Zentrum für Europäische Integrationsforschung Center for European Integration Studies. Michele Fratianni, Jürgen von Hagen - PDF

Zentrum für Europäische Integrationsforschung Center for European Integration Studies Rheinische Friedrich-Wilhelms-Universität Bonn Michele Fratianni, Jürgen von Hagen The Konstanz Seminar on Monetary

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Zentrum für Europäische Integrationsforschung Center for European Integration Studies Rheinische Friedrich-Wilhelms-Universität Bonn Michele Fratianni, Jürgen von Hagen The Konstanz Seminar on Monetary Theory and Policy at Thirty B The Konstanz Seminar on Monetary Theory and Policy at Thirty by Michele Fratianni a and Jürgen von Hagen a,b,c This draft: May 2000 a Kelley School of Business, Indiana University b ZEI, University of Bonn, c CEPR Correspondence Department of Business Economics Kelley School of Business, Bloomington, IN , USA Abstract Founded by the late Karl Brunner in 1970, the Konstanz Seminar celebrated its thirtieth anniversary in Brunner started the Seminar with two objectives, to close the gap in the quality of research and teaching of economics between the United States and Europe, Germany and Switzerland in particular, and to provide an alternative to the dominant Keynesian paradigm to European monetary policy makers. Thirty years ago the Konstanz Seminar was at the fringe of the economics profession; today it is part of the mainstream. This paper reviews the academic and policy accomplishments of the Konstanz Seminar. JEL classification: B22. E40, E50, and F41. Keywords: Monetary theory; Monetary policy; History of economic thought 1 1. Introduction The Strandhotel L`chnerhaus on the Reichenau island near Konstanz, Germany, attracts tourists for sun, beauty, and South German hospitality. Once a year, the island s tranquillity is disrupted by a group of monetary economists and policy makers who gather there for the Konstanz Seminar on Monetary Theory and Policy. The 1999 (3-6 June) meeting marked the 30 th anniversary of this conference, now a venerable institution in European monetary economics. The Konstanz Seminar was started by the late Karl Brunner ( ), an eminent scholar and accomplished academic entrepreneur who, in addition to this conference, founded the Journal of Money, Credit, and Banking, the Journal of Monetary Economics, the Carnegie-Rochester Conference Series, the Shadow Open Market Committee, the European Shadow Open Market Committee, and the Interlaken Conference on Analysis and Ideology. With the exception of the latter two, these enterprises continue to thrive. The first Konstanz Seminar took place in 1970 (June 24-26) at the University of Konstanz, where Brunner held a chair in economics. The conference was moved to the island of Reichenau in 1971 and has remained there. Manfred J. M. Neumann, an economist at the Bundesbank before starting to work with Brunner, and today professor of economics at the University of Bonn, soon became the Seminar s codirector, and its sole organizer after Brunner s death in May of The Seminar s format has hardly changed through the years: it is as close to a steady-state equilibrium as economists ever see. A typical Konstanz Seminar program consists of eight papers and a policy session. A distinctive feature is the unusual amount of time devoted to discussion: Authors get 15 minutes, discussants 20 minutes; and general discussion the remaining 40 minutes. The Seminar s discussions are extremely lively. Participants are expected to contribute to the debate; only those who perform are invited again. It is no secret that Brunner and Neumann kept lists of inactive individuals. Competition to be heard is fierce and the sessions chairs often resort to strong tactics to cut off long-winded questions and answers. From 1970 to 1999, 262 papers were presented and discussed at Konstanz. Apart from the first conference volume (Brunner, 1972), the Seminar never made an effort to publish its own proceedings, leaving it up to the authors to find their publication outlets. Nevertheless, a flavor of the highlights of the Konstanz Seminar can be gleaned from a reading of the collected papers in Brunner and Neumann (1979) and Neumann (1986) as well as the review article for the 25 th anniversary of 2 the conference written by Laidler (1995). 1 As of September, 1999, 211 of the 262 papers presented at the Seminar had been published: 56 in top-tier journals, 2 46 in second-tier journals 3, and 109 in other journals and books. A total of 514 individuals from 31 different countries attended the Konstanz Seminar over the span of 30 years. An important characteristic of the Konstanz Seminar is the regular participation of policy makers from Europe and the United States. Over the years, central banks and treasuries from many countries have sent representatives to the conference, often contributing to the program. 