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A joint initiative of Ludwig-Maximilians University’s Center for Economic Studies and the Ifo Institute for Economic Research
Bulletin
Volume 19 No. 4
October 2009
Smarter Regulation
As soon as the financial crisis reared its head, voices started calling with increasing stridency for tightening and expanding financial regulation. But, as David Mayes says,
smarter regulation would be the better bet if what we want is financial stability without stifling economic growth.
(page 3)
Liquid Asset
Ifo News
Abundant yet scarce, coveted yet badly managed. Water is an increasingly precious resource
that sorely needs to be used more effectively. Alberto Asquer focused his stay at CESifo on
how European reforms in this area are being implemented.
(page 6)
(p. 4-5)
CESifo Turns 10
(p. 8)
New Climate
Lecture Series
Climate Policy Paradoxes
Many policies have been implemented in the EU, in particular in Germany, to curb fossil
fuel consumption as a way to fight global warming. Unfortunately, it appears that many of
those measures are not only ineffective, but downright counterproductive. A new Ifo Lecture Series with Hans-Werner Sinn will explain why.
(page 2)
(p. 2)
Exporter Premium
Featured Researchers
Alberto Asquer (p. 6)
Exporters tend to perform better than non-exporters. Karen Helene Ulltveit-Moe is examining the potential sources for such superior performance.
(page 3)
Lars-Erik Borge (p. 2)
Dirk Engelmann (p. 8)
Christian Leuz (p. 6)
Jim Malley (p. 7)
David Mayes (p. 3)
Eastern Germany’s Economy Still Not Up to Par
Twenty years after the fall of the Berlin Wall, a divide still exists between eastern and western Germany. Prosperity in the former Eastern Germany has undeniably improved beyond
the wildest dreams of many easterners, but the many billions in subsidies and investment
have not yet managed to bring per capita GDP to western levels.
(page 5)
Joachim Ragnitz (p. 5)
Daniel Schunk (p. 6)
Konstantinos Tatsiramos (p. 7)
Karen H. Ulltveit-Moe (p. 3)
CESifo Turns Ten
CESifo is not a toddler any longer. In a mere ten years, it has achieved an enviable place
amongst the world’s largest and most influential economics research organisations. Reason enough to celebrate.
(page 8)
Behold My Reputation
Not only sellers’ reputations are important in online auctions, such as those through eBay.
As Dirk Engelmann shows, buyers’ reputation also plays a crucial role.
(page 8)
Poverty Risk in Germany Declines
Wage supplements introduced as part of a labour market reform in Germany have reduced
poverty risk, as a new Ifo study shows.
(page 5)
You can also download this bulletin from www.cesifo.de
Vol. 19, No. 4 | October 2009
New Lecture Series:
Climate Policy Paradoxes
year peak. As a result, in only a few
decades the earth’s temperature is headed
to a new 800-millennia record.
demning nuclear energy should not overlook the disadvantages of the other energy
sources. Wind and solar electricity have
very low reliability. Electricity from coal
ranks amongst the largest climate offenders. Scrubbing carbon dioxide from coalfired plants is technically feasible, but storing the resulting liquefied CO2 is problematic: it is by no means risk-free and the earth
does not offer enough storage volume. The
upshot? Storing carbon dioxide is much
more difficult than storing nuclear waste.
His second thesis is that while Germany
spends lots of money on green electricity,
it still achieves little in terms of climate
protection, because Europe already has an
emissions market that has set a cap on the
amount of carbon dioxide that may be
emitted. In the end, the energy tax, the
feed-in rates for wind and solar electricity,
support for combined-heat-and-power
generation and the many other measures
only serve to subsidise the non-green electricity generated by the other EU countries.
Thesis No. 5 is that European climate
policies ironically have accelerated climate change instead of curbing it. Curbing demand for fossil fuels does not
reduce consumption if resource owners
do not reduce their supply as a result. If
suppliers fear that green policies will
become increasingly greener over time,
exerting downward pressure on fossil
fuel prices, they will feel compelled to
speed up fossil carbon extraction, doing
climate a great disservice.
The third thesis is that giving the fuel tank
priority over the food plate creates poverty
and unrest in the world. Gigantic expanses
of farmland have been turned over to the
production of biodiesel and bioethanol,
making food prices rise in tandem with oil
prices. The effect has been hunger and
strife in several countries.
