CES Journal online
No. 28, issued 3 November 1997
Contents: [ Krugman | De Grauwe
| Sibert | van Aarle | Lockwood
| Asheim | Treble | Prizes
| News | Contributors]
- Paul Krugman - Distinguished CES Fellow
1997
Paul R. Krugman, Ford International Professor of Economics at the Massachusetts
Institute of Technology, will give this year's Munich Lectures in Economics.
Krugman was elected the "Distinguished CES Fellow 1997" by the Scientific
Advisory Council of CES. The prize which is attached to the lectureship
honours Krugman's important achievements in international trade theory and his
outstanding ability to apply economic theory to policy issues. The prize will
be awarded on 25th November at 6 p.m. in the Great Hall of the Ludwig Maximilian
University.
Krugman was born in the US in 1953. He received his Ph.D. from MIT in 1977 and
has since taught at Yale, Stanford and MIT. In 1982-83 he served the US president
as a member of the Council of Economic Advisers. In 1991, Krugman was awarded
the John Bates Clark Medal, a prize granted every two years by the American
Economic Association to an outstanding economist under the age of 40.
Krugman's main achievement as a theoretical economist is the introduction of
monopolistic competition into trade theory. His work has opened up a new way
of looking at international integration and has, for example, influenced research
on Europe's common market programme immensely. Krugman is known as a brilliant
and outspoken policy analyst who deserves great credit for his courage in fighting
popular economic fallacies and incorrect folk wisdom. His belief is that "if
an op-ed or column does not greatly upset a substantial number of people, the
author has wasted the space."
Apart from an impressive list of scholarly articles, Krugman has written numerous
books which, because of their immediate policy interest and accessibility, have
received a level of attention unknown to any other modern economist. Two examples
may be mentioned. In The Age of Diminished Expectations (1990), a second edition
of which appeared recently, Krugman identified the most important problems of
the US economy and highlighted the growing dispersion of the income distribution.
Peddling Prosperity (1994) is a fascinating history of the linkages between
economic thought and economic policy. It is a book an economics professor should
give to a friend "who wants to know what economics is all about [...] and why
it matters," says Gregory Mankiw.
Following the presentation of the award, Professor Krugman will start his three
part Munich Lecture on "Making Sense of Globalization". The Lectures will later
appear as a book in the Munich Lectures in Economics Series, published by CES
in conjunction with MIT Press. The festivities are supported by the Bayerische
Rück and are held in association with the annual meeting of the Alumni Club
of the department of economies. The members of the Alumni Club, faculty members,
the friends of CES, and interested students are all cordially invited
to attend the presentation of the award, the lecture, and the reception which
follows. [aw]
- Cost and Benefits of a European Monetary Union
Professor Paul De Grauwe from the University of Leuven, Belgium, visited CES
in September. He continued his research on the process of monetary integration
in the European Union including the costs and benefits of monetary union. It
is still important to be aware of the benefits and the costs of such a union
even though it seems that the die is cast.
One of the problems is how and when the exchange rates should be chosen that
will be irrevocably fixed on January 1, 1999. The Maastricht Treaty forces policy
makers to select the market exchange rates of the previous day (December 31,
1998) as the conversion rates. De Grauwe shows that selecting conversion rates
based on the market exchange rates prior to the start of EMU will lead to turbulence
in the foreign exchange markets. The main reason is that, as the start of EMU
comes closer, the movements of the exchange rates become increasingly self-validating.
This problem is not solved by taking an average of market exchange rates over
a longer period. In such a system turbulence is front-loaded to the moment when
the rule is announced. Paul De Grauwe has analysed several alternatives, and
comes to the conclusion that the authorities should anchor the beliefs of market
participants as early as possible. The decisions of the EU ministers of finance
and governors of central banks taken in mid-September also reflect this idea.
[rs]
- Pros and Cons of the Maastricht Criteria
Distortions in labour markets cause unemployment, and give policy makers a systematic
incentive to inflate. A lack of labour market flexibility tempts them to use
competitive devaluations to import jobs from their neighbours. Distorted and
inefficient direct tax systems create an incentive to collect an inflation tax.
