Juergen Von Hagen

Areas of Expertise

International Macroeconomics, Public Finance, Federalism

Academic Degrees

• Diploma, University of Bonn, 1981
• PhD, University of Bonn, 1986

Professional Experience

• Federal Reserve Bank of St. Louis, Spring 2005
• Bank of Japan 2002
• Sultanate of Oman, 2001
• European Parliament, 1998, 1999
• World Bank, Economic Development Institute 1998, 2006
• Research Consultant, Interamerican Development Bank, 1996, 1997, 1999
• Special Consultant, European Commission 1995
• Visiting Professor, Tel Aviv University 1995
• International Baltic Economic Commission, 1991
• Visiting Professor, Catholic University of Leuven, July-August, 1991
• Visiting Professor, University of Giessen, May-June 1991
• Research Consultant, International MonetaryFund, Washington DC, March 1991, March 1992; March 1995, May 1998, July 2001
• Visiting Research Fellow, University of Bonn, May - August 1990
• Visiting Scholar, Board of Governors of the Federal Reserve System, April 1990
• Visiting Assistant Professor, Indiana University 1987 - 88
• Visiting Scholar, Federal Reserve Bank of St. Louis, February to April 1987, Jan. to August 1989

Awards, Honors & Certificates

• Research Fellow, BRUEGEL, Brussels, since 2005
• Program Chair, Annual Conference of the International Institute for Public Finance 2005
• Invited Lecture, Annual Meetings of the German Economics Association (Verein für Socialpolitik), October 2003
• Opening Lecture, Journees de l’Association Francaise de Science Economique, May 2003
• Inaugural Francis Y Edgeworth Lecture, Irish Economic Association, May 2002
• Academic Advisory Council of the German Federal Minister of Economics, since 2001
• Member, Deutsche Akademie der Naturforscher Leopoldina, since 2001
• Fellow World Economic Forum 2001, 2002, 2003
• Research Council of Deutsche Bundesbank, 2000-
• Academic Advisory Council, Hallesches Institut für Wirtschaftsforschung, 1999-
• Macroeconomic Committee of the German Economic Association (Chairman), 2000-
• Council of the European Economic Association, 1999-2002
• Commite Economique de la Nation, France, 1999-2003
• Council of the German Economic Association, 1998-
• First Winner of the Gossen Prize of the Verein für Socialpolitik (German Economics Association), 1997
• Thyssen Lecture, Georgetown University, April 1997
• CEPR Economic Policy Panel, 1992-94
• Research Fellow, Center for Economic Policy Research, London, since 1992
• Best Teacher Award, Indiana University School of Business Graduate Student Committee 1991

Selected Publications

• von Hagen, Jürgen (2010), “Sticking to Fiscal Plans: The Role of Institutions,” Public Choice, Vol. 144, No. 3-4, September, pp. 487-503.

Abstract The rules-based fiscal framework of the EMU relies heavily on the development of medium-term fiscal plans by the EU governments. In this paper, I present an empirical analysis of the deviations from the plans presented in the annual Stability and Convergence Programs. I focus on projections for real GDP growth and general government balances, revenues and spending at different time horizons. I show that deviations from the projections presented in these Programs since 1999 can be explained by institutional factors, i.e., the form of fiscal governance and the stringency of fiscal rules.

• Jürgen von Hagen, 2010. "The Sustainability of Public Finances and Fiscal Policy Coordination in the EMU", 412, CASE-Center for Social and Economic Research.

Abstract The financial crisis of 2007-2009 led to a renewed increase in government deficits and debts in many EU countries, causing a full-fledged fiscal crisis in Greece and severe fiscal pressures in other euro-area countries. This has prompted a series of proposals for improving the fiscal framework of the European Monetary Union, the Excessive Deficit Procedure and the Stability and Growth Pact. The first part of this paper reviews the main properties and developments of that framework until 2007. On that basis, it discusses the recent proposals for reform, which range from marginal improvements of the existing framework to the introduction of an explicit framework for managing fiscal crises in the member states, and the expansion of the scope of policy coordination to address macro economic imbalances and the competitiveness of the member states. We find the proposal of a mechanism for dealing with government default most useful. Attempts to suppress current account imbalances and to target national competitiveness positions would most likely result in serious economic losses and do damage to the internal market of the EU. This would increase the wedge between members and non-members of the euro area.

• Ralf Hepp & Jürgen von Hagen, 2010. "Interstate Risk Sharing in Germany: 1970-2006", Working papers 2010-13, University of Connecticut, Department of Economics.

Abstract We study the channels of interstate risk sharing in Germany for the time period 1970 to 2006, estimating the degrees of smoothing of a shock to a state''s gross domestic product by factor markets, the government sector, and credit markets, respectively. Within the government sector, we pay special attention to Germany''s fiscal equalization mechanism. For pre-unification Germany, we find that about 19 percent of a shock are smoothed by private factor markets, 50 percent are smoothed by the German government sector, and a further 17 percent are smoothed through credit markets. For the post-reunification period, 1995 to 2006, the relative importance of the smoothing channels has changed. Factor markets contribute around 50.5 percent to consumption smoothing. The government sector''s role is diminished: it smoothes around 10 percent of a shock. Fiscal equalization only plays a very small role for consumption smoothing in Germany.

• Kerstin Bernoth & Jürgen von Hagen & Casper G. de Vries, 2010. "The Forward Premium Puzzle and Latent Factors Day by Day", Discussion Papers of DIW Berlin 989, DIW Berlin, German Institute for Economic Research.

