The COVID crisis has led to a collapse in international travel. According to the World Tourism Organization, international tourist arrivals declined globally by 73 percent in 2020, with 1 billion fewer travelers compared to 2019, putting in jeopardy between 100 and 120 million direct tourism jobs. This has led to massive losses in international revenues for tourism-dependent economies: specifically, a collapse in exports of travel services (money spent by nonresident visitors in a country) and a decline in exports of transport services (such as airline revenues from tickets sold to nonresidents).

This “travel shock” is continuing in 2021, as restrictions to international travel persist—tourist arrivals for January-May 2021 are down a further 65 percent from the same period in 2020, and there is substantial uncertainty on the nature and timing of a tourism recovery.

We study the economic impact of the international travel shock during 2020, particularly the severity of the hit to countries very dependent on tourism. Our main result is that on a cross-country basis, the share of tourism activities in GDP is the single most important predictor of the growth shortfall in 2020 triggered by the COVID-19 crisis (relative to pre-pandemic IMF forecasts), even when compared to measures of the severity of the pandemic. For instance, Grenada and Macao had very few recorded COVID cases in relation to their population size and no COVID-related deaths in 2020—yet their GDP contracted by 13 percent and 56 percent, respectively.

International tourism destinations and tourism sources

Countries that rely heavily on tourism, and in particular international travelers, tend to be small, have GDP per capita in the middle-income and high-income range, and are preponderately net debtors. Many are small island economies—Jamaica and St. Lucia in the Caribbean, Cyprus and Malta in the Mediterranean, the Maldives and Seychelles in the Indian Ocean, or Fiji and Samoa in the Pacific. Prior to the COVID pandemic, median annual net revenues from international tourism (spending by foreign tourists in the country minus tourism spending by domestic residents overseas) in these island economies were about one quarter of GDP, with peaks around 50 percent of GDP, such as Aruba and the Maldives.

But there are larger economies heavily reliant on international tourism. For instance, in Croatia average net international tourism revenues from 2015-2019 exceeded 15 percent of GDP, 8 percent in the Dominican Republic and Thailand, 7 percent in Greece, and 5 percent in Portugal. The most extreme example is Macao, where net revenues from international travel and tourism were around 68 percent of GDP during 2015-19. Even in dollar terms, Macao’s net revenues from tourism were the fourth highest in the world, after the U.S., Spain, and Thailand.

In contrast, for countries that are net importers of travel and tourism services—that is, countries whose residents travel widely abroad relative to foreign travelers visiting the country—the importance of such spending is generally much smaller as a share of GDP. In absolute terms, the largest importer of travel services is China (over $200 billion, or 1.7 percent of GDP on average during 2015-19), followed by Germany and Russia. The GDP impact for these economies of a sharp reduction in tourism outlays overseas is hence relatively contained, but it can have very large implications on the smaller economies their tourists travel to—a prime example being Macao for Chinese travelers.

How did tourism-dependent economies cope with the disappearance of a large share of their international revenues in 2020? They were forced to borrow more from abroad (technically, their current account deficit widened, or their surplus shrank), but also reduced net international spending in other categories. Imports of goods declined (reflecting both a contraction in domestic demand and a decline in tourism inputs such as imported food and energy) and payments to foreign creditors were lower, reflecting the decline in returns for foreign-owned hotel infrastructure.

The growth shock

We then examine whether countries more dependent on tourism suffered a bigger shock to economic activity in 2020 than other countries, measuring this shock as the difference between growth outcomes in 2020 and IMF growth forecasts as of January 2020, just prior to the pandemic. Our measure of the overall importance of tourism is the share of GDP accounted for by tourism-related activity over the 5 years preceding the pandemic, assembled by the World Travel and Tourism Council and disseminated by the World Bank. This measure takes into account the importance of domestic tourism as well as  international tourism.