The final thesis is that only a worldwide
emissions trading system, coupled with a
source tax on the capital gains of the
resource owners, would manage to persuade fossil fuel suppliers to postpone
resource extraction, thereby slowing down
climate change. If deforestation is halted
and afforestation efforts stepped up,
mankind would have a fair chance of winning the battle against carbon dioxide that
threatens to make our planet unlivable.
As part of its educational outreach, the Ifo
Institute, in association with Bavarian
Radio and BR-Alpha, will hold a lecture
series at its conference centre in November and December to examine the theses
on climate change contained in HansWerner Sinn’s best-selling book The
Green Paradox. The lecturer will be HansWerner Sinn himself.
Once realisation set in that mankind does
face a climate problem that could have
dire consequences in the coming decades,
many governments and organisations
started to devise ways and mechanisms to
cope with the challenge. Unfortunately,
good intentions do not suffice. Many of
the measures implemented have proved to
be too expensive and ineffectual in terms
of tackling global warming.
Mr Sinn does not question the goals of climate policies, but shows that the instruments they use are ineffective and to a large
extent counterproductive because they disregard important economic mechanisms. In
a series of six lectures, Mr Sinn will present
his book and show what must be done to
ensure that climate policies are successful.
His first thesis is that human action is
behind global warming. While carbon
dioxide itself is non-poisonous, its accumulation in too great concentrations in the
atmosphere triggers the so-called greenhouse effect, increasing average temperatures around the world. Since the beginning of the industrial age, the amount of
carbon dioxide released has brought its
atmospheric concentration to an 800,000-
His fourth thesis is that Germany is on the
wrong track in terms of nuclear energy. It is
the only country worldwide to turn its back
on nuclear power, after others pursuing
such policies rescinded them. Those con-
For further information, visit www.cesifogroup.de
Accounting for Sound Corporate Governance
Lars-Erik Borge’s research focuses on fiscal federalism and political economy, and is
to a large extent empirically oriented. During his stay one-month stay at CESifo, until
late November, he will continue his work in
these fields, with particular emphasis on
capitalisation and local government
responses to temporary grant programmes
and demographic shocks.
In a recent paper (co-authored with Jørn
Rattsø) he studies the capitalisation of
property taxation and local public services
2
in Norway. The main idea is to investigate
whether good services and a low property
tax rate are capitalised into higher housing
prices. The analysis shed light on the role
of residential mobility as an efficiencyenhancing mechanism for local government resource use.
Lars-Erik Borge is a professor at the
Department of Economics of the Norwegian University of Science and Technology
in Trondheim. He has been affiliated with
the department since 1990, interrupted by
Bulletin
longer stays at the
Massachusetts
Institute of Technology (1991-1992)
and the University
of Maryland (20062007). In the period
2000-2002 he was
editor of the Norwegian Journal of
Economics (Norsk
Ø k o n o m i s k
Tidsskrift).
Vol. 19, No. 4 | October 2009
Smarter Regulation
Exporter Premium
Mayes
Ulltveit-Moe
Economists tackling the
regulatory aftermath of the
financial near-meltdown
have their work cut out.
There is hardly a corner of
the world where new, better, or smarter banking
regulations are not needed. It is then good to have
a safe pair of hands, such
as David Mayes’s, working on the matter.
Mr Mayes, who is Director of the
Europe Institute at the University of
Auckland, is currently completing work
on the implications of the present crisis
for closer monetary and financial integration in Asia. This work, with the
Asian Development Bank Institute, follows up earlier work on the problems of
integration in Europe, particularly on
handling the regulation and supervision
of cross-border banks.
His research culminated in a couple of
books earlier this year, the first with
Robert Pringle and Michael Taylor, on
Towards a New Framework for Financial
Stability, and the second with Geoffrey
Wood on Designing Central Banks. The
theme of the first book can be described
as ‘smarter rather than tougher regulation’. It argues that in trying to get institutions to manage their risk better the key
is to align the incentives of the intermediaries with those of the investors. This is
illustrated in the latest statement of the
Joint Shadow Financial Regulatory Committees, who met in Chile in August, on
how to reopen securitisation. Mr Mayes
represents the Australian and New
Zealand Committee.
The present crisis has led to a rapid reappraisal of crisis avoidance and crisis man-
agement mechanisms. Mr
Mayes has been exploring
these in the Nordic region.
One might have expected
that with the experience of
crises within the last twenty years, these countries
might have been best prepared in the present circumstances, but Iceland
experienced the worst crisis of all. Although he
comes from New Zealand,
which does not have explicit deposit
insurance, one aspect on which Mr Mayes
has focused is trying to make deposit
insurance more realistic and ensure that
retail runs can be avoided.
