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Working Papers


Warwick McKibbin and David Vines 

Abstract: The COVID-19 crisis has caused the greatest collapse in global economic activity since 1720. Some advanced countries have mounted a massive fiscal response, both to pay for disease-fighting action and to preserve the incomes of firms and workers until the economic recovery is under way. But there are many emerging market economies which have been prevented from doing what is needed by their high existing levels of public debt and—especially—by the external financial constraints which they face. We argue in the present paper that there is a need for international cooperation to allow such countries to undertake the kind of massive fiscal response that all countries now need, and that many advanced countries have been able to carry out. We show what such cooperation would involve. We use a global macroeconomic model to explore how extraordinarily beneficial such cooperation would be. Simulations of the model suggest that GDP in the countries in which extra fiscal support takes place would be around two and a half per cent higher in the first year, and that GDP in other countries in the world be more than one per cent higher. So far, such cooperation has been notably lacking, in striking contrast with what happened in the wake of the Global Financial Crisis in 2008. The necessary cooperation needs to be led by the Group of Twenty (G20), just as happened in 2008–9, since the G20 brings together the leaders of the world’s largest economies. This cooperation must also necessarily involve a promise of international financial support from the International Monetary Fund, otherwise international financial markets might take fright at the large budget deficits and current account deficits which will emerge, creating fiscal crises and currency crises and so causing such expansionary policies which we advocate to be brought to an end.

Keywords: COVID-19, risk, macroeconomics, DSGE, CGE, G-Cubed (G20)


Hans Fehr, Maurice Hofmann and George Kudrna

Abstract: Although Germans and Australians have very similar incomes per capita, Australians hold significantly more wealth than Germans. In addition, they typically own their place of residence while in Germany a majority of households are renters. The question is to what extent these differences in wealth levels and patterns are induced by national tax and transfer policies. In order to shed light on this issue, we apply an overlapping generations model with tenure choice where households face labour income and lifespan uncertainty. The model is calibrated to Germany featuring unfunded pension benefits based on individual earnings points accumulated during the working phase and a dual income tax system. Then the Australian tax and pension structures are implemented sequentially in order to distinguish the impact of higher capital taxation as well as means-tested and funded pensions. Our simulation results indicate that the Australian tax and pension design has a dramatic impact on asset levels and structures, explaining more than two thirds of the observed differentials in asset levels and homeownership rates. While capital taxation and means-testing shift the asset structures towards residential properties, the superannuation system increases the overall wealth level.

Keywords: OLG model, stochastic general equilibrium, tenure choice, optimal pension design


Warwick McKibbin and Roshen Fernando

Abstract: The COVID-19 global pandemic has caused significant global economic and social disruption. In McKibbin and Fernando (2020), we used data from historical pandemics to explore seven plausible scenarios of the economic consequences if COVID-19 were to become a global pandemic. In this paper, we use currently observed epidemiological outcomes across countries and recent data on sectoral shutdowns and economic shocks to estimate the likely impact of COVID-19 pandemic on the global economy in coming years under six new scenarios. The first scenario explores the outcomes if the current course of COVID-19 is successfully controlled, and there is only a mild recurrence in 2021. We then explore scenarios where the opening of economies results in recurrent outbreaks of various magnitudes and countries respond with and without economic shutdowns. We also explore the impact if no vaccine becomes available and the world must adapt to living with COVID-19 in coming decades. The final scenario is the case where a given country is in the most optimistic scenario (scenario 1), but the rest of the world is in the most pessimistic scenario. The scenarios in this paper demonstrate that even a contained outbreak (which is optimistic), will significantly impact the global economy in the coming years. The economic consequences of the COVID-19 pandemic under plausible scenarios are substantial and the ongoing economic adjustment is far from over.

Keywords: Pandemics, infectious diseases, risk, macroeconomics, DSGE, CGE, G-Cubed


Peyman Firouzi-Naeim and Golnoush Rahimzadeh

Abstract: Labor unions are among the largest institutions in the United States, and their role in regulating employee–employer relations is hard to ignore. Costly efforts to control the spread of COVID-19 (i.e., decreasing economic activity and increasing workplace safety measures), combined with the monopoly and collective voice faces of unions, emphasize the role unions can play in shaping the response of the workforce in coping with COVID-19. We analyze the effect of union size by utilizing state-level data in the United States and by employing a nonlinear probability model and general method of moments estimation. The results suggest new evidence of positive externalities for union employees compared with nonunion employees. We find that a 10% increase in unionization in the United States would lead to around 5% decrease in total cases of COVID-19 100 days after the onset of the virus, controlling for hours of work and differences in union members’ characteristics.

