Unexpected Policy Research Articles

The impact of subsidy retraction on European renewable energy investments

Over the past few decades, renewable energy has received considerable public support through subsidies. However, its reliance on governments inherently induces policy uncertainty through the possibility of retroactive policy changes, i.e., ex post subsidy adjustments, which, in turn, impact private investors’ appetite for renewable energy investments. We empirically investigate the effect of retroactive policy changes on investment decisions by considering common support mechanisms in the EU for the period 2000–2017. To quantify the impact, we estimate a regression model utilizing a difference-in-difference approach, which allows us to identify the impact stemming from retroactive policy changes. The results show that a retroactive subsidy change decreases the investment rate by approximately 45% for PV and 16% for onshore wind. Hence, our results indicate that once the seed of mistrust is sown, it is likely to have a lasting impact. Consequently, our results suggest that a stable policy environment with credible policy commitments is crucial for incentivizing investments made by private firms. We find that that sudden unexpected policy changes deter further investment activity in affected countries suggesting that a stable policy environment is crucial to incentivize investments by private firms. This effect was greater for solar investments than onshore wind.

Impact of zero-mark-up medicines policy on hospital revenue structure: a panel data analysis of 136 public tertiary hospitals in China, 2012–2020

ObjectiveTo quantify the overall and dynamic effects of the implementation of the zero-mark-up medicines policy on the proportionate revenue generated from medicines, medical services and government subsidies at Chinese tertiary...

Making Sense of Schooling during COVID-19: Crisis as Opportunity in Korean Schools

This article explores how policy actors in South Korea understand and make meaning of school-related policies responding to COVID-19. Using sensemaking and crisis theory as a framework and informed by literature on policy culture, we analyzed qualitative data collected from interviews with teachers, educational leaders, and parents. The findings show that our participants initially thought the crisis situation would “just pass,” but they experienced “fear” and “chaos” when online and hybrid classes were implemented. After adopting unexpected policy changes to cope with the spread of COVID-19, participants sought shared responsibility to overcome the crisis. In addition, our participants made meaning of the crisis as an opportunity to transform schools, suggesting that COVID-19 catalyzed democracy, innovation, and equity in Korean school education. We conclude this article with a discussion on the role of crisis in sensemaking and the importance of national policy culture and sociohistorical contexts in shaping policy actors’ meaning making, extending comparative perspectives in education.

(Un)expected monetary policy shocks and term premia

SummaryThe term structure of interest rates is crucial for the transmission of monetary policy to financial markets and the macroeconomy. Disentangling the impact of monetary policy on the components of interest rates, expected short rates, and term premia is essential to understanding this channel. To accomplish this, we provide a quantitative structural model with endogenous, time‐varying term premia that are consistent with empirical findings. News about future policy, in contrast to unexpected policy shocks, has quantitatively significant effects on term premia along the entire term structure. This provides a plausible explanation for partly contradictory estimates in the empirical literature.

Technology Forgiveness: Why emerging technologies differ in their resilience to institutional instability

Long-term public support may encourage the diffusion of emerging technologies by coordinating the generation of knowledge and providing patient funding, but unexpected policy changes may hinder private investment and even lead to situations of technology lockout. Leveraging archival data; insights from 45 interviews across academia, industry, and government; and 75 hours of participant observations, we develop insights about why institutional instability in Portugal affected the adoption of Polymer Additive Manufacturing (PAM) and Metal Additive Manufacturing (MAM) differently. In both cases, Portugal invested in the technology relatively early. While PAM has been widely adopted, including increasingly in high-tech applications, MAM adoption has been modest despite MAM's potential to greatly improve the performance and competitiveness of metal molds. From the comparison between PAM and MAM, we generate theory about technological and contextual factors that affect ‘technological forgiveness’, defined as the resilience of a new technology's adoption to institutional instability.

