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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. 1
January 2009
KEEPING AN EYE ON THE DRAGON
China’s economy has been charging ahead like a dragon on steroids since seemingly forever. Now that the world’s economy stumbles, China’s is set to grow by merely 7.4 percent. No wonder that it attracts the attention of economists. One of the best in the field,
Yin-Wong Cheung, will examine China’s interactions between capital flight and exchange
rate while at CES.
(page 7)
THE PERSISTENCE OF BORDERS
IFO NEWS
(p. 4-5)
As Marshall McLuhan once predicted, the world has turned into a global village. Or has it?
As Nikolaus Wolf points out, location continues to matter, despite the massive decline in
the costs of communications and transport. He examines why and how borders keep being
so stubborn.
(page 8)
A VERY SPECIAL MUNICH SEMINAR
(p. 2)
NEW RESEARCH AREAS
(p. 2)
FEATURED RESEARCHERS
Yin-Wong Cheung (p. 7)
Jakob de Haan (p. 6)
Karolina Ekholm (p. 8)
Christina Gathmann (p. 3)
Eric A. Hanushek (p. 2)
Michael Hoel (p. 2)
Evzen Kocenda (p. 6)
Andreas Roider (p. 3)
Dirk Schindler (p. 3)
Hans-Werner Sinn (p. 2)
Nikolaus Wolf (p. 8)
Ian Wooton (p. 7)
SKILLS TRANSFERABILITY
How transferable are skills, in these times of fast-paced technological change? Have they
become more or less transferable since the 1970s? These are some of the questions Christina
Gathmann will delve into during her stay in Munich.
(page 3)
READ AND WEEP
The various forecasts released by the Ifo Institute for the German, Eurozone and global economy all look grim. But do not despair: its Business Climate Index perked up a bit. (pages 4-5)
THE STATE AS ULTIMATE OWNER
Now that people can talk about nationalising banks and other companies without getting
stoned in the process, it is worth paying attention to the implications. Evzen Kocenda is
doing just that.
(page 6)
THE JOYS OF A SABBATICAL
Ian Wooton is using his sabbatical to further pursue his studies of FDI determinants, international trade flows, international tax competition and other such goodies.
(page 7)
EDUCATIONAL POLICY UNDER UNCERTAINTY
The fact that private insurance markets do not offer sufficient insurance againt human
capital risk prompts households to over- or underinvest in education, according to research
by Dirk Schindler.
(page 3)
HIGH-LEVEL APPOINTMENT
CESifo Research Fellow Karolina Ekholm has been appointed Deputy Governor of
Sweden’s Central Bank.
(page 8)
Online version of this issue available at www.cesifo.de
Vol. 19, No. 1 • January 2009
A GUIDED TOUR TO THE CRISIS
Sinn
That must mean
something when
the students who
flock to an event in
order to stage a
protest decide to
stay for the duration and listen
attentively. So it
was at the University of Munich’s
Grosse Aula, as
Hans-Werner Sinn gave a lecture on the
causes of the financial crisis and the
prospects for the world economy in midDecember. Every staircase and aisle in
the aula was crammed, the crowd
spilling out onto the surrounding spaces.
ties. This is the
true cause of
the real-estate
bubble.
a minimising of capital equity.” While
limited liability laid the foundation for the
establishment of incorporated companies,
in the run-up to the crisis it was thoroughly abused by US investment banks. The
banks’ shareholders were aware of the fact
that a portion of any potential losses would
be borne by the creditors and taxpayers,
which fostered a gambling mentality that
made them take greater risks. But it was
not only Wall Street that engaged in the
high-risk game: Main Street did as well.
Normal homeowners also had the certainty that their liability did not include their
salaries or other assets. For this reason
they ignored their possible losses and concentrated only on their profit opportuni-
Held within the Munich Seminar series,
the lecture reviewed the origins of the current financial and economic crisis from a
global and a German perspective, dissected the failures of watchdogs, policymakers, bank managers and investors, and
delineated measures to avert a recurrence.
The main cause, according to Mr Sinn, “is
the limited liability of bank shareholders.
This led to a generous dividend policy and
Mr Sinn called
for
stricter
capital equity
requirements and
for obliging the
German banks to
accept the capital
offered in the rescue package. “Otherwise there’s no way
to prevent a credit crunch”, he asserted.
