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Cambridge Economics Economics Cambridge Cambridge Faculty of Economics Alumni Newsletter Welcome Royal Economic Society Applied Economics FROM ANDREW HARVEY Conference he fifth Alumni newsletter number of exciting initiatives in contains pieces on the Applied Economics are under TMarshall and Stone lectures, A development in the Faculty. new arrivals, conferences, distinguished alumni and visiting Newly launched following a generous professors. The Marshall lectures benefaction, the Keynes Fund for Applied were given by Peter Diamond, a Economics will provide grants for research, distinguished economic theorist fellowships and teaching at the intersection who was awarded the Nobel of financial markets with the real economy. Prize 2010. The Stone lecturer was Susan Athey of Harvard University The Faculty is also engaged in discussions and Microsoft. with the New York-based Institute for New Economic Thinking to undertake Richard Smith, our Professor of a fundamental research programme in Econometric Theory and Economic economics at Cambridge. The initial focus Statistics, took over as Chair of the will involve the themes: Networks, Crowds Faculty last September. He is still and Markets; Transmission Mechanisms and surviving! (Indeed he sometimes Economic Policy; Information, Uncertainty admits that he enjoys certain aspects and Incentives and Empirical Analysis of of the job, despite the attendant Financial Markets. frustrations). t’s over twenty years since the The Faculty also wishes to establish a Chair The annual garden party for staff Royal Economic Society annual in Applied Economics to replace Professor and graduate students took place in I conference was last held in David Newbery FBA CBE who retired in the grounds of Newnham College Cambridge. This year it returned and 2010. and was blessed with sunshine, a local organisers Pramila Krishnan and somewhat unusual occurrence for Solomos Solomou (pictured above For more information on these initiatives, please this rain-soaked year. The occasion in a planning session) worked hard get in touch or visit our website, www.econ. cam.ac.uk provided the opportunity to say to make it a success. Another of farewell to Hashem Pesaran and Willy our Faculty, Chryssi Giannitsarou, Brown, at least as full-time members played an important role on the Staff Comings and Goings of the Faculty. Hashem will continue programme committee. The to work at the University of Southern conference featured a distinguished California. Willy is retiring not only line up of invited speakers, including: Guilherme Carmona has left the Faculty to from the Faculty but also from the Elhanan Helpman, Harvard; Nancy Mastership of Darwin and from take up a Chair at The University of Surrey. Stokey, Chicago; Ariel Pakes, Harvard; his spell as Chair of the School of We thank him for his contributions to the Ken Rogoff, Harvard; Guillermo Humanities and the Social Sciences. Faculty’s teaching and research. Calvo, Columbia; and Lorenzo Bini However, he will doubtless continue to be involved in the University. Smaghi, currently a Visiting Scholar The Faculty would like to welcome Edoardo at Harvard's Weatherhead Center for Gallo who joined us early this year from Finally a reminder that the Alumni International Affairs. Topics covered in The University of Oxford. Dr Gallo’s research Weekend will, as usual, take place in the conference sessions ranged from focuses on Networks, Microeconomics and September, 21-23rd to be precise. The the crisis in the euro to modelling Experimental Economics. He is currently Phillips machine will again be coaxed drug related crime in London contributing to the faculty’s teaching in into action. boroughs. Political Economy. Issue number 5 Autumn 2012 Robert Chote and the Dog that Barks (sometimes) arlier this year, amid fears of a the sustainability of the public finances. has been charged to assess whether double-dip recession, stuttering It also scrutinises the Treasury’s costing the government is on course to hit Etax receipts, and policy disarray in of Budget measures. In addition it the budget balance and public debt the euro area, Robert Chote, Chairman publishes briefing and working papers targets that it has set itself. It also uses of the Office for Budget Responsibility on these and allied topics. sensitivity tests and scenario analyses to (OBR), the coalition government’s fiscal judge how wrong the central forecast watchdog, was unperturbed. OBR For its analyses and forecasts, the would have to be – and in what ways – reckoned at the time that, in spite of OBR uses the large macroeconomic for the government no longer to be on everything, the government had a model that was used for many years course to hits its targets. For example, better than evens chance of meeting its by the Treasury and which the two what difference would it make if the self-imposed targets, when looking five organisations now maintain jointly. This recovery was faster or slower, or if more years