Thus, distortions and frictions associated with labour markets and tax systems
bears the risk of inflation.
As inflation would be detrimental to the successful operation of the European
Monetary Union (EMU), the policy conclusion has been that countries before joining
EMU ought to have an underlying economic structure consistent with low inflation
. The Maastricht criteria can be seen as an attempt to restrict EMU membership
to nations which do not need a monetary expansion to increase output or improve
their revenue collection.
During her stay at CES in December Professor Anne Sibert from the University
of London will investigate the reasons why the Maastricht criteria might nevertheless
be counterproductive. Her work is a joint project with Alan Sutherland and F.
Gulcin Ozkan. It is true that the criteria may increase credibility. However,
imposing an inflation target on EMU may reduce the incentive to reform labour
markets. Without having the criteria as a safeguard, governments would always
want to further enhance the flexibility of the labour market. In a world without
Masstricht criteria, this would be the way to improve adjustment to asymmetric
shocks. Due to the currency union this threat is no longer valid and the mechanism
is no longer in place. Therefore, the authors conclude that rigidities on the
labour market are harder to fight in EMU. [hf]
- The Importance of the Euro in the World
CES has focused on the coming Economic and Monetary Union (EMU) in Europe
in the end of 1997. Not only Paul de Grauwe and Anne Sibert, but also Bas van
Aarle, researcher at the University of Nijmegen, is presenting his views on
EMU. Bas van Aarle visited CES with a stipend of the European Commission.
Under EMU, the Euro replaces the national currencies and the monetary policy
of the European Central Bank replaces national monetary policies. It will no
longer be possible for countries to implement individual monetary and exchange
rate policies. In his first lecture van Aarle analyzed how this might affect
both the economic and strategic interactions of the EU countries. In his second
lecture he discussed possible public finance consequences including the issue
of fiscal federalism in the EU.
The third lecture was devoted to the ‘external’ implications of EMU. In the
long run the Euro will challenge the role of the Dollar as the main transaction
currency in international foreign exchange and capital markets, and as an invoicing
currency in official reserve management. It is likely to generate international
seignorage profits and to result in a more prominent role of Europe in international
policy forums. [ct]
- The optimal level of decentralisation: inefficiencies
vs. externalities
In September and October Ben Lockwood, a younger economist from the United Kingdom,
visited CES. Ben Lockwood started his professional academic career at
the age of 33 when he became professor of economics at the University of Exeter.
In 1998, he will move to the University of Warwick to take a research chair.
Despite his youth, Lockwood has researched in various fields of economics and
he has published a large number of papers in well known journals. His research
includes, among other things, projects on time consistency problems of monetary
policy and on tax competition within the European Union.
More recently, Ben Lockwood has become interested in the economics and political
economy of multi-level government, and in what determines the allocation of
tax, spending and regulatory powers between different levels of government.
Centralization internalizes fiscal externalities, but may bring about inefficiencies
in other respects. While at CES Ben Lockwood will give a lecture on the
positive and normative aspects of this problem. [us]
- Sustainable Development and GDP
Geir B. Asheim from the University of Oslo will visit CES for six weeks
in November and December. His research interests are concentrated in the fields
of game theory and the economics of natural and environmental resources.
Asheim's research in the economics of natural and environmental resources has
for a long time centered around the concept of sustainable development. According
to this concept, the net national product (NNP) is defined as the maximum level
of consumption that can be sustained for all future periods despite the use
of depletable natural resources. If consumption remains at this level, the economy's
development is sustainable and the net national product can be used as an indicator
of social welfare.