The banks would then have the necessary
cushion in order to survive future crises.
With an increase in the liability limits, the
stockholders will demand more caution
from their executive boards. This will
result in more cautious business models
and in compensation systems that place
emphasis on sustainable success of the
corporation. Such measures would have
to be harmonised internationally in order
to prevent what Mr Sinn calls a “laxity
competition”, with each country outdoing
the next in terms of deregulation.
Watch the entire video (in German):
www.cesifo-group.de/link/_semmuc/ms-20081215-Sinn.htm
The former, co-ordinated by Michael
Hoel of the University of Oslo, has the
goal of promoting co-operation on theoretical and empirical research on all economic issues related to energy markets,
climate change, and climate policy. Concerns about future climate change have
increased significantly since the beginning of this century, and are likely to be
strong also in the coming decades.
The interests of the area’s researchers
span a wide range of fields, including the
design of climate policies and climate
agreements, the promotion of renewable
energy, and the functioning of fossil fuel
markets. Policy intervention in the functioning of energy markets is often moti-
2
M. Hoel
In keeping with the issues that shape
our times, the CESifo Economics
Research Network has established two
new Research Areas: Energy and Climate Economics, and Economics of
Education.
E. Hanushek
NEW RESEARCH AREAS IN CESIFO NETWORK
vated by climate concerns, and an important aim of research in this area is to
improve our understanding of the climate implications of various policies,
both for policies that have climate
change as their primary concern and
policies with other primary objectives
(such as e.g. energy security).
The Economics of Education area, coordinated by Eric A. Hanushek, of Stanford University and former member of
the CESifo Group Scientific Advisory
Council, in addition to intensifying
Bulletin
research in the field, aims to correct the
lack of intersection between the enormous research activity on the economics
of education going on in both Europe
and the United States by increasing interaction among researchers on both sides
of the Atlantic. Both sides stand to gain.
While the US has something to show for
its world-class universities, countries
such as Finland have something to teach
the US regarding elementary and highschool education.
The other areas in the Network are
Employment and Social Protection,
coordinated by Kai Konrad, Berlin;
Applied Microeconomics, coordinated
by Christian Gollier, Toulouse; Macro,
Money and International Finance,
coordinated by Paul De Grauwe, Leuven; Public Sector Economics, coordinated by Frederick van der Ploeg,
Oxford; and Global Economy, coordinated by John Whalley, Western Ontario.
Vol. 19, No. 1 • January 2009
EDUCATIONAL POLICY UNDER UNCERTAINTY
SKILL TRANSFERABILITY
Schindler
Gathmann
the moral hazard problem
in learning effort, caused
by skill-specific tax
instruments, e.g. a graduate tax.
Studying optimal tax and
education policies in
models with endogenous
labor supply and educational investment under
uncertainty can be a
tricky thing.
Dirk Schindler, of the
University of Konstanz,
points out the consequences of a fiscal externality, which is generated
by incomplete insurance
markets and self insurance by households. As
private insurance markets typically do not offer sufficient
insurance against human capital risk,
households over- or underinvest in education in order to reduce their exposure
to risk.
In deriving the optimal education subsidies/taxes, income taxation as social
insurance device creates a welfare-relevant tax revenue effect (fiscal externality), an externality that can have surprising
effects on optimal tax and subsidy rates.
In recent papers, Mr Schindler also
shows that improving the quality of education by increasing public spending in
the educational sector can provide exante insurance, i.e., a higher probability
of success for any household, if the
probability for graduating as a skilled
worker depends on learning effort and
quality of education. At the same time,
enhancing educational quality mitigates
Another field of interest
Mr Schindler will pursue
while at CES are taxinduced effects on the
capital structure of multinational enterprises. He
shows that minority ownership has opposite
effects in case of tax
avoidance by thin capitalisation via internal debt,
i.e. related party debt, compared to standard wisdom in profit-shifting models
(transfer pricing).
In case of internal debt, a multinational
will engage less in tax avoidance if there
are minority partners. This is because
minority partners benefit in full from tax
avoidance by thin capitalisation, but only
share part of its costs. A next step is now
to analyze the combination of profitshifting by transfer pricing and tax
avoidance by relying on internal debt,
which creates ambiguous tax effects.