Liquidity Shocks and Pension Fund Performance: Evidence From the Early Release Scheme

We study how expectations of fund flows causally affect fund performance by exploiting a quasi-natural experiment in the Australian pension system where an unexpected policy change temporarily allowed fund withdrawals from a pre-specified date in the future. Using fractions of young members, middle-aged members, and government co-contributions for low income earners as instrumental variables, we find an insignificant effect of expected fund outflows on fund performance. A potential explanation is that Australian superannuation funds preemptively engage in liquidity management in response to changes in expectations of future fund flows and that this helps to limit direct and indirect costs in the rebalancing process.

Effect of an abrupt change in sexual and reproductive health policy on teen birth rates in Ecuador, 2008–2017

Several countries have implemented “family-centered” abstinence-only policies for teenagers, as opposed to encouraging utilization and expansion of reproductive health services and education. Little is known, however, about the effects of these more restrictive policies on adolescent birth rates at the national level or their differential effects by race and ethnicity. The extant literature is even scarcer in low- and middle-income countries. We analyze an unexpected policy change in Ecuador that abruptly reversed course and restricted reproductive health services for teenage women in 2014. We use a canton- and time-fixed effects difference-in-differences analysis of Ecuador’s 221 cantons with time-varying controls to analyze the impact of the abrupt policy change on the difference of teen (15−19 years) minus young adult (20−24 years) birth rates. In a difference-in-difference-in-differences analysis, the policy change increases birth rates by 8.5 births per 1000 women in cantons with higher indigenous concentration. Results are robust to changes in the comparison population (young adults vs. women in their late 20 s or in their early 30 s), pre-intervention control periods, population weighting, serial correlation, logarithmic model specification, adjustments for intervention year, definition of indigenous concentration, and potential delays in policy implementation.

Il Miracolo del Crocifisso di Beirut del fiorentino Jacopo Coppi in San Salvatore a Bologna: architettura picta e tentativi per una nuova tolleranza ebraica nell’età di Paleotti.The Miracle of the Crucifix of Beirut by the Florentine Jacopo Coppi in San Salvatore in Bologna: painted architecture and hypothesis for a new Jewish tolerance in the age of Gabriele Paleotti.

The altarpiece by the Florentine Jacopo Coppi kept at the church of San Salvatore in Bologna represents the Miracle of the Crucifix of Beirut, a rare iconography that the Florentine painter inserts in a complicated architectura picta. This studio reconsiders the iconographic and stylistic aspects through the data of the most updated artistic literature pieces in order to read them in a new and different historiographic perspective, which also shows an unexpected policy of tolerance towards Jews in the Palaeottian context.

The price of risk in residential solar investments

Households are key actors in decarbonizing our economy, especially when it comes to investments in a decentralized energy system, such as solar photovoltaics (PV). The phasing-out of feed-in tariffs, and unexpected policy changes in the wake of an increasingly polarized climate debate, require residential PV investors to bear new risks. Conducting a discrete choice experiment coupled with a randomized informational treatment among potential residential solar investors in Switzerland, we test whether policy and market risks deter households from investing in solar. We find that salient policy risk reduces households' intention to invest in solar, especially for risk-averse individuals. Conversely, households seem less sensitive to market risk: residential solar investors accept volatile revenues, as long as a price floor for excess electricity sold to the grid is guaranteed. Our study suggests that keeping perceived policy uncertainty low is more important for residential solar investors than fully hedging against electricity market risk.

Deciphering Federal Reserve Communication via Text Analysis of Alternative FOMC Statements

We apply a natural language processing algorithm to FOMC statements to construct a new measure of monetary policy stance, including the tone and novelty of a policy statement. We exploit cross-sectional variations across alternative FOMC statements to identify the tone (for example, dovish or hawkish), and contrast the current and previous FOMC statements released after Committee meetings to identify the novelty of the announcement. We then use high-frequency bond prices to compute the surprise component of the monetary policy stance. Our text-based estimates of monetary policy surprises are not sensitive to the choice of bond maturities used in estimation, are highly correlated with forward guidance shocks in the literature, and are associated with lower stock returns after unexpected policy tightening. The key advantage of our approach is that we are able to conduct a counterfactual policy evaluation by replacing the released statement with an alternative statement, allowing us to perform a more detailed investigation at the sentence and paragraph level.

