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12081. Sovereign Debt in the 21st Century

Author:
Kris James Mitchener and Christoph Trebesch
Publication Date:
08-2021
Content Type:
Working Paper
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
How will sovereign debt markets evolve in the 21st century? We survey how the literature has responded to the eurozone debt crisis, placing “lessons learned” in historical perspective. The crisis featured: (i) the return of debt problems to advanced economies; (ii) a bank-sovereign “doom-loop” and the propagation of sovereign risk to households and firms; (iii) roll-over problems and self-fulfilling crisis dynamics; (iv) severe debt distress without outright sovereign defaults; (v) large-scale sovereign bailouts from abroad; and (vi) creditor threats to litigate and hold out in a debt restructuring. Many of these characteristics were already present in historical debt crises and are likely to remain relevant in the future. Looking forward, our survey points to a growing role of sovereign-bank linkages, legal risks, domestic debt and default, and of official creditors, due to new lenders such as China as well as the increasing dominance of central banks in global debt markets. Questions of debt sustainability and default will remain acute in both developing and advanced economies.
Topic:
Debt, Finance, Banking, and Sovereign Debt
Political Geography:
Global Focus

12082. Kind or contented? An investigation of the gift exchange hypothesis in a natural field experiment in Colombia

Author:
Francesco Bogliacino, Gianluca Grimalda, and David Pipke
Publication Date:
11-2021
Content Type:
Working Paper
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
The gift exchange hypothesis postulates that workers reciprocate above market-clearing wages with above-minimum effort. This hypothesis has received mixed support in dyadic employer-worker relationships. We present a field-experimental test to assess this hypothesis in the context of a triadic relationship in which only one out of two workers receives a pay increase. We conjecture that inequality aversion motivations may thwart positive reciprocity motivations and analyze the interaction between such motivations theoretically. Across three treatments, the pay increase is justified to workers based on either relative merit or relative need or was arbitrary as no justification was offered. Two conditions in which either none or both workers receive a bonus serve as the reference. In contrast to the gift exchange hypothesis, we find that pay increases lead to a decrease in productivity. Such a decrease is most sizable in the condition where both workers receive the bonus. A post-diction of this result is that workers interpret the monetary bonus as a signal of the employer’s contentment with their effort, which makes them feel entitled to reduce their effort. In other treatments, receiving the pay increase while the coworker does not has a positive effect on productivity, especially when the pay increase is based on merit. This result is consistent with statusseeking preferences rather than aversion against advantageous inequality. Conversely, not receiving the pay increase while the coworker does, leads to lower productivity, especially when the pay increase is assigned based on relative needs.
Topic:
Labor Issues, Employment, Labor Policies, and Wealth
Political Geography:
Colombia and South America

12083. Green gifts from abroad? FDI and firms' green management

Author:
Peter Kannen, Finn Ole Semrau, and Frauke Steglich
Publication Date:
11-2021
Content Type:
Working Paper
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
Improvements of firms' environmental performance crucially determine the speed of a country's green economic transformation. In this paper, we investigate whether firms with foreign ownership are more likely to adopt 'green' management practices, which determine the capability to monitor and improve a firm's impact on the environment. By using multi-country firm-level data, we show that foreign ownership increases the likelihood of implementing green management practices. Considering country heterogeneity, we reveal that only firms based in more developed economies and in countries with better environmental performance benefit from foreign direct investment, while this is not the case for firms based in less developed economies or countries with weak environmental performance. In addition, we find that the effect is more robust for manufacturing sector firms than for service sector firms. Overall, our results suggest that foreign ownership can contribute towards a country's green economic transformation.
Topic:
Development, Economics, Environment, Green Technology, and Green Transition
Political Geography:
Global Focus

