Research Report

• Introduction

• Interdisciplinary initiatives

• Policy Reports

• Research excellence

• CEPR goes electronic

• Innovations in dissemination

• International Macroeconomics (IM)  

• International Trade (IT)

• Public Policy (PP)

• Labour Economics (LE)

• Financial Economics (FE)

• Industrial Organization (IO)

• Transition Economics (TE)

• Staff

Introduction  

Now 17 years old, CEPR has blossomed into a network of over 525 Research Fellows, Affiliates and Associates based throughout Europe as well as in North America and elsewhere. Broadly interpreted, our focus is on policy-relevant economic analysis. We aim to be inclusive of all high-quality researchers, with a particular emphasis on young and female researchers.

In 1999–2000 we have continued to place emphasis on the key policy issues for which research tools are relevant. In this respect, we are very pleased to be associated with six Research Training Networks (RTNs) which have obtained funding from the European Union during the past year. Such networks are intended to foster European collaboration on fundamental research, and the networks with which we are associated all bring together first-rate research teams and are concerned with vital policy questions for Europe: (1) innovation and its interaction with product and financial markets; (2) economic geography; (3) regional development and the spatial propagation of macroeconomic shocks; (4) capital markets in the global economy; (5) financial architecture; and (6) the evaluation of labour market policies.  

Interdisciplinary initiatives: At the same time, we have tried to play a role in expanding the traditional boundaries of economic analysis. In this respect, we are pleased to have been active in the areas of Political Economy and of Behavioural Economics, which both take an explicitly interdisciplinary perspective, developing links with political science and psychology respectively. We brought together European (and American) researchers working in this field at a 1999 conference on ‘Psychology and Economics’, organized jointly with the Institut d’Economie Industrielle in Toulouse. We will follow this up with a Euroconference funded by the European Union in Brussels in June 2000; another Euroconference, on the behavioural aspects of finance, is scheduled to take place in 2001. In the field of Political Economy, the first EU-funded Training and Mobility of Researchers (TMR) network with which we were associated brought together political scientists and economists. The network, which began work in 1996, focuses on the ‘Economic Analysis of Political Institutions: Coalition Building and Constitutional Design’. We will follow this up in June 2000 when we will organize, again jointly with Toulouse, a European Science Foundation conference on ‘Institutions of Restraint’.

Each of these interdisciplinary initiatives attempts to relax the conventional assumption of the optimality of economic decision-making. Political economics relaxes the assumption of the rational benevolent public decision-maker, and allows for public decisions that are the result of competition among individual voters or interest groups. Behavioural economics allows for departures from the assumption of the rational individual – the homo economicus. It is not difficult to posit such departures: the key is to identify and explore those which are both well-founded psychologically and can withstand experimental scrutiny.

Both perspectives bring us closer to the real world. We are convinced that they represent important investments in methodologies that will prove very fruitful down the road in terms of policy insights on, for example, institution design or the dynamics of market ‘sentiment’. Both these issues are crucial in determining aggregate economic performance, in terms of both stability and long-term growth.

The size of our research network and scale of our activities continue to grow. During 1999–2000, the number of researchers increased from 491 to 526 and the number of Discussion Papers from 269 to 290. Most of these will appear in due course in leading journals. This research output is typically first presented in our workshops and conferences, which bring researchers together, often at an early stage in the research process. In 1999–2000 we held 72 such meetings: 24 conferences, 24 workshops and 24 informal research meetings. These meetings include our series of annual symposia, which play a particularly important role in sustaining our commitment to research excellence. Each symposium brings together CEPR Research Fellows and Affiliates, as well as other leading researchers, to discuss the most important research topics in the field. As in previous years, we supported the symposia from our general funds, and in addition benefited from generous support from the Banco de Portugal, the European Union, the Ford Foundation, the Institute for the Study of Labor, the Norwegian School of Economics and Business Administration, the Society for Economic Analysis, Studienzentrum Gerzensee, Tsinghua University, the William Davidson Institute and the World Bank.

We aim to encourage policy-relevant research as well, and our public discussion meetings, briefings and press meetings play a key role in this process. They enable us not only to disseminate new and innovative research outside the research community, but also to confront researchers with the concerns of decision-makers in the public, and especially the private, sectors. We also published six policy-oriented reports, books and journal issues in this period: these are aimed at researchers and also at decision-makers in the private sector and the policy community.  

Policy Reports: Our three series of reports, Monitoring European Integration (MEI), Monitoring European Deregulation (MED) and Monitoring the European Central Bank (MECB), have a common goal: to bring together teams of leading researchers to analyse important policy issues in an authoritative and accessible manner. The tenth MEI report, ‘Integration and the Regions of Europe: How the Right Policies Can Prevent Polarization’ (see page 15) was published in April 2000. It explores the factors influencing the location of economic activity in Europe. The second MED Report, published in November 1999, examines the European electricity industry. The Report, entitled ‘A European Market for Electricity?’ (see page 20), explores the obstacles to a single European market for electricity, examining the policy choices facing the regulators at both national and EU levels. The MED Reports are a joint project with SNS in Stockholm, a collaboration which we have found valuable and rewarding over the years. The second MECB Report, entitled ‘One Money, Many Countries’ (see page 13), was published in February 2000. It assesses the key issues facing European monetary policy, focusing in particular on the political economy of the European System of Central Banks (ESCB) and on banking in EMU. It will be followed by the second MECB Update, to be published in June 2000.

This year we launched a fourth series of reports with the same aim, of encouraging the best researchers to provide fresh thinking and new perspectives on important policy issues. This new series, the Geneva Reports on the World Economy, is published jointly with the International Centre for Monetary and Banking Studies (ICMB) in Geneva. The first report, published in September 1999, was entitled ‘An Independent and Accountable IMF’, while the second report, to be published in July 2000, is on ‘Asset Prices and Central Bank Policy’.  