Do checks on bureaucrats improve firm value? Evidence from a natural experiment

AbstractThis paper studies the impact on firm value of tighter checks on bureaucrats’ behaviour. We use as a natural experiment the revision in 2015 by the Communist Party of China (CPC) of its regulations on disciplinary actions. We document a positive and substantial market reaction following this unexpected policy change that tightened and formalised constraints on bureaucrats’ misconduct. The impact is less pronounced for firms with state ownership, firms having CEOs or directors with CPC membership, and firms that operate in provinces with better institutional quality. The subsequent revision in 2018 that enforced political obedience is not associated with a positive market reaction.

Monetary policy through exchange rate pegs: The removal of the Swiss franc‐Euro floor and stock price reactions

AbstractThe Swiss National Bank abolished the exchange rate floor versus the Euro in January 2015. Using a synthetic matching framework, we analyze the impact of this unexpected (and therefore exogenous) policy change on the stock market. The results reveal a significant level shift (decline) in asset prices following the discontinuation of the minimum exchange rate. As a novel finding in the literature, we document that the exchange‐rate elasticity of Swiss asset prices is around −0.75. Differentiating between sectors of the Swiss economy, we find that the industrial, financial and consumer goods sectors are most strongly affected by the abolition of the minimum exchange rate.

Trade policy changes, tax evasion and Benford's law

This paper draws attention to import duty evasion as a margin through which firms adjust to changes in trade policy. This margin is different from the other forms of adjustment, as it can be employed very fast and thus it may constitute the initial reaction to the shock before a slower adjustment through the other channels takes place. The study also proposes a new method of detecting tax evasion in international trade, based on deviations from Benford's law. It applies the method in the context of an unexpected policy change in Turkey that increased the cost of import financing. The results are consistent with an immediate increase in tax evasion in the affected import flows, which dies down a year later. A standard approach to detecting tariff evasion, based on “missing trade”, confirms these conclusions.

Do Checks on Bureaucrats Improve Firm Value? Evidence from a Natural Experiment

This paper studies the impact on firm value of tighter checks on bureaucrats’ behavior. We use as a natural experiment the revision in 2015 by the Communist Party of China (CPC) of its regulations on disciplinary actions. We document a positive and substantial market reaction following this unexpected policy change that tightened and formalized constraints on bureaucrats’ misconduct. The impact is less pronounced for firms with state ownership, firms having CEOs or directors with CPC membership, and firms that operate in provinces with better institutional quality. However, the subsequent revision in 2018 that enforced political obedience is not associated with a positive market reaction.

The Value of Academic Independent Directors

This paper investigates the value of academic independent directors (ADs) by exploring an unexpected policy shock that forces ADs to resign from Chinese listed firms. Around the announcement of the policy, stock prices of firms with ADs drop by 2.2%, which translates to a loss of 135M RMB (around $19.3M). ADs with backgrounds that are related to the firms’ primary line of business, with connections to industry associations, and who hold top positions in prestigious universities are more valuable to firms. ADs with business backgrounds are more valuable when they serve on particular board subcommittees. Moreover, ADs miss fewer board meetings. In the long run, firm fundamentals and independent directors’ monitoring and advising efficiency deteriorate significantly after ADs resign. Our paper sheds new light on the value of independent directors.

Do Bureaucratic Checks Improve Firm Value? Evidence from a Natural Experiment

This paper studies the impact of bureaucratic checks on firm value using the revision of the regulations on disciplinary actions of the Communist Party of China (CPC) in 2015 as a natural experiment. We document a positive and substantial market reaction following this unexpected policy change that tightens and formalizes the constraints on bureaucrats’ misconduct. The impact is less pronounced for firms with state controlling shareholders or state ownership, firms having CEOs or directors with CPC memberships, and these operate in regions with better institutional quality. The subsequent revision in 2018 that emphasized political obedience is not associated with positive market reactions. Our results have policy implications for the design of the incentive structure within bureaucratic organizations.

