VIDEO INTERVIEW: Monetary-Fiscal Interaction, the Euro Crisis, and More with Dr. Jan Libich

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.



Five Distinguished Professors Join CERGE-EI Executive and Supervisory Commitee

CERGE-EI is delighted to announce the names of five distinguished academics who have recently joined the Executive and Supervisory Committee (ESC) of CERGE-EI: Christopher Sims (Princeton University),  J. Peter Neary (Oxford University), George J. Mailath (University of Pennsylvania), Kevin Miles Murphy (Chicago University), Larry Samuelson (Yale University).

The ESC’s functions include ensuring the introduction and maintenance of the highest academic standards, reviewing institutional finances, supervising the efficient use of available funds, and assisting in developing external funding sources. The ESC is also responsible for certain management functions, including recommending candidates for the directorship of the institution.

Christopher Sims (Princeton University), Nobel Prize Laureate 2011

Christopher Sims is a Nobel Laureate and a professor of economics and banking at Princeton University since 1999. In 2012, he served as president of the American Economic Association. In 2011, he was awarded the Nobel Prize along with Thomas Sargent (New York University) for their development of tools to analyze the economic causes and consequences of monetary policy. Their work has revolutionized the field of macroeconomics and is used by central banks and governments around the world.

Prof. Sims laid the foundations for the theory of ‘rational inattention.’ This rapidly expanding research area stands on the idea that it is costly and difficult for people to process information, Therefore, their decisions and actions do not move smoothly, as is predicted by many other theories, but rather in leaps. Rational inattention theory helps explain many previously inexplicable phenomena in financial and equity markets, and can even be applied to understanding current events in troubled Eurozone countries like Greece and Spain.

Professor Sims visited CERGE-EI in 2012 to participate in an academic conference about rational inattention and related theories. Christopher Sims works closely with CERGE-EI faculty member Filip Matějka.

George J. Mailath (University of Pennsylvania)

George J. Mailath is Walter H. Annenberg Professor in the Social Sciences and Professor of Economics at the University of Pennsylvania. He obtained his M.A. and Ph.D. degrees from Princeton University.

Professor Mailath’s recent research focuses on pricing and matching: the role of prices in providing incentives for efficient investments in settings where value is generated by matching agents (such as workers and firms, or buyers and sellers). In earlier work, with Professors Cole and Postlewaite, Professor Mailath showed that under complete information, the presence of many agents on both sides of the market ensures that there is no hold-up problem. Recently, with Professors Postlewaite and Samuelson, he has studied the impact of asymmetric information on pricing and investment behavior, showing that investments will typically be inefficient and describing the nature of these inefficiencies.

Kevin Miles Murphy (University of Chicago) 

Prof. Murphy joined the Chicago Booth faculty in 1984. He is a fellow of the Econometric Society and an elected member of the American Academy of Arts & Sciences. Murphy was a John Bates Clark Medalist in 1997.

In his research, Prof. Murphy reveals economic forces shaping vital social phenomena such as wage inequality, unemployment, addiction, medical research, and economic growth. His work challenges

preconceived notions and attacks seemingly intractable economic questions, placing them on a sound empirical and theoretical footing.  In addition to his position at the University of Chicago, Murphy works as a faculty research associate for the National Bureau of Economic Research. He primarily studies the empirical analysis of inequality, unemployment, and relative wages as well as the economics of growth and development and the economic value of improvements in health and longevity.

In 2007, Murphy and fellow Chicago Booth faculty member Robert Topel won the Kenneth J. Arrow Award for the best research paper in health economics for “The Value of Health and Longevity,” published in the Journal of Political Economy. The award is given annually by the International Health Economics Association.

Prof. Murphy is also the author of two books and many academic articles. His writing also has been published in numerous mainstream publications including the Boston Globe, the New York Times, the Chicago Tribune, and two Wall Street Journal articles coauthored by Nobel laureate Gary Becker.

J. Peter Neary (Oxford University)

Peter Neary is Professor of Economics at Oxford University and a Professorial Fellow of Merton College. He was an editor of the European Economic Review from 1986 to 1990 and has served on a number of other editorial boards. He was President of the European Economic Association in 2002, and played a leading role in establishing the Journal of the European Economic Association.

His main research field is international trade theory, where he has worked on short- to long-run adjustment, the economics of resource-rich economies (especially the “Dutch Disease”), trade and industrial policy, and the implications of imperfect competition (especially oligopoly) for trade and globalization, among other topics. He has also written on consumer theory (including rationing and index numbers), industrial organization (including the economics of research and development), and macroeconomics (including international macro theory and Irish economic policy).

Larry Samuelson (Yale University)

Larry Samuelson’s research focuses on microeconomic theory, game theory, and the evolutionary foundations of economic behavior. Samuelson joined the Yale faculty in 2008. He became a member of the American Academy of Arts and Sciences in 2011 and a Fellow of the Econometric Society in 1994. He has served on the editorial boards of a number of journals, including Econometrica, Economic Theory, and the Journal of Economic Theory.

Samuelson is widely known for his unconventional ways of thinking about economics. “ Economic theory has long emphasized impersonal market forces,” he says. “My work seeks to inject a more personal element into economic theory.” Using game theory as a research tool, Samuelson studies strategic interactions in which many individuals have an impact on outcomes and recognize how their actions affect others. He also looks at how people use personalized relationships, as opposed to anonymous markets, to allocate resources. Samuelson is the author of two books, Evolutionary Games and Equilibrium Selection and Repeated Games and Reputations: Long-Run Relationships, with George J. Mailath, as well as many articles and book chapters.


An Interview with Dr. Ferre de Graeve, Researcher at Sweden’s Central Bank

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


CERGE-EI Sports: Students and Professors Run Together in 10k Race

Last weekend, seven CERGE-EI students and two CERGE-EI professors participated in the Palestra Kbelska 10K race in Prague. This was the 27th year of the race, which is one of the biggest cross country races in Prague. With Spring coming to the city, it was a great kick-off to outdoor sports and activities for CERGE-EI students. Hats off to these guys for running it the morning after the CERGE-EI beer party…

The professors and students were: Prof. Jan Hanousek, Prof. Fabio Michelucci, Dejan Kovac, Lin Kuan-Heng, Jakub Beran, Iva Pejsarova, Oleg Sidorkin, Leon Petani, and Myroslav Pidkuyko.