Dirk Schindler is assistant professor of
public economics at the University of
Konstanz, where he also received his
doctorate. He is also a member of a
research group on profit-shifting in
multinational enterprises at the Norwegian School of Economics and Business
Administration in Bergen.
INDUSTRIAL ECONOMICS EXPERTISE
Roider
Andreas Roider is full professor at the
Department of Economics of the University of Heidelberg, Germany. He received
his M.A. in Economics from the University of Bonn in 1998 and his doctorate from
the Bonn Graduate School of Economics
and the European Doctoral Program
(EDP). In June 2003 he completed a PhD
thesis on optimal contracting in and
between firms. From 2003 until 2008 he
was an assistant professor at the Department of Economics of the University of
Bonn. He has been a visiting professor at
the London School of Economics and
Political Science (LSE),
and Stanford Graduate
School of Business. He is
a research affiliate of the
Centre for Economic Policy Research (CEPR,
London), and an associated member of the
Junges Kolleg of the
North Rhine-Westphalia Academy of Sciences. His research interests are in the theory of economic incentives, institutional
economics, behavioral economics, and
experimental economics.
Bulletin
Skills, as Nobel laureate James Heckman
stresses, are key to
your job prospects.
But how transferable
are they, in these times
of fast-paced technological change?
This is one of the
areas
Christina
Gathmann’s research will focus on while
at CES. To go about it, her project first
extends the traditional notion of general
and specific skills by Becker and Mincer
to include partially transferable skills, i.e.
skills that are transferable to jobs that
require similar tasks. Using this extended
concept of human capital, the project then
analyses whether skills have become
more or less transferable since the late
1970s, based on rich data from Germany.
Based on the study, the benefits and costs
of technological change in terms of
human capital can be calculated, something that has important implications for
the design of labour market policy.
In her most recent work in public economics, Ms Gathmann studies the effect
of a country’s electoral system on public
policies. Using newly collected data on
Swiss cantons from 1890 and 2000, she
shows that the switch from a majoritarian
to a proportional system has strong
effects on the electoral incentives of candidates and the composition of the legislature. Specifically, she finds that proportional systems tilt spending toward public
goods like education and welfare benefits
but decrease spending for targeted transfers like agricultural subsidies. However,
she finds little evidence that proportional
representation increases the size of government. These results have important
consequences for electoral reform. They
imply, for example, that better political
representation in a proportional system
does not necessarily come at the price of
a larger public sector.
Christina Gathmann holds a PhD from
the University of Chicago and is currently a Post-Doctoral Fellow at Stanford
University. Her research interests are in
public economics, labour economics and
applied econometrics.
3
Vol. 19, No. 1 • January 2009
IFO NEWS
IFO ECONOMIC FORECAST 2009:
GERMAN ECONOMY IN RECESSION
On December 11 the Ifo Institute presented its economic forecast for the coming two years. The world economy is
experiencing a massive downturn and
the survey data points to a global recession in 2009.
In
Germany
economic activity has been
clearly
in
decline since the
middle of 2008.
In the first year
half of the year,
the
economy
once again experienced a strong recovery. But since the summer the massive
worsening of the world economic environment became increasingly evident.
The financial crisis grew much worse in
the meantime.
A clear decline in value added in Germany was first seen in the third quarter.
The operating rate of the economy, however – using the Ifo capacity utilisation
rate in manufacturing as a proxy – still
stood clearly above its long-term average. The labour market situation has also
remained surprinsingly robust, partly as
a result of the flexible use of temporary
employment and the depletion of overtime accounts. In the meantime, however, job offers have decreased and reports
of shorter working hours have increased
perceptibly.
In the coming year, the business-cycle
will point downward. The German economy, which because of its trade orientation had benefited from the strong
upswing in the global economy, now is
being particularly pulled under by the
vortex caused by the financial crisis. As
a result, economic output will continue
to decline strongly. On average for the
year, real GDP – unadjusted and also calendar-adjusted – will decline by 2.2 percent. In the wake of the world recession,
exports will be reduced drastically. With
declining capacity utilisation, collapsing
profit outlooks and restrictive financing
conditions, plant and equipment spend-
4
ing will decline sharply. Construction
will also slide into negative territory with
the exception of public-sector non-residential construction.
