Sounds familiar?

I have one more week of teaching in the summer school, but to be honest... I feel like having a bit of a vacation. And one of the things I love best about being at the Ciutadella Campus of UPF-BGSE is the amazingly central location (right next to the Born area, good for a beer with the colleagues and students). It is also just 5 minutes from the beach.
View Larger Map One of my students from the globalization class last term rented warehouse space on the P/Maritim for his windsurfing equipment with two friends, and I got in on the act -- 500 metres from the office, and I get to practice falling off the board and looking like an idiot. The M.Sc. programs located at UPF are really lucky. I envy the ones located at UAB the peace and quiet out amongst the green woods of the Bellaterra campus - it's really a bit like an American campus university. At the same time, we have the beach, the city, restaurants galore, hip bars and shady cafes, and Ciutadella park with its lake and the remnants of the old fortress, all in walking distance.

Getting in - a tough act

We were kind of amazed by the number of students that applied to our program, in year 1. We got to pick and choose from a very wide range of applicants. Now that the numbers are more or less in, we tried to see how selective we had been -- and it turns out that ITFD this year was the toughest master at BGSE to get into. We rejected more than 35% of applicants (in addition to those who didn't satisfay basic criteria), being almost twice as tough as the next-most selective program. This is how we compare:

program rejection rate
ITFD 37%
CompMR 21%
GPEM-Econ 20%
MESI 18%
Macro 16%
GPEM-Fin 9%

Summer Readings

Forward-looking members of the incoming ITFD class of 2009 are asking me for recommendations on what books to take to the beach, to prepare themselves for the courses ahead. Wow! I like it when the students ask for more even before they arrive. We must have done something right with our admission decisions.
My suggestions would be [ordered from dead-serious preparation to more entertaining and stimulating]:

1. Krugman-Obstfeld; International Economics: Theory and Policy
2. Krugman, Peddling Prosperity: Economic Sense and Nonsense in the Age of Diminished Expectations [a bit dated now, but incredibly well-written]
3. Taylor-Obstfeld, Global Capital Markets: Integration, Crisis, and Growth
   
4. Eichengreen, The European Economy since 1945: Coordinated Capitalism and Beyond [my favourite economic history book of the last year]
5. Seabright, The Company of Strangers: A Natural History of Economic Life
   

Search and Cycles

Last week, Robert Shimer from Chicago came to give the first of the CREI Lectures - a new series that CREI is organizing every other year, in association with Princeton University Press. The idea behind the series is to get "young seniors" who have already had a big impact on the profession to come to Barcelona, and to summarize a research area that is still active. Robert did a fantastic job, giving 3 two-hour lectures on labor markets and the business cycle. For all those who think that economics professors have a cushy life, flying from one conference to the next, Shimer provided the counter-example -- having attended a conference in the South of Portugal the day before, he had to leave at 3 am on the first day of the lectures to make it here on time. I am sure that the editors at PUP will sleep more easily in the knowledge that there is already a 100+ page manuscript on his webpage with the lecture notes.

The Leaves of Summer

If you grew up in Northern Europe, as I did, falling leaves produce an instant emotional reaction. Perhaps you feel a tinge of sadness -- the summer is over, another year is more than half-gone, the days are getting shorter. I have spent many a year in Spain, but I am still confused by the crunching of leaves under my feet that comes with high summer. The trees in Barcelona at least just give up on all that greenery sometime between mid-June and late July. For several weeks, while temperatures are around 30 degrees or more, the streets are brown and yellow with leaves. I guess that in a way, we get the best of all possible worlds -- all the sweet nostalgia of autumn, and the heat of high summer.