Among the 40 countries with the largest share of tourism in GDP, the median size of growth shortfall compared to pre-COVID projections was around 11 percent, as against 6 percent for countries less dependent on tourism. For instance, in the tourism-dependent group, Greece, which was expected to grow by 2.3 percent in 2020, shrunk by over 8 percent, while in the other group,  Germany, which was expected to grow by around 1 percent, shrunk by 4.8 percent. The scatter plot of Figure 2 provides more striking visual evidence of a negative correlation (-0.72) between tourism dependence and the growth shock in 2020.

Of course, many other factors may have affected differences in performance across economies—for instance, the intensity of the pandemic as well as the stringency of the associated lockdowns. We therefore build a simple statistical model that relates the “growth shock” in 2020 to these factors alongside our tourism variable, and also takes into account other potentially relevant country characteristics, such as the level of development, the composition of output, and country size. The message: the dependence on tourism is a key explanatory variable of the growth shock in 2020. For instance, the analysis suggests that going from the share of tourism in GDP of Canada (around 6 percent) to the one of Mexico (around 16 percent) would reduce growth in 2020 by around 2.5 percentage points. If we instead go from the tourism share of Canada to the one of Jamaica (where the share of tourism in GDP approaches one third), growth would be lower by over 6 percentage points.

Measures of the severity of the pandemic, the intensity of lockdowns, the level of development, and the sectoral composition of GDP (value added accounted for by manufacturing and agriculture) also matter, but quantitatively less so than tourism. And results are not driven by very small economies; tourism is still a key explanatory variable of the 2020 growth shock even if we restrict our sample to large economies. Among tourism-dependent economies, we also find evidence that those relying more heavily on international tourism experienced a more severe hit to economic activity when compared to those relying more on domestic tourism.

Given data availability at the time of writing, the evidence we provided is limited to 2020. The outlook for international tourism in 2021, if anything, is worse, though with increasing vaccine coverage the tide could turn next year. The crisis poses particularly daunting challenges to smaller tourist destinations, given limited possibilities for diversification. In many cases, particularly among emerging and developing economies, these challenges are compounded by high starting levels of domestic and external indebtedness, which can limit the space for an aggressive fiscal response. Helping these countries cope with the challenges posed by the pandemic and restoring viable public and external finances will require support from the international community.

Read the full paper here.

      

Superstar firms, unique in their capabilities to scale up innovations, have become increasingly important in the US economy. Investments related to digital technologies are likely to play a particularly important role, reflecting, among other things, economies of scale and network effects. Much of the rise in the concentration of power in these firms has been attributed to intangible investments. For digitally-focused firms, investments in the intangible assets needed to realize value from new technologies – like cumulative investment in skills training, new decision-making structures within the firm, management practices, and software customization – often account for significantly greater total costs than the technologies themselves. As the economy becomes increasingly digitized, these assets can be expected to grow even further in importance. For instance, there has been a wave of interest in the potential of data analytics and artificial intelligence (AI) to become the next important general purpose technology that drives economic growth and business value.

This paper uses new firm-level data on IT investment to develop panel measures of digital capital prices and quantities. In particular, building upon earlier work, authors compute firm-level measures of intangible IT capital quantities that allow them to: 1) generate estimates of the annual growth of this asset, 2) to compare how these growth rates differ among firms of different value, and 3) analyze how the accumulation of these assets contributes to productivity differences among firms. Authors find that by 2016, the stock of digital capital accounted for about 25% of total capital stock for firms in our sample. Changes in the value of digital capital in the years before and after the dot-com boom and bust appear to primarily be due to price fluctuations; after the bust, firms continued to accumulate significant amounts of digital capital while prices varied little. The most recent technology-related increases in the market value of firms appear to be due to changes in quantity, not price, as firms accumulate more and more digital capital.

Authors find evidence of striking firm-to-firm heterogeneity in digital capital value, with most of the value concentrated in a small group of superstar firms with market values in the top decile. Inequality in digital capital among firms is growing as the top firms pull further away from the rest. Moreover, per-capita digital capital stocks are substantially greater in firms with more educated workers. These findings are consistent with the emphasis that technology-intensive firms place on making investments in training and skills.

