CER-ETH Research Seminar, Fall Term 2008

Everyone who is interested is cordially invited!

If you would like to receive our weekly invitation via e-mail, or if you have any other question, please contact Jean-Philippe Nicolai

Speakers

Omar Licandro: ‘The Child is Father of the Man:’ Implications for the Demographic Transition

We propose a new theory of the demographic transition based on the evidence that body development during childhood is an important predictor of adult life expectancy. Fertility, childhood development, longevity, education and in come growth all result from individual decisions. Parents face a trade-off between the number of children they have and the spending they can afford on each of them in childhood. These childhood development spending will determine children longevity when adults. It is in this sense that we refer to Wordsworth’s aphorism that “The Child is Father of the Man.” Parents face a second trade-off in allocating their time between increasing their own human capital and rearing children. The model displays different regimes. In a Malthusian regime with no education fertility increases with adult life expectancy. In the modern growth regime, life expectancy and fertility move in opposite directions. The dynamics display the key features of the demographic transition, including the hump in both population growth and fertility, and replicate the observed rise in educational attainment, adult life expectancy and economic growth. Consistent with the empirical evidence, a distinctive implication of our theory is that improvements in childhood development precede the increase in education.

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Nick Hanley: Do increases in resource productivity improve environmental quality and sustainability?

Resource Productivity is increasingly seen as an important aspect of sustainability by governments world-wide. Making more with less seems to be intuitive in terms of reducing the burden on the environment while allowing for economic development. In the UK policy context there appears to be an acceptance that enhanced resource productivity is “good for the environment”. However, there is a debate in the literature concerning the possibility that any beneficial impact on the environment may be partially (“rebound”) or even more than wholly (“backfire”) offset. This paper clarifies the theoretical conditions under which such effects would occur and explores their likely significance using a computable general equilibrium (CGE) model of the Scottish economy. We find that an improvement in energy efficiency ultimately increases energy use and results in a worsening of the GDP to CO2 emissions ratio. The time interval of analysis proves significant, with rebound effects eventually growing into backfire. The reason is simple: energy efficiency improvements result in an effective cut in energy prices, which produces output and substitution effects that stimulate energy demands. However, the presence of backfire effects does not imply irrelevance of efficiency-enhancing policies: rather it implies that such policies alone are insufficient to improve the environment. The implication is that energy policies need to be co-ordinated.

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Michael Ehrmann: Politics and Monetary Policy

This paper analyses the determinants of controversies between politicians and central banks about the preferred monetary policy stance, for the case of the European Central Bank (ECB). More specifically, it investigates i) to what extent the ECB puts more emphasis on price stability than politicians, testing whether it is conservative in Rogoff's (1985) sense, ii) how important the time inconsistency problem is, i.e. whether politicians' preferences shift over time due to a reelection motive, and iii) to what extent these issues become more imminent in the case of a monetary union, where the central bank has a different constituency than politicians. The paper finds that the ECB is indeed conservative in Rogoff's sense. At the same time, however, the different constituencies of the ECB and of national governments account for the bulk of controversies over preferred interest rates. Moreover, the paper shows that the motivation for politicians' pressure on the central bank stems from a time inconsistency problem as well as their attempt to shift blame to the central bank.

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Rick van der Ploeg: Harnessing windfall revenues in developing economies: Sovereign wealth funds and optimal tradeoffs between citizen dividends, public infrastructure and debt reduction

A windfall of foreign aid or natural resource revenue faces government with choices of how to manage public borrowing, public asset accumulation, and the distribution of funds to households (across time and household types), particularly when the windfall is both anticipated and temporary. These choices are acute if some households do not have access to credit markets and are unable to smooth consumption, and if the country as a whole is not a price-taker in international capital markets – both reasonable descriptions of many developing countries experiencing resource (or aid) booms. We analyse the optimal policy actions for countries in this position and show that the usual permanent income hypothesis prescription of engineering a permanent increase in consumption financed by borrowing ahead of the windfall and then accumulating a Sovereign Wealth Fund (SWF) is not optimal. Heavily indebted countries with a small windfall should both increase current consumption and accumulate capital to accelerate their development. Only if the windfall is large relative to initial debt is it optimal to build a SWF. We study the intricate dynamic trade-offs faced when using the windfall to pay off debt and possibly accumulate a SWF, build public infrastructure and hand out citizen dividends. Finally, we show that a more sophisticated range of instruments (e.g., an asset holding subsidy) makes the trade-offs easier.

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Carl Christian von Weizsäcker: Welfare Economics with adaptive preference changes – a progress report

Preferences traditionally have been assumed to be exogenously given. The reason is that in welfare economics they provide the measuring rod for the performance of an economy. Can we do welfare economics, when preferences are influenced by the economic process, so that the measuring rod is no longer exogenous to what it is supposed to measure? For a particular class of endogenous preferences, namely "adaptive preferences", the answer is yes. For adaptive preferences I can show that we again can order consumption baskets by an exogenous quasi-preference structure in terms of the existence of "improvement paths". There exist then similar theorems of efficiency of competitive equilibria like in the traditional neoclassical theory. But these are "more local" efficiency theorems. The theory developed in the talk allows us to develop a welfare economics even for people with bounded rationality or with certain other deviations from the full rationality postulate of traditional economics. I believe that my approach opens a fruitful field of further theoretical and empirical research.

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Gerhard Illing: Endogenous Systemic Liquidity Risk

Traditionally, aggregate liquidity shocks are modelled as exogenous events. Extending our previous work (Cao & Illing, 2007), this paper analyses the adequate policy response to endogenous systemic liquidity risk. We analyse the feedback between lender of last resort policy and incentives of private banks, determining the aggregate amount of liquidity available. We show that imposing minimum liquidity standards for banks ex ante are a crucial requirement for sensible lender of last resort policy. In addition, we analyse the impact of equity requirements and narrow banking, in the sense that banks are required to hold sufficient liquid funds so as to pay out in all contingencies. We show that such a policy is strictly inferior to imposing minimum liquidity standards ex ante combined with lender of last resort policy.

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Jochen Kurt Hartwick: Has health capital formation cured ‘Baumol’s Disease’? – Panel Granger causality evidence for OECD countries

A large body of both theoretical and empirical literature has affirmed a positive impact of human capital accumulation in the form of health on economic growth. Yet Baumol (1967) has presented a model in which imbalances in productivity growth between a ‘progressive’ (manufacturing) sector and ‘nonprogressive’ sector of the economy (of which health care forms an integral part) lead to perpetual expenditure shifts into the latter and, as a consequence, to a decline in overall GDP growth. Which of the two views has an empirical grounding is here tested by means of Granger causality analysis of a panel of 21 OECD countries. The results do not lend support to the hypothesis that health capital formation fosters economic growth in rich countries. They are more in line with the predictions of Baumol’s model of unbalanced growth.

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