Countercyclical Student Demand

I teach a summer course in the CREI Macro Summer School on financial crises. It is going to be a mix of theory and empirics, of looking at the sub-prime crisis and the South Sea bubble, plus everything we know about credit booms gone wrong (the chart on the left shows US GDP relative to trend1890-1940). Last time I taught something similar was two years ago, in the summer of 2006. I had about 15 students or so. It was fun and very interactive, the way I like to teach, but I couldn't help thinking that perhaps, it would have been nice if a few more people had signed up.
Today, the secretary in charge of registration rang me and asked if I wanted to limit registration. Limit registration? I thought I had trouble hearing. She proceeded to tell me that I had 41 students, and that applications were still coming in. Of course, recent minor hickups in world markets may have a thing or two to do with this. I look forward to having a good crowd of central bankers, private sector analysts, and PhD students taking my course. It seems that the most countercylical business you can run is a summer university dedicated to financial and other crises...

Fuel price strike

There is still milk on the shelves of my supermarket, but for how much longer? Spanish lorry drivers have decided to strike, in protest against higher fuel prices. Apparently, transport fees are renegotiated only intermittently (taxi drivers are out of luck completely), and oil at $135 is not making them happy. Apart from the spectacle of cars lining up for fuel (like during the oil crises of the 1970s), it's an interesting exercise in how rigid some prices apparently are - without rigidities in setting prices for truck transport, presumably truckers would care but little (unless demand for their services collapses if they introduce a fuel surcharge). I assume the whole thing will be resolved with a few symbolic compromises, but it could be quite nasty if the strike lasts for more than a week or so. Now, if only I didn't have to worry about getting to a weekend wedding...

Recessions and Civil Wars

Antonio Ciccone, one of the steering committee members of the ITFD program, has recently been doing work on the determinants of civil war. We know that recessions often coincide with the outbreak of civil conflict. What is not clear is the direction of causation - it could be that countries on the brink of a breakdown of civic order also end up with a drop in output. Antonio uses variations in the price of international commodities, such as coffee, to pin down causality. In work with Markus Brückner that uses data on Subsaharan Africa, they conclude that the link between recession and civil war is indeed causal. The effect is strong in autocratic regimes. Democracies, on the other hand, do not experience the same increase in civil conflict when recessions bite. You can see Antonio talk about his research here.

Banning the Speculators

As the price of food soars skyward, a lot of people wonder what can be done. Is the price rise in rise and wheat, causing serious unrest and hunger in many parts of the world, a result of speculation? A knock-on effect of higher oil prices? Should we think of rising commodity prices as a reaction to negative real interest rates, as Jim Hamilton over at Econbrowser argues?
Instead of doing the hard work of getting to the bottom of today's problems, I did what I like to think I do better, and looked at what happens when you ban the speculators. In 1896, largely as a result of lobbying by the agricultural elites, the German parliament banned all commodities futures trading on exchanges. The reason was the opposite of today's -- they blamed speculators for the downward pressure on prices. American grain was invading Europe, making life hard for the estate-owning Junker of Eastern Prussia. I did a full-page article for the Frankfurter Rundschau on this particular piece of backlash against the world market [in German]. The punchline? It doesn't work. You can ban the traders, but it's equivalent to shooting the messenger. Speculation may be to blame, but it's near-impossible to stop.

Applications for the first incoming class of the ITFD master

We just counted the total applications up to the end of April of this year - we got 65! About a year ago, Jaume, Fernando, Antonio and I were just kicking the idea of launching this program back and forth. Naturally, we wondered if people would really want to come. Weren't we too ambitious, thinking of a stand-alone program? Would the reputation of CREI and UPF pull enough people in to make the course viable? I don't think even one of us predicted we would get such an overwhelming response. And it's not just the number - it's the quality. We are going to have exceptionally well-qualified students from every corner of the globe. If my own graduate student days taught me something, it's that you learn an awful lot from your peers. It's in that sense that I think this is such great news. We have been quite selective and had to turn down a lot of applicants who unfortunately did not meet our standards; now we have to convince the ones that we admitted that joining ITFD in the fall is the right move.

Only in Spain?

Ah! To be a student in Spain... I receive some interesting excuses from students, but for today's class on the rise of the global economy from 15:00 to 17:00, I got one that I will always remember:

I am writing this email because I won’t be able to come to class on the first hour today. I am telling you this in case you wanted me to do the presentation today. I have a lunch that I cannot finish earlier.