Private consumption, despite increasing
real average wages, will make only little
progress due to the clear drop in employment
and
because the savings rate will
remain high in
light of the
financial turmoil
and the crisis in
confidence. The
inflation
rate
will average ca.
1% for 2009, and in individual months of
the year it will even be noticeably below
this mark.
Stabilisation is not expected until 2010,
with the gradual subsiding of the financial crisis and a slight improvement of
the international environment. Because
of the underhang,
however, real GDP
will still fall by ca.
0.2 percent, and calendar-adjusted by ca.
0.3 percent, on average for 2010. Despite
all this, the output gap
– with a potential rate
of 1½ percent – will
decline further.
Labour demand will
deteriorate in the forecast period. In the
coming year the number of wage and
salary earners will decline by 0.8 percent
to ca. 40 million. In the course of 2009
some 540,000 additional people will register as unemployed. This will result in
an average unemployment rate of 8.0
percent for the year. In 2010 this will
continue so that the average number of
unemployed will nearly reach the 4 million mark, which corresponds to a rate of
9.2 percent.
CREDIT CONSTRAINTS REMAIN TIGHT
The credit constraints for firms in industry and trade in Germany tightened again
Bulletin
in December and stayed unchanged in
January. The trend towards more restrictive bank lending policies is here to stay.
In construction, trade and manufacturing,
the survey participants assessed bank
policies as clearly more restrictive in
December than in the previous month,
and this did not improve much in January.
In manufacturing the extent of the credit
constraints is differentiated according to
company size: of the larger firms now
44.4 percent complain of restrictive lending policies compared to 35.6 percent of
medium-sized and 34.2 percent of small
firms. Large firms, traditionally those
who had the best access to credit, are now
encountering credit constraints more
often, evidently because they are particularly reliant on the larger private and state
banks, which have been most affected by
the financial crisis. Overall, the Credit
Constraint Index stood at 39.8.
Since spring 2003, in its regular surveys
of German
businesses
in industry
and trade,
the
Ifo
Institute
has queried
companies’
assessments of
bank lending policies. The
special question on access to credit was
added to the Ifo Business Survey because
of the acute difficulties of the German
banking system at that time and after a
comprehensive analysis of the Japanese
banking crisis.
The monthly Ifo Business Survey, from
which the Ifo Business Climate is calculated, is based on ca. 7,000 responses
from firms in Germany. The special question on bank lending policies had been
asked twice a year up to the August survey but will now be polled monthly. The
results will be released monthly at a previously announced date under the name
“Credit Constraint Indicator”.
Vol. 19, No. 1 • January 2009
IFO WORLD ECONOMIC CLIMATE INDEX
FALLS FURTHER
The Ifo World Economic Climate worsened further in the fourth quarter of 2008,
falling to its lowest level in more than
twenty years. The decline is primarily the
result of more unfavourable assessments
of the current economic situation, but also
of a worsening in the expectations for the
coming six months. On the whole, the survey data point to a global recession.
The cooling of the Ifo World Economic
Climate has this time affected not only
the major economic regions of North
America, Western Europe and Asia but
also Central and Eastern Europe, Russia,
Latin America and Australia. In the US
the current economic situation is regarded as very unfavourable, but the economic expectations for the coming six
months are no longer quite so pessimistic
as in the first half of the year. In Western
Europe the economic climate indicator
worsened again in nearly all countries.
The assessments of the current situation
have been clearly revised downwards.
The economic situation is particularly
unfavourable in Spain, Italy, Belgium
and Ireland, according to WES experts.
In Asia the assessments of the current situation as well as the six-month outlook
have also been revised downwards. Particularly unfavourable appraisals of the
economic situation were given in Japan,
South Korea and Taiwan.
Inflation expectations have peaked out
worldwide. In nearly all regions the WES
experts have reduced their inflation
expectations for the coming six months.
In contrast to the previous survey, a
majority of WES experts now anticipate
declining central bank interest rates.
Long-term interest rates are also expected to fall in the coming six months.
After having increased in value in recent
months, the US dollar and the Japanese
yen are now regarded as hardly overvalued. Thus the overvaluation of the euro
has been corrected but according to the
WES experts this process has not yet been
concluded. Correspondingly they expect
that the euro will lose value vis-à-vis the
US dollar in the coming six months.