David Mayes obtained his PhD from
Bristol University. Until last year he was
Advisor to the Board at the Bank of Finland, as well as Professor of Economics
at South Bank University in London.
Before that he was chief economist and
Chief Manager at the Reserve Bank of
New Zealand.
His many positions in academic and public institutions have included Group Head
at the National Economic Development
Office in London, Director (CEO) of the
New Zealand Institute of Economic
Research in Wellington, Editor (responsible for the forecasting of the UK and
world economies) and then Senior
Research Fellow at the National Institute
of Economic and Social Research in London, after beginning his professional
career at the University of Exeter.
Although his current focus is on the future
development of monetary and financial
integration in Europe he has published
widely in economics and related areas.
David Mayes has been an editor of the
Economic Journal since the late 1970s.
Macro in Intensive Care
Modern macroeconomics is said to be in
trouble. If you want to sort it out, you need
large-calibre guns. Like Nobel laureate
Robert Solow, for instance. Together with
Hans-Werner Sinn and Financial Times
Chief Economics Commentator Martin
Wolf, he will analyse the strengths and
weaknesses of modern macro in view of
the recent seizing-up of the financial system, in a panel of the forthcoming CESifo
Conference called, well, “What’s Wrong
with Modern Macroeconomics?” Selected
papers will be included in a special issue of
CESifo Economic Studies.
Bulletin
Karen
Helene
Ulltveit-Moe currently focuses her
research on trade and
heterogeneous firms.
She has recently
examined the impact
of a real exchange
shock on productivity, employment and
offshoring using microdata for Norwegian manufacturing firms. The real
exchange rate shock (a real appreciation)
is found to be associated with substantial
within-firm productivity gains for net
exporters, gains that seem to have come
about partly through technological
improvements. The productivity gains
also appear to have been associated with
employment cuts. Somewhat surprisingly, firm exits did not contribute significantly to aggregate productivity gains.
While visiting CESifo, Ms Ulltveit-Moe
will work on a new study analysing
potential sources of the so-called
exporter premium, which refers to the
superior performance of exporters versus
non-exporters. This will be done using a
matched employer-employee data set for
the Norwegian manufacturing sector.
Karen Helene Ulltveit-Moe is professor
of international economics at the University of Oslo. She holds a PhD from
the Norwegian School of Economics
and Business Administration (NHH) and
a Master of Science in economics and
business administration from Universität Mannheim. From 1996 to 2004 she
held various positions at NHH, and was
the research director of the Centre for
International Economics and Shipping
at the Norwegian School of Economics
and Business Administration from 1999
to 2003.
She has worked as a consultant for the
European Commission, the Norwegian
Ministry of Finance, the Norwegian Ministry for Trade and Industry, the Norwegian Ministry for Foreign Affairs and the
Swedish Globalisation Council. She has
served at a set of government-appointed
expert commissions and also on the
board of directors of a number of listed
multinational companies.
3
Vol. 19, No. 4 | October 2009
News
Ifo Business Climate Perking Up
The Ifo Business Climate for industry and
trade in Germany brightened further in
September. Appraisals of the business situation and outlook have improved. However, by far the greater number of firms still
assesses the business situation as poor.
Only with regard to the six-month business outlook is there now nearly a balance
between pessimists and optimists. In light
of the catastrophic developments over the
past twelve months, this is good news.
In manufacturing the indicator has recovered somewhat, with firms no longer regarding their present business conditions quite so
negatively as in the previous month. They
also anticipate a somewhat more favourable
course of business in the coming half year.
With regard to exports, their scepticism has
subsided. However, more firms are now
planning to reduce their payrolls.
In wholesaling and in retailing the index
rose. In both sectors, the survey participants are less critical regarding business
developments in the coming half year.
However, wholesalers are nearly just as
dissatisfied with their current business situation as in the previous month. In contrast, retailers have given slightly more
favourable appraisals of their present
business situation than in August, assessing it now as nearly satisfactory.
In construction the business climate has
clouded over somewhat. Although the survey participants assessed their present business similarly to that in August, with regard
to business in the coming half year they are
more sceptical than in the previous survey.