Interesting issues arise when normative foundations for the concept are sought
in order to make it operational. The article "Adjusting Green NNP to measure
sustainability" - the first draft of which was written during Asheim's previous
visit to CES in Munich in 1994 - is an example of a contribution towards
making the concept of sustainability accessible for welfare comparisons. During
his upcoming visit to CES, Asheim will present both the theoretical and
the practical problems of his concept in a series of lectures entitled "Normative
foundations for sustainable development, and principles for using green accounting
to measure sustainable income". [mt]
- Fighting Absence
Professor John Treble from the University College of North Wales, UK, is a labour
economist, whose current interest concentrates on the empirical study of absence
behaviour. To identify labour supply effects he has developed a structural dynamic
model which he estimates using firms' personnel and payroll records. The dynamic
features of his model are particularly important as many firms use dynamic incentive
schemes under which a worker's current behaviour determines a future promotion.
Treble and his co-author Tim Barmby aim at giving personnel managers additional
tools for improving their incentive schemes. They have developed a method to
estimate certain parameters of individual utility functions. Such parameters
could be used in the design of more effective absence policies and as a part
of the evaluation of overall worker performance.
John Treble also has an interest in economic history. In a recent study he exploits
the peculiar characteristics of wage payments and work assignment methods used
in Durham coalmines in the late 19th century. His dataset makes it possible
to mesure the intertemporal substitution elasticities of workers at that time.
Treble will visit CES between 1st and 31st of November. [aw]
- Prizes and Awards
Gossen Award of the Verein für Socialpolitik for Jürgen von Hagen. -
The Bonn Professor is honoured as the first winner of the Gossen award for his
contributions to monetary and exchange rate policy which helped him gain an
outstanding international reputation. The aim of the prize is to enhance the
internationalization of Economics in Germany. Publications in renowned international
journals, and especially the number of citations in the Social Science Citation
Index, are crucial for Nomination.The prize winner has to be younger than 45
years.
Joseph E. Stiglitz awarded Horst Claus Recktenwald-Preis. - The CES
council member has created the new field economics of information. Stiglitz
is also a brilliant political economist. He just left the council of economic
advisors of U.S. president Bill Clinton to become vice president and chief economist
of the World Bank.
University of Oslo Honorary Doctoral Degree for Agnar Sandmo. - The Norwegian
Business School economist form Bergen has been awarded a honorary doctoral degree
from the University of Oslo. Sandmo's path-breaking scientific works relate
to the theory of optimal taxation and to taxation and risk-taking. He has been
a member of the CES council since it was created.
Edwin-von Böventer Prize for Regional Sciences awarded to Georg Hirte and
Ulf Teubel.- The former, from the University of Ingolstadt , studied welfare
effects of regional income taxes in a CGE analysis for Germany. Dresden economist
Teubel studied distribution effects of tolls in metropolitan areas. The prize
is donated annually for excellent achievements of young economicsts in regional
science. It bears the name of Edwin von Böventer, a professor of the Munich
faculty of Economics, and a member of the CES council, who died in 1994.
Alexander von Humboldt Foundation Research Award for Edward Shorter.
- The professor from the University of Toronto and CES visitor in August
1996 now has a solid base for an extended research project in the history of
medicine which Shorter will conduct in Munich during the next two summers.
- News of the Faculty
Gebhard Flaig, chair of the Seminar for Empirical Economic Research,
has accepted an offer of the ifo Institut für Wirtschaftsforschung. Since October,
he is in the board of directors of ifo, which is one of the six leading German
institutes for applied economics research and forecasting. The also Munich-based
ifo Institut traditionally has close ties with the Munich Economics faculty.
Dalia Marin from the Humboldt University in Berlin will serve as an acting
head for the vacant chair on international economics in the winter term.
Gisela Kubon-Gilke from the University of Darmstadt will be acting head
at the Seminar for Theory and Politics of Income Distribution while its chair,
Ekkehard Schlicht, is on leave in the winter term.
- Contributors
Journal Editor: Holger Feist [hf], Lector: Alfons Weichenrieder
[aw], Contributors: Ulrich Scholten [us], Ronnie Schöb [rs], Claudio
Thum [ct], Marcel Thum [mt], Online Journal: Eckhard Wannieck.
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