Newsletter 1/09

1 9 Editorial 1 CFS Colloquium / 12 Research and Policy 3 CFS Presidential Lectures 16 Research Networks 3 Joint Lunchtime Seminars 17 CFS Financial Center Index 7 Lunchtime Debate 20 Issing Committee 8 CFS Conference 22 CFS White Papers 11 CFS-DAI Seminar 26 CFS Working Papers 12 Deutsche Bank Prize in Financial Economics 2009 28 Events 12 Miscellaneous CFS Executive Education 35 Editorial Towards a socialization of losses? As the financial crisis continues into its third year, it is time to con- sider the lasting impact it may have on our society. Will we see a drift by Jan Pieter Krahnen towards more government-led economic activity, a tendency towards the rolling back of markets and private enterprise? As a recent debate at a CFS-Luncheon suc- cinctly asked: how much instability is capitalism able to bear? Discussions in the public arena have begun increasingly to question the political fundament of our market economy. In contrast to earlier economic crises, an impressive joint course of action among all major governments has been initiated. The G-20 meetings set the pace, creating a high level of expectations around the world. By and large, governments, ➾ Gesellschaft für Kapitalmarktforschung e.V.: Chairman Board of Trustees: Prof. Dr. Dr. h.c. mult. Otmar Issing; Chairman Managing Board: Dr. Rolf-E. Breuer Center for Financial Studies: President: Prof. Dr. Dr. h.c. mult. Otmar Issing; Director: Prof. Dr. Jan P. Krahnen (Goethe University) Editorial | Towards a socialization of losses? the European Commission, and central banks have lived up to these expectations. Will this continue? When the crisis is over, and we review the actions taken to fight it, will we still have a strong and innovative financial industry? In his seminal book on Capitalism, Socialism and Democracy, first published in 1942, Joseph Schumpeter argues that despite all its achievements in terms of efficiency and innovation, private, entrepreneurial industry will eventually relinquish control to the guided hand of socialist planning. A weakening of market Frederick Deligne, Le Pelerin, France (www.caglecartoons.com) powers via government intervention will smooth business cycles associated with There is, however, a second form of common understanding that an inherent the imbalances and instabilities perceived instability that has to be distinguished component of private ownership is to be inherent to capitalist market from the market-driven instabilities indeed the potential to risk of losing economies. If enterprises become large just described. It is that of crisis-related everything, in exchange for retaining and manager-run, rather than owner-run, policy instability, pertaining to the the decision rights and an entitlement to the rise of public ownership will appa- basic governance rules of our so-called residual profits. rently have no dramatic consequences ‘capitalist’ system. Today’s economic on innovation and efficiency. While system must, in fact, be regarded as The rise in interventionist policy- Schumpeter’s analysis leaves many issues a mixture of capitalist and socialist making, ranging from the taking over unresolved, including, for example, the elements, if the extensive role of of toxic assets in the banking industry issue of corporate governance in large publicly-owned firms and institutions, to the engineering of corporate firms, the role of small and medium particularly in services and banking, is restructuring in the car industry, or in industry, and the potential of firms to considered. The fundamental question, other industries, is highly alarming. It remain innovative and efficient, he never- therefore, remains: do the remedies is likely to frustrate structural changes, theless proves to be accurate in predicting offered by policy-makers to fight the which are badly needed in order to an increased role for government in financial crisis comply with the ground defend tomorrow’s competitiveness of volatile and – with hindsight – systemic rules of our economic system? The these industries. industries such as that of banking. respect for private property plays an important, defining role with respect to Current public economic policy is, Macroeconomists would describe the these basic tenets. The frequently voiced therefore, structurally conservative, current crisis as an extreme shock to the critique of an accommodating public and is likely to impose large losses on economy that forces firms and house- policy that accepts the socialization of society as a whole in the longer run. holds to adjust their plans downward. losses, while permitting private owners’ In the interest of long-term welfare, Nevertheless, the devastating impact of entitlement to accruing profit, is that government money should be strictly instability emanating from a