CESIFO FORUM:
CAUSES AND CONSEQUENCES OF THE
FINANCIAL MARKET CRISIS
Just two years ago after the real-estate
crisis in the US began it has developed
into a worldwide economic crisis.
Numerous factors are listed as the cause:
unethical credit brokers, naive homeowners, badly informed investors, information deficits between traders and
banks, conflicts of interests of the rating
agencies and much more. This list is followed by another with reform proposals:
regulation of the banks and the rating
agencies, higher capital reserve requirements, a stronger risk consciousness on
the part of the banks, and more appropriate monetary policies. In the current
issue of CESifo Forum, well-known
economists give their views on all this.
For Barry Eichengreen, University of
California at Berkeley, the revision of the
Basel II agreement is one of two reform
approaches. The capital reserve requirements of internationally active banks
must be oriented not only on banks’ own
risk evaluation models but must also be
compared with the former Basel I method
(share of total assets). For the necessary
capital reserves the higher share must
then be chosen. A second reform proposal stresses the liquidity of financing and
criticises the previous, too-one-sided orientation on the volatility of investments.
Martin Hellwig,
Max Planck Institute for Research
on
Collective
Goods, explains
that not only the
misguided speculation with toxic
US mortgages, but
also the erroneous behaviour of market
participants and systemic error were also
responsible for the financial crisis. The
approach of the policymakers to expand
and increase financial oversight ignores, in
his opinion, the fact that the present system of bank oversight has contributed to
the downward spiral in the crisis: “If we
wish to prevent repetitions of this experiment, we must fundamentally rethink the
conceptual basis of bank regulation.”
Bulletin
For Ifo President Hans-Werner Sinn, policymakers must redefine the liability limitations of corporations by fixing strict minimum standards for capital reserves for the
various types of banks, both in America
and in Europe (see also page 2). Stricter
rules will not hurt the economy, in his
opinion. Equity is economically not more
expensive than external capital, as the burden that the American government is now
taking on proves. In this way no scarcity
of financing can arise because the savings
in the world suffices, independently of
such rules, to finance investments.
SLIGHT IMPROVEMENT IN
IFO BUSINESS CLIMATE INDEX
The Ifo Business Climate for industry and
trade in Germany improved in January,
albeit very slightly. Following a strong
decline throughout last year, the Business
Climate Index remains stuck at a low
level. Its two components changed in different ways: Whereas the firms again
assessed the current situation as worse,
they are a little less sceptical about their
business in the next six months. A cyclical
turnaround cannot be derived from this.
Manufacturers report yet again a worsened business situation. While fewer
firms than in the past survey are negative
regarding their business outlook in the
next half year, on the whole they continue to expect a very unfavourable business development.
With respect to
exports, the surveyed firms also
expect a largely
unchanged downward
trend.
Capacity utilisation of machinery
and equipment is
considerably lower than last autumn. The
firms are planning to reduce their staff.
In retailing, by contrast, the business climate improved, with both the present
situation as well as the outlook rated less
negatively than in December. The index
for wholesaling and construction rose
marginally, while for construction the
current situation appears less favourable
but expectations a bit less negative.
5
Vol. 19, No. 1 • January 2009
MEASURING EFFECTS OF CHANGES IN THE TAX AND TRANSFER SYSTEM
MUNICH SEMINARS
v
Kocenda
Deutschlands große Tageszeitung
In these times of increased
state stakes in private companies, from banks to insurance companies and much in
between, it is not unthinkable that the state will end up
being the ultimate owner in
some firms, even in those
where a wealthy family has
long been sitting at the top of
the ownership pyramid.
This, as Evzen Kocenda points out,
deserves some study by economics
scholars, as not much literature has
been devoted to the subject. Corporate
pyramids, ownership structures of vertically organised companies, are widespread around the world, and their
presence is even more prevalent in
emerging markets. While most of the
literature on the topic considers a
wealthy family at the top of a pyramid,
much less attention has been paid to
the state as the ultimate owner. Mr
Kocenda’s research while at CES will
focus on this gap.