Research excellence: Our Programme Directors all play a key role in maintaining the appropriate balance between research excellence and policy relevance. They provide intellectual leadership within their Programme Area, and so help sustain our tradition of research excellence, while also encouraging researchers in their Programme to apply their research to important and topical policy issues. Once again, their dedication has been a key factor in our success. We are grateful to them all for their contribution, and we take this opportunity to welcome Raquel Fernández as Co-Director of the Public Policy programme, as the sole addition to an otherwise unchanged team of excellent Programme Directors.

Our Scientific Advisory Committee, chaired by Anthony Atkinson, also plays a key role in ensuring the quality of our research. We are grateful to them for their dedication, and we especially thank Olivier Blanchard and Francois Bourguignon, who are stepping down at the end of their term. We are very pleased to announce that Jean-Jacques Laffont and Kenneth Rogoff have agreed to join the committee in autumn 2000.  

CEPR goes electronic: Lastly, we should stress that 1999–2000 has been the year when CEPR has seriously started to ‘go electronic’. That this has happened at the turn of the millennium is symbolic. We made important progress during 1999–2000 in two key areas: Electronic Meetings Organisation (EMO) and electronic Discussion Papers (eDPs).

The EMO initiative aims to move CEPR to an electronic, paper-free system for managing our conferences and workshops. Many websites offer ‘factual’ information about their meetings. Others go further and provide the facility to download papers presented at the meeting. We thought we should aim higher, offering a fully interactive service in which participants could respond to calls for papers and invitations via the web, recording their willingness to present papers and act as discussants, and informing us of their travel plans and other details. The EMO facility has one overriding objective: to provide a convenient, web-based, interactive tool for participating in our workshops and conferences. The initiative has been developed progressively over the past several months, and we expect to use this system to organize all our conferences and workshops by the end of the year, completing the first stage of the EMO project.

The eDP initiative aims, in the first instance, to allow authorized users to download (in PDF format) the full text of CEPR Discussion Papers from our website. Since June 1999, 99% of our Discussion Papers have been submitted in an electronic format that we have been able to convert to downloadable PDF format with little difficulty. We have now converted all Discussion Papers submitted since January 1999 to downloadable format. From January 2000, new subscribers (and existing subscribers who switched to the annual invoicing scheme) have had automatic access to electronic versions of all Discussion Papers published since January 1999. We also established ‘authentication’ procedures, necessary to allow subscribers and other authorized users (such as Research Fellows and Affiliates) to download individual Papers from our website. Lastly, a system that allows a visitor to the website to download individual Discussion Papers and to pay for them using a credit card through a secure payment facility will be available by the end of this summer.

We plan during the coming year to focus on the development of ‘profiles’, extending their use beyond Research Fellows and Affiliates and participants in electronic meetings. The goal here is to provide a customized web service to the different groups of CEPR ‘customers’, each of whom requires a different range of services from us. Our current website attempts to satisfy the needs of each of these groups in a single layout. This was unavoidable in our initial web design. Once a visitor has created a profile on our site, however, we can customize both the content and layout of the site accordingly. This approach would allow us to show visitors precisely the information they require and hide information that is less important to them.

Work on virtualizing other forms of interaction (selecting Research Fellows and Affiliates, developing ideas and proposals for new research initiatives and carrying out research itself) has not really begun. Tackling these projects will keep us busy for the rest of 2000 and no doubt beyond.  

Innovations in dissemination: We also introduced a number of important innovations in dissemination and media relations during 1999–2000. These included revamping the CEPR Bulletin, as well as launching the new CEPR Policy Papers.

We streamlined the content of the Bulletin, both to make it more readable and to increase its value added. We moved some of the content (for example, Discussion Paper abstracts) to our website. In addition, we have shifted the focus of the Bulletin away from reports of meetings and workshops, with more emphasis on accessible summaries of the key research advances and intellectual highlights of the work carried out in each Programme Area. These summaries (aimed at the research community) will appear in the Bulletin beginning in the summer of 2000. We will continue this shift in emphasis later in 2000 by commissioning individual Research Fellows and Affiliates who have pioneered work in a particular field of research to write short accounts of their research, in the context of the emerging literature in that field.

In the spring of 1999 we revamped our Occasional Paper Series and relaunched it as the new CEPR Policy Papers Series. Our first two Policy Papers were published in April and June. In ‘Alice in Euroland’, Willem Buiter argued that the legal framework, institutional arrangements and emerging operating practices of the European Central Bank (ECB) and ESCB were flawed and in urgent need of modification. In ‘The Eurosystem: Transparent and Accountable or “Willem in Euroland” ’, Otmar Issing, chief economist at the ECB, responded vigorously to Buiter’s proposals. Our third Policy Paper reported work carried out for the European Commission’s Directorate for Economic and Financial Affairs on monetary union and public debt management. ‘EMU and Public Debt Management: One Money, One Debt?’ by Carlo Favero, Alessandro Missale and Giuseppe Piga, was published in January 2000. The fourth Policy Paper, ‘Putting “Humpty” Together Again: Including Developing Countries in a pro-WTO Consensus’, by L Alan Winters and Zhen Kun Wang, was published in early April and launched at a London lunchtime meeting that same month.

In the spring of 1999 we began working with James Morgan, an experienced economics journalist, in order to strengthen our contacts with the print and broadcast media. Much of his work during 1999 focused on preparing research findings in a form suitable for the media, writing press releases of CEPR research and following up coverage of this research with selected journalists. During 2000 the focus of his work shifted somewhat, to take advantage of our newly available electronic Discussion Papers. We introduced a weekly notification service designed for journalists, which lists the CEPR Discussion Papers published that week. James Morgan added his own introduction to the weekly list, in which he identifies those Discussion Papers (and other CEPR publications) that he thinks are of particular interest to journalists. Journalists can then download the papers once they have created a profile on our site.