Keywords: COVID-19; labor unions; unionization; work environment


Jennifer Alonso-García, Michael Sherris, Samuel Thirurajah and Jonathan Ziveyi

Abstract: This paper considers variable annuity contracts embedded with guaranteed minimum accumulation benefit (GMAB) riders when policyholder's proceeds are taxed. These contracts promise the return of the premium paid by the policyholder, or a higher stepped up value, at the end of the investment period. A partial differential valuation framework, which exploits the numerical method of lines, is used to determine fair fees that render the policyholder and insurer profits neutral. Two taxation regimes are considered; one where capital gains are allowed to offset losses and a second where gains do not offset losses, reflecting  stylized institutional arrangements in Australia and the US respectively. Most insurance providers highlight the tax-deferred feature of a variable annuity. We show that the regime under which the insurance provider is taxed significantly impacts  supply and demand prices. If losses are allowed to offset gains then this enhances the market, narrowing the gap between fees, and even producing higher demand than supply fees. On the other hand, when losses are not allowed  to offset gains, then the demand-supply gap increases. When charging the demand price, we show that insurance companies would be profitable on average. Low (high) Sharpe ratios are not as profitable as policyholders are more likely to stay long (surrender).

Keywords: taxation; retirement income;  policyholder behavior;  pricing;  method of lines;  surrender;  variable annuity


health data

Elena Capatina, Michael Keane and Shiko Maruyama

Abstract: We study the contribution of health shocks to earnings inequality and uncertainty in labor market outcomes. We calibrate a life-cycle model of labor supply and savings that incorporates health and health shocks. Our model features endogenous wage formation via human capital accumulation, employer sponsored health insurance, and means- tested social insurance. We find a substantial part of the impact of health shocks on earnings arises via reduced human capital accumulation. Health shocks account for 15% of lifetime earnings inequality for U.S. males, with two-thirds of this due to behavioral responses. In particular, it is optimal for low-skill workers – who often lack employer sponsored insurance – to curtail labor supply to maintain eligibility for means-tested transfers that protect them from high health care costs. This causes low-skill workers to invest less in human capital. Provision of public health insurance can alleviate this problem and enhance labor supply and human capital accumulation.

Keywords: Health, Health Shocks, Human Capital, Income Risk, Precautionary Saving, Earnings Inequality, Health Insurance, Welfare

Elderly couple researching pension options

Monisankar Bishnu, Shresth Garg, Tishara Garg and Tridip Ray

Abstract:In presence of imperfections in education loan market, the standard policy response of intervening solely on education front, funded through taxes and transfers, necessarily hurts the initial working population. The literature suggests compensating them via pay-as-you-go pensions as a possible solution. But for various reasons sustainability of PAYG pensions is under serious doubt. We carry out the optimal policy exercise of a utilitarian government in a dynamically ecient economy with pension and education support obeying the Pareto criterion. We find that expansion of one instrument along with the other emerges as the optimal response, however, once the complete market level of education is achieved, the optimal policy suggests phasing pensions out. Eventually, government leads the economy to an equilibrium with zero pension and the Golden Rule level of education. This is achieved by exploiting only market opportunities without relying on other factors including human capital externalities, general equilibrium effects or socio-political factors.

Keywords: Public education; PAYG pension; intergenerational transfers; welfare state

CEPAR industry report

Joydeep Bhattacharya, Monisankar Bishnu and Min Wang

Abstract: This paper studies the welfare of time-inconsistent, partially sophisticated agents living un- der two different regimes, one with complete, unfettered credit markets (CM) and the other with endogenous borrowing constraints (EBC) where the borrowing limits are set to make agents indifferent between defaulting and paying back their unsecured loans. The CM regime cannot deliver the first best because partially sophisticated agents would undo plans laid out by previous selves and borrow too much. Somewhat counterintuitively, in some cases, the EBC regime may deliver higher welfare than the CM regime. These results speak to the aca- demic debate surrounding the creation and functioning of the CFPB (Consumer Financial Protection Bureau) in the U.S. and its implementation of the ability-to-repay rule on lenders after the 2007-8 crisis. Such institutions generate commitment publicly and may help time- inconsistent agents economize on the costs of private commitment provision.

Keywords: endogenous borrowing constraints, overborrowing, financial protection




Olivia S. Mitchell

Abstract: In the wake of the global pandemic known as COVID-19, retirees, along with those hoping to retire someday, have been shocked into a new awareness of the need for better risk management tools to handle longevity and aging. This paper offers an assessment of the status quo prior to the spread of the coronavirus, evaluates how retirement systems are faring in the wake of the shock. Next we examine insurance and financial market products that may render retirement systems more resilient for the world’s aging population. Finally, potential roles for policymakers are evaluated.

Keywords: COVID-19, retirement, financial market, aging population