Another focus of his research will be
corporate divestitures. These play an
important role in advanced market
economies, but they have been much
less researched in emerging markets. At
the same time, not enough attention has
been paid to accounting for changes in
ownership when analysing the effect of
divestitures and controlling for endogeneity, selection and data attrition
when analysing the effects of divestitures and ownership.
Both aspects fall within the
corporate performance area
in Mr Kocenda’s research
agenda. His recently published contributions to this
area include articles on the
effect of changes in ownership structure on the performance of large- and mediumsized Czech firms and the
extent of the hidden state
control over privatised firms. He has
also written extensively on the topic of
privatisation and he is co-author of the
large survey on the effects of privatisation on corporate performance that is
forthcoming in 2009 in the Journal of
Economic Literature.
Evzen Kocenda received his PhD in
Economics from the University of
Houston (1996) and currently is Professor of Economics at Charles University
in Prague and Senior Researcher at the
Economics Institute of the Czech Academy of Sciences (joint working place
CERGE-EI).
He has taught at New York University,
Université Paris Dauphin, and AngloAmerican University (Prague). His
other affiliations include the William
Davidson Institute, CEPR, and EABCN.
He has served as member of the editorial boards of the Journal of Comparative Economics, the Czech Journal of
Finance and Economics (since 1998),
and Economic Systems (since 2009).
The main areas of his research include
applied econometrics and European
integration.
sponsored by
BMW Niederlassung München
Wegweisend und voller Wertschätzung für Sie.
Chaired by Hans-Werner Sinn (CESifo) and
Marc Beise (Süddeutsche Zeitung)
Monday, 6 pm, CESifo Conference Centre,
Ludwig-Erhard-Hall, Poschingerstr. 5,
Munich
2 February 2009
Frank-Jürgen Weise
Chairman of the Board
Federal Employment Office, Nuremberg
Vom Arbeitsamt zum modernen Dienstleister
– die Reform der Bundesagentur für Arbeit
(From Employment Office to a Modern
Service Provider – The Reform of the
Federal Employment Office)
16 February 2009
Prof. Martin Hellwig
Director at the Max Planck Institute for
Research on Collective Goods, Bonn
Die Auswirkungen der Finanzkrise
(The Effects of the Financial Crisis)
20 April 2009*
Prof. Ulrich von Alemann
Institute for Social Sciences,
University of Düsseldorf
4 May 2009
Prof. Ottmar Edenhofer
Potsdam Institute for Climate Impact
Research
A Global Deal for the Climate?
Risks, Challenges and Opportunities
18 May 2009*
Prof. Axel Börsch-Supan
Mannheim Research Institute for the
Economics of Aging (MEA),
University of Mannheim
A SAFE HAND IN PUBLIC CHOICE
Auerbach
De Haan
15 June 2009*
Jakob de Haan is Professor of Political
Economy, University of Groningen, the
Netherlands. He is also Scientific Director
of SOM, the graduate school and research
institute of the faculty of Economics and
Business at the University of Groningen.
He graduated from the University of
Groningen, where he also got his PhD. He
has published extensively on issues like
public debt, monetary policy, central bank
independence, political and economic
6
freedom and European
integration. He is a member of the editorial board of
Public Choice and European Union Politics, editor
of the European Journal of
Political Economy, and
has been President of the European Public
Choice Society. He has been visiting professor at the Free University Berlin, Kiel
Institute, and the University of Munich.
Bulletin
Prof. David G. Blanchflower
Dartmouth College
29 June 2009*
Dr. Wulf H. Bernotat
Chairman of the Executive Board
E.ON AG
* Topic to be announced. For details, please check
the Munich Seminars webpage at
www.cesifo-group.de/link/0010-MUNICHSEMINARS
Vol. 19, No. 1 • January 2009
ON
A RISING STAR ON THE EAST
Wooton
Cheung
The more prominence China
gains in the global economy,
the more it attracts highquality research by economists. The fact that it surpassed Germany as top merchandise exporter, its status
as one of the biggest lenders
to the US, its huge foreign
reserves and trade surplus,
or whether its currency, the
Renminbi, is undervalued or not, there is
enough to keep researchers busy for
quite a while yet.
