The faculty members involved are Vincent Bodart, Raouf Boucekkine, Isabelle Cassiers, David de la Croix, Michel De Vroey, Frédéric Docquier and Fabio Mariani. The team also includes three post-doc researchers (Fatemeh Shadman Metha, Carmen Camacho, Luca Pensieroso ), many young researchers, and collaborators from other universities.
Ten selected recent publications:
- Beine, M., F. Docquier, H. Rapoport (2008),” Brain drain and human capital formation in developing countries: winners and losers”, Economic Journal, 118, 631-652.
- Bodart, V. and P. Reding (1999), “Exchange rate regime, volatility and international correlations on bond and stock markets”, Journal of International Money and Finance 18 (1): 133-151
- Boucekkine, R., D. de la Croix and D. Peeters (2007), “Early literacy achievements, population density and the transition to modern growth”, Journal of the European Economic Association, 5, 183-226.
- Boucekkine, R., F. del Rio and O. Licandro (2005), “Obsolescence and modernization in the growth process", Journal of Development Economics 77, 153-171.
- Boucekkine, R., O. Licandro, L. Puch and F. del Rio (2005), “Vintage capital and the dynamics of the AK model", Journal of Economic Theory 120, 39-72, 2005.
- de la Croix, D. and M. Doepke (2009), “To Segregate or to Integrate: Education Politics and Democracy”, Review of Economic Studies, 76, 597–628.
- de la Croix, D. and M. Doepke (2003), “Inequality and growth: why differential fertility matters”, American Economic Review, 93, 1091-1113.
- De Vroey, M. (2009), Keynes, Lucas, d'une macroéconomie à l'autre, Editions Dalloz: Paris.
- Docquier, F., O. Paddison, P. Pestieau (2006), “Optimal accumulation in an endogenous growth framework with human capital”, Journal of Economic Theory 134(1), 361-78.
- Mariani, F. (2007), ”Migration as an antidote to rent-seekingω”, Journal of Development Economics 84, 609-630.
Our team analyzes the international spillovers of financial crises. The financial accelerator research program has been quite successful in explaining how imperfect financial markets may amplify and propagate different shocks. Progress has been made in understanding how shocks originating in the credit market spread into the economy. However, there are no studies so far on the international propagation of an asymmetric credit market shock based on the financial accelerator approach. The importance of such analysis became evident in the aftermath of the 2007-2008 financial crisis which originated in the US but spread across the world. Our objective is to assess the effects on the home and foreign economies. We identify the factors that amplify the international contagion effects of a credit market upheaval, and those that dampen them. We are also interested in normative issues such as the role of central banks. This project is led by Céline Poilly in collaboration with Julio Carrillo from the University of Maastricht.
Another topic of research is the normative analysis of labor market reforms. In modern economies, different degrees of regulation drive the performance of labor markets. For instance, continental European labor markets are usually considered as less flexible than the US’s, partly due to labor market institutions. In this project, we use a medium-scale dynamic general stochastic equilibrium (DSGE) model incorporating a set of instruments reflecting labor market policies. Then, we seek to determine which labor market policy is preferable in terms of welfare objectives. We also investigate whether labor market reforms should be announced so as to allow agents to adjust their consumption and labor supply decisions. A related project aims at assessing the welfare implications of labor market reforms in models with heterogeneous workers and monetary union. These projects are conducted by Céline Poilly, Dennis Wesselbaum from the Kiel Institute for the World Economy, and Jean-Guillaume Sahuc from the Banque de France.
DSGE models are also used for other purposes. Céline Poilly uses DSGE tools to study the effects of monetary policy shocks. She hopes to clarify how the identification assumptions of monetary policy shocks modify the inference stage in standard DSGE models. Henri Sneessens and Raf Wouters (National Bank of Belgium) use DSGE models with heterogeneous agents to analyze the dynamics of productivity and risk premiums. Agents (shareholders, bondholders and workers) differ in their participation in the capital market and in their attitudes towards risk and inter-temporal substitution. Aggregate productivity and distribution risks are transferred across these agents via the bond market and an efficient labor contract. The result is a combination of volatile returns to capital and a highly cyclical consumption process for the shareholders. These are two important ingredients for generating high and counter-cyclical risk premiums which are consistent with a strong propagation mechanism through an elastic supply of labor, rigid real wages and a countercyclical labor share. Based on the empirical estimates for the two sources of real macroeconomic risk, our models explain time variation and are used to predict the effects of the current recession. The latter project involves three researchers: Ferre De Graeve, Maarten Dossche and Marina Emiris.