Sorry for any inconvenience!

Now, I I do enjoy a good lunch. And I don't want to create the impression that this is normal. Yet I wonder if faculty at other universities/countries can top this... To be honest, the vast majority of students here are actually very hard working. They certainly know how to have a good time, but especially the first year of the M.Sc. in Economics can be gruelling. I am glad to add that the student in question, fortified by a good lunch, gave a great presentation.

Alwyn Young at UPF

Alwyn Young (LSE) was here on Monday, speaking in the CREI Macro seminar. He gave his talk about the positive side of AIDS - how a reduction in fertility, induced by the spread of AIDS in Africa, creates the resources with which to soften the blow of the disease. Together with his earlier article "Gift of the Dying", I think this is some of the boldest thinking in development economics. This time, I wasn't so convinced. Young shows how fertility declines rapidly in countries that are suffering particularly badly from the epidemic, but the causal channels remain slightly vague. I am not sure that country-specific trends are a good way to get rid of omitted variables. Of course, from a policy perspective, you don't really have to think that this is causal - that the AIDS epidemic really causes people to reduce their fertility. As long as the two trends coincide, for whatever reason, the countries in question have additional resources that can be used to alleviate suffering and to combat the disease.

Final fine-tuning of the courses

We had to make one final change in our courses, affecting terms 2 and 3. The course on "Conflict, Wars, and Aid" will now be available via the electives option in term 3, and is going to be taught by Marta Reynal-Querol. Formerly an economist at the World Bank, Marta is one of the prides and joys of the department. She recently won a five year ERC starting grant for young researcher - one of two for the department, and worth more than a million euros. These are the first of their kind awarded in Europe, by the new research funding body modelled on the NSF.
At the same time, we have added a class on the economics of immigration in term 2, taking the place of this class. It's going to be taught by our colleague Francesc Ortega Carandell. Francesc has worked on the redistributive impact of immigration, and has recently analysed the effect of migration on house prices. As I cycle through Barcelona on my way to work, I find it hard to think of a more topical addition to the class list.

Bubble mess and monetary policy

Am I the only one who is confused? We have debated for about a decade if monetary policy should take asset prices into account - going back to Greenspan's "irrational exuberance" speech at least. And very clever people, like Bernanke and Gertler, wrote clever papers arguing it's a bad idea. I looked at what happened when a central bank intervenes to bring down the stock market - as the German central bank did in 1927 (published here). My conclusion was that it was an unnecessary disaster - there was no bubble, and the intervention that sent the German stock market down by a quarter by year-end did real damage to the economy. Capital-raising by undercapitalized firms came to an end. Investment turned down the year after, and weakly-capitalized firms went under in the Great Depression much more quickly. My conclusion - targeting asset prices can be seriously bad for your economic health. Only ex post do we know if something is a bubble. Bernanke, when he became governor of the Boston Fed, mentioned my research in his first speech, concluding that interventions are a bad idea.

Well, a few years on, I am no longer quite sure. Let's take the different points of the "no intervention" idea in turn: a) you never know if it's froth b) even if it is, intervening may not work c) if it does, the collateral damage may be awful. True, if I say bubble, you can say "bad model" - every claim that prices are too high comes from some model, and the models can be pretty poor. But that doesn't mean that we have no idea about what periods of overpricing look like. If you see P/E multiples north of 30 (or infinity - no earnings, as on NASDAQ), or rental yields around 2% (Spain today), the prior should be that these are abberrations. I am also no longer so convinced that nothing can be done.

