signalling models. Our model also explains related features of conspicuous consumption: that the rich are more sensitive to others’ incomes than the poor, and that the effect of income inequality on consumption differs qualitatively across groups. Importantly, it explains this fourth stylised fact without falling back on differences in preferences across groups, as required in other models. In addition, our model delivers new testable predictions regarding the role of network structure and income inequality for conspicuous consumption.
  • ItemOpen Access
    When Did Growth Begin? New Estimates of Productivity Growth in England from 1250 to 1870
    (Faculty of Economics, University of Cambridge, 2023-03-07) Bouscasse, P.; Nakamura, E.; Steinsson, J.
    We provide new estimates of the evolution of productivity in England from 1250 to 1870. Real wages over this period were heavily influenced by plague-induced swings in the population. We develop and implement a new methodology for estimating productivity that accounts for these Malthusian dynamics. In the early part of our sample, we find that productivity growth was zero. Productivity growth began in 1600—almost a century before the Glorious Revolution. We estimate productivity growth of 3% per decade between 1600 and 1760, which increased to 6% per decade between 1770 and 1860. Our estimates attribute much of the increase in output growth during the Industrial Revolution to a falling land share of production, rather than to faster productivity growth. Our evidence helps distinguish between theories of why growth began. In particular, our findings support the idea that broad-based economic change preceded the bourgeois institutional reforms of 17th century England and may have contributed to causing them. We estimate relatively weak Malthusian population forces on real wages. This implies that our model can generate sustained deviations from the “iron law of wages” prior the Industrial Revolution.
  • ItemOpen Access
    Superstar Teams: The Micro Origins and Macro Implications of Coworker Complementarities
    (Faculty of Economics, University of Cambridge, 2022-12-15) Freund, L. B.
    This paper proposes a model of the firm as a “team assembly technology,” with the aim of explaining why differences between firms represent a large and growing dimension of wage inequality. In the model, firms assign tasks to workers who vary in overall quality and task specific skills. Hiring takes place in a frictional labor market. Worker-task specialization not only reinforces the potential gains from team production, but also endogenously generates coworker complementarity: the quality of the least capable team member disproportionately influences joint output. In equilibrium, therefore, employers hire workers of similar quality and those with superstar teams pull away in terms of productivity and pay. The key model mechanisms are validated using rich administrative micro data. A theory-informed measure of coworker complementarity doubles from the mid-1980s to the 2010s, mirroring a shift towards greater task complexity. According to a structural estimation exercise, this rise explains close to 40% of the empirically observed increase in the between-firm share of wage inequality in Germany. Additionally, the model sheds light on how the interaction between specialization and labor market frictions influences total factor productivity.
  • ItemOpen Access
    Markets and Markups: A New Empirical Framework and Evidence on Exporters from China
    (Faculty of Economics, University of Cambridge, 2018-02-13) Geraci, M. V.; Corsetti, G.; Han, L; Crowley, M.; Song, H.
    Exporting firms frequently change the set of foreign markets they serve: changes in the pattern of destinations for a firm's product convey information on unobservable factors affecting pricing and market participation. Building on this insight, we show how to construct a "trade-pattern" fixed effect estimator that helps reduce omitted variable and selection biases in analyses of pricing-to-market. Using this estimator and a new product classification, we document substantial markup elasticities to the exchange rate among exporters of highly differentiated goods, accounting for half of China's exports. Conversely, we find little evidence of pricing-to-market in the trade of less differentiated goods.
  • ItemOpen Access
    Contract Design for Storage in Hybrid Electricity Markets
    (Faculty of Economics, University of Cambridge, 2023-03-06) Billimoria, F.; Simshauser, P.
    Challenges to the term financing of standalone storage in energy-only electricity markets relate to the difficulty of obtaining long-tenor contracts given multiple volatile revenue streams. Government and central agency-initiated contracting and procurement of storage has garnered interest as a means of catalysing adoption and learning curve effects, particularly given the required scale and pace of the decarbonisation objective. Given the complexity of storage operations and multiple streams of value, standard contract forms are yet to emerge. While there is flexibility in the design of forward contract arrangements, flow on effects of design on incentive compatibility in dispatch, risk-trading and investment represent a critically important avenue of investigation. This article establishes six principles for government-initiated contracting and examines the incentive compatibility of storage contract designs. We find that that preferences for structural simplicity in contract design could introduce incentive incompatibility without careful consideration of the interactions between storage operations and investment.
  • ItemOpen Access
    Exchange Rates, Tariffs and Prices in 1930s’ Britain
    (Faculty of Economics, University of Cambridge, 2023-02-21) Chadha, J. S.; Lennard, J.; Solomou, S.; Thomas, R.
    This paper investigates the degree of pass-through from import prices and tariffs to wholesale prices in interwar Britain using a new high-frequency micro data set. The main results are: (i) Pass-through from import prices and tariffs to wholesale prices was economically and statistically significant. (ii) Despite devaluation, import prices exacerbated deflation in the early 1930s because of the global slump in export prices. (iii) Rising protection, however, was a mild stimulus to prices during the shift to inflation.
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