Finally, another area of research is the analysis of cyclical fluctuations and the elaboration of short-term forecasts for the Belgian economy. This gives rise to a quarterly detailed report discussing recent economic developments in Belgium and providing short-term economic forecasts. This work is supervised by Vincent Bodart and involves four researchers: Jean-François Carpantier, Helène Latzer, Vincent Scourneau and Géraldine Thiry. Another team analyzes business cycle fluctuations and the effectiveness of macroeconomic policies in Belgium. Their purpose is to provide a better understanding of business cycle fluctuations in Belgium. They investigate important relationships among macroeconomic variables (such as Okun's law and the Phillips curve) empirically, and use econometric techniques to evaluate the impact of macroeconomic policies in Belgium. The team is supervised by Vincent Bodart and comprises Fatemeh Shadman-Metha, Jean-François Carpantier and Vincent Scourneau.
Economic development and growth theory
The research project on growth and development theory has been very active in recent years and has given rise to many publications. Its first research topic is the role of longevity in the transition from stagnation to growth. The transition from a world of low economic growth with high mortality and high fertility to one with low mortality and fertility but sustained growth has been the subject of intensive research in recent years. During this transition, there is a very strong correlation between adult longevity and income; the relation between these two variables is also very strong in a cross section of countries today. Understanding this relationship is obviously very important when exploring the processes of transition from stagnation to sustained growth (i.e. the industrial revolution) experienced by many countries in the past, and it is also key to improving the design of today’s development policy. It is clear that longevity is positively influenced by the standard of living, but the question of whether it played a key role in the industrial revolution is disputed. We believe that longevity is a key factor. One important mechanism through which it operates is the incentive for more education as longevity increases. The research is carried out using various data sets: longevity data before the industrial revolution in Geneva and Venice; mortality data on English aristocrats; evidence on the rise in medical knowledge; and the height of Swedish soldiers. This project is led by David de la Croix and Omar Licandro from the European Institute; Allesandro Sommacal is also involved.
We are also analyzing the impact of failing institutions on economic growth. The quality of institutions is key to explaining why some countries managed to emerge from stagnation while others are still struggling to develop: at least this was the belief of international institutions such as the World Bank at the beginning of the 21st century. We look at several types of institutions and their relations with growth: politics and the structure of education funding, institutions promoting gender equality, failing legal and political institutions, imperfect financial markets and redistribution. This project is conducted by David de la Croix in collaboration with Clara Delavallade, Matthias Doepke, Michel Lubrano, assisted by Marie Vander Donckt.
Another topic is the links between the brain drain and economic development. Skilled migration is a key component of the globalization process. Recent theoretical literature shows that such migration affects the source countries in a number of ways. In particular, it has been suggested that remittances, return migration, network effects favoring international transactions and technology diffusion, as well as brain-gain channels, may compensate the sending countries for their loss of human capital. These channels have been explored in the recent empirical literature, but have never been quantified so that they can be compared. Our purpose is to evaluate these channels, to bring them together in integrated frameworks, and to quantify the overall impact of the brain drain on sending countries. The development of simple partial equilibrium models and large-scale computable general equilibrium models allows us to combine these various factors. Using numerical experiments and parameters taken from existing empirical studies, we quantify the costs and gains of the brain drain for developing countries, comparing the predictions of the traditional (pessimistic) view with those of the recent (optimistic) view. Our studies reveal that the brain drain can generate short-run and long-run positive net gains for many developing countries, while adverse overall impacts are found only in a small number of countries, which exhibit very high levels of highly skilled emigration. Expect in a few countries where the rates of brain drain are high or concentrated in strategic sectors (such as the health sector), these costs and gains are relatively small in size. Our studies have contributed to changing the way economists and decision makers think about skilled migration in many leading institutions. This suggests that the strongest causal link is from poverty to brain drain, not from brain drain to poverty, and emphasizes the need for more integrated models in which both emigration decisions and economic performances are endogenized. The project is led by Frédéric Docquier in collaboration with Michel Beine (University of Luxembourg) and Hillel Rapoport (Bar-Ilan University). It involves five researchers: Aysegul Kayaoglu, Elisabetta Lodigiani, Luca Marchiori, Bénédicte Meert, and I-Ling Shen.
