Highlights 2023

WP 23/06

In “Common Components Structural VARs” Marco Lippi, together with Mario Forni, Luca Gambetti and Luca Sala, provide a systematic study of a new approach to Structural Macroeconometric analysis. The paper starts by showing how Structural VARs are non robust with respect to the choice of variables. This is explained by measurement errors and deficient information sets. The paper proposes to replace the observed variables by their common components, estimated in a High-Dimensional Dynamic Factor Model. Consistency of this procedure is proved. Moreover, in an application to monetary policy shocks, the CC-SVAR results are robust and well-known puzzles disappear.

WP 23/05

In "The intergenerational transmission of higher education: Evidence from the 1973 coup in Chile" Mounu Prem, together with María Angélica Bautista, Felipe González, Luis R. Martínez, and Pablo Muñoz, studies the transmission of higher education across generations using the arrival of the Pinochet dictatorship to Chile in 1973. Pinochet promoted a large contraction in the number of seats available for new students across all universities. Using census data, we find that parents who reached college age shortly after 1973 experienced a sharp decline in college enrollment. Decades after democratization, we observe that their children are also less likely to enroll in higher education. The results imply large and persistent downstream effects of educational policies over more than half a century.

WP 23/04

In "Peaceful Entry: Entrepreneurship Dynamics during Colombia's Peace Agreement" Mounu Prem, together with Carolina Bernal, Juan F. Vargas, and Mónica Ortiz studies entrepreneurship dynamics during the recent peace agreement in Colombia. In general, the end of internal conflicts is often shaped by political uncertainty and threats of violence recurrence. This implies that the effects of conflict termination on economic activity and specifically entrepreneurship can go in either direction, and we know little about this relationship. We study Colombia’s recent peace agreement with the FARC guerrilla, where we document that dynamics of entrepreneurship in traditionally violent areas closely mapped the politics that surrounded the peace agreement. When the agreement was imminent after a 5-decade conflict and violence had plummeted, local investors from all economic sectors established new firms and created jobs. Instead, when the agreement was rejected in a referendum, the party that promoted this rejection rose to power, and violence re-escalated, the rate of firms’ creation rapidly reversed.

WP 23/03

In "Managers' Productivity and Recruitment in the Public Sector" Mounu Prem, together with Pablo Muñoz study how a civil service reform in Chile changed the effectiveness of a vital group of public sector managers: school principals. They start by constructing a measure of principal effectiveness based on students’ performance. Then, they evaluate the effect of the reform on principal effectiveness by comparing public schools that experienced a principal turnover to turnovers in publicly funded but privately run schools. They find that public schools appointed more effective managers and improved their students’ outcomes after increasing the competitiveness and transparency of their selection process.

WP 23/02

In “Refining Public Policies with Machine Learning: The Case of Tax Auditing”, Luigi Guiso, together with Marco Battaglini, Eleonora Patacchini, Chiara Lacava and Douglas L. Miller, studies how ML techniques can be used to improve tax-auditing efficiency using administrative data without the need for randomized audits. It uses Italy's population data on sole proprietorship tax returns and audits and offers a new approach that addresses the challenge that predictions must be trained on human-selected data. The key finding is that there are substantial margins for raising revenue from audits by improving the selection of taxpayers to audit with Machine Learning. Replacing the 10% least promising audits with an equal number selected by the algorithm increases detected tax evasion by as much as 38%, and evasion that is actually paid back by 29%. Gains remain large even if the algorithm suggested audits are restricted to taxpayers in specific income groups or industrial sectors.

WP 23/01

In “How much and how fast do investors respond to equity premium changes? Evidence from wealth taxation”, Luigi Guiso, together with Andreas Fagereng and Marius Ring, investigates how individual investors respond to predicable changes in the equity premium. The paper exploits a wealth tax reform that first induced an equity premium and later reversed to track individual investor responses. Using administrative data on Norwegian investors’ portfolios, the paper documents strong but slow portfolio allocation responses to the equity premium shock. Tracking the portfolio allocations over time, it shows that the short-run responses are weak and resemble those found in a growing survey-based literature that uses variation in subjective beliefs of stock returns.  However, the longer-run responses are much larger and can be rationalized by a contained coefficient of relative risk aversion between 2 and 3. The finding that response size increases significantly over time suggests that portfolio adjustment frictions are pervasive. The paper further finds that equity premium increases have large effects on stock market entry but that an equity premium decrease barely induces exits, which is consistent with the presence of both moderate entry costs, estimated at around $800, and considerably smaller per-period participation costs of around $90. The paper findings of slow portfolio responses to equity premium shocks provides supportive evidence for recent strands of literature that build on adjustment frictions to explain a wide range of asset pricing puzzles. They also have implications for optimal capital taxation when tax rates can differ across assets.


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