Category: 2021

Anti-Money Laundering Enforcement, Banks, and the Real Economy

2021, Senay Agca, Working Papers

June 2021

Senay Agca (George Washington University)
Pablo Slutzky (University of Maryland)
Stefan Zeume (UIUC)

IIEP working paper 2021-20

Abstract: We exploit a tightening of anti-money laundering (AML) enforcement that imposed disproportionate costs on small banks to examine the effects of a change in bank composition on real economic outcomes. In response to intensified enforcement, counties prone to high levels of money laundering experience a departure of small banks and increased activity by large banks. This results in an increase in the number of small establishments and real estate prices. Consistent with a household demand channel, wages and employment increase in the non-tradable sector. Last, we document secured lending as a potential driver of this outcome.

JEL Codes: G21, G28

Key Words: Money laundering, Financial Institutions, Real economy, Deposits and lending, Financial crime

The Impact of COVID-19 on Supply Chain Credit Risk

2021, Senay Agca, Working Papers

June 2021

Senay Agca (George Washington University)
John R. Birge (University of Chicago)
Zi’ang Wang (Chinese University of Hong Kong)
Jing Wu (Chinese University of Hong Kong)

IIEP working paper 2021-19

Abstract: Global supply chains expose firms to multi-regional risks, but also provide benefits by creating a buffer against local shocks. The COVID-19 pandemic and its differential impact on different parts of the world provide an opportunity for insight into supply chain credit risk, and how operational and structural characteristics of global supply chains affect this risk. In this paper, we examine supply chain credit risk during different phases of the COVID-19 pandemic by focusing on Credit Default Swap (CDS) spreads and US-China supply chain links. CDS spreads reflect both the probability of default and expected loss given default, and are available with daily frequency, which allows the assessment of supply chain partners’ credit risk in a timely manner. We find that CDS spreads for firms with China supply chain partners increase with the economic shutdown in China during the pandemic, and the spreads go down when the economic activity resumed with the re-opening in China. We consider Swift, Even Flow (SEF) and Social Network Theories (SNT) within our context. Supporting SEF theory, we find that the impact of pandemic-related disruptions to even flow of goods and materials reflected in supply chain credit risk is mitigated for firms with lower inventory turnover and those with better ability to work with longer lead times and operating cycles. Examining supply chain structural characteristics through SNT reveals that spatial and horizontal complexity, as well as network centrality (degree, closeness, betweenness, information) mitigate the impact of supply chain vulnerabilities on supply chain credit risk.

JEL Codes: E21, E51, F23, G12, G14, G23, G32, L11

Key Words: Supply Chains, Credit Risk, CDS, COVID-19, Pandemic

Credit Shock Propagation Along Supply Chains: Evidence from the CDS Market

2021, Senay Agca, Working Papers

June 2021

Senay Agca (George Washington University)
Volodymyr Babich (GeorgetownUniversity)
John R. Birge (University of Chicago)
Jing Wu (Chinese University of Hong Kong)

IIEP working paper 2021-18

Abstract: Using a panel of Credit Default Swap (CDS) spreads and supply chain links, we observe that both favorable and unfavorable credit shocks propagate through supply chains in the CDS market. Particularly, the three-day cumulative abnormal CDS spread change (CASC) is 63 basis points for firms whose customers experienced a CDS up-jump event (an adverse credit shock). The value is 74 basis points if their suppliers experienced a CDS up-jump event. The corresponding three-day CASC values are −36 and −38 basis points, respectively, for firms whose customers and suppliers, respectively, experienced an extreme CDS down-jump event (a favorable credit shock). These effects are approximately twice as large for adverse credit shocks originating from natural disasters. Credit shock propagation is absent in inactive supply chains, and is amplified if supply-chain partners are followed by the same analysts. Industry competition and financial linkages between supply chain partners, such as trade credit and large sales exposure, amplify the shock propagation along supply chains. Strong shock propagation persists through second and third supply-chain tiers for adverse shocks but attenuates for favorable shocks.