2. Objectives and Achievements of the Konstanz Seminar 2.1. Objectives Brunner started the Konstanz Seminar to bring sound monetary theory and monetary policy analysis to Europe, in particular to Germany and Switzerland. In the introduction to the published proceedings of the first conference Brunner outlined the Konstanz scientific manifesto (1972, p. 7): The Conference was designed to encourage empirical and analytic work in Europe and particularly in Germany in the field of monetary policy and monetary analysis....the division of monetary theory and monetary policy into separate unrelated realms of discourse still persists in Europe to a large extent. But theory without application to our environment is useless and policy discussion or judgments not based on analysis are dangerous. Allan Meltzer - Brunner s long-time friend, collaborator and co-founder of many activities - recalls that Brunner was struck by the large quality gap in economic research and teaching between the US and Germany. 4 Manfred Neumann remembers that at the time, in Germany as in most other European countries, analytical and empirical research in monetary economics were poorly 1 Laidler s (1995) review focuses on the development of monetarism as a school of thought in macroeconomics and, largely, in North America. In contrast, this paper focuses on the influence of the Konstanz Seminar on modern European macroeconomics and on European monetary policy making. 2 We count among top-tier journals the American Economic Review, the Carnegie-Rochester Conference Series, Econometrica, the Economic Journal, the International Economic Review, the Journal of Economic Literature, the Journal of Finance, the Journal of Political Economy, the Journal of Monetary Economics, the Journal of Money, Credit, and Banking, the Journal of International Economics, and the Quarterly Journal of Economics. 3 Our list of second-tier journals includes Applied Economics, Economic Inquiry, Economica, the European Economic Review, the European Journal of Political Economy, the Journal of Banking and Finance, the Journal of Business and Economic Statistics, the Journal of Economic Dynamics and Control, the Journal of International Money and Finance, the Journal of Institutional and Theoretical Economics, the Journal of Policy Modelling, Kyklos, the Manchester School of Economics and Social Studies, and Weltwirtschaftliches Archiv. 4 Private communication to the authors dated 30 March developed Monetary theory and monetary policy were taught in the universities as separate topics. Courses on monetary policy were typically void of theoretical analysis; the focus was instead on describing institutions. As a reflection of this, the staff of central banks was barely in touch with academic research. 5 According to David Laidler, the Konstanz Seminar was from the beginning a place where young Europeans were brought into contact with the best among the young North Americans, to the enormous benefit of both groups. This emphasis on bridge-building among the young has made the Konstanz Seminar unique. 6 A second, perhaps implicit, but no less important objective was to provide an alternative to the mainstream Keynesian paradigm, whose political appeal, as Brunner (1983, p. 58) saw it, rested in the rationalization of activist pursuits of redistributive schemes under one guise or another. The Konstanz Seminar was to be the European counterweight to the orthodoxy of policy activism. At the 1970 seminar, Leonall Andersen of the FRB of St. Louis, an active soldier of the monetarist revolution, sketched the properties of a monetarist model for economic stabilization (Brunner 1972, pp ). Andersen, the first to speak at the conference, was followed by Brunner and Meltzer who presented their Monetarist Hypothesis of Economic Fluctuations (Brunner, 1972). The significance and symbology of the first seminar in this regard was not lost to William Wolman, who wrote in the New York Times (November 1, 1970) that: the First Konstanz Conference provided insight into not only the current state of monetarist thinking but also what new fields the monetarists who, like all members of new scientific movements, have a streak of evangelism - would like to conquer. The Konstanz Seminar acquired almost immediately the reputation of an intense monetarist challenge to the Keynesian orthodoxy of the time; some regarded it as a stronghold of monetarism. Brunner himself had coined that term in an article published in the Federal Reserve Bank of St. Louis Review (Brunner 1968), describing it as a school of thought that believes in the self-stabilizing properties of the private economy, that money affects the real economy primarily through changes in relative asset prices, and that monetary fluctuations are primarily due to the erratic behavior of monetary authorities inspired by the wrong model of how money works in the economy. As Laidler (1991, p. 639) aptly put it: Much (not all) of this is nowadays utterly respectable doctrine, and some of it conventional wisdom. It is hard to conceive of just how outlandish and old-fashioned a body of ideas monetarism 5 Private communication to the authors dated 9 April seemed when Friedman, Brunner, and a few others began to propound it in the 1950s and the 1960s. Allan Meltzer (1998, p. 10) goes further: by the late 1970s the monetarist response had restored a version of the main propositions of classical monetary theory. The Keynesian challenge had been met. Keynesianism had been reduced mainly to the claim that labor markets (and perhaps anticipations) do not adjust without a lag and to a preference for discretionary policy actions fiscal and, more importantly for this discussion, monetary actions. No classical economist from David Hume to Alfred Marshall would have quarreled with the statement about lags in the adjustment of labor markets or anticipations. 