Jordi Galí (Universitat Pompeu Fabra), Lucrezia Reichlin (ECARES, Université Libre de Bruxelles) and Charles Wyplosz (Graduate Institute of International Studies, Geneva) served as Programme Directors during 1999–2000. The IM Programme that they direct has continued to stress research themes including:

•  European Monetary Union: assessing the policy stance of the ECB and whether it is appropriate for the euro area economy; the transmission mechanism for monetary policy in the euro area; evaluation of the properties of alternative monetary policy rules and their implications for how the ECB should conduct monetary policy.

•  Economic fluctuations in Europe: understanding economic fluctuations and their inter-action with monetary and fiscal policies, as well as with business cycles abroad; the synchronization of business cycles across Europe; and (related to the first theme) the impact of the common monetary policy across euro area countries and regions.

•  Exchange rate policies for the euro area: analysis of the implications of alternative policy strategies regarding exchange rates between the euro, US dollar and the yen.

•  The international financial system: the Mexican, Asian and Russian crises, origins and responses; international capital flows; Europe’s links to the global economy and its role in the management of the inter-national financial system.  

European Monetary Union: EMU forms an important part of the research agenda for many of our IM Fellows and Affiliates and features prominently in our activities.

During 1999–2000, we completed, for example, four studies for the Economic and Financial Affairs Directorate of the European Commission, each focusing on one or more aspects of EMU. One of the studies, completed in spring 2000, examines the impact of EMU on portfolio adjustment, focusing on the indirect effect of the euro (in terms of transaction costs and changing investment opportunities) on portfolio allocations.

The institutional structure and the policies pursued by the ECB continue to be an important topic for IM researchers. Monitoring the European Central Bank (MECB) aims to help establish the accountability of the ECB and ensure that its actions receive thorough scrutiny by a broad audience, including the European Parliament and the media. We published the first MECB report in October 1998, and in May 1999 we published the first MECB Update, a shorter report that assessed developments in the European economy and ECB policy in the first months of 1999. David Begg, Paul De Grauwe, Francesco Giavazzi, Harald Uhlig and Charles Wyplosz concluded that in its first months of operation the ECB had managed the euro area’s monetary affairs in a remarkably pragmatic way and had confounded critics who predicted that it would adopt excessively rigid and conservative monetary policies. ‘The ECB quickly emerged as the main, some will say as the only, policy-maker managing the macroeconomic developments in the European Union. It has been a stabilizing force in Europe’, the team concluded.

‘One Money, Many Countries’, the second full MECB Report, was published in February 2000. In it, Carlo Favero, Xavier Freixas, Torsten Persson and Charles Wyplosz provided an assessment of the key issues facing European monetary policy, focusing in particular on the political economy of the ESCB and on banking in EMU. The Report was launched at press dinner hosted by Citigroup, one of the sponsors of the Report, at which Persson and Wyplosz spoke, and at a public discussion meeting in London in March, at which Freixas and Persson spoke (see box facing).

Our April 2000 conference with the Bank of Finland, on ‘The Transparency of Monetary Policy: Theory and Evidence’, was the second we have organized with the Bank. It examined how the communications strategy adopted by a central bank can affect the relationship between long-term interest rates and the monetary policy pursued by the bank. ‘Monetary Policy in a Deflationary Environment’, a topic of particular interest in Japan, was the focus of the annual CEPR/NBER/TCER conference, which took place in Tokyo on 16 December.  

Economic fluctuations in Europe: Our second TMR network on ‘New Approaches to the Study of Economic Fluctuations’ began work in 1998, and we have followed this up in 2000 with a new RTN that addresses related issues. EMU and the single market are likely to bring about significant changes in the geographical pattern of productive activity in Europe. Modelling these changes is necessary to predict how monetary and fiscal policies will propagate through the regions and nations of the European Union. Most analysis of this issue has been based on historical data and so is of limited relevance. If the propagation mechanisms for European macroeconomic policy are changing, we need to model the spatial pattern of economic activity at a deeper structural level, and then evaluate the implications of these structural findings for the synchronization of regional cycles and for European macroeconomic policy. Researchers in the IM programme, led by Programme Co-Director Lucrezia Reichlin, aim to do this in the new RTN on ‘Specialization versus Diversification: The Microeconomics of Regional Development and the Spatial Propagation of Macroeconomic Shocks in Europe’. The network will address issues that include the synchronization of regional and national business cycles in Europe and the propagation mechanisms for European macroeconomic policy. We have also received funding from the Fondation Banque de France for work by Reichlin on the impact of financial variables on European cyclical fluctuations.  

The international financial system: We have held a number of workshops and conferences on international financial crises in the past two and a half years, but policy debates on these issues need to be grounded in a strong programme of fundamental research in these areas. This year we launched a new initiative – an RTN led by Philip Lane. The network held its ‘kick-off’ meeting in Frankfurt in February 2000. Researchers will attempt to analyse the relationship between the European economy and international capital markets from a number of perspectives. First, theoretical models of the microfoundations of international financial markets are very rudimentary. We need to build models with a sounder theoretical basis and explore their empirical implications, by integrating recent developments in finance and market microstructure theory with the special features of international markets such as intensified default risk, information asymmetries and limited contract enforceability. Second, the international financial system creates macroeconomic interdependence between Europe and the global economy. Europe’s status as a ‘large player’ in international capital markets means that the transmission of macroeconomic shocks and policy shifts involves important spillover effects between Europe and other regions. The network will develop models of the international macroeconomy that are firmly based on rigorous models of the behaviour of households, firms and governments. Third, the stability of the global financial system is an international public good. Unlike purely domestic markets, responsibility for the stability of the international system and the management of crises must be shared among the major players, especially the issuers of international reserve currencies. Proposals for the reform of the global financial architecture cannot be adequately evaluated without a rigorous theory of the roles played by national governments and international organizations in stabilizing international financial markets. The new research should provide such a rigorous foundation.