JEL Codes: E43, E51, G12, G14, G23, G24, G32, L11, L22

Key Words: supply chains, credit risk, CDS, propagation, supply networks

A New Approach to Measuring Intercity Differences in Housing Costs

2021, Hyung Joon Chung, Nathaniel Harris, Working Papers

July 2021

Hyung Joon Chung (George Washington University)
Nathaniel Harris (George Washington University)

IIEP working paper 2021-17

Abstract: Intercity housing price indexes that rely on median house price or pooled hedonic regressions adjust imperfectly for differences in housing characteristics. In addition, intercity house price indexes that rely on asset value are a biased measure of differences in the rental price of housing, because capitalization rates vary dramatically across cities. To mitigate these shortcomings, we create Fisher Ideal intercity housing price indexes for both rental and asset prices using a two-way Oaxaca-Blinder decomposition. Our method improves upon current house price indexes by using rental rather than asset prices, controlling for location and housing characteristics, and allowing implicit prices to vary across locations.

JEL Codes: C1, R1, R3

Key Words: intercity house price indices, blinder-oaxaca decomposition, Fisher Ideal index, interarea cost of living differences

Economics and American Judaism in the 21st Century

2021, Authors, Carmel Chiswick, Working Papers

August 2021

Carmel U. Chiswick (George Washington University)

IIEP working paper 2021-16

Abstract: American Judaism is viewed from an economic perspective. Non-traditional family units and non-traditional religious practices are now persistent features of American Jewry. Incentives affecting the education, family formation and consumption patterns of American Jews are shown to have implications for patterns of Jewish observance and for the American Jewish community. Comparing US religious pluralism with Israel’s state-sponsored Rabbinate suggests stresses as well as complementarities between the two largest Jewish communities, including a rise in anti-Zionism and anti-Semitism. Forecasting the future of American Judaism is based on trends in economic conditions and changes in religious institutions affecting its cultural context. 

JEL Codes: Z12, J19, D10

Key Words: economics, demography, religion, Judaism, pluralism, consumption, value of time, cost of Judaism, Israel, anti-Semitism

Cities Without Skylines: Worldwide Building-Height Gaps and their Possible Determinants and Implications

2021, Authors, Remi Jedwab, Working Papers

August 2021

Remi Jedwab (George Washington University)
Jason Barr (Rutgers University)
Jan Brueckner (University of California)

IIEP working paper 2021-15

Abstract: There is a large literature on U.S. cities measuring the extent and stringency of land-use regulations and how regulatory and geographical constraints affect important outcomes such as housing prices and economic growth. This paper is the first to study the global extent and impact of regulatory and other constraints by estimating what we call building-height gaps. Using a novel data set on the year of construction and heights of tall buildings around the world, we compare the total height of a country’s stock of tall buildings to what the total height would have been if supply was more elastic, based on parameters from a benchmark set of countries. These gaps are larger for richer countries and for residential buildings than for commercial buildings in such countries. The gaps are driven by under-building in central areas of larger cities. These gaps are not compensated by tall building construction in peripheral areas of cities or less stringent limits on outward expansion beyond the existing boundaries of the cities. Countries with older, historic structures have larger gaps, likely due to more stringent height regulations and dispersed ownership that inhibits land assembly. Lastly, the gaps correlate strongly with international measures of housing prices, sprawl, congestion, and pollution.

JEL Codes: R3, R5, O18, O50

Key Words: International Buildings Heights; Land Use Regulations; Geographical Constraints; Housing Supply; Housing Prices; Sprawl; Congestion; Pollution

Educational Responses to Migration-Augmented Export Shocks: Evidence from China

2021, Authors, Working Papers, Yao Pan

May 2021

Yao Pan (George Washington University and Aalto University)
Jessica Leight (International Food Policy Research Institute)

IIEP working paper 2021-14

Abstract: This paper analyzes the effects of positive shocks to export-oriented industries following China’s accession to the World Trade Organization on human capital investment in urban and rural areas. Exploiting cross-county variations in the reduction in export tariff uncertainty both locally and at plausible migration destinations, we find that youth reaching matriculation age post-accession in counties experiencing a larger export shock show a lower probability of enrolling in high school. In urban areas, this effect is driven by local shocks, while in rural areas, it is primarily driven by shocks at migration destinations. Urban youth show evidence of a deterioration in labor market outcomes linked to declining matriculation rates, while there is no evidence of significant labor market effects for rural youth.

JEL Codes: F14, F16, J24, O15, O18, O19

Key Words: Export Shock, Human Capital Attainment, Urban-rural Inequality, China

Global Contagion and IMF Credit Cycles: A Lender of Partial Resort?