Their findings suggest that the higher values the financial markets have assigned to firms with large digital investments in recent years reflect greater digital capital quantities, rather than simply higher prices for existing assets. In other words, they reflect genuine improvements to firms’ productive capacity. In fact, the authors find that digital capital, if included as a separate factor in firm-level production functions, predicts differences in output and productivity among firms.

The authors’ estimates of the output elasticity of digital capital suggest that it is several times greater than the output elasticity of IT capital. Their estimates are broadly consistent with earlier evidence (Saunders and Brynjolfsson, 2016) that indicates that IT hardware accounts for only about 10% of total digital investment, with investments in complementary intangibles–that is, digital capital– accounting for the rest.

One interpretation of these findings is that translating organizational innovations into productive capital requires significant investment in organizational re-engineering and skill development. Therefore, even if firms have the appropriate absorptive capacity, knowledge of how to construct digital assets will not automatically generate productive digital capital any more than access to the blueprints of a competitor’s plant will directly lead to productive capacity.

Read the full paper here»

The authors did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this article. They are currently not officers, directors, or board members of any organization with an interest in this article. LinkedIn’s Economic Graph Research and Insights team, as the data provider, had the chance to review for possible release of confidential information and trade secrets prior to publication. They did not have editorial control over other aspects of the paper.

      

Liquidity in U.S. bond markets evaporated in March 2020 as the economic and financial implications of COVID-19 became apparent. Large and widespread selling of bonds by nonbank financial institutions, foreign central banks, and many others overwhelmed the supply of liquidity by the securities dealers that act as bond market intermediaries. The Federal Reserve took massive, unprecedented interventions to restore market liquidity. This reflects the extraordinary growth in the size of U.S. bond markets in recent years, increased holdings of Treasury securities by investors that may need to rapidly sell them in periods of stress, and a substantial reduction in the capacity or willingness of securities dealers to meet demands for liquidity in U.S. bond markets under market-wide stresses.

We seek to complement efforts by policymakers to address these issues by proposing four measures that are intended to increase the supply of market liquidity in stress periods.

First, we propose that the Federal Reserve create a new standing repurchase (repo) facility to support market liquidity in periods of broad stress through regulated dealers under pre-established arrangements. Currently, the Federal Reserve can provide liquidity directly only to commercial banks and other insured depository institutions, except in emergency situations. This patchwork backstop is ineffective for supporting credit in stress situations when the credit needs of the U.S. economy now are met more through bond issuance in markets than through bank loans.

A standing repo facility that offers backstop  financing of Treasury and agency securities in stress periods, secured by those securities as collateral, would encourage more dealers to invest in market-making capacity, and that, in turn, would allow them to supply liquidity to U.S. bond markets in normal periods and to be able to accommodate clients’ needs in abnormal periods.

Second, we propose serious consideration be given to a mandate for wider use of central clearing for Treasury securities, starting with a thorough study, as proposed by Darrell Duffie (2020).  Broader central clearing through a central counterparty clearinghouse (CCP) would increase the supply of liquidity by the largest bank-affiliated dealers by easing constraints because bank capital and leverage requirements recognize the risk reduction from multilateral netting of cleared trades. These reforms should be implemented to encourage smaller dealers also to increase capacity, and not to increase the concentration of the largest dealers.

Third, we propose targeted changes to bank regulations to improve liquidity provision by bank-affiliated dealers without reducing their overall safety and soundness. We propose that reserves at the central bank be permanently excluded from the supplementary leverage ratio (SLR) because they are riskless, but we do not support permanent exclusion of Treasuries, which have interest rate risk. We also propose replacing some of the higher static buffers of the enhanced SLR (eSLR) with a countercyclical component, which could be released in episodes of market-wide stress to support liquidity of Treasury markets.

Fourth, we propose increased data collection, especially for bilateral uncleared repo, and disclosure to improve transparency about broker-dealers. These data are critical to better monitor funding risks and leverage in nonbank financial intermediation and to reduce moral hazard from a standing facility.

