‘The Fiscal Crisis In Europe Seems To Be Approaching Its Climax’

From September 15th-17th an international workshop on ‘National Business Cycles in the Global World’ will take place at the HSE. The event has been organized by the HSE together with the Centre for International Research on Economic Tendency Surveys (CIRET) and the Swiss Economic Institute (KOF). Jan-Egbert Sturm, President of CIRET and Director of KOF, told us about the forthcoming workshop and the importance of business cycle studies.

— Who will be taking part in the international workshop on ‘National Business Cycles in the Global World’ in Moscow?

— This workshop will bring together empirical economists specialised on economic models and indicators from all over the world. They will present the work they have done in the last few months and open it up for discussion. The participants and presenters are all experts in the analysis of economic cycles and make full use of quantitative statistics as well as qualitative survey results in their work.

There is another event prior to the workshop which will introduce the subjects to be discussed in a somewhat more broader and general context. As president of CIRET, I will give an overview of the use of business tendency surveys in macroeconomic research and Gianluca Cubadda will talk about a general-to-specific approach for selecting appropriate short-term macroeconomic indicators.

— What is the focus of this Workshop?

— The title of the workshop is ‘National Business Cycles in the Global World’. Firms in market-oriented economies are confronted with ever changing economic conditions – in some periods the demand for their goods is higher than in others. Different demand, but also supply impulses cause production to accelerate or decelerate over time. External shocks (e.g. oil prices, wars, earthquakes) can heavily affect the flow of economic activities.

The theory and research of business cycles tries to explain and predict the ups and downs of the economy. These cyclical movements are mostly measured by the growth rate of core indicators (like GDP or industrial production) or by overcapacity or bottlenecks in production factors like labour and capital. The first route is the use of general or partial models of the economy which attempt to explain the behaviour of economic agents. Business and consumer tendency surveys contain valuable information on the actual and near-future situations with which these models can be fed. The measurement of elasticities and the reaction time to shocks are the basis for fiscal or monetary actions to smooth these movements.

A second way to explain and predict the economic development is the search for leading and coincident indicators. As the results of business and consumer tendency surveys are, in general, available sooner than official quantitative statistics, the answers to these surveys are a “natural” source for these types of indicators. As business and consumer tendency surveys contain not only questions on past changes but also on judgements and expectations, the data will contain exclusive information. To circumvent potential biases, these firms are not asked to judge the general economic situation but to comment explicitly only their own specific situation. Leading indicators based on qualitative survey data have proven to offer not only a publication lead but also a “real” lead to reference series like GDP.

As national economies are more and more linked, both to each other and therefore to the so-called world economy, the workshop will concentrate on transmission channels linking the national and global economy. The search for country-specific elements is important in this as they open up possibilities for country-specific fiscal and/or monetary actions to smooth domestic movements in production and demand.

, It is important to understand the reasons behind these common cycles, particularly during turbulent times, such as those we have been facing in recent years. The high synchronicity of economic movements in Asia, the US and Europe have substantially raised interest in short-term macroeconomic analyses.

— Why did CIRET decide to participate in the organization of this event?

— CIRET (Centre for International Research on Economic Tendency Surveys) is a forum for leading economists and institutions concerned with analysing and predicting economic developments and the economic and socio-political consequences. At the same time they also consider the outcome of economic tendency surveys which usually contain qualitative questions rather than concentrate on quantitative estimates. Members of economic research institutes, universities, central banks as well as companies and associations are all used in this process.

CIRET promotes the exchange of experience between all of its members, taking account not only of theoretical and empirical aspects of economic tendency research but also of operational issues associated to e.g. relevant surveys. The development and theoretical basis of simultaneous and leading indicators of various macroeconomic aggregates is a special focus of attention.

— What do you think about the main risks in the world economy just now?

— As reaction to the financial crisis, governments in most western economies have stepped in and bailed out consumers, firms and in particular banks. The excessive debt of private sectors in countries like the US, the UK and Spain has been transferred to the public sector. Consequently, the financial and economic crisis has turned into a fiscal crisis in those economies. In both the US and in the euro area, it is unclear how governments will be able to master these problems. This uncertainty is putting a tremendous pressure on first of all financial markets, but also on the economic conditions which firms and consumers are faced with. After a relatively speedy recovery worldwide during the second half of 2009 and 2010, this process has now started to slowdown substantially. The fiscal crisis in Europe seems to be approaching its climax and the outcome is still unclear.

— How important is the subject of business cycles in the programs of other large universities around the world?

— Traditionally macroeconomic lectures are split up in two parts. One part deals with long-term developments whereby one often concentrates on so-called neoclassical growth theories, the other part concentrates on short-term dynamics with usually a strong focus on so-called Keynesian type of models. In that way, already at the introductory stage most students in western economies are confronted with short-term business cycle theories. In more intermediate or advanced courses this knowledge is combined with dynamic and econometric techniques. Particularly in the subfield of monetary economics, short-term macroeconomic developments – using so-called new-Keynesian models as common workhorse to explain them – are core. In short, within the field of macroeconomics at least half of our teaching efforts are devoted to understanding business cycles.