2021, Authors, Stephen B. Kaplan, Working Papers

July 2021

Stephen B. Kaplan (George Washington University)
Sujeong Shim (University of Wisconsin-Madison)

IIEP working paper 2021-13

Abstract: The International Monetary Fund (IMF) has an incomplete governance architecture characterized by insufficient resources to fulfill its global financial stability mandate. We argue this institutional incompleteness influences how the IMF balances tensions between systemic risks and moral hazard, and when it surprisingly exits lending relationships. During high global contagion periods, the IMF targets stabilizing systemic risks to fulfill its mandate, granting large loans and overlooking non-compliance with conditionality. However, when the IMF perceives minimal contagion risk, it focuses on moral hazard, extending smaller loans with stricter conditionality, and willingly cuts financial ties to preserve its reputation and resources for future crises. Employing a comparative case analysis of IMF decision-making for Argentina (1998-2001) and Greece (2010-2015), we find evidence supporting our theoretical priors from content analysis of IMF executive board meeting minutes, complementary archival evidence, and field research interviews. These findings have important implications for the IMF, institutionalism, and development.

JEL Codes: O1, O16, O19, 052, 054, F21, F33, F34, F42, F49, F50, F55, F60, F65

Key Words: IMF, lender of last resort, financial crises, international financial risk, contagion risk, Argentina, Greece 

Can Trade Agreements Solve the Wicked Problem of Disinformation

2021, Authors, Susan Aaronson, Working Papers

April 2021

Susan Aaronson (George Washington University)

IIEP working paper 2021-12

Abstract: Disinformation is a wicked problem. Increasingly, disinformation comes from overseas. Many nations have adopted a wide range of strategies to mitigate disinformation. This patchwork may not be effective in mitigating cross-border disinformation. Moreover, the lack of coherent approaches could also lead to trade distortions and spillover effects upon internet openness and generativity. This paper shows how policymakers might use trade agreements to govern the cross-border data flows that at times fuel disinformation. 

JEL Codes: 038, 039, F68, F53

Key Words: trade, disinformation, spam, trust 

India’s Demographic Dividend or Disaster? Mismanaged Factors of Production – Land, Labor, Infrastructure, Cities

2021, Ajay Chhibber, Authors, Working Papers

April 2021

Ajay Chhibber (George Washington University)

IIEP working paper 2021-11

Abstract: India entered its so-called demographic dividend around 2005 – expected to last until 2055. India has already utilized almost a third of the period of its demographic dividend– it saw a period of explosive growth from 2003-2012 – but has not been able to sustain that growth. And since 2012 growth has generated less and less employment, as it has turned inward, so it is not helping the working age population get usefully employed. The Labor force participation rate for women has been low and is now falling. To understand where India stands in this transformation we ask – why is India’s so dualistic? Why is so much of Indian labor not employed in the organized sector? Why does India with limited capital – and vast quantities of surplus labor invest so much in relatively capital intensive sectors? Why is land which is scarce so badly allocated ? why do most of its cities develop in an unplanned manner ? What can be done to use India’s underlying factors of production better to generate greater, more inclusive and sustained prosperity for its citizens?

JEL Codes: J0, J1, J2, J5, J6, J8, R0, R4, O1, O2

Key Words: Demographic Dividend, Labor Laws, Urban Development, Infrastructure, Logistics, Land Mis-allocation

Counterfactual Dissimilarity: Can Changes in Demographics and Income Explain Increased Racial Integration in U.S. Cities?

2021, Authors, Paul Carrillo, Working Papers

March 2021

Paul E. Carrillo (George Washington University)
Jonathan L. Rothbaum (U.S. Census Bureau)

IIEP working paper 2021-10

Abstract: Urban areas in the U.S. have experienced important changes in racial/ethnic distributions over the last two decades. In the average urban area today black-white racial integration has increased by 10.6 percent between 1990 and 2010. Changes in racial and ethnic distributions and gentrification are often associated with changes in residents’ demographic characteristics, such as income, education and age. This paper applies a non-parametric spatial decomposition technique using complete (restricted-use) microdata files from the 1990 Decennial Long Form Census and 2008-2012 American Community Surveys to assess what portion of the changes in racial distributions can be attributed to changes in individual characteristics. We find that that, on average, a little over a third of the observed increase in integration can be accounted for by changes in observed individual characteristics.

JEL Codes: C14, R23, R30

Key Words: Counterfactual Distribution, Decomposition, Spatial Econometrics

Why is India’s Financial Sector in Such Trouble: A Whodunnit?