In May 1999 we resumed our collaboration with the International Center for Monetary and Banking Studies (ICMB) in Geneva, organizing jointly a conference on the role of the IMF. The conference brought together a select group of policy-makers to discuss the first in the new series of Geneva Reports on the World Economy, published jointly by CEPR and ICMB. The Report was published in September, and launched at a press dinner in London, at which Charles Wyplosz spoke. It received extensive media coverage. The second Report, ‘Asset Prices and Central Bank Policy’, will be published in July 2000 (see page 9).

In spring 2000 the Economic and Social Research Council (ESRC)’s Global Economic Institutions Programme drew to a close with a conference in London on ‘Reforming the International Financial Architecture’. CEPR has provided a range of services to the GEI programme, coordinated by David Vines, as part of its ESRC Resource Centre activities.

Richard Baldwin and Tony Venables continue to head the IT Programme. Research currently focuses on:

•  Economic geography: the location of economic activity; the impact of the Single Market and the Single Currency on location and market integration.

•  Foreign direct investment and the behaviour of multinationals: modelling the decisions of multinational firms to invest in a given country, license technology to firms in that country or to produce elsewhere and export finished products to that country; the impact of foreign direct investment (FDI) on the sending and the receiving countries.

•  The World Trading System: issues in the next WTO round; trade policy in the transition economies and the developing countries.

•  ‘Dematerialization’ and trade: the impact of ‘weightless commodities’ on output and trading patterns.

European Workshop on International Trade (ERWIT) has served as the IT programme’s annual symposium for many years. The 1999 meeting took place in Bergen, hosted by the Norwegian School of Economics and Business Administration, and in 2000 it will take place in Copenhagen, organized jointly with the Economic Policy Research Unit at Copenhagen University.  

Economic geography: Since the early 1990s the IT Programme has pursued a programme of research in the new economic geography. In June 1999 we held a workshop in Paris on ‘Economic Geography and Public Policies’. The tenth Monitoring European Integration Report, published in April 2000, also draws on the new economic geography literature, exploring the factors influencing the location of economic activity in Europe. The Report, entitled ‘Integration and the Regions of Europe: How the Right Policies Can Prevent Polarization’ (see box facing), was launched at public discussion meetings in Stockholm and London in early April.

In 1998 we were awarded two contracts from Directorate General for Economic and Financial Affairs of the Commission to carry out studies of the impact of market integration in Europe. The first study, on ‘EMU and the Integration of European Product Markets’, involves researchers drawn from both the IT and the Industrial Organization Programmes, and is discussed in more detail below. The second study, on ‘Factors Affecting the Location of Activities within the EU’ draws on the IT Programme’s work on location and the new economic geography, and is led by IT Programme Co-Director Tony Venables. Both projects were completed in early 2000.

Recent years have seen the emergence of ‘breakthrough technologies’ (both modelling and empirical tools) in the new economic geography, and the field enjoys the happy conflux of new data, new theory and pressing policy relevance. It is not surprising, then, that economic geography features prominently in the IT Programme’s future research directions as well, in particular through the new RTN network on ‘The Economic Geography of Europe: Measurement, Testing and Policy Simulations.’ Many members of the IT Programme are involved in the new network, which aims to carry out research to develop the microfoundations of agglomeration theory, in order to provide more precise guidance for testing, measurement and computer simulation of the location effects of European integration; to test econometrically the theory’s predictions using European data; and to use these results to analyse European policies designed to influence the location of activity.  

Foreign direct investment and the behaviour of multinationals: Our third TMR network, on ‘Foreign Direct Investment and the Multinational Corporation’, held its first workshop in London in November 1998, focusing on FDI. Further workshops have taken place, including a successful Mid-term Review meeting with European Commission staff. Plans are under way to bring the main research results of the network together in a single volume. The intention is to make this volume a definitive statement on what we know about FDI in the European context. It will contain selected papers from team members, as well as a substantial overview paper setting out the current state of knowledge about FDI and the implications of FDI for the EU.  

The World Trading System: The issues likely to arise in the new World Trade Organization (WTO) Round were the focus of the 1999 International Seminar on International Trade (ISIT), held jointly with the National Bureau of Economic Research in June 1999. Following the collapse of the talks in Seattle in December 1999, we continued to pursue this important issue in collaboration with other partners, including an initiative with the World Bank led by Research Fellow Bernard Hoekman. This will include a July 2000 conference on the governance of the WTO, a topic of prime importance following the Seattle debacle. The role of the developing countries in the WTO was also the subject of our fourth Policy Paper, by L Alan Winters and Zhen Kun Wang.

Raquel Fernández (New York University) joined Tim Besley (LSE) as Co-Director of the programme in 1999. Although activities in the new Programme are only in their formative stages, PP researchers have been focusing on issues that include:

•  Political economy and the reform of European institutions: the relationship between the political system, coalition formation and the performance of institutions; the political economy of the international financial institutions; the role of institutions in economic growth and development.

•  Taxation: tax competition and tax harmonization in Europe.

•  Welfare state: the role of the public and the private sectors in the provision of welfare services; the financing of the welfare state and its impact on European financial markets.

We have enhanced our collaboration with economists based in Toulouse, who constitute one of the strongest groups in the world working in the field of institutional design. Political economy issues will be the focus of a June 2000 conference organized by Tim Besley and Jean Tirole on ‘Institutions of Restraint’. We also collaborated with Toulouse in organizing a very successful conference in June 1999 on ‘Psychology and Economics’. This led to a successful application for funding for a series of Euroconferences linking psychology and economics. The first of these conferences will take place in June 2000 in Brussels, organized by Juan Carrillo and Isabelle Brocas.

