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Economic Policy and Finance in the Global Economy : Equilibrium Analysis and Social Evaluation

Research project P6/07 (Research action P6)

Persons :

Description :

The general purpose of the project is to develop and use economic, social-choice, finance and game-theoretical concepts to address the challenges of globalization for developed and developing countries and to normatively evaluate proposed policies. The approach is quantitative, reflecting the areas of competence of our network, and it builds upon the results of Phase V. This new project is focused on international issues.

The scientific objectives can be subdivided in three parts. Each part includes both theoretical developments and policy applications, and in particular applications at the EU or at the world level. The first two parts are the most conceptually oriented, the first adopting a more positive and the second a more normative view. The last part is the most empirically oriented.

Part I of the project is devoted to the study and the design of markets and social mechanisms, involving networks and coalitions, bargaining procedures and conflict resolution. General equilibrium modeling of long-term issues in a macro and international perspective, as well as computation methods for applications are also included in this part. It is divided in four workpackages (I.1, I.2, I.3 and I.4), supporting each other for economic policy purposes, and each involving a different methodological approach (Game Theory, Implementation Theory, General Equilibrium, Optimization). Applications are very diverse. R&D collaborations, trade associations, the harmonization of intellectual property rights, household networks, national conflicts and the role of mediation are studied from a game-theoretical viewpoint. In mechanism and market design, the main topics are auctions and firm organisation, transportation pricing and investment, and international arrangements for development and poverty reduction. Economic development and the reduction of unemployment are, as well, the main objectives of the general equilibrium approach. A specific application of the workpackage on computation methods is to competition in the « liberalized » sectors in Europe (telecommunication, natural gas, electricity).

The second Part - on social evaluation and public governance - is concerned by normative issues and by political feasibility considerations. From a methodological point of view, it requires advances in social choice theory and public economics. It is divided into three workpackages (II.1, II.2 and II.3) analyzing successively normative criteria, the challenges for social protection in Europe and the political feasibility of reforms. These workpackages are closely related and often use the techniques developed in the first part of the proposal. Throughout, international aspects will be taken into account. In the first (II.1), new equity criteria and their compatibility with collective efficiency in different types of social situations are considered. This is done in different settings and for different issues : poverty and solidarity, educational subsidies, mobility, pollution, multidimensional inequality and intergenerational equity. Also, the empirical relevance of economic approaches to distributional questions and to the link between risk perceptions and distributive justice is tested. The second workpackage (II.2) examines the future of social protection in Europe and its interaction with the functioning of the economy. Microeconometric techniques are to be used to study the relatively unknown relationship between age and productivity and to assess the political feasibility of the reforms needed to increase employment rates among older workers. The related issue of optimal population size will also be analyzed. The international dimension comes to the foreground through the analysis of the consequences of economic integration on social protection in a model with agglomeration effects. In the study of the health care sector, the goal is to bridge the gap between health economics and social choice theory, using the criteria developed in II.1. The third workpackage (II.3) turns to the political feasibility of reforms. To this end, advancement in the analysis of the functioning of political parties (the role of politicians, the internal functioning of parties) and the behavior of voters (presence of strategic behavior, altruistic preferences) is necessary. The effect of political and institutional characteristics on economic performance will be an important aspect.

The third part is devoted to international economics and finance. It also builds up on the concepts and tools developed in the first part. But, being more empirical, it relies heavily on econometric methods. It includes three workpackages (III.1, III.2 and III.3). The first concerns trade policy, competition policy in the EU and the spatial redistribution of economic activities. International migration will also be analyzed. It will imply both theoretical and empirical research in industrial organization. Workpackage III.2 is in international finance. Central bank interventions and their relation with market volatility, exchange rate policy and the relationship between credit market frictions and the labor market will be the main themes. The analysis of how consumption preferences affect asset prices is as well in the research agenda. The third workpackage (III.3), in financial econometrics, aims at developing quantitative tools to analyze investment decisions in the presence of interest rate and inflation risk (that may differ between countries) and at understanding the differences of stock market microstructures across competing markets (for instance, European markets) as well as the interrelations between financial variables generated from these markets (for instance the lead-lag effect between Asian, American and European markets).

As expressed in the title of this proposal, economic policy in the global economy should take into account international finance. But another purpose of this proposal is to make clear that correct equilibrium analysis (both theoretical and empirical) and good social evaluation of economic policies and reforms require three types of criteria: efficiency, equity and implementability criteria.

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