On 24th of February CERGE-EI hosted a presentation, Perspectives on the European Economy, provided by the European Economic Advisory Group at CESifo. The conference explored a variety of hot topics that are examined in the EEAG Report on the European Economy 2016, which was released earlier in the week. The session included two co-authors of the report, John Driffill and Jan-Egbert Sturm, plus special guest, Kamil Galuščák of the Czech National Bank, and was chaired by Danial Münich of IDEA think-tank at CERGE-EI. Continue reading Perspectives on the European Economy: An Overview
This post was prepared by Geghetsik Afunts, a second year PhD student at CERGE-EI.
Do governments need a “Personal Trainer or Watchdog” to achieve objectives such as long-term sustainability of public finances, economic growth or surplus targets? Fiscal watchdogs have existed for a long time in some countries and one of the first European countries was Sweden. But the Chairman of the Swedish Fiscal Policy Council John Hassler says that in practice such institutions are considered more as personal trainers than watchdogs. Continue reading Fiscal Policy Council: Personal Trainer or Watchdog?
Over the course of his long career, George Psacharopoulos has made a deep impact on the way education is viewed from the perspective of economics. During his CERGE-EI Public Lecture on November 4th, Prof Psacharopoulos gave an interesting overview of the evolution of this research. He walked the audience through years of evolving theories and empirical evidence on the importance of education as both a personal and public investment, sharing a number of revealing facts and thoughtful insights.
See the full lecture with accompanying slides here:
Unemployment is a major source of misery in modern society. It is also plainly a waste of resources. So it is perhaps no surprise that macro and labor economists are obsessed with explaining the phenomenon. But are they searching in the wrong place for answers? Professor Andrew Oswald (Warwick University) said at his public lecture at CERGE-EI that he thinks they are, and that he may have found a key.
According to Oswald, economists have typically looked for answers “too close to the source.” Standard explanations have focused on the impact of trade unions, over-generous unemployment benefits, and inflexible labor markets. Yet policies meant to address these issues have made only minor dents on unemployment levels.
Professor Oswald ventured to propose a radically different explanation for the persistent unemployment we observe across developed countries. According to his research, the level of homeownership within an economic area can largely explain the level of unemployment. Few economists have explored this rather unintuitive notion, but as Oswald noted, it is typical for experts to overlook deep structural forces in favor of more immediate explanations.
But how does homeownership negatively impact employment? Oswald considers three possibilities. The first is that higher homeownership lowers geographical mobility. By reducing the flexibility to move between locations, homeownership reduces workers ability to relocate to places where their knowledge and skills may be put to better use. The second possibility is that homeownership contributes to urban sprawl and lower-density housing. Long commuting times and congestion hamper economic activity and efficiency.
Finally, Oswald points out that homeownership directly relates to the ‘Not in My Back Yard’ problem (NIMBY). Homeowners often oppose new productive development projects because they perceive the projects as having negative external effects on their neighborhood. Residents can often team up in homeowners’ unions to block projects from being realized. Even though they often agree that those developments are needed in society, they do not want the development to take place in their ‘back yard.’ As such, NIMBY blocks productive economic activity and development from taking root.
Pondering how a lake becomes filled with water, primitive man would have concluded that it collects the rain falling from the sky. He could not have imagined that hidden streams of water deep underground are the true source. Andrew Oswald’s proposition—that homeownership is the underlying cause of long-term unemployment—is also hidden from sight, but that certainly doesn’t mean it’s not there.
The CERGE-EI Public Speaker Series invites leading international scholars to Prague to present their ideas and engage in public discussion. Learn about upcoming CERGE-EI events here.
“Economic growth is a function of education, period.” During his public lecture at CERGE-EI, Professor Eric Hanushek emphasized the enormous impact that human capital (i.e. education) has on long-term economic development. A renowned scholar in educational research, Professor Hanushek (Stanford University) used this link between education and development to make a compelling argument for improving the quality of instructors.
Prof. Hanushek began his lecture from a distance and gradually brought the audience ‘closer to earth.’ From the furthest vantage point, he established the unambiguous link between economic growth and test scores (i.e. what students know). A graph plotting test scores and economic growth revealed a nearly perfect correlation for a wide sample of countries over the past five decades. To Prof. Hanushek, the data screams loud and clear that imparting knowledge and skills through the educational system is the most potent means by which countries successfully grow.
Unfortunately, raising test scores is not so simple. Students may be required to attend school, and governments spend a great deal to make this happen, but merely sitting in a classroom with a teacher is not enough to guarantee meaningful learning. The question, then, is how to ensure that students learn while they sit in those classrooms.