crisis is it – if shown to be true – will be a limited to fighting systemic risks in cushioned in many ways, shifting much strong, politically destabilizing factor in banking. And even then, government of the burden over time. This cushioning a market economy. money should not be used to prevent includes, amongst other things, not only restructuring, and a change of owner- short-time work for entire industries and The current situation in Germany, with ship and control at the firm level. In a higher level of unemployment benefits, large amounts of public money earmarked this sense, a consistent ‘capitalist’ public but also a counter-cyclical fiscal policy for intervention in faltering markets and policy towards systemic risks will respect (the ‘stimulus’), and a benign monetary firms, challenges the fundamental rules private ownership – and insist on wiping policy (the ‘easing’). of the economic system – and erodes the out equity before taking over losses. 2 Research Networks | Research and Policy Research Networks The Macroeconomic Model Data Base A New Comparative Approach to Macroeconomic Modeling and Policy Analysis The Macro Model Data Base project is Albert Marcet (Consejo Superior de Smets and Wouters (2003, 2007) and part of the EU-sponsored joint initiative Investigaciones Científicas, Madrid), Christiano, Eichenbaum and Evans on “Modelling and Implementation Volker Wieland (Center for Financial (2005), and some fairly large models of Optimal Fiscal and Monetary Studies at the Goethe University of like John Taylor’s (1993) model of the Policy Algorithms in Multi-Country Frankfurt), and Riccardo Girardi G7 economies. Researchers can easily Econometric Models” (MONFISPOL). (European Commission – Joint Research include new models in the data base and Centre). compare the effects of novel extensions This initiative is supported by a three- to established benchmarks. year funding through the Seventh The Macro Model Data Framework Programme for Research Base project headed by (FP7) of the European Commission’s Volker Wieland and Socio-economic Sciences and Humani- carried out at CFS aims ties (SSH) Program. for building an archive of macroeconomic models The MONFISPOL projects focus on based on a common the evaluation of macroeconomic computational platform policy, specifically the analysis of and providing various optimal fiscal and monetary policy. This tools for systematic includes the development of optimal model comparison. policy models to analyze the strategic While in the past such interactions between monetary policy comparison projects and fiscal policies in a monetary union, have been infrequent the analysis of the dynamics of public and costly initiatives, the debt, as well as the construction of the Macro Model Data Base Macro Model Data Base, a data base provides a new approach of macroeconomic models that allows that enables individual for systematic models comparison. In researchers to conduct addition, new numerical tools will be model comparisons easily, frequently, The first version of the Macro Model developed and implemented in Dynare, at low cost and on a large scale. The Data Base will be made available in the a public domain platform for the broad range of macroeconomic models course of this year, so that users can simulation and estimation of dynamic incorporated in the first version of then employ the archive for their own stochastic general equilibrium models. the Macro Model Data Base include research or policy analysis projects. some fairly small models that focus The partners collaborating in this joint on explaining output, inflation and A detailed introduction to the new initiative are Michel Juillard (Centre interest rate dynamics such as the New comparative approach facilitated by the pour la Recherche Economique et ses Keynesian models of Clarida et al. Macro Model Data Base can be found in Applications, Paris), Joseph Pearlman (1999) and Rotemberg and Woodford Wieland, Cwik, Müller, Schmidt, and (London Metropolitan University), (1997), many medium scale models Wolters (2009). Paul Levine (University of Surrey), covering key economic aggregates like 3 Research and Policy | Research Networks Two recent papers by Taylor and and contained in the Macro Model evaluate fiscal policy stimulus proposals Wieland (2009) and Cogan, Cwik, Data Base to compare the monetary in the U.S. with a particular focus Taylor, and Wieland (2009) employ this transmission process of these models on the implied government spending new approach to model comparison. and evaluate the robustness of optimal multipliers. Taylor and Wieland (2009) look at three policy rules. Cogan, Cwik, Taylor, and monetary models, used to evaluate Wieland (2009) examine the robustness Sebastian Schmidt

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