7 The objective of advancing monetarism was pursued not only by educating the young and bright European academic minds, but also by networking with the policy world. Almost every year, the Konstanz Seminar gave policy makers primarily central bankers or influential policy advisors the opportunity to present and discuss their views of monetary policy. This interaction between the world of academia and the world of policy making began in 1970, with a presentation of the concept of monetary theory and policy by Heinrich Irmler of the Deutsche Bundesbank (see Brunner 1972, pp ). In the same year, Dimitrije Dimitrijeviƒ of the National Bank of Yugoslavia gave a paper on the determinants of the money supply in his country (see Brunner, 1972, pp ) in a session chaired by future Bundesbank President Helmut Schlesinger. Charles Goodhart, then an economist at the Bank of England and part of the Keynesian orthodoxy, came to Konstanz in 1971 to deliver a paper on the transmission mechanism of monetary policy and in 1972 for a study on money stock determination. Goodhart recalls that: I certainly received the distinct impression that I was invited from time to time, in the hopes of persuading me, in my role as a reasonably influential central bank economist, of the merits of monetarism in general, and of the version that Karl and Allan adopted in particular. 8 Goodhart s association with Konstanz had the profession puzzled as to whether he belonged to the Monetarist or Keynesian (Goodhart 1997, p. 400) 9 : Anyhow I had already found a niche in the Bank [of England], which was to try to explain internally to the Bank what the outside (monetarist) economists were arguing, while at the same time trying to explain to those same outside economists what the Bank's viewpoint was. This meant that within the Bank (and perhaps the Treasury) I was perceived as almost the resident 6 Private communication to the authors dated 8 April, Franco Modigliani (1977) in his Presidential address to the American Economic Association acknowledged that Monetarism was correct on all points, except on the rule-based policies. 8 Private communication to the authors dated 8 April, We thank George von Fürstenberg for bringing this passage to our attention. 5 'Monetarist', while to the Monetarists outside, notably at the Konstanz conferences organized by Karl Brunner and Allan Meltzer, I was seen as an 'unreconstructed Keynesian'. Over time, a healthy environment of interaction developed, with heated debates to be sure, but ultimately with a relationship of mutual trust. Policy makers and policy advisers came to Konstanz to convince academics that what they were doing was right, but were also willing to listen to the alternatives and perhaps put them into practice. In sum, Konstanz had two objectives, one explicit and one implicit. The explicit objective was to raise the quality of macroeconomic and monetary analysis of young European economists to the level achieved in North America. The implicit objective, of equal importance, was to influence the practice of central banking in favor of a less activist, forward looking monetary policy geared primarily at price stability Impact on monetary policy making in Europe The Konstanz Seminar started as part of the Monetarist counter-revolution. Outside of a few academic institutions in the United States --such as the University of Chicago, UCLA, Carnegie-Mellon University, the Ohio State University, and the University of Rochester-- teaching, research, and policy advice by academic economists built on the traditional Keynesian paradigm (Laidler 1991, p. 639). 10 The seminar also started in an environment where inflation was regarded as a lasting policy problem. Worries of persistent inflation had replaced earlier post-world War II fears of chronic deflation (Brunner 1969). In 1970, the Bretton Woods System was crumbling under the pressure of a rising US inflation rate and the unwillingness of some European countries, most notably Germany, to adopt the same inflationary policy via the fixed exchange rate regime. In this crisis environment, the Konstanz Seminar offered an alternative approach to macroeconomic modeling and alternative policy recommendations. As Wolman (1970) put it: the entire thrust of the conference was to get the Europeans to think of their problems in terms of stable growth rates of the monetary aggregates and to point out that such stabilization is an 10 There were some notable exceptions to Keynesianism in Europe as well, such as the University of Paris Dauphine (where Emil Maria Claassen and Pascal Salin taught), the London School of Economics (Harry Johnson), the University of Manchester (David Laidler and Michael Parkin), the Graduate Institute of International Studies in Geneva (Alexander Swoboda), and the Catholic University of Louvain (Paul de Grauwe, Michele Fratianni, and Theo Peeters). We thank David Laidler for this observation. 