According to Prof. Hanushek, research on student achievement has identified that good teachers play the essential role. In economic terms, how much can a good teacher contribute to economic growth? He showed that a top teacher with a class of 30 students will boost the cumulative lifetime income of that classroom group by over $800,000. Of course the inverse of this relationship also exists: lousy instruction from the worst teachers will damage their students’ earnings by a similar magnitude.
Removing the worst teachers and replacing them with average ones could contribute to large gains in test scores—and as Hanushek already demonstrated, higher test scores should directly contribute to long-term economic growth. Analyzing the Czech Republic and making conservative assumptions about teacher quality, he showed that removing the bottom 5% of teachers and replacing them with average instructors could lift the country’s test scores to the level of Finland. This in turn would add 110 trillion euros to the Czech Republic’s GDP over the next 80 years (in present value worth).
Considering the enormous impact that good teachers can have on student achievement and economic growth, the focus on improving teacher quality should be paramount. Unfortunately, solutions to improve teacher quality are often misguided and ineffective.
Rather than focus on a teacher’s educational credentials, experience, or training, Prof. Hanushek proposed solutions that work with incentives and focus on outcomes. He suggested methodically measuring testing outcomes and rewarding teachers for achieving defined objectives. He was also dismissive of those who see technology as a silver bullet. Accountability and performance rewards can be far more effective than giving students iPads.
Check out the full lecture below:
At the end of April 2013, we had the honor to welcome Prof. Eric Maskin (Harvard University) to CERGE-EI in Prague. On April 29, Prof. Maskin gave a public lecture titled “How to Make the Right Decisions without Knowing People’s Preferences: An Introduction to Mechanism Design”.
To begin his lecture, Prof. Maskin contrasted the field of ‘mechanism design’ with other more familiar parts of economic theory. Whereas the bulk of economics takes existing institutions as a given and aims to understand and explain outcomes delivered by those institutions, mechanism design reverses the direction. It starts by identifying outcomes one wishes to achieve and asks whether institutions are able to be designed to achieve the desired outcome(s) and, if so, what these institutions ought to look like. In this sense, mechanism design can be called an “engineering” component of economic theory.
To further illustrate the concept, Professor Maskin offered three concrete applications of mechanism design theory. They were, in the order presented, (1) how can you divide a plot between two people in a way that neither of them envies the share of the other?, (2) how can a government sell a license to allow transmission over a band of radio frequencies to a company which values it most?, and (3) how to choose a public energy source when individual preferences are different and optimal choice depends on the unknown state of the world? Professor Maskin explained how insights from mechanism design theory can provide answers to these intractable questions.
Simple as they are, these examples illustrate key features of mechanism design. First, a designer of the mechanism does not know what the optimal outcomes should be. Secondly, the designer must proceed to indirectly convince participants to reveal necessary information. Finally, participants have their own goals and motivations which may not coincide with those of the designer. Therefore, the mechanism must be ‘incentive compatible’—in other words, it should recognize those goals and reconcile them with those of the designer.
The examples presented during the lecture displayed transparent mechanisms that are implemented to achieve the designer’s goals. For those interested in a general way to understand whether a goal is implementable and, if it is, how to find a mechanism to implement it, Professor Maskin referred to his seminal paper, “Nash Equilibrium and Welfare Optimality.” Professor Maskin concluded with some further examples of possible future applications of mechanism design theory, namely the development of an international treaty on greenhouse gas emissions and the design of policies to prevent financial crises.
While here, Professor Maskin also sat down with CERGE-EI student Maxim Guryunov for a brief interview. Check out the highlights on our CERGE-EI Youtube Channel:
Find the full list of Distinguished Speaker Series at CERGE-EI here
Media economics, the study of the macro and microeconomic aspects of media companies and industries, is an ever-changing field. With new mediums of consumption, new audiences, and changing forms of entertainment, the research agenda is constantly expanding. Professor Anderson (University of Virginia) researches many aspects of media economics. He recently visited CERGE-EI to present his most recent paper, Media Market Concentration, Advertising Levels, and Ad Prices.
While at CERGE-EI, Professor Anderson sat down for a brief interview with PhD student Liyou G. Borga. Check it out in HD on the CERGE-EI youtube channel:
Professor Marcel Fafchamps (Oxford University) researches development economics, with a particular interest in social networks, risk-coping strategies, and market institutions. With advanced degrees in law and economics, Professor Fafchamps is fascinated by the role of institutions (both formal and informal) in the development of productive economic exchange. His recent papers include work on markets, political economy, social networks, and link formation. He also serves as deputy director for the Center for the Study of African Economies.