It's probably a bad idea to use interest rate policy, but there are other means. Instead of using interest rates, we can think about time-varying regulatory minima. Capital requirements could be made to fluctuate counter-cyclically, as per the Goodhart proposal. In housing markets, for example, we could use a simple rule that says "raise the down payment requirement every time rental yields dip below 5%", or something to that effect. While we have to live with a one-size-fits-all interest rate policy in Europe, mortgage markets are still national (try to get a German bank to finance your house in Spain - fat chance). We should encourage active guidance for national mortgage lenders, to take the different cycles into account. Finally, I think that stabilizing the prices of assets such as housing is beneficial overall -- there is much less risk of overshooting than in shares, and the welfare costs of pricing an entire generation out of adequate housing are phenomenally large. Next time you think "disaster" when the IMF tells you that Spanish house prices are set to fall by 20% or thereabouts, think of all the happiness it will buy for families that are living in cramped conditions. Combine that with very ugly redistributive implications of house price bubbles, and the pain of thousands of households defaulting on their mortgages and losing their homes, and I think we should consider a experimenting with better intervention just a little bit. Now, if only I could think of a good equivalent to raising the down payment in housing for equity markets...

Pictures from CREI

One of my important functions at CREI (you see, we all wear lots of hats here) is to act as the "official" photographer. The new building called for a small photo-shoot, and so did Robert Barro's visit last week. He gave two talks about his recent work on the frequency and impact of macroeconomic disasters. In particular, he argues along the lines of Rietz (1988) that disasters are common enough to explain why risky assets such as stocks yield as high a return as they do - what some call the "equity premium puzzle". The picture in the upper left shows him in conversation with Jordi Gali, director of CREI, during a recent lunchtime talk. You can see some more pictures of the new CREI building and of my beautiful colleagues here.

UNDP internships

As part of our focus on providing vocational training and real-life applications of classroom insights, we are actively seeking out internship opportunities for our students. Since ours is a one-year program, this is not the standard 'spend the summer' between years 1 and 2, and we try to be creative in what cooperations we pursue. As it happens, we've been in touch with the UN Development Program's International Poverty Center in Brasilia. Their Research Programme on Cash Transfers and Social Protection as well as their Communications and Outreach Programme are looking for interns. We've arranged for them to cooperate with us in making these internship opportunities available to one or two ITFD students per year.

Ted Miguel's paper on the cost of opposition in Venezuela

What is the cost of opposing your government? What if the government is run by a maverick general-turned-politician with, shall we say, not a great tolerance for those who disagree with him? Yesterday, Ted Miguel from Berkeley gave a talk about his work with Chang-Tai Hsieh, Daniel Ortega and Francisco Rodriguez. In 2002-03, the opposition tried to organize a referendum to recall Chavez from power. The list of signatures was submitted to the authorities, and it ended up - through some interesting twists and turns - on the internet. Government offices keep copies. So everyone can check if their neighbor is a "patriota" (signed the petition to recall opposition politicians, organized by the Chavistas), or an enemy of the president (i.e. signed the original petition). The so-called Maisanta database is an amazing document, and Ted and his co-authors use it to good effect. They demonstrate that firms run by opponents to Chavez ended with much lower profits and much higher taxes. On top, they track the earnings of those who signed the petition, and show marked drops in income. Overall, it seems that opposing Chavez is not for the faint-hearted. Some findings puzzle me a bit - patriota firms had very high capital productivity before the referendum, and then see a fall. This could be consistent with a story that has a fringe of firms outside the big business consensus locked out of credit markets; opposing the referendum and supporting the president might have relaxed this credit constraint, and led to a more optimal allocation of capital. Be that as it may, Ted and Co. show that labor allocation becomes MUCH worse after the referendum fails. I like the paper in a number of dimensions, and perhaps not least because I have a paper of my own (joint with Tom Ferguson) on the returns to affiliating with dictators.

Alessandra Bonfiglioni joins teaching faculty

We are very happy that Alessandra Bonfiglioni has agreed to teach a class on ""Trade, Competition and Outsourcing" in the first term. She is currently a Researcher at the CSIC-UAB. Alessandra is a specialist in International Economics and Economic Growth, and holds a doctorate from Stockholm University. Her most recent research looks at the causes of stock market co-movement. Every day, as I look at the US, Spanish, and Germany market gyrating in parallel, I think her research couldn't be more topical.