We believe that all four sets of reforms are needed. Any one on its own would not be enough to significantly increase the resilience of Treasury markets in both normal periods and stress periods. These reforms are intended to expand the capacity for dealers to absorb procyclical demand surges for liquidity, while minimizing drawbacks to safety and soundness of large bank-affiliated dealers. Importantly, they would reduce the need for the Federal Reserve to intervene with ex post emergency actions to support Treasury market liquidity outside of the most extreme circumstances.

Read the full paper here»

Pat Parkinson is a Special Advisor at the Bank Policy Institute—a nonpartisan public policy, research, and advocacy group. The authors did not receive financial support from any firm or person for this article, and other than the aforementioned or activities listed on Nellie Liang’s expert profile, from any firm or person with a financial or political interest in this article. The authors are currently not officers, directors, or board members of any organization with an interest in this article. The views expressed in this piece are those of the authors and do not represent the positions of the Bank Policy Institute or Brookings. No organization had the right to review this work prior to publication.

      

In this paper, Justin Marlowe of the Harris School of Public Policy at the University of Chicago examines the relationship between exchange-traded funds (ETFs) and the liquidity profiles of municipal bonds. Like mutual funds, ETFs own the underlying bonds and can create and redeem shares in the fund every day. Unlike mutual funds, investors in ETFs can trade in and out of positions throughout the day because ETFs trade like a stock on an exchange. This makes them attractive to investors who want a degree of liquidity not typically available in fixed income over-the-counter markets. ETFs are, in many ways, an ideal innovation for the municipal bond (i.e. “muni”) market. The muni market is fragmented and comparatively illiquid. Unlike publicly-traded corporations, state and local government financial disclosure is largely unregulated, so price-relevant information can be costly to obtain. This lack of liquidity and high search costs are reflected in mark-ups on muni trades that are often orders of magnitude larger than similar trades in corporates or equities. The muni market has high barriers to entry, but ETFs are a comparatively low-cost, well-diversified, and richly-informed vehicle for investors to access it.

But despite these benefits, ETFs also raise concerns for regulators and policymakers. Many of those concerns surround liquidity dynamics. Like with many fixed income ETFs, the bonds held by muni ETFs can be considerably less liquid than the ETF itself. That can create a substantial liquidity mismatch where ETF issuers might need to buy (sell) a particular bond at a considerable price premium (discount) when liquidity is scarce. This mismatch can distort the relationship between the ETF’s net asset value and its share price. It can also uncouple the ETF from the market index it is designed to track.

This paper is the first to examine the implications of ETF ownership for individual municipal bonds. Using data on the bond-level holdings of ETFs from 2010-2020, Marlowe finds that bonds held by ETFs tend to trade more often than bonds held by mutual funds, but with little or no impact on price dispersion, returns, or systematic risk. However, these effects vary considerably by the type of bond. Lower credit quality bonds held by ETFs tend to trade much more frequently than those with higher credit quality. Market conditions also matter. During the COVID-19 market dislocation of March 2020, bonds held by ETFs traded far less often. These results have implications for regulators’ stated concerns about the liquidity differential between ETFs and their underlying holdings, especially during market downturns. Marlowe’s findings suggest that at best ETFs bolster municipal bond liquidity overall, and at worst, bonds held by ETFs are no less liquid than bonds held in mutual funds.

Read the full paper here»

The author did not receive financial support from any firm or person with a financial or political interest in this article. Neither is he currently an officer, director, or board member of any organization with an interest in this article.

      

Ridesharing consists of drivers who provide private trips with their own car without intervention from a regulatory authority; passengers who use their smart phone to request transportation to various destinations; and transportation network companies (TNCs), such as Uber Technologies, Inc. (hereafter Uber) or Lyft, which match passengers’ demand for trips and drivers’ supply of vehicles with a smart phone application.