From a policy perspective there is a clear need to investigate the dynamic aspects of public finance. For example, there are conflicting proposals in the policy debate. In the US there have been many ‘flat-tax’ proposals, which call for removal of progressivity in the tax system and abolition of capital taxation. The proposals aim to stimulate growth and welfare. In Europe, however, there is a fear that countries will compete over tax policy and set taxes too low. This has been seen as a threat to public finances and to employment, and there have been calls for harmonization of capital taxes, and in particular a lower limit of capital taxation. These are at first sight conflicting proposals, and in order to make sense of this debate it is essential to have a good understanding of the welfare effects of capital taxes, and how they interact with the rest of the tax system, in order to make any policy recommendations. It is also essential to employ a dynamic perspective, which takes into account the long-run and intergenerational consequences of policy changes. This is an area where research in Europe has lagged behind the United States, so we are pleased to have secured EU funding for a series of conferences on ‘The Dynamic Aspects of Taxation and Public Expenditure’, organized by Thomas Renström. The first meeting will take place in September 2000.

Juan Dolado (Universidad Carlos III, Madrid) and Klaus F Zimmermann (IZA, Universität Bonn and Deutsches Institut für Wirtschaftsforschung) served as Co-Directors of the Programme during 1999. Researchers in the LE Programme are currently focusing on areas that include:

•  Regulation and deregulation in European labour markets: the impact of labour market policies on productivity and growth.

•  Evaluating the effectiveness of European labour market policies

•  Education, training and labour market outcomes

•  Migration and social exclusion in Europe: migration within the EU and from its periphery.

•  EU enlargement and labour market policies

This is one of our newest Programmes, but is already very active. Its annual Programme meeting – the European Summer Symposium in Labour Economics (ESSLE) – was launched in September 1998 and is now an important event in the calendar of European labour economists. The second symposium took place in Ammersee (near Munich) in September 1999 and was even more successful. It brought the leading researchers in labour economics in Europe together with senior figures from the US. Keynote addresses were given by Orley Ashenfelter (education); James Heckman (active labour market programmes); Edward Lazear (personnel economics); Jan Svejnar (labour markets in transition economies) and David Wise (social security programmes and retirement).  

Evaluating the effectiveness of European labour market policies: The fight against unemployment remains a top priority in Europe. Across the EU, a large number and wide variety of very expensive policies have been implemented. Little is known about the effectiveness of these programmes in Europe, even though there has recently been a revolutionary shift in the methodology used in evaluating social programmes in the United States. We need to deepen our quantitative knowledge of European labour markets and, in particular, how policies and institutions affect the behaviour of these markets. Part of the explanation of why Europe has lagged behind the United States in policy evaluation has been the lack of data sources rich enough to allow researchers to develop experimental designs that control for ‘selection biases’ in the observed data. Fortunately, the situation in Europe is changing. New micro datasets with detailed information on unemployment experiences, programme participation and earnings are increasingly becoming available.

We are therefore particularly pleased that a number of researchers in the LE programme will collaborate in developing new techniques for the evaluation of European labour market policies through a new RTN. The network, led by Per Anders Edin, will begin work in autumn 2000. Research in the new network will examine the evaluation of policies such as youth programmes and transition from school to work; training programmes and adult education; unemployment insurance; subsidies and tax breaks for the less skilled; and working time reductions. Research will also attempt to take advantage of these new and richer data sources, including matched employer-employee data, as well as large longitudinal databases (which must be made comparable across countries). As a prelude to the launch of this network, in November 1999 we organized a workshop on the evaluation of labour market programmes, in conjunction with IZA.  

Migration and social exclusion in Europe: The project on migration and social exclusion continues, led by Klaus F Zimmermann and funded by the Commission’s Targeted Socio-Economic Research (TSER) programme. This research project explores the post-1970 effects of technological change and market integration on the demand for labour with different levels of education and skills, and on unemployment and the process of social exclusion across Europe, and brings together teams from Ireland, the UK, Denmark, Sweden, Germany, France, Italy, Spain, Portugal and Israel. The project held a workshop in Ramat Gan, Israel, in November 1999. In addition, the second in a series of Euroconferences on urban labour markets took place in Dublin in October 1999.

We continued our successful series of workshops in labour economics, organized under the auspices of the ESRC Resource Centre at CEPR. In late 1999 it was decided to extend the remit of the workshops beyond unemployment dynamics, to include all labour economics issues, possibly with a different focus for each meeting. As part of this change, we appointed new academic organizers: Christian Dustmann, Jonathan Haskel and Simon Burgess. The first new-style workshop took place in March 2000, and will be followed by one on ‘Health and Labour Economics’ in June 2000.

Bruno Biais (Université des Sciences Sociales, Toulouse) and Marco Pagano (Università di Salerno) continued as Directors of the Programme. Activities in the FE Programme have grown steadily in the past year, with a variety of initiatives under way in areas that include:

•  Structural change in European financial markets: bank restructuring and consolidation in response to the single currency and changes in the financing of pensions; the readjustment of European household portfolios.

•  The industrial organization of banking and financial markets: increasing competition among banks and between them and securities markets; effects on the stability of the credit market and banking regulation; credit information systems and credit risk management.

•  Developments in security markets: the consolidation and changing geography of European equities markets; the role of the primary market for equity (IPOs and venture capital); the effects of international integration on the return on equity and the cost of equity capital.

•  Corporate governance: patterns of ownership and control in Europe (West and East).

•  Legal institutions and the performance of financial systems: corporate governance; bankruptcy codes; enforcement and the behaviour of the judicial system; credit markets and the legal system.

The European Summer Symposium in Financial Markets held its tenth highly successful meeting in Gerzensee in July 1999. It involved around 80 participants from Europe, the US and Israel. The ‘focus sessions’ were devoted to ‘Legal Rules and Corporate Structures’; ‘Bank Risk Management’; ‘Liquidity’; and ‘Experimental Finance Markets’.