The Long-term Rate and Interest Rate Volatility in Monetary Policy Transmission

As monetary policy tools exert increasing impacts on the longer end of the yield curve, this paper considers a long-term real rate as an alternative policy indicator in a structural VAR framework. Based on an event study of FOMC announcements, we advance a measure of the unexpected policy influence on long-term interest rate volatility. Monetary policy shocks identified by this volatility measure as an external instrument drive significant swings in credit market sentiments and real output, while the policy shocks motivated by unexpected policy rate changes lead to muted responses. Our results support the validity of the risk-taking channel, in which risk perception in financial markets plays an indispensable role in monetary policy transmission.

A MODEL OF STOCK MARKET CORRECTIONS USING STATISTICAL MACHINE LEARNING

ABSTRACT Global real economic activity is closely linked through various financial mechanisms, including credit and equity markets, as illustrated by the 2008 U.S. financial crisis and the resulting widespread economic dislocations. We apply statistical machine learning to the problem of identifying the key risk factors associated with daily equity market corrections and to address whether changes in monetary policy influence aggregate stock returns. Monetary policy changes that persist from one trading day to the next increase the odds of an equity market correction, as back-to-back adjustments in the funds rate might signal an unexpected policy action. If market agents view the temporal evolution in monetary policy as being unpredictable, the likelihood of market corrections increases as the overall confidence in the Fed’s ability to provide long-term price stability diminishes. The likelihood of a stock market decline is reduced if monetary policy follows a predictable path. An implication of this finding is that monetary authorities tend to remain in a tightening or an easing pattern until they receive a strong signal that they may have tightened or eased excessively. Such a signal in a contractionary cycle could be an inversion in real economic growth accompanied by a sizable equity market correction. Another finding of this paper is that heightened variability over time increases the odds of market corrections. The market response may be driven by the waning confidence of market agents. The impact of monetary policy changes is not symmetric as declines in the interest rate may lead to larger changes in equity prices. This fits the notion that many market agents fail to consider not only the effect of asymmetric temporal adjustments across a range of risk factors but also the impact of persistence in monetary policy changes on equity prices. Model results indirectly incorporate momentum-driven investor psychology and bandwagon effects. An original multiple feature lag-length optimization algorithm and the associated generalized non-linear vector autoregressive (GENVAR) framework introduced in the paper merit further study. Keywords Monetary Policy, Equity Prices, Stock Market Corrections, Statistical Machine Learning, GENVAR, Multiple Feature Optimal Lag Algorithm, Interest Rates, Asymmetric

Managing Policy Reversals: Consequences for Firm Performance

The recent revival of populism and nationalism across many parts of the world threatens to unravel the market-oriented reforms of the previous era. We examine the impact of the reversal of a previously adopted market-expanding policy on organizational performance. We argue that these policy reversals are contested; affected firms undertake a broad range of political and nonmarket activities to alter the implementation of the policy and buffer themselves from adverse consequences. However, these activities can increase policy uncertainty while making new demands on management, leading to diminished investment and a reallocation of finite managerial resources. The result is that firm performance on operational parameters suffers, including in locations that are not directly affected by the policy reversal. To empirically isolate this effect, we exploit an unexpected policy reversal in the context of telecommunications firms in India. Through an example caselet, we first outline the political and nonmarket activities of one firm affected by the unexpected policy reversal. We then empirically examine the performance of affected and unaffected telecommunication firms using a difference-in-differences approach to provide support for our arguments. The online appendix is available at https://doi.org/10.1287/stsc.2019.0083 .

Reassessment of Beijing’s economic and military aid to Hanoi’s War, 1964–75

ABSTRACTAlthough China’s assistance to North Vietnam was substantial, playing a vital role in Hanoi’s war against the United States, this policy was made based on Beijing’s strategic calculation and ideological conviction rather than on Hanoi’s needs. The Chinese leadership attempted to use aid to influence Hanoi’s approach to the war, but achieved almost no effect. Instead, Beijing’s manipulation made Hanoi suspicious about the Chinese leadership’s real intentions in Indochina, and Beijing’s effort to help Hanoi against the United States was arguably its biggest, unexpected foreign policy failure in the Cold War.