Ridesharing services have grown rapidly since 2010 when Uber launched its first on-demand car service, ‘UberCab,’ in San Francisco. The dramatic growth of ridesharing drivers’ labor supply has been aided by the absence of medallion permits or occupational licensing requirements that apply to taxi drivers. In addition, ridesharing drivers have flexible hours, which enable them to smooth income fluctuations. Finally, capacity utilization, measured by the fraction of business hours or miles that a fare-paying passenger occupies a shared vehicle, is much greater for UberX drivers than for taxi drivers in, for example, New York City and Boston.

In this paper, the authors measure the benefits of ridesharing services to travelers in the San Francisco Bay Area by estimating a mixed-logit model of mode choice. They include Uber as a representative ridesharing service and they quantify the welfare gain that it provides to travelers by estimating the difference in total benefits with and without its service. Consumers gain roughly $1 billion annually from Uber’s non-fare attributes, which they value but taxis have not provided. Annual benefits to travelers in major U.S. cities are likely to amount to several billions of dollars. Regulations that limit the expansion of ridesharing services are not justified and are likely to reduce travelers’ welfare without addressing the problems of the modes that they seek to protect.

Read the full paper here»

The authors did not receive financial support from any firm or person with a financial or political interest in this article. None are currently an officer, director, or board member of any organization with an interest in this article.

      

The investment-grade corporate bond market, which functioned well in the global financial crisis, did not in the COVID-19 crisis, and required aggressive emergency intervention by the Federal Reserve. The corporate bond market is an important source of financing for businesses. Nonfinancial corporate businesses borrow more in the corporate bond market ($6.5 billion) than they borrow directly from banks ($1.4 billion). Significant disruptions in the corporate bond markets that shut down new bond issues could lead firms to cut employment and investment.

The COVID-19 crisis triggered sharp falls in the prices of investment-grade corporate bonds, proportionately more than for high-yield bonds, which was surprising as high-yield bonds are riskier, less liquid, and more sensitive to a deterioration in the economic outlook. Measures of market liquidity, such as bid-ask spreads and price impact, deteriorated to such an extent that it was as or more costly to trade an investment-grade bond as a high-yield bond.

This paper presents evidence that significant structural changes in the financial sector since the global financial crisis have increased dramatically the demand for liquidity by corporate bond investors beyond the ability of the markets to provide it in stress events. It draws on a rich set of papers to document the turmoil and the market’s response to the Fed’s actions. It documents the acceleration of large redemptions from investment-grade corporate bond mutual funds, which put downward pressure on the prices of investment-grade corporate bonds. The use of Treasury securities by these funds for liquidity risk management also contributed significantly to the “dash for cash” by investors in those volatile weeks, when investors also were worried about the ability of markets to function when traders began to work at home.

The paper suggests areas for further study to increase the resilience of corporate bond markets to future shocks, by reducing the systemic consequences of liquidity mismatch of corporate bond mutual fund and improving dealers’ market-making capacity. Regulators for some time have worried about the “phantom” liquidity offered by bond mutual funds that offer daily liquidity when the underlying assets are less liquid, but they have focused mainly on this liquidity mismatch in high-yield bond or bank loan funds. But a lesson from March suggests that investment-grade bond mutual funds warrant attention, given the surprisingly large redemptions and whether they are viewed as “near-cash products,” as they collectively have become sizable and their behavior is highly correlated.

Another lesson from March is that the success to date of the Fed’s corporate bond program to calm the markets does not suggest that reforms are not needed. Instead, the reforms are even more critical, since the Fed’s actions likely raised expectations of such interventions in the future. It is important that the Fed, through financial reforms or clarifying its own intent for future emergency actions, reduce any perception by private entities that they would not have to bear the costs of their own risk-taking.