2021, Ajay Chhibber, Authors, Working Papers

August 2021

Ajay Chhibber (George Washington University)

IIEP working paper 2021-09

Abstract: India’s financial system has never collapsed – unlike many other emerging economies. But it suffers from a deep and expanding silent crisis, which has made it one of the most inefficient and non-inclusive financial systems in the world. This paper unravels the reasons for this deep crisis – who is responsible – the regulators, populist politicians, crony capitalists and India’s fiscal dominance. It shows that all the above are culpable. It lays out the major reforms needed and argues that if deep surgery is not performed India cannot emerge as a global economic powerhouse in the 21st century and will remain stuck in a low middle-income trap.

JEL Codes: G00, G01, G18, G21, G32, G33

Key Words: Financial Crisis; Public Sector Banks; Financial Inclusion; Banking Reform

Deepening or Diminishing Ethnic Divides? The Impact of Urban Migration in Kenya

2021, Sarah Baird, Working Papers

March 2021

Eric Kramon, George Washington University
Joan Hamory, University of Oklahoma
Sarah Baird, George Washington University
Edward Miguel, University of California, Berkeley

IIEP working paper 2021-08

Abstract: The impact of urban migration on ethnic politics is the subject of long-standing debate. “First-generation” modernization theories predict that urban migration should reduce ethnic identification and increase trust between groups. “Second-generation” modernization perspectives argue the opposite: Urban migration may amplify ethnic identification and reduce trust. We test these competing expectations with a three-wave panel survey following more than 8,000 Kenyans over a 15-year period, providing novel evidence on the impact of urban migration. Using individual fixed effects regressions, we show that urban migration leads to reductions in ethnic identification; ethnicity’s importance to the individual diminishes after migrating. Yet urban migration also reduces trust between ethnic groups, and trust in people generally. Urban migrants become less attached to their ethnicity but more suspicious. The results advance the literature on urbanization and politics and have implications for the potential consequences of ongoing urbanization processes around the world.

JEL Codes:

Key Words:

The Effect of Social Connectedness on Crime: Evidence from the Great Migration

2021, Bryan Stuart, Working Papers

March 2021

Bryan A. Stuart, George Washington University

Evan J. Taylor University of Arizona

IIEP working paper 2021-07

Abstract: This paper estimates the effect of social connectedness on crime across U.S. cities from 1970 to 2009. Migration networks among African Americans from the South generated variation across destinations in the concentration of migrants from the same birth town. Using this novel source of variation, we find that social connectedness considerably reduces murders, rapes, robberies, assaults, burglaries, and motor vehicle thefts, with a 1 standard deviation increase in social connectedness reducing murders by 21% and motor vehicle thefts by 20%. Social connectedness especially reduces murders of adolescents and young adults committed during gang and drug activity

JEL Codes: K42, N32, R23, Z13

Key Words: crime, social connectedness, Great Migration

Measuring Human Development for the Anthropocene

2021, Ajay Chhibber, Working Papers

March 2021

Ajay Chhibber, (Distinguished Visiting Scholar , IIEP and Non-Resident Senior Fellow, Atlantic Council)

IIEP working paper 2021-06

Abstract: This paper makes the case for an adjusted Human Development Index (HDI) that adds sustainability, vulnerability and human security to the existing HDI components of income, health and education. It shows that these additional elements were part of the discourse in many original writings on human development. They are also central in any discourse on development today. The HDI has made progress by adding gender and inequality in its formulations, but is more reflective of the Millennium Development Goal (MDG) agenda than the more comprehensive Sustainable Development Goals (SDGs) agreed in 2015. The paper reviews existing indicators and suggests a way towards an adjusted HDI. It shows that above an HDI level of 0.8, the cut-off for very high human development, major trade-offs emerge with ecology. It argues for incorporating ecological and human security variables into the HDI, and creating a vulnerability-adjusted HDI that measures resilience to ecological, health and economic shocks, akin to the Inequality-adjusted HDI.