4
Joint Economic Forecast Autumn 2009:
Hesitant Recovery, Growing
Government Indebtedness
In autumn 2009 the low point of the worst
economic recession since the Second
World War seems to be behind us. There
are many indicators for a recovery. The
situation on the world financial markets
has improved considerably, confidence
indicators are ticking upwards, new
orders received have increased and rises
in production are widespread. World
trade, which had declined
into the early months of
the year, increased clearly
in the summer. In a number of emerging economies,
especially in Asia, aggregate economic output was
clearly expanding already
in the second quarter.
A major contributor to the
turnaround was the stabilisation on the financial markets in the
early months of the year as a result of
massive intervention of central banks, as
well as the announcement of state support
programmes and guarantees for the financial sector. In the meantime, investors’
risk propensity has grown strongly, as
indicated by the increase in prices on the
international stock markets but also by the
decrease in risk premiums on corporate
bonds and on the government bonds of the
emerging economies. The positive effects
of government stimulus programmes are
also being felt in the real economy.
However, experience with past economic
slumps shows that recovery is usually
slow when recessions are accompanied by
bank and real-estate crises. For this reason
the institutes making this forecast expect
economic growth to be moderate worldwide in the coming year, since the problems in the international financial system
have not yet been overcome. Moreover,
the favourable effects of energy price
developments on consumption and corporate profits in the industrial countries are
reversing with an oil price of 75 dollars a
Bulletin
barrel, which is assumed in this forecast.
In addition, the effects of fiscal-policy
stimulus will weaken in the course of the
coming year. Finally, in many countries
employment has not yet adjusted to the
clear declines in production. Here, even
with a noticeable expansion in production,
unemployment will rise for some time,
exerting a dampening effect on disposable
income and domestic demand.
Total economic output in the industrial
countries will expand, on average for
2010, at barely more than 1%, after a
decline of around 3.5% this year. Although
this will also dampen the recovery in the
emerging economies, these countries
should initially prove to be the engines of
world economic activity, as their conditions on the international capital markets
are again quite favourable. On the whole
we expect this year’s 2.5% decline in
world output to be followed by an increase
of 2% next year. World trade will drastically decline for 2009, at a rate of 10.5%,
to be followed by a 5.5% increase in 2010.
Consumer prices will barely rise worldwide due to the low economic capacity
utilisation rates, and the core rate is likely
to fall even further. However, the clearly
higher price of oil as well as increasing
prices for other industrial raw materials
will result in a higher overall inflation rate
for 2010 compared to this year.
In Germany, economic activity also stabilised in the summer of 2009, albeit at a
clearly reduced level of output. The
worldwide financial crisis hit the economy with full force last winter. The
spreading crisis of confidence led to a
collapse in foreign orders and to an
unprecedented plunge in industrial production. The subsequent stabilisation is
primarily attributable to the massive economic-policy intervention since autumn
2008. Worldwide, central banks lowered
their lending rates and supplied the banks
with virtually unlimited liquidity in order
to replace the seized-up interbank markets. Parallel to this, governments supported stressed banks with guarantees
and capital injections, and increased the
Vol. 19, No. 4 | October 2009
guarantees for private bank deposits. In
Germany, this also averted a looming
collapse of the banking system.
Moreover, the government implemented
numerous measures to stabilise the economy. As a result, confidence grew again
and also the nonfinancial firms saw their
future with increasingly less pessimism.
In the second quarter of 2009, GDP
increased again somewhat, with considerable support from private consumer
demand. Falling energy prices, higher
wage agreements, tax cuts, higher transfers and the car scrappage scheme all led
to a noticeable expansion in household
spending. The shortened-hour work
scheme was behind the relative stability of
the labour market. The leading indicators
point to a quite robust recovery in the
third quarter. However, that momentary
recovery is not likely to be sustainable.
The institutes expect the German economy
to emerge only slowly from the crisis. For
2009 as a whole, GDP will decline by
5.0%, with only a hesitant recovery next
year. Because of the weak expansion of the
world economy, German exports will only
increase at a moderate pace. Domestic
demand is expected to grow only very
slowly. Firms’ readiness to invest will
remain weak because of the tepid turnover
outlook and because of more unfavourable
financing conditions. Private consumption
will be burdened by the worsening labour
market situation. Endogenous growth
forces will only gradually make themselves felt, so that the economy will
remain dependent on economic-policy
support during the forecast period.
All in all, the institutes anticipate a 1.2%
GDP growth for 2010. The number of
unemployed will rise, on average for the
year, to 4.1 million. Consumer prices, on
the other hand, are expected to increase
minimally, although more expensive
crude oil will continue to impact energy
costs. However, because of poor demand,
core inflation will continue to weaken.