We are also studying the welfare and growth effects of immigration with equilibrium unemployment and endogenous skill accumulation. According to some conventional wisdom, unskilled immigration should complement a relatively skilled national workforce. However, cross-country data suggest the opposite: immigrants’ and natives’ educational levels are positively correlated. In order to explain this stylized fact, we are building a two-country labor matching model, where the labor market is segmented by skills, and qualifications are endogenous. According to the expected quantity and quality of immigrants, natives decide whether to become skilled or not: in particular, they react to the prospect of unskilled immigration investing less in education. We have shown that a (relatively) low-skilled wave of immigration stimulates job creation, and may increase the wages of natives, thus reducing the relative returns to education. Moreover, unskilled migration can be shown to be welfare-improving in a static contest, but dynamically inefficient if growth depends on average human capital. This project is being carried out by Fabio Mariani and Eva Moreno-Galbis (GAINS - Université du Maine and CEPREMAP).
Finally, we have a project on the relationship between life expectancy (longevity) and the environment. A newly available synthetic indicator of environmental performance shows that environmental quality (as measured by lack of pollution and the availability of natural resources) is, across countries, positively correlated with life expectancy. Moreover, there is evidence of a bimodal world distribution of both these variables, suggesting the possibility of an environmental poverty trap, characterized by both short life expectancy and bad environmental quality. We are working on an overlapping generations (OLG) model in which life expectancy and environmental quality dynamics are jointly determined. Agents invest in environmental care, depending on how long they expect to live: environmental conditions, in turn, affect life expectancy. We expect to obtain both a positive correlation between longevity and environmental quality, and perhaps multiple equilibria (thus identifying the aforementioned poverty trap). We are also interested in assessing the welfare and policy implications of the intergenerational externalities generated by individual choices. This project is staffed by Fabio Mariani, Agustin Perez-Barahona (INRA and Ecole Polytechnique) and Natacha Raffin (Paris School of Economics).
The concept of sustainability is central in growth and development theories. One of our projects in this area examines the mathematical aspects of sustainability. A prominent part of economic growth theory is based on the neoclassical growth model, which relies on the maximization of an inter-temporal (or intergenerational) welfare function. The basic optimization apparatus used is optimal control, as pioneered by Pontryagin. Importantly, inter-temporal optimization in traditional growth theory relies on a time discounted social-welfare function, which, by giving more weight to present generations, does not satisfy long-term sustainability criteria. To correct this, several strategies have been pursued, such as adding a long-term outcome term to the traditional inter-temporal optimization of utility. Unfortunately, this does not guarantee the existence of an optimal sustainable path. Other researchers have departed from the constant-social-discount-rate assumption inherent in the neoclassical model by assuming that the discount rate is endogenous. In both frameworks, inter-temporal optimization remains the criterion of intergenerational resource allocation. In this project, we examine an alternative framework, much closer in spirit to that of Arrow and co-authors,who formalized sustainability in line with the Brundtland Commission’s (1987) requirement that inter-temporal social welfare did not decrease over time. Arrow et al. emphasized that this criterion “does not identify a unique consumption path: the criterion could in principle be met by many consumption paths”, and that “in defining sustainable development, there is no presumption that the consumption path being followed is in the sense of maximizing social welfare”. Clearly enough, the set-up advocated by these authors need not be compatible with inter-temporal optimality in the sense of optimal control (i.e. Pontryagin optimality). In this project, we wish to show the deep link between sustainability (as defined by the Brundtland Commission) and viability theory (a theory pioneered by Nagumo as early as 1942). In particular, we study the link between viability and Pontryagin optimality. This project is led by Raouf Boucekkine and involves three researchers: Noel Bonneuil, Jacek Krawczyk and Tanguy Isaac. Link to ARC projects on these issues
Another project addresses the technological and environmental aspects of sustainability. A crucial issue repeatedly explored in the ongoing debate on sustainable development is the possibility of economies continuing to grow when faced with physical limits and legal constraints (such as those related to the limited availability or regenerative capacity of natural resources (fossil fuels, fisheries, forests, etc.), to economic and ecological regulation (emission quotas, harvesting quotas, etc.), and to financial resource constraints at the firm or national economy levels). One of the common themes is that such growth is possible if the economies can maintain a permanent stream of innovations, assuring long-term technological progress. In terms of economic theory, the problem can be connected to two hot topics: the relationship between resource scarcity and innovation, and the relationship between regulation and economic behavior. Scarce resources are becoming increasingly expensive, and this should affect the behavior of consumers and firms, and end up shaping the direction of technological progress. Regulation can also be a decisive determinant of technological progress. As an immediate illustration of such a potential nexus, environmental economists have put forward the Porter hypothesis, according to which carefully designed environmental regulation can increase firms’ competitiveness by encouraging innovation in environmental technologies. In this project, we explore the firms’ perspective. Firms are typically affected by a variety of institutional and economic factors, notably competition, credit constraints and legal constraints (not only those linked to ecological regulation). How, in this context, can the firm ensure a sustainable growth of profitsω Answering this question requires a comprehensive set of modernization instruments that the firm can use in response to the above constraints to be exploited. These issues are addressed using realistic vintage-capital models with endogenous scrapping of dirty technologies and endogenous technological progress towards less energy or resource consumption. This research is led by Raouf Boucekkine and also involves Natali Hritonenko, Yuri Yatsenko, Jacek Krawczyk and Thomas Vallée.