In 1999 the FE Programme launched new collaborations with two leading finance journals, the Review of Financial Studies (RFS) and the Journal of Financial Intermediation (JFI). This consisted of two conferences, the second of which, on ‘Regulation and Financial Integration’, took place in May 1999 at INSEAD, Fontainebleau. We will follow this up with a conference in Manresa in September 2000, in collaboration with the European Economic Review.

In May 1999 Ron Anderson and William Perraudin organized, in Louvain-la-Neuve, a Euroconference on ‘Security Prices in Secondary Markets: The Impact of Incentives, Regulation and Market Structure’. Perraudin also coordinated a series of ESRC workshops in London, on credit risk management, financial regulation and real options, as part of the activities of the ESRC Resource Centre established at CEPR. In spring 2000 Perraudin stepped down, and was succeeded by Antoine Faure-Grimaud and Henri Servaes, who will organize their first workshop in the relaunched series in November 2000.  

Structural change in European financial markets: In another European Commission funded study, Jean-Pierre Danthine, Kpate Adjaouté, Laura Bottazzi, Andreas Fischer, Richard Portes and Mike Wickens examined the ‘Impact of EMU on Portfolio Adjustment’. The study identifies the factors influencing observed portfolio allocations and assesses the likely impact of the euro on these factors, focusing on the indirect effect of the euro (in terms of transaction costs and changing investment opportunities) on portfolio allocations. The study will be published as a CEPR Policy Paper in autumn 2000.  

The industrial organization of banking and financial markets: Our fourth TMR network, ‘The Industrial Organization of Banking and Financial Markets in Europe’, began work in the summer of 1998 and continued during 1999–2000. The first workshop, on Banking and Financial Markets, was held in November 1999 in Barcelona. The second, on ‘New Approaches to Modelling Financial Transactions’, took place in London in February 2000, organized in conjunction with the Financial Markets Group at LSE. 

Developments in security markets: Work continued on a project led by Marco Pagano and supported by the research foundation of the Banque de France, on ‘Where to List: The Geography of Equity Issuance and Trading’.

Corporate governance: Corporate governance is a central issue for both firms and financial markets in Europe today. It has a critical impact on the competitiveness of European industry, the creation of innovative and dynamic firms in the ‘new’ economy and the success of European financial markets and institutions. What structure of corporate governance should Europe adopt to promote competitiveness, innovation and strong financial markets? Should there be harmonization or diversity of codes and regulation across Europe?

Plans are under way with SNS in Stockholm for an ‘MEI-style’ report on this issue, to be published in 2001. A team of CEPR researchers will prepare a Report examining the relation between corporate governance arrangements and the nature of economic activity in ‘new’ versus ‘old’ economy activities. They will discuss the way in which a mature institutional environment like the United States has dealt with these issues. The aim is to form a ‘reference group’ (or steering committee) drawn from the private sector to advise the team writing the Report.

Collaboration with the European Corporate Governance Network (ECGN) began with the launch in March 2000 of the ACE-funded project on corporate governance in the transition economies. This project will extend the work of the ECGN into the Associated Countries, compiling information on patterns of corporate ownership and governance in the Czech Republic, Hungary, Poland, Romania and Slovenia.  

Legal institutions and the performance of financial systems: ‘Law and Finance’ is a new and exciting area of research for the FE Programme. Enterprises cannot raise sufficient capital without corporate and bankruptcy laws; markets for goods and services require well-specified contracts and efficiently functioning courts to enforce them; and financial markets must be supported by adequate regulation. Increasing our understanding of the complex interrelationship between the legal system and the financial sector is essential, not only for the countries of Eastern Europe attempting to build functioning market economies but also for West European economies.

There is a growing demand for guidance from researchers on this issue. Micro-oriented, theory-based comparative research with a strong local empirical base and interaction between economists and lawyers is needed. A number of researchers in the FE Programme are currently active in this burgeoning field, and we will launch a new RTN on this topic (funded by the Commission) in mid-2000. The network will devote particular attention to laws and regulations governing the operation of financial markets and to the legal enforcement of creditors’ and shareholder rights. But attention will also be devoted to the need to balance the benefits from improved legal protection for those who provide funds with the interests of debtors and managers. An excessively punitive policy towards bankruptcy, for example, may thwart the incentives of entrepreneurs to launch new firms in innovative but risky sectors.

Philipe Aghion (UCL) and Lars-Hendrik Röller (Wissenschaftszentrum Berlin für Sozial-forschung) served as Co-Directors of the Programme during 1999–2000. The Programme currently focuses on themes that include:

•  Liberalization and regulation in ‘network’ industries: the liberalization and integration of telecommunications, energy and other ‘network’ markets in Europe.

•  Competition policy: anti-trust policy at national and the EU level; the design and operation of competition policy in the transition economies.

•  Market integration: the impact of EMU and the Single Market on the integration of product markets.

•  Innovation: the relationship between innovation and the structure of product and financial markets in Europe.

Many of these themes have been addressed over the years at the annual European Summer Symposium in Economic Theory (ESSET), hosted by the Swiss National Bank at its study centre in Gerzensee, and currently supported by the Review of Economic Studies. CEPR was instrumental in launching the theory symposium, which is now in its tenth year. We are, however, just as keen to encourage the growth of high-quality empirical work in Industrial Organization. We were therefore particularly pleased with the award of Commission funding for two Euroconferences on ‘Competition and the Evolution of Markets: New Empirical Approaches to the Study of European Industry’. The first meeting took place in Toulouse in October 1999, organized jointly with the Institut d’Economie Industrielle, and the second will take place in Lisbon in July 2000.