On average for 2010, a price increase of
0.6% is expected.
Eastern German Economy Not Yet
Self-Sustaining
Twenty years after the fall of the Berlin
Wall, the interim balance on the economic unification of Germany is mixed. The
prosperity of the population in the new
federal states has clearly increased over
what it was in the GDR. Disposable
household income has risen, on average,
from just 60 percent of the western German level in 1991 to 78.6 percent in 2007.
The housing situation and the spread of
consumer durable goods have also clearly
improved. Expanded infrastructure as
well as progress in environmental protection are further successes of reunification.
However, the economic balance drawn up
by the Dresden Branch of the Ifo Institute
also reveals clear deficits. Per capita GDP
in the east is only 71% of that in the west.
Here, the gap to the old federal states has
narrowed very slightly since 1997. Considerable structural differences also exist
between both areas. Businesses in the east
are smaller, on average, than those in the
west. Also, corporate headquarters tend
not to be located in the east. As a result,
certain areas with high value added, such
as research and development, are weakly
represented in the east. The exportincome ratio is also comparably low.
That disposable household income in the
new federal states has developed better
than GDP is because of the redistribution
through the tax and transfer system, from
which the east still benefits. The social
services received per inhabitant are 20 percent higher than in the west; income tax
paid, on the other hand, is almost 50 percent lower. “About one fifth of domestic
demand in the new federal states is
financed by transfers of the federal government, the western federal states and the
social insurance systems. In this respect
the economy in the new federal states is
not yet self-sustaining”, points out
Joachim Ragnitz, acting manager of the
Dresden branch of the Ifo Institute.
The Ifo Institute criticises that the promotion of investment in the new federal states
depends primarily on the amount of the
investment sum. This principle led already
in the past to an excessive capital intensity
of production and to a favouring of the
establishment of capital-intensive industries. “It would be more sensible to gear
government promotion not to the investment sum but to the number of jobs created. That would help to combat the still
high level of unemployment in the new federal states”, Mr Ragnitz explains.
While the 1.12 million jobless (15%) in
eastern Germany in 2008 are a clear
Bulletin
improvement on the 2003 peak (1.62 million, 20 percent), unemployment there is
still twice as high as in western Germany.
Poverty Risk Declines
The number of people at risk of poverty in
Germany stood at ca. 14 million in 2006,
one million lower than in 2005. The poverty risk ratio, i.e. the share of people earning less than 60 percent of average German incomes, fell correspondingly from
18 to 17 percent. This is the result of a
study by the Ifo Institute that examined the
newly available Socio-Economic Panel
data for 2006. Since from 2000 to 2005 the
poverty risk rose continuously by a total of
five percentage points, the Ifo results point
to a welcome turnaround.
“Our study confirms that the reduction of
the poverty risk ran parallel to the decline
in unemployment that, because of Agenda
2010, was one million more in western
Germany in the past boom than would
have been expected from a continuation of
previous patterns. In 2005 we had the
highest unemployment in the history of the
Federal Republic. Starting in 2006, we
saw an upswing on the labour market and
also a dramatic decline in the poverty
risk,” explains Hans-Werner Sinn, President of the Ifo Institute. “This contradicts
the claims of those who maintain that the
decline in unemployment was at the cost of
reducing social protection. The opposite is
the case: work is the most important factor
in combating poverty.”
The study shows that even very low-paid
work is sufficient for earning an income
above the poverty line, since the state
gives wage subsidies to those affected.
With the wage subsidy system introduced
with Agenda 2010, those who qualify
receive supplemental payments under the
Hartz-IV social welfare system, so that the
total of workers’ own wages and the wage
supplements amounts to an income above
the poverty risk threshold.
In this context, Mr Sinn is critical of the
ongoing debate on minimum wages in
Germany. “Minimum wages would lead to
a decrease in employment, because in
some jobs value added is not high enough
to justify the higher wages. A minimum
wage of, say, €7.50 could increase the number of jobless by more than one million. In
the long run these people would fall back
below the poverty risk threshold.”
5
Vol. 19, No. 4 | October 2009
Liquid Asset
Developing Human Capital
Asquer
Schunk
Water is somewhat of a
paradox: the commonest
substance on earth, and yet
scarce. Barely one percent
of it is available for human
consumption; the rest is
salty or locked up in ice
sheets or polar snow. And
it is unevenly distributed:
some regions have more
than they need, some are
desperately short. Some
get too much in certain
months, and nothing at all
the rest of the year.
