Jan-Egbert Sturm's research while affiliated with ETH Zurich and other places

This seminal Handbook provides a comprehensive overview of contemporary research on economic freedom, using multidisciplinary methods to assess studies of the determinants and consequences of market-oriented institutions and policies. Niclas Berggren brings together world-leading experts in their respective fields to explore the notion of economic freedom in the history of economic thought, to present measures of economic freedom and to provide overviews of the latest empirical research.

Independent central banks typically counteract positive fiscal shocks that would otherwise increase the inflation rate above the target. In a theoretical model, we show that, in a monetary union, this mechanism implies weaker responses to national fiscal shocks because the overarching central bank must account for the fiscal policies of all members. The model highlights that the response is especially weak for small members, given their marginal impact on the union’s aggregate inflation rate. Empirically, we exploit the exogenous variation in elections to show that the European Central Bank reacts more vigorously to fiscal shocks from larger countries. We then provide evidence that small countries take advantage of this; they engage more in fiscal expansions during election years than large countries. In an extension, we discuss, both theoretically and empirically, why the difference between small and large countries disappears in times of crisis.

We study the effect of geopolitics on short-term financial market reactions to IMF program approvals. If IMF programs are influenced by geopolitics, they may be less successful in stabilizing the economy. This could lead financial market participants to sell the country’s assets and thus reduce the catalytic effect of IMF programs. Using a monthly panel data set for about 100 IMF members covering 1993-2019, we find that if geopolitics are involved, the approval of a new IMF program increases risk aversion of financial market participants. To measure geopolitical interest, we focus on program approvals for temporary members of the United Nations Security Council (UNSC). We find that temporary UNSC members receiving an IMF program face higher bond and bill yields, depreciating exchange rates, and weaker stock market developments. This is consistent with investors reducing exposure to the country’s financial assets. Such a negative investor reaction is not observed for IMF program approvals for non-UNSC temporary members.

We study the interplay of non-pharmaceutical containment measures, human behavior, and the spread of COVID-19 in Switzerland. First, we collect sub-national data and construct indices that capture the stringency of containment measures at the cantonal level. Second, we use a vector autoregressive model to analyze feedback effects between our variables of interest via structural impulse responses. Our results suggest that increases in the stringency of containment measures lead to a significant reduction in weekly infections as well as debit card transactions, which serve as a proxy for behavioral changes in the population. Furthermore, analyzing different policy measures individually shows that business closures, recommendations to work from home, and restrictions on gatherings have been particularly effective in containing the spread of COVID-19 in Switzerland. Finally, our findings indicate a sizeable voluntary reduction in debit card transactions in response to a positive infection shock.

Many theories have been proposed to explain why social expenditures have increased in industrialized countries. The determinants include globalization, political–institutional variables such as government ideology and electoral motives, demographic change, and economic variables, such as unemployment. Scholars have modeled social expenditures as the dependent variable in many empirical studies. We employ extreme bounds analysis and Bayesian model averaging to examine robust predictors of social expenditures. Our sample contains 31 OECD countries over the period between 1980 and 2016. The results suggest that trade globalization, the fractionalization of the party system, and fiscal balances are negatively associated with social expenditures. Unemployment, population aging, banking crises, social globalization, and public debt enter positively. Moreover, social expenditures have increased under left-wing governments when de facto trade globalization was prominent, and at the time of banking crises. We conclude that policymakers in individual countries rely on domestic conditions to craft social policies—globalization, aging, and business cycles notwithstanding.

Financial development may affect poverty directly and indirectly through its impact on income inequality, economic growth, and financial instability. Previous studies do not consider all these channels simultaneously. To proxy financial development, we use the ratio of private credit to GDP or an IMF composite measure. Our preferred measure for poverty is the poverty gap, i.e. the shortfall from the poverty line. Our fixed effects estimation results for an unbalanced panel of 84 countries over the 1975–2014 period suggest that financial development does not have a direct effect on the poverty gap. However, as financial development leads to greater inequality, which, in turn, results in more poverty, financial development has an indirect effect on poverty through this transmission channel. Only if we use poverty lines of $3.20 or $5.50 (instead of $1.90 a day as in our baseline model) to define the poverty gap, we find that economic growth reduces poverty. This implies that in those cases the overall effect of financial development on poverty may be positive or negative, depending on which indirect effect, i.e. that of income inequality or growth, is stronger. Financial instability does not seem to affect the poverty gap. These results are consistent across various robustness checks.

This paper presents a coincident and a leading composite monthly indicator for the world business cycle—the Global Economic Barometers. Both target the world’s output growth rate and consist of economic tendency surveys results from many countries around the world. The calculation of these indicators comprises two main stages. The first consists of a variable selection procedure, in which a pre-set correlation threshold and the targeted leads to the reference series are used as selection criteria. In the second stage, the selected variables are combined and transformed into the respective composite indicators, computed as the first partial least squares factor with the reference series as response variable. We analyse the characteristics of the two new indicators in a pseudo real-time setting and demonstrate that both are useful additions to the small number of indicators for the global business cycle published so far. Finally, yet importantly, the Barometers were quick to plunge in the beginning of March 2020 and have since then given a reliable real-time reflection of the economic consequences of the Covid-19 pandemic.

The political budget cycle (PBC) literature argues that governments expand deficits in election years. However, what happens when an economic downturn is expected? Will the government allow the deficit to expand even further, or will it resort to spending cuts and tax increases? When voters expect less than full automatic stabilization, our model shows that opportunistic government behavior leads to smaller deficits, thereby responding procyclically to expected downturns. Panel data evidence for 74 democracies covering the period 2000-2016 robustly supports the theoretical procyclicality prediction. Moreover, expected downturns remain significant when other context-conditional PBC effects are included in the empirical analysis.