Professor Fafchamps visited CERGE-EI recently to present a paper titled “Networks and Manufacturing Firms in Africa”. While here, he sat down for an interesting interview with two CERGE-EI PhD students, Liyou G. Borga and Dejan Kovac.
Before you began doing economic research, you did some development work. Why did you choose to go back and get your PhD?
That’s correct. After completing my military service I went to work for the ILO in Ethiopia. I initially went for a year but ended up staying for four and a half years, and I even met my wife there. I became interested in research at that point, and I noticed that everyone around me who was doing interesting research already had a PhD… so I thought, I better get one of those!
You work on research and you design some policy recommendations for developing countries, but these countries and their government are not always fond of these recommendations and may not put them in to practice. Is it frustrating to do this kind of work?
I find it very rewarding. Even though I started in policy, over time I moved away from pure policy-oriented work and more into behavioral work, because I think that if you can understand some of the main drivers of human behavior, you can try to anticipate how they will respond to various policies, even policies we haven’t tested yet. That’s always been my personal approach.
So I don’t try to come to the government of Ghana and say ‘You should do X’. I never could see myself in that role. For several reasons: One is that I don’t think I should be advising the government of Ghana. I don’t know enough about Ghana. They should be listening to their own people, they should have their own local capacity. I train people from a whole series of developing countries, and a lot of them go back to their country. So I try to give them the best possible grounding and training. In my view teaching is my most important policy work.
And the second is that politicians are on a different clock than we are. They are subject to pressure; they deal with crises and emergencies all the time. If the prime minister wants me to advise on what to do, they want an answer now. But research takes time—it will take at least two years before you get a meaningful result. Politicians never have time to wait that long.
And the third thing is that policy research is impossible in the following sense: You can never do research on something that has not happened yet. Hence you cannot give a definitive answer to someone who wants to know the future effect a proposed policy. You can offer a prediction based on your understanding of the processes at work, and hopefully this opinion is an informed one so you can give a better prediction than other people. But at the end of the day it’s only a prediction. The politician should blend this prediction to their own predictions based on their own understanding of the various political dynamics at work, which they understand way better than you ever will. And of course, as a policy advisor I am not really responsible for my actions as an advisor. I can say ‘well you should do X, Y, and Z’— and then what? What if it costs millions, or kills people? I think they should be the ones who make the decisions, not outsiders who are ultimately not responsible for the consequences of their advice.
You are involved in the Center for the Study of African Economics. Do you see a reason to be an optimist about African development? Are they on the right track?
You know the answer to that question is yes. There will be hiccups along the way, just like in Latin America (and if you want to find a part of the world that is most comparable, in terms of population pressure, types of resources, geographical location, and to some extent history, it’s Latin America). The way I see it, the main historical difference between Latin America and Africa is the pattern of colonization and pattern of settlement. America was colonized very early, from 1500 onward, and ended in the 1820s, roughly. And because the Europeans brought many diseases which the Native Americans were not immune to, there was a very large depopulation on the continent. So you have a lot of Latin American countries where big native populations were largely marginalized, and only now are they politically emerging after 200 years of independence.
That’s very different in Africa where it was the opposite. The settlers didn’t survive very well, and the native Africans were much better at surviving, so colonization started very late and lasted for a very short period of time. And it did not, except in South Africa, generate a settler population. Whatever settler population was introduced as a result of colonization, a lot of them have left.
So then if you compare Latin America to Africa, you see that these settlers bring with them a lot of talent and human capital. They bring familiarity with business practices, with modes of contracting, and these get transplanted nearly immediately. You don’t have to wait for the local population to learn how to take advantage of innovations like supplier credit, banking, etc.
This explains why it took longer in Africa. But now it’s happening ! I’m very optimistic. There’s no reason why it shouldn’t continue. It could have happened faster if there were more settlers, but then you would have the same problem we see in Latin America, where the native population gets side-lined. In Africa that is not taking place.
So in a sense, in a bizarre way, I am more optimistic for Africa; it was a bit harder to get started because there was a lot of learning to do about modern business practices and institutions, but once they have learned it, they’ll be in charge.
A lot of your research is based on Social Capital. So what is social capital, and how does it influence economic outcomes?
The way I think of social capital, the way the word is useful, is that it’s a flag behind a research agenda which looks at certain phenomena. There are three components: norms, networks, and outcomes (for example, the provision of public goods).