This makes water one of the most coveted commodities, and yet one of the least
well managed. It is usually wastefully
misused, due to lack of regulation and
being priced well below its worth. And,
as California, Ethiopia and Australia
show, lack of sufficient water can have
dire economic consequences.
This is where Alberto Asquer’s
research comes in handy. During his
stay at CESifo, he examined more
deeply the implementation of water
reforms across countries. His main
interest is to understand the challenges
posed by the implementation of the EU
Water Framework Directive (WFD) in
terms of governance, regulation, and
effectiveness. In particular, he aims to
collect data of the ways in which the EU
WFD is being implemented in Germany
with respect to the analogous experience
in Italy.
This research interest is an
extension of previous work
Mr Asquer has done on
water reform implementation in Italy. In a recent
paper (“The Regulatory
Reform of Water Infrastructure in Italy: Overall
Design and Local Variations”, to be published in a
special issue of Water Policy), he analyses the reasons for the difficulties
experienced in implementing the 1994 water reform
in Italy, and for the wide variation in the
resulting governance and organisational
structures for managing water service provision across the country.
The paper showed, in particular, that
governance and organisational structures
for managing water service provision
originated from the particular historical
occurrences which took place during the
implementation process rather than any
original design.
Mr Asquer graduated in Economics
from the University of Cagliari, Italy,
and later got a MSc Management at the
London School of Economics and a
doctorate at the University of Salerno,
Italy. After some years’ research and
teaching assistantship at the London
School of Economics, he became a lecturer of planning and control at the Faculty of Economics at the University of
Cagliari.
Public policy proposals
that promote both social
justice and productivity,
in the economy and in
society at large, are rare.
Recent research suggests
that investments in disadvantaged young children
represent such a policy,
acknowledging
the
dynamic nature of the
skills acquisition process. What is the role
of both cognitive and non-cognitive skills in
the process of human capital development?
How should these policies be designed, and
to what extent should they specifically
address disparities in child health?
Daniel Schunk will further pursue the
answers to these questions while at CESifo, using administrative, survey, and
experimental data. He will also collaborate with researchers from Ifo and the economics department at LMU University of
Munich on ongoing projects concerning
the behavioral foundations of survey
response biases and concerning the genetic basis of human economic behaviour.
Daniel Schunk holds a PhD from the University of Mannheim and now works at
the Institute for Empirical Research in
Economics at the University of Zurich. He
teaches experimental and behavioural
economics as well as applied econometrics and has published his work in journals
such as the American Economic Review
and the Journal of Economic Dynamics
and Control.
Accounting for Sound Corporate Governance
Christian Leuz is Joseph Sondheimer Professor of International Economics, Finance
and Accounting, and a Neubauer Family
Faculty Fellow at the University of Chicago’s Booth School of Business. He is also
an Executive Board Member of the Initiative on Global Markets, a Research Associate at the European Corporate Governance
Institute, and a Fellow at Wharton’s Financial Institution Center.
His research examines the role of corporate
disclosures, accounting transparency and
6
disclosure regulation in capital markets,
corporate governance and corporate
financing. His most recent publications
have appeared in the Journal of Accounting
Research, Journal of Financial Economics,
and the Review of Financial Studies. He
received a JFE All Star Paper Award and
the Geewax Terker Prize.
Mr Leuz is an associate editor for the Journal of Accounting and Economics and sits
on the editorial board of several international accounting journals.
Bulletin
He earned both his doctoral and post-doctoral
degrees at the Goethe
University Frankfurt in
Germany. Before this,
he was the Harold Stott
Term Assistant Professor in Accounting at the
Wharton School of the
University of Pennsylvania and a visiting doctoral fellow at the Simon School of Business, University of Rochester.
Vol. 19, No. 4 | October 2009
Improving Real Business Cycle Models
A Mushrooming Problem
Malley
Tatsiramos
Welfare costs associated
with model uncertainty
can be significant. That is
one of the findings of
research conducted by
Jim Malley, jointly with
Konstantinos
Angelopoulos of Glasgow University, employing a standard stochastic two-sector
real business cycle (RBC)
model and robust control
theory. Based on these findings, they also
allow for the possibility that the robust
decision-maker can attempt to reduce
these costs by optimally diverting part of
her time allocation to learn more about
the economy/model through the accumulation of ‘information’ human capital.
