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International Seminar on Macroeconomics.

International Seminar on Macroeconomics

The twelfth annual International Seminar on Macroeconomics (ISOM) was held in Paris on June 19-20. ISOM is cosponsored by the National Bureau of Economic Research, the Maison des Sciences de l'Homme, and the European Economic Association. This year it was hosted by the Banque de France at the Chateau de la Vrilliere in Paris. ISOM is organized jointly by Robert J. Gordon of the NBER and Northwestern University and Georges de Menil of the Ecole des Hautes Etudes en Sciences Sociales.

The major themes of this year's meeting were deregulation and trade liberalization in the context of Europe in 1992. Topics discussed included: welfare effects of trade liberalization; economic integration in imperfectly competitive markets; job security and employment; internal and external economies; industrial policy in the airline industry; intrafirm trade in the manufacturing industries; and financial deregulation in Japan. The papers and their discussants were:

Victor Norman, Norwegian School of Economics

and Business Administration, "Assessing Trade

and Welfare Effects of Trade Liberalization"

Discussants: William H. Branson, NBER and Princeton

University; and Alan Winters, University College

of North Wales

Anthony Venables, University of Southampton, "The

Economic Integration of Oligopolistic Markets"

Discussants: Henryk Kierzkowski, Institute of

Graduate Studies, Geneva; and Jean Waelbroeck, Free

University of Brussels

Giuseppe L. Bertola, Princeton University, "Job

Security, Employment, and Wages"

Discussants: Dennis Snower, Birkbeck College; and

Jacques Mairesse, NBER and ENSAE

Ricardo J. Caballero, Columbia University; and

Richard K. Lyons, NBER and Columbia University,

"Internal versus External Economies in European


Discussants: Heinz Konig, Universitat Mannheim;

and Daniel Cohen, CEPREMAP

Gernot Klepper, Kiel Institute of World Economics,

"Entry into the Market for Large Transport Aircraft"

Discussants: Robert W. Crandall, Brookings

Institution; and Didier Laussel, Universite d'Aix-Marseille II

Richard E. Baldwin, NBER and Columbia University,

"Measuring 1992's Medium-Term Dynamic Effects"

Discussants: Paul R. Krugman, NBER and MIT; and

Damien Nevin, INSAED

Takatoshi Ito, NBER and Hitotsubashi University,

"Financial Deregulation and Money in Japan, 1985-8"

Discussants: Koichi Hamada, NBER and Yale

University; and Yves Barroux, Banque de France

Norman's paper addresses two questions: Does the "new" international economics indicate significantly different effects of trade policy on the intersectorial pattern of international trade and the allocation of resources than the conventional theory of competitive advantage? Second, what modeling approach would incorporate the "new" trade theory into computable general equilibrium (CGE) models? Norman uses several numerical model experiments in which CGE models with product differentiation and reciprocal dumping are contrasted with comparative advantage models based on the approach developed by Paul Armington. Norman concludes that imperfect competition matters significantly for interindustry trade and the welfare effects of trade liberalization. Less aggressive competition reduces elasticities of equilibrium quantities, so that comparative advantage is not fully exploited. In addition, the Armington approximation is poor in regard to welfare effects and interindustry trade.

Venables uses a model of international trade under oligopoly to investigate the implications of two types of integration: reductions in the cost of trade, or reductions in the extent to which firms regard markets as being internationally segmented. Economic integration may change the degree of market segmentation and thereby may alter the nature of strategic interaction between firms in different countries. Expanding on his work with Smith, Venables uses a two-stage game model. Three separate points on the spectrum of market integration are identified as Nash equilibriums. Venables shows that if the initial equilibrium is of the intermediate type, then potential gains from further integration of the European market are lower than previous studies have estimated.

Bertola examines the arguments that the poor employment performance of European economies is caused by obstacles to firing that make labor less attractive to firms. Bertola also scrutinizes the theory that firing restrictions may allow incumbent workers to bargain for high wages as they disregard unemployment among "outsiders." He finds that job security provisions do not bias the firm's labor demand toward lower average employment at given wages, just as they do not bias wage determination toward higher wages and lower unemployment. Employment is more stable where job security provisions are stronger. In addition, the medium-and long-run employment performance of the countries Bertola considers appears unrelated to the extent of job security legislation in those countries. In countries with high job security, wages tend to be lower and more sensitive to "outside" unemployment, suggesting that wages are more strongly influenced by other factors than by job security provisions. In sum, the evidence suggests that job security provisions alone should not be blamed for the poor employment performance of European countries.

Caballero and Lyons estimate internal returns to scale and external economies for two-digit manufacturing industries in four European countries: West Germany, France, the United Kingdom, and Belgium. They find little evidence of increasing returns to scale. However, external economies are evident in all four countries, especially in France and Belgium. Failure to take external economies into account results in upward-biased estimates of internal elasticities of output with respect to capital and labor at the industry level. Caballero and Lyons conclude that economic integration will create substantial external economies and higher growth in many European industries.

European governments have been accused of unfairly subsidizing their large commercial aircraft industries. Klepper examines the likely results of market entry and estimates the additional cost that a firm faces when it is late in entering the market for transport aircraft. In the analysis, a capacity game is calibrated to the expected market for transport aircraft from 1987 to 2006. The results show that it takes a long time to overcome the disadvantage of late entry. Hence, without government subsidies, market entry is unlikely. Klepper finds that the scale and scope effects of production outweigh the output-reducing effects of a monopoly.

Baldwin examines a broad-based market liberalization stemming from the 1992 program in Europe as a source of dynamic gains, specifically in the marginal productivity of capital. In Solow and Arrow growth models, liberalization increases the steady-state capital-labor ratio, leading to a one-time upward shift in output greater than that suggested by the static effect. Baldwin attempts to gauge the effects of 1992 on a country-by-country basis. He finds that the dynamic gain is between 30 and 136 percent of the static effect. Hence, current EC estimates of the increase in GDP resulting from the 1992 integration are anywhere from 30 to 136 percent too small. Baldwin estimates that 1992 will raise GDP by between 3.1 and 25.4 percent. The imprecision of this range is a result of the lack of precise knowledge of the actual output elasticity of capital.

Ito evaluates the effect of recent financial deregulation in Japan on the behavior of money supply and demand. Deregulation in Japan has coincided with decreasing interest rates and a booming stock market, making it difficult to identify the source of the money supply increase. Therefore, Ito estimates the magnitude of deregulation by the size of a shift from conventional to new types of deposits. He finds that a major portion of the observed increases in large-amount time deposits and money market certificates comes from decreases in other components of money, especially certificates of deposit and small-amount time deposits.

The conference also included a roundtable discussion entitled, "The Macroeconomic Environment of 1992." Among the participants were Michael L. Mussa of the University of Chicago, John Flemming of the Bank of England, and Jacob A. Frenkel of the NBER, the IMF, and the University of Chicago.
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Title Annotation:conference
Publication:NBER Reporter
Date:Sep 22, 1989
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