ahead, of bringing the cyclically- model is relatively ‘old fashioned’ (for banking and financial problems spilled adjusted current budget into balance example compared to those used by over from the eurozone? and of having public sector net debt the Bank of England), with its structure falling as a share of GDP by 2015-16. determined less by the dictates of But while the OBR looks at lots of different potential forecast outcomes, Parliament has instructed it not to speculate about possible future policy initiatives (such as any Plan B). The OBR’s assessments have to be made in the context of the coalition’s current measures and policies.This leaves hanging the question of whether public debate and the quality of policy would be improved if the OBR were able to look at alternatives. So far the main criticism of the OBR’s forecasts has focused not on their predictions for the public finances but on their inability to foresee how weak the recovery would be from late 2010 onwards. Acknowledging the inevitability of error and of criticism, Robert wryly comments that economic forecasting ‘is God’s way of making you look foolish’. Robert’s team of around twenty people is small by any standards and Chote (Economics, Queens’, 1986-9) microeconomic foundations than by certainly by comparison with the was appointed Chairman of the OBR what seems to fit the data. The model human and technical resources available in October 2010, following eight years also generates a more detailed medium- to OBR’s American counterpart, the as Director of the highly-regarded term breakdown of national income Congressional Budget Office. Inevitably, Institute for Fiscal Studies (IFS), the and expenditure than most forecasters this raises the question of whether OBR independent research institute that need, as the OBR requires a large is still, in effect, the creature of the has long been a thorn in the side of number of economic determinants to Treasury. In spite of the government successive governments through its forecast the various tax and spending nominating him and some of his rigorous analyses of the public finances streams that make up the public colleagues, Robert answers robustly, and of micro-economic policy measures. finances. These disaggregated revenue on three main grounds. First, the He firmly rejects the suggestion that and spending forecasts are prepared OBR has statutory direct access to the one motive behind his selection and using a variety of tailor-made models, outturns and projections it needs from appointment as OBR Director was to usually with the help of analysts at other government departments, in muzzle the IFS. He points out that IFS, HM Revenue & Customs and the particular HM Revenue and Customs led by Paul Johnson, his successor, is Department for Work and Pensions. and the Department for Work and more than able to look after itself in As with all forecasts, judgement plays Pensions. Second, the OBR staff robust policy debates. a key role alongside the models and combines outsiders with analysts who the OBR has to take full responsibility have previously been Treasury officials OBR reports at regular intervals on the for the ultimate outputs. Based on and enjoy challenging their former economic and fiscal outlook, and on its ‘best guess’ forecast, the OBR employer. And third, the Chancellor 2 Robert Chote and the Dog that Barks (sometimes) Hashem Pesaran cannot hire or fire the OBR’s key conometrics seminars in officials without the approval of the Cambridge will never be the formidable Treasury select committee. Esame again – Hashem Pesaran Robert has long experience of retired from his post in the Faculty commenting effectively on economic this summer. This news may come and financial matters. Before his time as a relief to speakers scheduled with IFS he worked at the International to appear this year, since very few Monetary Fund in Washington D.C. people have given a talk here without with first, Stanley Fischer and then Hashem pointing out the error of their Anne Krueger, both Deputy Managing ways. Not that his interventions are Directors, writing and advising on a necessarily unwelcome. He is usually wide range of issues including reform right (correction from Hashem – always of the international financial system and right) and the scope and depth of his globalization. This was after his earlier knowledge of econometrics means that career in journalism, at first with The his comments are invariably constructive Independent and later as economics and to the point. Everybody learns editor of the Financial Times. something – even other Cambridge professors of econometrics. Robert says that although he has spent many years looking at the public Part of the reason for Hashem’s finances and microeconomic issues, amazing knowledge of econometrics comes from his editorial handing of being responsible for macroeconomic papers for the Journal of Applied forecasting has taken some adjusting Econometrics. He founded the to.
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