JEL Codes:

Key Words:

Data is Divisive: A History of Public Communications on E-commerce, 1998–2020

2021, Susan Aaronson, Working Papers

February 2021

Susan Ariel Aaronson and Thomas Struett

IIEP working paper 2021-04

Abstract: For 22 years, the members of the World Trade Organization (WTO) have been discussing how to govern e-commerce and the data that underpins it. In 2019, some 74 (now 86) nations began to negotiate e-commerce. These talks are conducted in secret and little is known about how they are progressing. However, WTO members issued a wide range of public comments on both the Work Programme on Electronic Commerce and the Joint Statement Initiative (JSI) on Electronic Commerce from 1998, when the work program began, to the present. These communications provide context as well as a window into the negotiations. Using qualitative techniques to analyze these communications, the authors found that throughout the 22-year period, member states were divided by their understanding, capacity and willingness to set rules governing e-commerce or digital trade. Members had divergent views on: whether or not to extend the moratorium on customs duties (although they have consistently extended it); how best to nurture the digital economy and what role trade agreements should play in governing it; and the ability of all WTO member states to participate effectively in these talks. Many countries had e-commerce expertise, but they did not have a wide range of firms with digital prowess. Moreover, many of the WTO member states did not have expertise governing various types of data. In short, data, digital prowess and data governance expertise were creating division among members. To bridge this divide, this paper offers three suggestions: First, donor nations should provide funds and expertise to help developing and middle-income nations build a data-driven economy. Second, digital trade/e-commerce agreements should be designed to enable more people to benefit from data-driven growth while simultaneously setting rules to govern digital trade that facilitate trust and predictability among market actors. To that end, the Digital Economy Partnership Agreement (DEPA), an agreement among New Zealand, Chile and Singapore, provides a good model of such collaboration and rule-setting. Third, as data governance has become a key issue for development, development organizations should define what comprehensive data governance looks like at the national level. Development organizations should next examine how they can help developing countries achieve flexible and technologically neutral governance. These organizations should also provide financial and technical assistance to help developing countries build data governance skill. 

JEL Codes: 

Key Words: trade, digital trade, data, development

What Do Hedonic House Price Estimates Tell Us When CAP Rates Vary?

2021, Anthony Yezer, Anthony Yezer, Paul Carrillo, Working Papers

February 2022

Paul E. Carrillo and Anthony Yezer

IIEP working paper 2021-03

Abstract: This paper demonstrates theoretically and empirically that estimated implicit prices from hedonic equations using house value do not reflect implicit willingness to pay for housing attributes unless very strong conditions are present. The argument is simple. Implicit prices obtained from rental hedonics, consistent with theory, can potentially be used to reveal the willingness to pay for current housing services. Therefore hedonic equations relating asset prices to current characteristics only reveal willingness to pay for structure and neighborhood services if cap rates (rent to value ratios) are constant. In some cases, the sign of the bias inherent in using asset rather than rental prices can be anticipated. Some rules and tests for situations where cap rates are constant are developed. At a minimum some of these checks for variation in cap rates should be implemented before using asset price hedonics to measure the current flow of housing services.

Key Words: Hedonic models, implicit markets, capitalization rate, environmental valuation

India’s Interventionist State: Reduce Its Scope and Improve Its Capability

2021, Ajay Chhibber, Working Papers

January 2021

Ajay Chhibber, (Distinguished Visiting Scholar , IIEP and Non-Resident Senior Fellow, Atlantic Council)

IIEP working paper 2021-02

Abstract: This paper lays out a two-part strategy to improve the effectiveness of the state in India reduce the scope of the state and then improve its capability. It argues that the state tries to do too many things and ends up doing many of them badly. It must reduce its scope and change the way it does things – reduce their complexity. It must also strengthen the capabilities of the state institutions – especially those dealing with administrative functions and rule of law. The state must also build up the capability of local administration and increase its financing. It must also get out of the business of business by privatizing state -owned enterprises. 

JEL Codes: H00, H2,H4, H5,H7, H11

Key Words: Role of the State, State-Owned Enterprises, Devolution, State Capability

Farm Protests in India: A new menu needed

2021, Ajay Chhibber, Working Papers

March 2021

Ajay Chhibber (George Washington University)

IIEP working paper 2021-01

Abstract: While the world has changed, India’s farm policy is stuck in a 50-year-old mindset. India’s response to food shortages in the 1960’s was to establish a mix of price (procurement, ration, and minimum support prices MSP’s) and non-price policies – irrigation, high yielding seed, subsidised fertiliser – which led a green revolution in cereals and a complex system of procuring and selling this grain through the Food Corporation of India and the Public Distribution System. But this system has outlived its usefulness for India but changing it is not easy as those whose livelihoods depend on it are unwilling to risk any changes as the farm protests show. This paper examines the issues behind the farm protests and suggests ways forward for India’s farm policy. 

JEL Codes: Q1,Q2,O1,O2,O3

Key Words: Farm protests, structural transformation, green revolution, farm price policy, farm subsidies 

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