It’s funny that sometimes researchers will only look at the first and the third. For example, they look at certain types of social norms and how they influence outcomes, but do not focus on the networks, or do not even require network dimensions. Other researchers focus on networks and outcomes, but not on the norms. So in the first case, social capital will be the norms people have internalized, and in the second case social capital will be their networks, for example how many friends they have, what kind of friends they have. In this sense it is a strange research agenda, because it doesn’t always use this phrase with the same meaning.
I think the provision of local public goods is absolutely essential for communities, and also for business communities. And this is what has particularly interested me. Because you don’t get very effective business communities without them using up-to-date organization forms and contractual forms between themselves. When you think about growth and development, if you try to explain the last two hundred years and the rapid increase in standards of living across much of the world, what you see is the spread of innovation. If you learn something about knowledge in one particular area it can spread and help you innovate in another area. But the innovations people typically focus on are things, like the steam engine or electrical power, or consumer goods like the computer and the telephone. But they forget about institutions and forms of organization. Yet that’s what we economists do. This is the kind of thing we study and where we offer innovations. For example: independent central banks, auction for cellphone airwaves, conditional cash transfers. We offer research on innovations in organizational forms and institutions.
But the thing is: if we discover that a computer is useful, you buy a computer. However, if you discover that trade credit is useful, it’s not so easy to introduce that on your own. Everyone is going to suck you up, take your credit, and not pay you. It has to be a collective decision. So you get into this issue: how to respect other people’s trade credit practice so it becomes like a local public good within your community. But how do you generate that? That’s pretty interesting. It involves social norms, respect for social norms, it involves networking, coordination. Basically it involves the provision of local public goods.
What do you think of bonding capital becoming a negative influence, for example the Mafia in Southern Italy? Is this type of thing possible to empirically investigate?
I think this point has been made before. I would say it’s worse than that, in the following sense: if you tell me that people with a bigger interpersonal network derive advantages from it (e.g. getting a job, doing more business, easier access to credit, ability to deliver public goods within their group), then by definition you are saying there are other people out there who don’t have these benefits. So I would say that every time that interpersonal social capital is helpful, it is also creating inequality. For that reason, I am very skeptical of interpersonal social capital, and why I prefer generalized trust and generalized norms; I prefer things that are the same for everyone and don’t exclude anyone.
What is the connection between monetary and fiscal policy? How do the interactions between them explain the global financial crisis and its aftermath? Dr. Jan Libich, senior lecturer at La Trobe University in Melbourne, is deeply interested in questions of monetary and fiscal interaction and how an understanding of them may provide solutions to today’s difficult global economic problems.
Dr. Libich visited CERGE-EI in January to discuss his paper, ‘Monetary Exit Strategy and Fiscal Spillovers’. While here in Prague, Dr. Libich sat down for an interview with CERGE-EI student Dejan Kovac to discuss his economic research and policy suggestions. Topics of discussion included: interactions between government’s fiscal policy, the central bank’s monetary policy, the prospects of the European monetary union, sustainability of public finances, the global financial crisis, the future of inflation targeting, and aging populations.Watch the full video interview (in HD) here!:
Dr. Jan Libich is a senior lecturer at La Trobe University in Melbourne and the School of Economics, VŠB-TU Ostrava.
Dr. Ferre de Graeve, a researcher at Sveriges Riksban (Sweden’s central bank), visited CERGE-EI back in November to discuss fiscal policy in contemporary DSGE models. Check out the hitherto unpublished interview between Dr. de Graeve and CERGE-EI PhD student Liyou G. Borga
Why did you choose to study economics? What motivates you?
At the age of 18, going out of school, I didn’t really know what I wanted to do. I decided to study but I pretty much eliminated subject after subject, and what was left was economics. After about three or four months of studying economics, I knew I wanted to do research in the field. And here I am. No regrets so far.
How do you approach your research interests?
I tend to not take advantage of economies of scale. I switch topics a lot. And that’s essentially because I want to learn more. Certainly there are disadvantages to that. But it’s so easy to get excited by something entirely new. I just pursue ideas that I find interesting.
At any point in time I have a couple ideas that I don’t pursue but I think about. But if let’s say a year later they’re still in my head, chances are I start working on them.
What are you working on now?