New course structure

Fernando, Jaume and I had a late-night session the other day, and decided that we could do better -- we are revamping the ITFD course structure. Some changes look bigger than they are; others are more substantial. The first big change involve replacing the existing, broad 40 hour classes with smaller, more focused 20 hour modules. Jaume and Fernando are going to teach 20 hours on international finance (Jaume) and on money and exchange rates (Fernando). My own teaching is going to cover an overview of the rise of the global economy in term 1, and a class on financial crises and bubbles in term 2.
We are particularly excited about the advanced elective classes that we will be offering (this replaces the micro and macro classes in term 1 that we had initially put on the program). There will now be additional classes that our students can chose: by Francesc Ortega and Libertad Gonzalez on the economics of immigration, on growth by Gino Gancia and Xavier Sala-i-Martin, by Paula Bustos and Gino Gancia on international trade, and by Alberto Martin and Fernando Broner on international finance.

Solow doctorate

Fernando and I just came back from the Doctor honoris causa ceremony for Bob Solow. Last year, it was Woody Allen (our first doctor h.c.) I am probably not the most sentimental person on earth, but I found it strangely moving. Jaume Ventura, member of our ITFD steering committee and senior researcher at CREI, gave the eulogy. He was on the MIT faculty when Solow retired; Solow's own speech dwelled on the challenges that most advanced economies face as a result of wage stagnation for the less educated part of the population. Solow is 83 now, and doesn't look a day over 60. Amazingly, his ideas have also retained a freshness that most of us can only dream of.
I also learned something new -- Bob Solow spent WW II as an artillery observer in North Africa and Italy. He may even have been in charge of guiding in shellfire on my grandfather's position on the Cap Bon Peninsula in Tunisia in 1942/43 (my paternal granddad served as an interpreter, and was jolly happy about being taken POW by the Americans. He finished the war in a POW camp in Colorado, digging up potatoes).

Hiring Season and Sunscreen Reflections

The hiring season at CREI and UPF is drawing to a close. We had some great junior scholars coming through, and it's always a pleasure to learn what the latest crop of Ph.D.s is working on. Now we have to keep our fingers crossed and hope that our offers are accepted. This year, the weak dollar should make our offers look particularly attractive. You'd think that if anyone is unaffected by the optics of an offer driven by the $/€ rate, it should be economics Ph.D.s, but you never know. UPF is also lucky that recruiting happens in January and February, when our relative "weather advantage" is greatest. All those graduate students emerging from the frozen East and North of the US tend to be charmed by our mild Mediterranean climate. This year, the winter has been ridiculously warm-- yesterday, I decided to get the deckchairs out on my terrace. While reading the latest issue of the Economist (which contains our new ad for the Master's), I even had to get sunscreen...

Merrill Lynch Japan Internship

My former student, Takuji Okubo, is now chief economist at Merrill Lynch Tokyo. We have arranged for one student from the ITFD M.Sc. to complete an internship in his division in the summer of 2009. Tak wrote a thesis on "negative bubbles" -- the idea that big deviations from fundamental asset prices could just as well be negative as positive, and the way to detect these statistically. He applied this methodology to East Asian currencies in the late 1990s. Let's hope the incoming intern doesn't have to do analysis on negative bubbles in world stock and bond markets...

Exchange Rate Specialist to Present in Spring 09

I am happy to report more progress this week. We convinced Eduardo Levy-Yeyati, Head of Latin American Research at Barclays to speak to our students in the spring of 2009. Eduardo is a former professor at Di Tella in Buenos Aires and used to serve as the Financial Sector Advisor for Latin America and the Caribbean at the World Bank. He is widely considered one of the leading experts on the choice of exchange rate regimes, dollarization, and the origins of macroeconomic volatility in emerging markets.