It is only fitting that Yin-Wong Cheung,
a renowned econometrist and an
acknowledged expert in exchange rate
dynamics and Asian economic issues,
should devote his attention to China as
well. His 2007 book, The Economic
Integration of Greater China—Real and
Financial Linkages and Prospects for
Currency Union (co-authored with M.
Chinn and E. Fujii), examines the degree
of economic and financial linkages within greater China using a variety of
empirical measures of economic and
financial relationships. Using this foundation, the authors evaluate the costs and
benefits of a currency union in a comprehensive empirical study. The evidence suggests that a Chinese currency
union would make sense.
Another line of Mr Cheung’s recent
research on China concerns the value of
China’s currency and is motivated by the
contentious policy debate over the possible undervaluation of the Renminbi
against the US dollar. His most prominent research article is “The Overvaluation of Renminbi Undervaluation,”
which systemically considers the undervaluation argument using an empirical
framework built around the relationship
between relative price levels and relative
output levels across countries. Using rigorous time-series econometrics, Mr Cheung rejects the undervaluation argument
or, more accurately, finds that undervaluation cannot be definitely demonstrated
within standard boundaries of statistical
inference. The results of this paper have
been cited in the press, including The
Economist and also in the US government 2007 Congressional Research Ser-
SABBATICAL
vice Report to the Congress,
“China’s Currency: Economic Issues and Options for
U.S. Trade Policy.” (Another of Mr Cheung’s papers on
the topic is cited in one of
the latest editions of The
Economist.)
In the article “Does the Chinese Interest Rate Follow
the US Interest Rate?” Mr
Cheung questions the “usual” wisdom
that the adoption of a flexible Chinese
Renmenbi exchange rate offers China a
policy leeway to free her monetary policy from the US influences. Using several empirical approaches, Mr Cheung
finds that there is no evidence of China’s
monetary policy following the US’s even
when the Renmenbi has a de facto peg to
the US dollar. Thus, monetary policy
independence is not a good reason to
entice China to adopt a flexible Renmenbi exchange rate policy.
A second theme of Mr Cheung’s recent
research concerns real exchange rate
volatility and exchange rate forecasting.
His article “Empirical Exchange Rate
Models of the Nineties: Are Any Fit to
Survive?” reconsiders the classic finding in empirical international finance
that structural exchange rate models of
the 1970s forecasted so poorly that they
are outperformed by a random walk.
Contrary to articles in the 1990s thatfound support for forecasting with structural exchange rate models using new
empirical methods, Mr Cheung, demonstrates that there is no model that could
consistently outperform a random walk
specification across different currencies
and historical periods. The article has
received considerable attention.
During his visit at CES, Mr Cheung will
continue his recent research on economic issues related to China. Specifically,
he will examine the interactions between
capital flights and exchange rates.
Yin-Wong Cheung is a professor in the
Economics Department at the University
of California, Santa Cruz and a Guest
Professor of the Shandong University.
He is included in The America’s Registry
of Outstanding Professionals.
Bulletin
Ian Wooton is
Professor of Economics at the
University
of
Strathclyde
in
Glasgow, having
previously held
posts at the University of Glasgow and the University of Western
Ontario. He studied at the University of St Andrews and
Columbia University, from which he
received his PhD in 1982.
Mr Wooton’s research focuses on international trade and he has published on
many facets of that area including customs union theory, international factor
migration, trade and the environment,
economic geography, trade in services,
and international tax competition.
He has held visiting positions at several
research institutions around the world
and has served as a consultant to a number of governmental and international
agencies. At present he is enjoying a
year-long study leave following his
tenure as Head of Department at the University of Strathclyde. Prior to his time
in Munich, he will have spent extended
periods at the University of Cape Town
and at the Copenhagen Business School.
Mr Wooton’s recent research includes
work with Joseph Francois (Linz) on the
effects of imperfect competition in intermediary services on international trade
flows, as well as a number of papers with
both Ben Ferrett (Loughborough) and
Andreas Haufler (Munich) on the outcome of international competition to
attract foreign direct investment (FDI).
He has recently started a project, in collaboration with Strathclyde colleagues
Julia Darby and Rodolphe Desbordes, on
the determinants of FDI to developing
countries.
In 1999, Mr Wooton and Joseph Francois established the European Trade
Study Group (ETSG) as a means of promoting research in international trade,
especially for young European scholars.