Read the full paper here»

      

In the aftermath of the 2008-2009 financial crisis, the Basel Committee on Banking Supervision (BCBS) strengthened banks’ liquidity regulation by requiring banks to maintain a minimum liquidity coverage ratio (LCR). This ratio is defined as high-quality liquid assets (HQLA) divided by estimated total net cash outflows during a 30-day stress period. Whether municipal bonds should be classified as HQLA in computing this ratio and the resulting economic consequences are subject to intense debate. Issuers of municipal bonds contend that municipal bonds should be classified as HQLA based upon their safety and liquidity profiles. In contrast, the U.S. banking regulators questioned both the liquidity of these bonds and the claim that municipalities would be affected and excluded municipal bonds from HQLA in the final rule issued in 2014. However, less than a year later, in an abrupt reversal, the Federal Reserve Board (FRB) unilaterally decided to include general obligation municipal bonds in the measurement of HQLA while continuing to exclude revenue municipal bonds. Exploiting this policy reversal, Jacob Ott of the University of Minnesota examines two potential spillover effects of the classification of general obligation municipal bonds as HQLA: (1) if there is a change in the yield spread of general obligation bonds relative to revenue bonds; and (2) if municipalities change their pattern of issuance of general obligation bonds relative to revenue bonds.

Ott finds that changing the measurements used in bank liquidity management can have spillover effects, specifically that classifying a general obligation municipal bond as a high-quality liquid asset in the regulatory accounting for the liquidity coverage ratio has a spillover effect by influencing municipal market pricing and behavior. In addition, the reduction in financing costs of general obligation bonds appears to influence municipalities’ issuance decisions. This effect is magnified in the cross section of highly rated municipalities. Finally, Ott finds some indirect evidence for the proposed mechanism: a change in banks’ investment behavior.

This paper contributes to several veins of literature, but also has important policy implications. The effects this paper discusses are the result of changing municipal bonds to Level 2B assets. Many different entities (e.g., banks, politicians, trade groups, etc.) have requested Level 2A treatment. It may be the case that the results of this paper would be strengthened in magnitude if this change was made. For example, municipalities could potentially be able to borrow at even lower rates under Level 2A treatment. The lack of Level 2A treatment may put U.S. domiciled municipalities at a disadvantage in maintaining and improving infrastructure relative to municipalities in other countries who do treat municipal bonds as Level 2A in their liquidity management regulations. However, it is important to note that this study does not examine if classifying general obligation bonds as high-quality liquid assets is an optimal decision for the purposes of liquidity management.

Read the full paper here»

The author did not receive financial support from any firm or person with a financial or political interest in this article. Neither is he currently an officer, director, or board member of any organization with an interest in this article.

      

We assess how rising concerns about climate change affect disclosures to financial markets.

For equities, we look systematically at 10-K filings from the 3,000 largest U.S. publicly traded firms over the last 12 years and samplings of Official Statements from U.S. municipal bonds.  Disclosure has risen sharply. Today, 60 percent of publicly traded firms reveal at least something about climate change. The largest volumes of information concern risks due to possible transition away from fossil fuels. By contrast, there is much less disclosure around the physical risks of climate change, such as sea-level rise (see chart).

In municipal finance, disclosure of physical risks is even weaker, although many municipalities are exposed to flood, fire, heat stress, and other perils that could destroy infrastructure and undermine the tax and income bases essential to repayment of long duration bonds. Looking at large samples of the Official Statements released with new municipal debt issuances, we find no relationship between objective measures of which municipalities are most exposed to climate impacts and what they disclose to the markets.

Although policy makers and investor ESG frameworks have focused klieg lights on the financial risks that might accompany policy-driven transitions away from fossil fuels, the real mispriced risks lie with the raw physical risks of a changing climate. Details are presented in the Supplemental Information appendix.

Note: The methodology for gathering this data is explained in Figure 1 and Figure 3 of the working paper. The figure above looks at the average number of risk mentions by category in one 10-K per company by year. It is clear from the chart above that transition risk has historically and continues to dominate climate risk discussion. There is an open question about why the amount of disclosure spiked between 2009 and 2010. It is possible that the 2008 New York AG lawsuits against Xcel and AES played a role. It seems probable that the TCFD report in 2017 spurred the inflection seen in the graph for the years 2017-2020.

Source: Ceres/Cook/Morningstar 10-K Database and analysis by authors

We make two central arguments:

• The quality of disclosure is highly uneven and generally lousy.
• New analytical tools, regulatory incentives, and business practices can lower the cost and raise utility of meaningful disclosure, particularly if accompanied by stronger regulatory rules and industry norms. New practices at credit ratings agencies and rethinking of liability rules could accelerate best practices.