In some of his latest work, he is asking if emerging markets are really decoupling from the rich world, and if so, why. He argues that the "financial channel" (transmitting rich world shocks to poor countries) is still alive and well, but smaller than it used to be. At the same time, there is real decoupling, with growth rates in Latin American developing countries largely impervious to a slowdown in the North. He also calculates that basically all of the improvement in the current account and the trade balance in Latin America is due to the boom in commodity prices (see chart on the left).

What policies work in Iraq?

I thought it would be interesting for prospective students to learn a bit about the kind of seminars that take place at UPF -- we don't just run undergrad and grad programs, there is a plethora of seminar series as well. One paper in particular caught my eye last week. Eric Chaney (Berkeley) came here on Friday, and talked about his work on Iraqi bonds. Iraq issued new debt after the fall of Baghdad. These are traded worldwide. He argues that you can learn a lot about the stability of the Iraqi government from looking at these bond prices. In particular, he asks if the major "turning points" in the fight against the insurgency show up in bond prices. The punchline - "hard power" doesn't work. Catching, for example, the head of El Qaeda in Iraq, Abu Musab al-Zarqawi (trumpeted as a major success at the time), hardly shows up in the bond prices at all. The market also wasn't much impressed by the formation of the al-Maliki government. What does matter is "soft power" - evidence of Sunni-Shiite reconciliation, of negotiations with tribal groups, etc. As Chaney notes, the bond price responses offer policy-makers real-time feedback on the type of initiative that works. I think this is really exciting work. Michael Greenstone (MIT) also has a paper using the same data to assess the success of the "surge". Potentially, these methods could improve the quality of decision-making.

Sala-i-Martin signs up

Xavier Sala-i-Martin, Catalan economist at Columbia and founder of the NGO Umbele has agreed to give one of our policy topics classes in the spring of 09. I cannot tell you how thrilled I am -- in addition to being a leading expert on the economics of growth, Sala is a political economist in the best tradition, and one of the most popular lecturers at Pompeu (where he teaches in the graduate program every year). A frequent commentator on Spanish politics, economics and society, his foundation attempts to change the rules of the game in terms of development aid in Africa. Umbele is Kishwahili for "future", and you should go and check out the initiatives they support over at www.umbele.org.

Policy expert on board

We are now in the process of signing up senior policy experts for the courses in the third term. Antoni Estevadeordal from the InterAmerican Development Bank has agreed to teach for us. This is great news! He heads the trade and integration section at the Bank, and has been involved in developing new programs that facilitate trade development. Antoni holds a PhD from Harvard and has published in the leading economics journals, including the Quarterly Journal of Economics and the American Economic Review.

Silly item of the day

The delights of academic life... while you hopefully think that we slave day and night to get the new M.Sc. off the ground (not far off the mark), a friend of mine at the LSE apparently devoted his precious hours to energetic googling, and dug up all the dirt on my background:

"Voth - Memory Alpha, the Star Trek Wiki
The Voth are a saurian species, presumably native to the planet Earth, but residing in the Delta Quadrant. A significantly advanced species, the Voth are cold-blooded creatures, have a superior sense of smell, and skin pigmentation which alters according to moods... Adult Voth are slightly taller than adult Humans..."

This is apparently from the Star Trek wiki, and comes with full-color pictures of the species. I am sure my colleagues now find my eccentricities easier to understand. Last time anyone thought they could read my reaction to a paper in my face... they were just decoding subtle changes in skin pigmentation. Me? I am personally disappointed; all that cosmetic surgery to appear human for nothing...

Blogging the new M.Sc. in International Trade, Finance and Development

I thought it would be a nice idea to have a blog where I can tell people about the progress we are making as we move towards the launch of the new Master's at UPF in International Trade, Finance and Development. It's February now, almost a year after Jaume, Fernando, Antonio and I started to toy with the idea of launching this. Another six months, and we'll be "going live"! The process from idea to approval and launch of the program was short but pretty intense. Two weeks ago, we presented the new program the BGSE open day in Barcelona. Fernando's presentation seems to have generated quite a bit of interest.