She would then be able to quantitatively
establish the conditions which must exist
to eliminate model uncertainty.
A second strand of Mr. Malley’s recent
research, joint with Ulrich Woitek of
Zurich University, concentrates on estimating the structural parameters of both RBC
and two-sector endogenous growth models
using Bayesian methods. This work also
attempts to account for the movements and
co-movements of the model’s data not
explained by the theory by allowing for
alternative descriptions of the processes
driving the models’ measurement errors.
They find that while neither of the work-
horse growth models uniformly dominates the other
across all variables and
forecast horizons, the twosector endogenous growth
model provides a far better
fit to the data. Some other
key results are first, that
Hicks-neutral
shocks
explain a greater share of
output and consumption
variation at shorter-forecast
horizons, whereas human capital productivity innovations dominate at longer ones.
Second, the combined explanatory power
of the two technology shocks in the human
capital model is greater than the Hicks-neutral shock in the RBC model in the medium- and long-term for output and consumption. Finally, the RBC model outperforms the two-sector model with respect to
explaining the observed variation in investment and hours.
An extension to the estimation research
which will be pursued during his visit to
CES involves incorporating time-varying
parameters into the processes driving the
measurement errors in an attempt to capture structural change.
Jim Malley is Professor of Economics at
the University of Glasgow. He previously
held full-time posts at Stirling University
and the US Federal Government.
sponsored by
Deutschlands große Tageszeitung
MUNICH SEMINARS
BMW Niederlassung München
Wegweisend und voller Wertschätzung für Sie.
Chaired by Hans-Werner Sinn (CESifo) and Marc Beise (Süddeutsche Zeitung)
Sponsored by BMW Niederlassung München
Monday, 6 pm, CESifo Conference Centre, Ludwig-Erhard-Hall, Poschingerstr. 5, Munich
16 Nov 2009
Christian Kirchner
Professor of Economic Law and Institutional
Economics, Humboldt Univesity Berlin
Basel II und IFRS: Reformbedarf zur Lösung
der internationalen Finanzmarktkrise
7 Dec 2009
Torsten Hinrichs
Head for Northern Europe, Standard & Poor’s
Finanzkrise und Rating-Agenturen
14 Dec 2009*
René Obermann
Chairman of the Board,
Deutsche Telekom AG
18 Jan 2010*
Justus Haucap
Chairman of the Monopoly Commission
*Topic to be announced
For details, visit
www.cesifo-group.org > Conferences > Seminars
Bulletin
In most industrialised
countries, the demographic pyramid is taking on a
decidedly
mushroomy
shape: A thin stem of
younger, working people
supporting a large, and
growing, cap of older,
retired folk. Given that this
shape, if anything, will
become more accentuated
in the foreseeable future, it pays to study
what is happening at its upper end.
Konstantinos Tatsiramos is one of the
researchers exploring this region. Together with Guido Schwerdt, he is working on
a new project on the employment dynamics of older workers and in particular on
understanding early retirement decisions.
One of his recent papers, “Benefit Duration, Unemployment Duration and
Employment Stability: A Regression Discontinuity Approach”, written jointly
with Marco Caliendo and Arne Uhlendorff, uses a sharp discontinuity in the
maximum duration of benefits in Germany, which increases from 12 to 18
months at the age of 45, to identify the
effect of extended benefit generosity on
unemployment duration and on subsequent employment stability as a measure
of job match quality.
Mr Tatsiramos, a Senior Research Associate at the Institute for the Study of Labor
(IZA) in Bonn, received his PhD in Economics from the European University
Institute in Florence. He obtained his MSc
in Economics at the University College
London in 1999, and his first degree in
Economics at the Athens University of
Economics and Business in 1997.
His main research interests lie in applied
micro-econometrics and labour economics,
with particular emphasis on employment
and unemployment dynamics, labour, geographic and residential mobility, economics of aging, and entrepreneurship.
He has published in such journals as the
Journal of the European Economic Association, European Economic Review,
Journal of Applied Econometrics, Labour
Economics, and Journal of Population
Economics.
7
Vol. 19, No. 4 | October 2009
CESifo Turns Ten
Banking on Reputation
Engelmann
Ten years ago, a series
of ideas floating in the
halls of the University
of Munich’s Center for
Economic Studies (CES)
and the Ifo Institute
started to coalesce. How
to bind more closely the
more than 230 guest
researchers who had stayed at CES by then.
How to stimulate academic research at the
Ifo Institute. How to give a home to a nascent, high-quality working paper series.