12084. The Need for Local Governance of Global Commons: The Example of Blue Carbon Ecosystems

Author:
Christine Merk, Jonas Grunau, Marie-Catherine Riekhof, and Wilfried Rickels
Publication Date:
11-2021
Content Type:
Working Paper
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
To limit global warming to 1.5°C, vast amounts of CO2 will have to be removed from the atmosphere via Carbon Dioxide Removal (CDR). Enhancing the CO2 sequestration of ecosystems will require not just one approach but a portfolio of CDR options, including so‐called nature‐based approaches alongside CDR options that are perceived as more technical. Creating a CDR “supply curve” would however imply that all carbon removals are considered to be perfect substitutes. The various co‐benefits of nature‐based CDR approaches militate against this. We discuss this aspect of nature‐based solutions in connection with the enhancement of blue carbon ecosystems (BCE) such as mangrove or seagrass habitats. Enhancing BCEs can indeed contribute to CO2 sequestration, but the value of their carbon storage is low compared to the overall contribution of their ecosystem services to wealth. Furthermore, their property rights are often unclear, i.e. not comprehensively defined or not enforced. Hence, payment schemes that only compensate BCE carbon sequestration could create tradeoffs at the expense of other important, often local, ecosystem services and might not result in socially optimal outcomes. Accordingly, one chance for preserving and restoring BCEs lies in the consideration of all services in potential compensation schemes for local communities. Also, local contexts, management structures, and benefit‐sharing rules are crucial factors to be considered when setting up international payment schemes to support the use of BCEs and other nature‐ or ecosystem‐based CDR. However, regarding these options as the only hope of achieving more CDR will very probably not bring about the desired outcome, either for climate mitigation or for ecosystem preservation. Unhalted degradation, in turn, will make matters worse due to the large amounts of stored carbon that would be released. Hence, countries committed to climate mitigation in line with the Paris targets should not hide behind vague pledges to enhance natural sinks for removing atmospheric CO2 but commit to scaling up engineered CDR.
Topic:
Climate Change, Environment, International Cooperation, Governance, Global Warming, and Local
Political Geography:
Global Focus

12085. Endogenous Growth, Skill Obsolescence and Optimal Monetary Policy

Author:
Wolfgang Lechthaler and Mewael F. Tesfaselassie
Publication Date:
11-2021
Content Type:
Working Paper
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
We analyze Ramsey optimal monetary policy in a New-Keynesian model with search and matching frictions featuring (i) training costs due to skill loss from long-term unemployment and (ii) endogenous growth through learning-by-doing externalities. In a simplified two-period version of the model, the competitive equilibrium is shown to be inefficient due to two externalities: i) firms do not internalize the effects that hiring has on labor productivity through learning-by-doing; ii) firms do not fully internalize the effects that hiring has on future training costs. These externalities lead to inefficient fluctuations, thereby justifying deviations from price stability in response to productivity shocks. In a calibrated version of the full model we show significant deviations from price stability and significant differences between optimal monetary policy and monetary policy that follows a Taylor rule.
Topic:
Economic Growth, Economic Theory, Keynes, and Unemployment
Political Geography:
Global Focus

12086. Accounting for terrestrial and marine carbon sink enhancement

Author:
Marius Paschen, Wilfried Rickels, and Felix Meier
Publication Date:
12-2021
Content Type:
Working Paper
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
Any integration of extra carbon dioxide removal (CDR) via terrestrial or marine sink enhancement into climate policies requires accounting for their effectiveness in reducing atmospheric carbon concentration. Different accounting methods have been introduced to quantify the impacts of sink enhancements. Here, we provide a manual for the different accounting methods, accompanying the implementation of the accounting methods in a R-file which is free for download. Hence, the material allows applying the different accounting methods and for demonstration purposes we provide a numerical example.
Topic:
Climate Change, Environment, Maritime, and Carbon Footprint
Political Geography:
Global Focus

12087. Who benefits really from phasing out palm oil-based biodiesel in the EU?

Author:
Ruth Delzeit, Tobias Heimann, Franziska Schunemann, and Mareike Soder
Publication Date:
12-2021
Content Type:
Working Paper
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
The latest Renewable Energy Directive (RED II) by the European Union (EU) provides an updated framework for the use of renewable energy in the EU transport sector until 2030. We employ the computable general equilibrium (CGE) model DART-BIO for a scenario-based policy analysis and evaluate different possible futures of biofuel use under four specifications of the RED II. Our results show that conventional biofuels will not become cost competitive to oil-based fuels. Moreover, we demonstrate the impact of the RED II specifications on the global production of food and feed crops. A further focus of this paper lies on the palm oil phase-out as feedstock for biofuels in the EU, to halt deforestation and land-use change in tropical countries. We find that this phase-out has a relatively small impact on global palm fruit production. Moreover, this study shows that the regulation has the potential to act as a technical barrier to trade, discriminating palm oil producing countries in favour of European rapeseed producers.
Topic:
Energy Policy, Oil, Regional Cooperation, and European Union
Political Geography:
Europe