Liberalization and regulation in ‘network’ industries: Our TMR network on ‘The Evolution of Market Structures in European Network Industries’, led by Programme Co-Director Lars-Hendrik Röller, began work in 1998. The network has already allowed participating institutions to hire a number of young researchers and foster exchanges of young doctoral students and post-doctoral fellows.

The regulation of network industries is also a key issue for European policy-makers, yet there is little high-quality research that directly addresses this issue. In 1998 we therefore joined the Swedish Center for Business and Policy Studies (SNS) in launching a new series of reports on Monitoring European Deregulation (MED). The first Report, published in September 1998, had two themes: it examined the general analytical issues that arise in the regulation of network industries; and it applied these analytical tools in an examination of the European telecommunications industry.

The second MED Report was published in November 1999 jointly with SNS. It examines the European electricity industry. A preliminary draft was presented at a meeting in June 1999 organized in conjunction with the Commission and attended by staff from DG Enterprise and DG Energy and Transport. The Report, entitled ‘A European Market for Electricity?’ (see box), explores the obstacles to a single European market for electricity, examining the policy choices facing the regulators at both national and EU levels. The Report combines analyses of key issues in electricity market integration and liberalization with evaluations of practical experiences in the UK, Nordic countries, Germany, Spain, France and Hungary. Access charges are the key to an integrated European electricity market, the Report argues, and it proposes a number of measures to facilitate cross-border trade. The third MED Report, which will deal with European (and global) airlines, will be published in early 2001.  

Competition policy: The IO programme has for many years played a leading role in the analysis of competition policy in Europe, and the Programme has recently made important contributions to policy in this area. Researchers from the IO Programme, led by Lars-Hendrik Röller, have carried out a study on ‘Efficiency Gains from Mergers’ for Directorate General for Economic and Financial Affairs of the Commission. This study, completed in late 1999, suggested a methodology to measure and evaluate efficiency gains from mergers, and showed how such measures could be used in the design and implementation of European competition policy. The proposals put forward in the report have been welcomed by the Commission, which has already taken steps to implement some of the proposals.

The IO programme also held a workshop in June 2000 in Stockholm to review current research on mergers, organized by Röller and Frank Verboven. In the summer of 2000 we launched a project, led by Paul Seabright and Damien Neven, which will analyse the first decade’s experience of European merger policy. In addition, in late November Neven will join Röller, Kai Konrad and Ralf Siebert in organizing a joint conference with WZB in Berlin on ‘Anti-trust Issues in International Markets’.

Market integration: The extent of national segmentation in European product markets and the impact of the Single Market and the Single Currency on product market integration in Europe are a key research theme in both the IO and IT Programmes. Researchers from these Programmes were awarded a contract by the Commission’s Economic and Financial Affairs Directorate, to examine ‘EMU and the Integration of European Product Markets’.  

Innovation: Innovation is the last theme of the IO Programme, and one that will play a growing role in the future. Here, research activities focus on the theme of innovations and market institutions. Existing theoretical and empirical studies have tended to concentrate on quantitative issues, for example on how to measure the frequency and size of innovations and on how these are affected by an increase in the amount of R&D subsidies.

Economists and policy-makers have, however, become increasingly aware of the importance of institutional factors in influencing the rate of productivity growth. The example of the United States, where the new information technologies (the ‘new economy’) were first developed and have recently induced an acceleration in the rate of growth, has forced both industrial organization and growth economists to turn their attention to the other aspects of innovation, in particular to the role of market institutions. The key issues here include:

•  Market competition: How does competition affect the rate and nature of technological progress, and what are the main driving forces underlying the observed positive correlation between competition and innovations? Should we insist on policies which increase competition in product markets? How should we design competition policy in ‘high-tech’ industries, and in particular how should we combine anti-trust and intellectual property rights (patent) policies?

•  Competition and (de)-regulation: What are the main interactions between innovation, regulation and competition in network industries and what do these imply for the optimal mix of competition and regulatory policies in those industries? In particular, what are the main obstacles to establishing integrated European markets for electricity or telecommunication services, and how can we combine such integration with more effective measures to promote R&D and innovation at the European level? These issues are closely linked to the work of the TMR network on network industries and our series of Monitoring European Deregulation reports.

•  Financial sector reform: Bank finance and targeted government support appear to facilitate innovation in manufacturing activities (such as aircraft) that involve large fixed costs and require coordination of resources on a large scale. Other activities, particularly in the new economy (such as software and biotechnology), appear to benefit instead from the development of stock markets and venture capital. To what extent can we establish a clear relationship between the degree and nature of financial development on the one hand, and the process of competition and innovation on the other hand? What implications can we draw for the design and regulation of financial systems, as well as for the design of government subsidies to R&D?

Europe has no shortage of programmes designed to close ‘the innovation gap’ with the United States, and these programmes have absorbed a great deal of public money. There is, however, a great deal of uncertainty concerning the impact of these policies. Part of this problem comes from an excessive focus on what happens inside firms (i.e. the organization of R&D). This is clearly important, but it is essential to look as well at the environment facing firms, in particular product markets and financial markets. Our new RTN on ‘Product Markets, Financial Markets and the Pace of Innovation in Europe’ (see boxes on pages 7 and 8) will examine these issues. The network, led by Programme Co-Director Philippe Aghion, will commence work in mid-2000.

Gérard Roland and Jan Svejnar continued to serve as Co-Directors of the Programme during 1999–2000. Research currently focuses on issues such as:

• The economic implications of Eastern enlargement: the impact on intra-European trade and production patterns.

•  Monetary and exchange rate policies in Central and Eastern Europe: the relationship between accession, membership of the monetary union, and monetary, fiscal and exchange rate policy in the Associated Countries.

•  Competition policy in Central and Eastern Europe: its role in the Accession Process and in economic transition more generally.

