CES Journal online

• 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.