The last sustainable growth project relates to the measurement of prosperity along the growth path. For many decades, our societies have pursued the objective of economic growth and material progress. If performance in this area has led to certain types of progress (longer life expectancy, higher incomes, more leisure time, etc.), it has also generated adverse effects for which we, as a society, are paying a significant price today. Environmental problems, the decrease in some aspects of quality of life, and the rise in inequality, are some of the numerous reasons why economic growth does not give – or no longer gives – rise to an increase in life satisfaction. A good understanding of these questions goes far beyond the scope of economics. Multidisciplinary research can undoubtedly feed and enrich the economists’ approach by incorporating those of philosophers, sociologists, lawyers, medical specialists, agronomists, and engineers. In the context of this project, a specific focus has been put on alternative indicators of progress to GDP. For sixty years, GDP has been used as the major yardstick for assessing the economic performance of a nation and driving economic policies. However, it seems more and more obvious that this statistical tool is no longer adequate to cope with the major issues of the 21st century. Replacing GDP implies thinking about the underlying concept(s) of progress, adjusting the national accounting system and organizing a socio-political debate about a new consensus. Clarifying this debate should contribute to moving it forward. This project is led by Isabelle Cassiers, and Géraldine Thiry is also involved.
History of macroeconomics and economic history
Our first historical project is the history of macroeconomics from Keynes up to the present. Macroeconomics started as a specific sub-discipline of economics in the immediate post WW2 period. It was originally centered on the IS-LM model, the result of John Hicks’s attempt to capture the central message of John Maynard Keynes’s General Theory. The IS-LM model remained the dominant paradigm in the field twenty years or so. This was the heyday of Keynesian macroeconomics. In the mid-1970s, a scientific revolution resulted in Keynesian macroeconomics being dethroned and replaced by a radically different approach to the field, both in terms of substance and method. One leading protagonist of this revolution was Robert Lucas. Hence, the two towering (and rival) figures of 20th century macroeconomics are Keynes and Lucas. Michel De Vroey’s objectives are to describe and analyze the history of macroeconomics, and highlight the sweeping changes that have occurred within it.
Another project concerns the analysis of half a century of economic growth and crisis, institutional and social changes (from 1944 to the present time) Understanding historical movements is a fruitful way of shedding light on current challenges. Three major aspects of this history are being explored: (i) the Belgian monetary policy under Bretton Woods (1944-1971) and its prospects during the present international disequilibria; (ii) the major economic and institutional changes during the last sixty years; and (iii) the historical links between social bargaining, growth and crises. This project is being undertaken by Isabelle Cassiers, Philippe Ledent and Luc Denayer from the Belgian Economic Council.
Our third historical topic is the analysis of the Great Depression, using dynamic general equilibrium (DGE) models. Recent years have witnessed a revival of interest in the Great Depression of the 1930s. Starting with the work of Harold Cole and Lee Ohanian (1999), quantitative dynamic models in the real business cycle (RBC) tradition are being used to explain this historical event. We have produced a general equilibrium analysis of the Great Depression and a critical assessment of the DGE methodology. We argue that economists should be cautious in deriving historical interpretations and policy implications from these exercises, as important methodological concerns are still left unanswered. Particular attention is devoted to the analysis of the Belgian economy during the 1930s. We have built several DGE models to elucidate the origins and features of the Great Depression in Belgium: these include both closed-economy and open-economy setups, with perfect competition or with sticky wages, and with one or two goods. The results so far show that monetary shocks connected with the exchange rate and real shocks, possibly related to the collapse in world trade in of the 1930s were a major source of disturbance for the Belgian economy. This project is being conducted by Michel De Vroey and Luca Pensieroso.