•  Economic transition in Russia and the CIS

•  Building research capacity in CEE and the CIS

CEPR, in collaboration with the William Davidson Institute, held its annual symposium on Transition Economics in Beijing in July 1999, on the theme of ‘Twenty Years After: China’s Reforms and its Place in the World Economy’. The 2000 symposium will take place in Moscow in July and will be organised jointly with Russian European Centre for Economic Policy (RECEP), the Economics Education and Research Consortium (EERC) in Moscow, and the European Bank for Reconstruction and Development.

The economic implications of Eastern enlargement: Enlargement is the focus of a study for the Employment and Social Affairs Directorate of the Commission, involving researchers drawn from a number of European research institutes, led by the Deutsches Institut für Wirtschaftsforschung (DIW) and the Innocenzo Gasparini Institute for Economic Research (IGIER). The study examines the impact on employment, wages and income distribution of integrating the accession candidates from Central and Eastern Europe into the European Union’s goods, labour and capital markets. It will conclude with a ‘strategic report’: an evaluation of the policy options for the present EU member states and candidate countries for accession, based on the study’s findings. We will collaborate with the IGIER researchers and assist in the preparation of the strategic report, which we expect to publish in early 2001.  

Monetary and exchange rate policies in Central and Eastern Europe: In September 1999 we published ‘Monetary and Exchange Rate Policies, EMU and Central and Eastern Europe’, the fifth Report from the Economic Policy Initiative Forum. The Report, written by David Begg, László Halpern and Charles Wyplosz, examined the design of macroeconomic policy in the Associate Countries during the period leading up to accession and in preparation for joining EMU. The Report argues strongly that early insistence on limiting the exchange rate flexibility in the accession countries is unwise. The Report notes that the tighter is the exchange rate commitment, the more fiscal policy must take on responsibility for its own sustainability and for dealing with the shocks and the costs of completing restructuring. Unless fiscal policy is under control, even an independent central bank will face strong pressure to monetize government debt. The authors argue that priorities for transition economies should therefore be structural adjustment and fiscal responsibility. Unless both exist, designers of monetary policy will always be making the best of a bad situation. Incentives for responsible fiscal policy should be given at least as much weight as formal exchange rate agreements and nominal convergence criteria, the Report concludes. The Report was launched at a public discussion meeting in London in November 1999, and at a Brussels seminar organized by the Commission later that month.  

Economic transition in Russia and the CIS: Work was completed on ‘Inside the Transforming Firm: A Study of Enterprise Restructuring in the CIS’, a project funded by the TACIS-ACE programme. This project brought CEPR researchers based in Hungary, Sweden, Switzerland and the United Kingdom together with economists based in Russia. The project analysed the restructuring process using firm-level survey data for Russia, by identifying how the structure and the behaviour of firms is affected by factors such as the economic environment, state policies, harder budget constraints, new private owners and governance structures.  

Building research capacity in CEE and the CIS: Many of the activities in the TE Programme are aimed at strengthening research capacity in economics in Central and Eastern Europe and the CIS. Our ‘Transition Economics Summer Workshop for Young Academics’, launched in 1998 with funding from the EU’s Phare-ACE Programme, aims to promote the research of young economists from Central and Eastern Europe (and the EU) who are working in the field of transition economics. The second workshop took place in May 1999 in Budapest. Some 21 papers were presented at the workshop over 10 days, with three evening sessions given over to seminars by senior researchers. The workshop allowed young researchers to receive feedback on their research and to develop contacts with each other and with established academics in the field. We plan to organize the third workshop in Slovenia during the summer of 2001, again with Phare-ACE funding.

Capacity building is also one of the primary objectives of the RECEP in Moscow, funded by the EU’s TACIS Programme. The contract to administer RECEP was awarded in 1998 to a consortium involving the Stockholm Institute for Transition Economics (SITE), CEPR and DELTA in Paris, and was renewed for a further 18 months in January 1999. RECEP has been very successful in strengthening the capacity for research and policy analysis in Russia by, for example, attracting back Russians who have recently received doctorates from leading US and European universities.

Work on the ACE project, ‘Policy-making in a Small Open Economy Aiming at Joining the European Union: The Case of Hungary’, concluded in autumn 1999. The project was led by István Székely and included Mark Salmon and Axel Weber. It aimed to transfer the knowledge necessary to carry out basic research on a number of key economic problems related to the successful implementation of monetary and exchange rate policy in a transition economy.

In April 2000 we organized, jointly with the Zentrum für Europäische Integrationsforschung (ZEI), a workshop in Vilnius on ‘Labour Markets, Work and Welfare During the Transition and Integration Processes’. In March our ACE-funded project on corporate governance in the transition economies was launched at a workshop in Brussels.

Staff

In Publications, Ian Jordan took over from Jason Carey as Publications Administrator in July and Emma Moore, formerly a member of the Finance and IT teams, joined Publications in January. Michaela Cahillane continued her work in developing our electronic Discussion Papers until December on a short-term contract, and then worked for the Chief Executive Officer, leaving the Centre in June. In the Meetings team Kate Pedley took over from Matthew Wellesley-Smith as Meetings Administrator in November.

In the Information Technology team, Julie Bozdogan completed her industrial placement year as Computer Services Project Assistant and has returned to City University. Martyn Bigby and Safia Ali, also from City University, joined us for their industrial placement years in the autumn of 1999.

In Administration, Esther López Pérez joined CEPR as Mailing List Assistant and Receptionist during the summer of 1999. Karim Mattar was replaced as Office Assistant by Louise Parker earlier this year.

Rita Gilbert joined us in August as External Relations Officer, replacing Joan Concannon, who left for London Business School in June. Emma Busby moved from the finance team to assist Rita.  

Mathias Dewatripont

Research Director

Stephen Yeo

Chief Executive Officer

8 September 2000

Download a pdf version of CEPR's
1999/2000 Annual Report (1356k).