Essentially I am presenting at CERGE-EI an old paper of mine in which we were concerned with the term structure of interest rates. Now I am revamping that paper from a different angle. There has been a lot of discussion lately about fiscal policies, for obvious reasons. What we realized is that, although the paper has nothing to do with fiscal policy, essentially it turns out to be quite informative about what people call ‘fiscal inflation’. This is the probability that inflation is going to be driven by fiscal policy in the near future. So we basically estimated the model, and it turns out that the model immediately speaks to this issue. It was only two weeks of research, and all the results are already there. That’s definitely not my usual experience.
How did that happen? Is it just that you got lucky? Why did you decide to go back and look?
In terms of work, we got lucky, because we didn’t have to do much. There are a couple of people these days who warn us about fiscal inflation, and perhaps it’s the sense in their arguments that made us go back and look.
One big area for our students is macro models. This DSGE model comes up often in macro issues. Can you tell us in laymen-terms what this model is and why it is different from traditional models?
DSGE models are essentially models that describe business cycle fluctuations and are built from what we call “micro foundations”; deep structural parameters that determine economic agents’ behavior.
Let me distinguish DSGE models from reduced form forecasting models on the one hand, and old-style structural models on the other. DSGE models complement both. Regarding the first set of models, the important part is that the DSGE models allow us to understand something that the forecasting models don’t necessarily do. Both models will produce forecasts. But DSGE models build on mechanisms that have an economic interpretation. The big advantage that implies for example for central banks is that they allow storytelling. You can think about policies and how they will work. You can create forecasts conditional on policies and that’s a lot harder to do in traditional reduced-form models.
The old-style structural models had the same objective as DSGE models. However, the way they were constructed was rather ad hoc, often inconsistent with theoretical models. They therefore produced answers to policy questions that were hard to put faith in.
How risky is it for central banks to adopt this model and base their forecasts on it, if we base our micro-foundations on some assumptions that don’t work?
I think the main risk is over-estimating the value of a model. I mean as soon as you have a model that you can use to tell stories, you may have too much attention for that model and you may stop thinking about model uncertainty. Because there are other models out there we are not studying. The current crisis is hopefully teaching us that we should think about other models too. In building a model and using it for policy analysis, there are a lot of steps we take that involve assumptions that won’t do well in the current state. We often fail to generate crises in these models of the type we see in reality. That said, I think there is a lot of value in being able to communicate clearly through a model. I definitely think there is value in DSGE models and how they are constructed, but we shouldn’t think that we’ve solved everything here.
As students, we always want to know advice about how to pursue research. Do you have any advice?
I ask myself that question everyday, and I don’t know. The most important factor, I think is this: pursue your interest. In research you never know where you’re going to end up. You’ll always find out that things don’t work out. So you better have inherent motivation to get you going, even when you face those stages of research.
If it’s your interest, you’re kind of blessed to have the opportunity. For me, it’s certainly better than a lot of alternatives. The fact that I can think of something I find interesting and follow up on it—the average job doesn’t necessarily give you that.
Following the literature might give you more of a probability of getting publication success, but maybe there is value in thinking completely differently and pursuing it.
What is economics now, in terms of importance and relevance, compared to the past?
Well the field is getting so big now. When I started, I had the impression that everyone was doing macro and everyone was discussing with everyone. Now it seems there are so many fields, and they have all developed so much, so it’s hard to know about everything.
So is that a good thing?
Perhaps with more fields we are inclined to go deep in every particular field, but then you can easily lose track of the bigger picture. It’s important that at least some people keep a bird’s eye view of all the fields, and question whether we are focusing on the right questions. Of course sometimes reality does it for us, such as with this recent crisis. Afterwards, a lot of researchers I know thought ‘am I working on the right topic, given that current events are so massively important?’. Of course having many different fields can help people learn from each other and build.
Economics is indeed very diversified now, but there are some important questions unanswered. What research questions should be best pursued today by students?
Although we have models that have evolved to understand crises, we’re not there yet. I’m sure there are a lot of questions that are unanswered relating to all aspects of the financial crisis: both what’s happening in the financial sector, how it related to what’s happening in the real economy, and feedback between the two. There are a lot of things we don’t know in this area.
Mostly our students are from transition and developing countries. In terms of research, what is the comparative advantage of a student coming from one of these countries?
Well for one thing, they probably have more observations and experiences with crises than Western Europeans have. I see that roots are important in research. But having had a good education will basically allow you to do anything. So then it comes back to interest. I don’t necessarily see a comparative advantage, it’s just that there is some correlation about what you think is important and where you come from. But given a good education, you’re basically going to be able to do whatever you want, because you have a wide understanding of issues and the ability to learn.
Author: Liyousew G. Borga, 2nd Year PhD Student
9 November 2012