ETSG has now grown to be the largest
annual international trade conference
and will meet for its tenth anniversary in
Rome in September.
7
Vol. 19, No. 1 • January 2009
THE PERSISTENCE OF BORDERS
HIGH-LEVEL APPOINTMENT
Wolf
Ekholm
Where is the Global Village? Despite the massive
decline in the costs of communication and transport,
location continues to matter
big time. The spatial concentration of economic
activity is hardly declining
and trade across political
borders is still much more
costly than trade within
such borders.
Nikolaus Wolf, a CESifo
affiliate from the University of Warwick,
explores Germany’s changing borders as
a spectacular long-run experiment.
Using a large new data-set on regional
trade flows across Central Europe since
1885 and state-of-the-art tools from the
empirical trade literature, he first asks
whether Germany was ever united prior
to 1945. Did the country ever integrate
over the many lines of internal fragmentation in terms of administration, culture,
religion, or geography?
Surprisingly, Germany started to become
an economically integrated area only
after 1918 and still then exhibited significant internal barriers to trade. The division of Germany in 1945 followed
roughly an old, pre-existing fragmentation between East and West and turned it
into a nearly impregnable border: the
Iron Curtain.
Next, the political unification in 1990 did
not immediately remove that East-West
divide. Indeed, the former Iron Curtain is
fading away very slowly, and still matters
for domestic trade flows today. This
research (joint with Volker Nitsch) suggests that borders are by no means random
lines but often follow deep, historical lines
of fragmentation. Moreover, it highlights
that the impact of political borders on
trade can be highly persistent, even a generation after the border has been removed.
It’s a long way to go to the Global Village.
Bulletin
Not least, how does the
location of industry and
services react to changing
borders? The “New Economic Geography” developed in the wake of work
by 2008 Nobel Prize laureate Paul Krugman suggests
that even transitory historical events can have persistent long-run effects on patterns of location. Ex ante,
there are many possible
steady-state location patterns, and history or expectations rather than fundamental differences between locations will
select one. The division and reunification
of Germany can be used as a natural
experiment to test such theories against
data. A case study on the location of Germany’s major air hub (joint with Daniel
Sturm and Stephen Redding) shows first
how Frankfurt replaced Berlin as Germany’s air hub. Second, this research
shows that the change in hub location is
not explained in terms of changing fundamentals but by historical accident and
major sunk costs that prevent a return to
the pre-division pattern. This is powerful
evidence that transitory shocks can have
persistent effects on the location of key
industries and services.
Mr Wolf is also continuing his work in
Munich with Peter Egger at the Ifo Institute exploring the impact of the opening
of the Suez Canal on the volume and
structure of international trade.
Nikolaus Wolf is Associate Professor of
Economics at the University of Warwick
and RCUK Senior Research Fellow at the
Centre for the Study of Globalisation and
Regionalisation. He is also a Research
Affiliate at CEPR and the CEP. He
received his PhD from Humboldt University in 2003 and currently serves on
the editorial board of Cliometrica and
Explorations in Economic History.
CESifo Research
Fellow Karolina Ekholm has
been appointed
Deputy Governor
of
the
Sveriges Riksbank, the central bank of
Sweden and the
world’s oldest
central bank.
She will take up her post in March 2009
for a six-year term.
Ms Ekholm is a recognised authority on
the effects of globalisation, in particular
the location decisions of multinationals.
In work conducted with Sascha O.
Becker and Marc-Andreas Muendler,
she examined the labour market effects
of foreign investments by German and
Swedish firms.
The study, based on detailed firm-level
information on the firms’ foreign activities
and on worker-level information on the
labour market characteristics of employees, used data with linked information on
employers and employees, making it possible to estimate more precisely than previously what effects this expansion has on
employment levels in the investing countries. Her work provided an insight into
how many jobs are gained or lost in the
home country for every job created by a
multinational in an offshore location.
Karolina Ekholm is Associate Professor at
the Department of Economics, Stockholm
University. Her research deals with international trade and international investment. She has carried out several studies
on the causes and consequences of foreign direct investment and the expansion
of multinational firms. She is also a member of the Swedish Fiscal Policy Council
and of the scientific committee at the
European Trade Study Group (ETSG).
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.