12088. Sovereign Bonds since Waterloo

Author:
Josefin Meyer and Christoph Trebesch
Publication Date:
12-2021
Content Type:
Working Paper
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
This paper studies external sovereign bonds as an asset class. We compile a new database of 266,000 monthly prices of foreign-currency government bonds traded in London and New York between 1815 (the Battle of Waterloo) and 2016, covering up to 91 countries. Our main insight is that, as in equity markets, the returns on external sovereign bonds have been sufficiently high to compensate for risk. Real ex-post returns average more than 6 percent annually across two centuries, including default episodes, major wars, and global crises. This represents an excess return of 3-4 percent above US or UK government bonds, which is comparable to stocks and outperforms corporate bonds. Central to this finding are the high average coupons offered on external sovereign bonds. The observed returns are hard to reconcile with canonical theoretical models and the degree of credit risk in this market, as measured by historical default and recovery rates. Based on our archive of more than 300 sovereign debt restructurings since 1815, we show that full repudiation is rare; the median creditor loss (haircut) is below 50 percent.
Topic:
Economics, Governance, Finance, and Bonds
Political Geography:
Global Focus

12089. Procedurally Justifiable Strategies: Integrating Context Effects into Multistage Decision Making

Author:
Fynn Kemper and Philipp Wichaardt
Publication Date:
12-2021
Content Type:
Working Paper
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
This paper proposes a simple framework to model contextual influences on procedural decision making. In terms of utility, we differentiate between monetary payoffs and contextual psychological ones, e.g. deriving from the subjects’ normative frame of reference. Monetary payoffs are treated as common knowledge while psychological payoffs are treated as partly unforeseeable. Regarding behaviour, we assume that players act optimal given their local perception of the game. As perceptions may be incorrect, we do not consider common equilibrium conditions but instead require strategies to be procedurally justifiable. As we will argue, various common inconsistencies considered in behavioural economics can be understood as procedurally justifiable behaviour. With the present framework, we add an abstract tool to the discussion which allows to consider also the behavioural implications of players foreseeing the corresponding behavioural effects ̶ which is often not considered in the respective original models.
Topic:
Economics, Monetary Policy, and Models
Political Geography:
Global Focus

12090. Regional Solutions to Regional Challenges in the Middle East?

Author:
Brandon Friedman
Publication Date:
11-2021
Content Type:
Commentary and Analysis
Institution:
Moshe Dayan Center for Middle Eastern and African Studies
Abstract:
Members of two rival camps in the Sunni Middle East — Qatar and Turkey on one side, and Egypt, Saudi Arabia, and the UAE, on the other — have continued a sustained diplomatic effort at reconciliation that began early this year. In a sign of the delicate progress between Qatar and its Gulf neighbors, on September 17, the Saudi Gazette tweeted a picture of Saudi Crown Prince Mohammed bin Salman standing beside Qatari Emir Tamim Al Thani and Emirati Sheikh Tahnoun bin Zayed, all dressed informally, in the Egyptian resort city of Sharm al-Sheikh. More recently, on November 24, Mohammed bin Zayed, the Crown Prince of the UAE, met in Ankara with Turkey’s President, Recep Tayyip Erdoğan, in a dramatic reversal of what had appeared to be a hostile rivalry.[1] The visit resulted in the Emiratis establishing a $10 billion fund for investment in Turkey.[2]
Topic:
Diplomacy, Sectarianism, Regional Integration, Sunni, and Shiism
Political Geography:
Turkey, Middle East, Saudi Arabia, Egypt, Qatar, and United Arab Emirates