6 achievable goal provided that central bankers use the right technique and focus on the right questions. Money mattered at the Konstanz Seminar. According to the models presented at the first conferences, changes in the monetary base were the dominant impulses underlying the growth of the monetary aggregates. The monetary authorities had the ability to control these aggregates, not on a daily or weekly basis, but on a quarterly or a yearly basis. Monetary policy makers were advised to think less about the short run and more about the medium and long run. Inflation was basically interpreted as a monetary phenomenon; consequently, central bankers were ultimately responsible for it. While relative price and wage rigidity of the real sector gave the monetary authorities an opportunity to alter the path of output and unemployment, their actions would be anticipated by the public and affect price and wage expectations. Underestimating these reactions, activist policy makers were seen as raising the risk of creating an inflation bias. The implication was that discretionary monetary policy did not systematically raise the rate of output, but created an inflationary environment. The main tenet of the message offered by the Konstanz Seminar was that central banks ought to look at the long run and build reputation by being firmly committed to price stability. Furthermore, central bankers had to receive correct incentives for pursuing such policies: The Konstanz Seminar was an early advocate of central bank independence. Today s landscape is radically different from the seventies. Much of the message that seemed revolutionary at a time, when old-style Keynesianism was still rampant, has long been accepted into the dominant paradigm used by economists. Inflation in the industrial world has been squelched, economic policy activism seems out-dated, and central banks in many countries have been granted independence - in fact, central bank independence became an entry condition to the European Monetary Union - or have been given explicit incentives to achieve low rates of inflation. The organizers of the Konstanz Seminar ought to be happy with these developments. But the question is: How much credit can they claim? This is a difficult question to answer with any degree of precision. Surely, the Konstanz Seminar has contributed to the dramatic change in the intellectual climate since the seventies. In what follows we try to identify some linkages between the Konstanz Seminar and monetary policy making. A first indication of success is that a fair number of participants of the Konstanz Seminar were or became influential policy makers (see Table A in the Appendix). In this group many were already working in central banks or government when they first came to Konstanz; others were in academia and moved into the 7 policy world later. Among the first are Antonio Fazio, Charles Goodhart, Jerry Jordan, H. Robert Heller, Norbert Kloten, Markus Lusser, Tommaso Padoa-Schioppa, Paolo Savona, Kurt Schiltknecht, and Helmut Schlesinger. Typical of the second group are Stanley Fischer, Jacob Frenkel, Otmar Issing, Pieter Korteweg, Mario Monti, and Michael Mussa. André Fourçans and Paul de Grauwe represent a third and rare group of individuals who are both academics and policy makers. The Konstanz Seminar probably had its largest impact on Germany s Bundesbank and the Swiss National Bank and a smaller impact on the Bank of England and the Banca d Italia. Most Seminar participants we contacted agree on this point. Allan Meltzer speaks for all of them when he says: The Bundesbank and the Swiss National Bank changed the way they conducted policy. Is it an accident that they are the two most monetarist central banks? Did they contribute to and support our efforts because they agreed about objectives and were interested in improving techniques? It is hard for me to identify structural parameters of influence. We learned a lot about the problems from them as they saw them. I believe they continued their support and attendance because they found the interaction and the conference useful. 11 The connection between the Deutsche Bundesbank and the Konstanz Seminar existed from the very beginning. Heinrich Irmler, a member of the Bundesbank s Council kicked off the first Konstanz Seminar. Horst Bockelmann, head of the monetary division in Schlesinger s department of economics and statistics, was a regular participant of the seventies. The late Hermann Dudler replaced him at the Bundesbank and also at the Seminar in the early eighties
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