Among our specific findings:

• In 2009, the average firm mentioned climate-related risks 8.4 times in its 10-K. In 2020, that number was 19.1 times, primarily because a growing number of firms cite the risk.
• Four industries (oil and gas, power utilities, coal mining, and other mining) constitute 8 percent of the Russell 3000 (by count), but 58 percent of the mentions of climate-related risks in 2019.
• In our sample of municipal bond Official Statements, 10.5 percent of bonds tied to specific streams of revenue refer to climate risks, but only 3.8 percent of general obligation bonds do.
• Innovations in climate science over the last decade make it possible to assess these physical risks at fine geographical resolution, but we find no relationship between such measures and municipal disclosure.
• Climate risks are rarely material rating decisions of major credit rating agencies.

Among our policy conclusions:

• Disclosure reflects a lack of imagination; much of the disclosure reflects risks easiest to measure, namely transition risk, rather than significant physical risk. What’s missing is an effort with a system-wide view, primarily rating agencies and regulators, to tie the risks together.
• Disclosure by issuers of municipal debt would be improved by building national databases of critical infrastructure and exposure to climate-related perils. Regulators in states most vulnerable, such as Florida and California, could take the lead in experimentation. National regulators (FASB, PCAOB, the Fed) should promote best practices and emphasize fiduciary responsibilities.
• Incentives must be better aligned to promote forthright disclosure, particularly via practices at FEMA and flood insurance providers.
• Activists and analysts are fighting the wrong fight. The extraordinary attention to transition risk aligns with most mental models of how financial assets might be affected by climate policy, but the real push for better disclosure should be on physical risks.

Read the full paper here»

Find supplemental information here»

Eric Gesick was the Chief Underwriting Officer for AXIS Capital, a global specialty insurer and reinsurer, until July 31, 2020. The authors did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this article. They are currently not an officer, director, or board member of any organization with an interest in this article.

      

This paper provides the first evidence on an unmentioned cost of U.S. medical marijuana liberalization imposed by investors in the capital market. Stephanie Cheng, Gus De Franco and Pengkai Lin show that the staggered passage of state medical marijuana laws increases state bonds’ offering and trading spreads by 7-11 basis points. Consistent with medical marijuana laws causing an increase in states’ credit risk, states incur higher safety and public welfare expenditures and experience greater deficits following the law’s passage. Additional analyses show the increase in spreads is stronger for states with greater corruption, more vulnerable demographics, and better cultivation environments. Overall, these results support economic theory on substance use, which suggests that legalizing marijuana for medical purposes expands the availability, reduces the perceived risks, and increases the local consumption of marijuana.

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The authors did not receive financial support from any firm or person with a financial or political interest in this article. None is currently an officer, director, or board member of any organization with an interest in this article.

      

In this paper, Omar Swei, David Gillen and Anuarbek Onayev of University of British Columbia propose an approach to generate a quality-adjusted producer price index for highway construction. The authors use price data for highway construction projects across the contiguous United States from 2005 through 2017. The data set includes approximately 5,000 unique items for each project. These items are distilled to form 60 item baskets. The authors redefine their output from being lane-miles to ‘lane-miles of service.’ The indicator of quality is the deterioration rate of a roadway, which is measured using data on pavement roughness which links to deterioration and the time between required servicing; an improvement in quality reduces deterioration and increases the time span between maintenance and reconstruction, something which adds significant value to state budgets. They use a chained-Fisher price index and find that our proposed, quality-adjusted producer price index exhibits lower annual growth by 2.0 percent than the unadjusted price index. Given price inflation has been overestimated in the past by failing to account for quality changes, their finding suggests the lack of productivity growth in construction, specifically highways, bridges and infrastructure, may have been significantly underestimated.

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The authors did not receive financial support from any firm or person with a financial or political interest in this article. None is currently an officer, director, or board member of any organization with an interest in this article.