How to foster synergies between the Ludwig-Maximilian University of Munich and
Ifo. How to turn Munich into a European
hotbed of economic research.
The result was CESifo.
A decade later, CESifo has attained a solid
position alongside the other great international economics networks. Its well-regarded working paper series, economic policy
publications, refereed journals, survey
results and other specialised periodicals
have become an essential source of information for a wide range of users. As EU
Commissioner for Economic and Monetary Affairs Joaquín Almunia puts it, they
provide an “excellent contribution to the
European construction”.
Created as a joint initiative of the LudwigMaximilian University of Munich (LMU)
and the Ifo Institute for Economic
Research, CESifo has evolved into the
CESifo Group, which encompasses the
Center for Economic Studies, Ifo and
CESifo GmbH, the latter the unit that
administers the publications, runs the network and organises the conferences. The
CESifo Group benefits from its uniquely
close relationship with the LMU, one of
Germany’s elite universities, a relationship
that underpins its steady output of highquality academic research. Ifo’s empirical
research is also legendary, of which its
monthly Business Climate Index is but one
of the more influential results. Not for
nothing has the Ifo
Institute been ranked
top in Germany in
terms of research output and quality.
CESifo’s 750-strong
network of top academic scholars from some
30 countries, including six Nobel laureates,
gives it an enviable global depth. Throughout the year, many of the network members
spend a few weeks at the group’s premises
as guest researchers and working on joint
projects with Ifo or CES economists.
The recently established Richard Musgrave
Visiting Professorship, awarded jointly with
the International Institute of Public Finance,
brings a world-class scholar to spend a
month at CESifo doing research and giving
lectures at the LMU. CES, in turn, awards
the yearly Distinguished CES Fellow prize
to another top-notch academic, who gives
the Munich Lectures in Economics.
CESifo holds numerous conferences every
year, ranging from the highly coveted
CESifo Venice Summer Institute to the
prestigious Munich Economic Summit.
The latter is a top-level event that every
year attracts renowned scholars, business
people, academics and chief media editors
to discuss key European economic issues.
Ifo and CES also run a very active graduate
programme, with a score of doctoral candidates working on their degrees and gaining
hands-on experience with real-life projects.
CESifo’s tight focus on promoting
economic research and the wide range and
quality of its services, products and
activities have gained it widespread
recognition. James Poterba, NBER
President and CEO, summarised it neatly
by saying that CESifo has “become a
global leader not only in the analysis of
current economic conditions, but also in
the broader realm of economic research.”
God bless e-bay. That
odd item gracing the
shelf or the couch in the
den wouldn’t be there
otherwise. But, careful,
you are dealing with
strangers, transferring
your cash to an unknown
entity before you see the
goods. So, some indication regarding
the other party’s trustworthiness would
be helpful. Well, there is such a thing:
the “reputation ratings” appearing next
to the seller’s nickname.
But what about buyers’ reputations?
How big a role does his/her reputation
actually play in auctions and other such
transactions? For a scientific assessment
of this, turn to Dirk Engelmann, of the
University of London, who has devoted
part of his research to the issue.
The literature on reputation building
mechanisms emphasises that sellers
have incentives not to cheat buyers.
While reputation-building mechanisms
are often in place for buyers as well,
these have rarely been studied and their
economic impact is less clear. In his
project, Mr Engelmann is analysing theoretically why a buyer might actually
have a bad reputation, testing in laboratory experiments the main predictions.
He will present the results obtained so
far at a research seminar at the University of Munich in November.
Dirk Engelmann has a Mathematics
degree from the University of Göttingen and a PhD in Economics from the
Humboldt University Berlin, where he
obtained his post-doctoral degree
(habilitation) as well. He is a professor
of economics and Director of the
Experimental Economics Laboratory,
Royal Holloway, University of London. He is also an Associate Editor for
the Journal of Economic Behavior and
Organization.
Bulletin
Munich Society for the Promotion of Economic Research (Münchener
Gesellschaft zur Förderung der Wirtschaftswissenschaft, CESifo GmbH)
is the international platform of Ludwig-Maximilians University and
the Ifo Institute for Economic Research.
President and CEO: Hans-Werner Sinn
Address: CESifo, Poschingerstr. 5, 81679 Munich (Germany)
Telephone +49 (0) 89/9224-1410, Fax: +49 (0) 89/9224-1409
Editor: Julio C. Saavedra. Ifo News provided by Annette Marquardt.