Abstract We use futures instead of forward rates to study the complete maturity spectrum of the forward premium puzzle from two days to six months. At short maturities the slope coefficient is positive, but these turn negative as the maturity increases to the monthly level. Futures data allow us to control for the influence of an unobserved factor that can be decomposed into a contract-specific and a time- to-maturity effect. Once we do this, we find that the coefficients on the forward premium are much closer to one. The latent factor is shown to be related to conventional proxies of risk.

• von Hagen, Jürgen, Ludger Schuknecht, and Guido Wolswijk (2009), “Government Risk Premiums in the Bond Market: EMU and Canada,” European Journal of Political Economy, Vol. 25, No. 3, September, pp. 371-384. 

Abstract This article looks at US$ and DM/Euro-denominated government bond spreads relative to US and German benchmark bonds before and after the start of the current financial crisis. The study finds, first, that bond yield spreads during the crisis can largely be explained on the basis of the same variables as before the crisis. Second, markets penalise fiscal imbalances much more strongly after the Lehman default in September 2008 than before. There is also a significant increase in the spread on non-benchmark bonds due to higher general risk aversion, and German bonds obtained a safe-haven investment status similar to that of the US which they did not have before the crisis. These findings underpin the need for achieving sound fiscal positions in good times and complying with the Stability and Growth Pact.

• von Hagen, Jürgen and Jizhong Zhou (2009), “Fear of Floating and Pegging. A Simultaneous Choice Model of De-jure and De-facto Exchange Rate Regimes in Developing Countries,” Open Economies Review, Vol. 20, No. 3, pp. 293-315. 

Abstract We present an analysis of the determinants of de jure and de facto exchange rate regimes based on a panel probit model with simultaneous equations. The model is estimated using simulation-based maximum likelihood methods. The empirical results suggest a triangular structure of the model such that the choice of de facto regimes depends on the choice of de jure regimes but not vice versa. This gives rise to a novel interpretation of regime discrepancies.

• von Hagen, Jürgen and Valeriya Dinger (2009), “How Small are the Banking Sectors in Central and Eastern European Countries Really?,” Journal of Financial Regulation and Compliance, Vol. 17, No. 2, pp. 96-118.

Abstract Purpose – The purpose of this paper is to present an analysis of the size of the banking sectors in central and Eastern European (CEE) countries. The banking sectors'' ability is focused to provide financial intermediation between savers and investors in the economy. Design/methodology/approach – The existing literature on banking in transition economies argues in unison that banking sectors in CEE countries are too small and do not provide sufficient levels of financial intermediation. In this paper, a common drawback of the existing measures used to indicate the size of CEE banking sectors is detected: they all relate the volume of bank intermediation to gross domestic product (GDP). It is argued that since transition economies have a low stock of financial wealth relative to economic activity, a more objective measure of the size of the banking sector is the ratio of bank assets to a proxy of the stock of financial wealth rather than to GDP. Findings – There is evidence that the estimation of the size of the banking sectors relative to GDP produce downward biased measures for the ability of CEE banks to intermediate available financial resources. When the size of the banking sector is measured relative to financial wealth, the gap between the developed European Union banking systems and those of the CEE countries is not as severe as argued in studies based on the traditional approach of measuring the size of the banking system with respect to GDP. Practical implications – Using the downward biased measure of financial system development to stress the underdevelopment of the financial intermediation in CEE may produce misleading policy recommendations, e.g. recommendations in the direction of rapid financial system expansion by lowering barriers of entry for new banks. The authors'' new measure presents an alternative that should be considered by policy makers in the design of measures promoting financial system development. Originality/value – The paper challenges the existing consensus on severe underdevelopment of the CEE banking sectors. It presents a new approach of accessing financial system development in emerging economies.

• von Hagen, Jürgen and Jean Pisani-Ferry (2009), "To The Commissioner for Economic and Monetary Affairs," in André Sapir (ed.), Memos to the New Commission, Brussels: Bruegel.
• Jürgen von Hagen, 2009. "Monetary Policy on the Way Out of the Crisis", Policy Contributions 379, Bruegel.

Abstract Senior Non-Resident Fellow Jürgen von Hagen offers his recommendations for the proper monetary policy to lead the eurozone out of the crisis. He argues that the tentative recovery in the euro area indicates that both monetary and fiscal policy can be normalised soon. However, because delaying fiscal consolidation would result in greater debt burdens whereas monetary policy can be quickly adjusted to respond to unforeseen developments, there is less risk involved if a fiscal exit comes first. In any case, the two strategies must be coordinated and the European Central Bank must be very clear on its interest rate policies. This paper was prepared as part of testimony for the European Parliament''s Economic and Monetary Affairs Committee.  

• Hepp, Ralf & von Hagen, Jürgen, 2009. "Fiscal Federalism in Germany: Stabilization and Redistribution Before and After Unification," CEPR Discussion Papers 7246, C.E.P.R. Discussion Papers.

Abstract We provide empirical estimates of the risk-sharing and redistributive properties of the German federal fiscal system based on data from 1970 until 2006, with special attention to the effects of German unification. We find that tax revenue sharing between the states and the federal government and the fiscal equalization mechanism (Länderfinanzausgleich) together reduce differences in per-capita state incomes by 36.9 percent during period 1970 to 1994. After the full integration of East German states into the mechanism in 1995, the redistributive effects increase slightly to about 38.6 percent. With respect to the insurance effect of the German fiscal system, our results indicate that the federal fiscal system offsets 47 percent of an asymmetric shock to state per-capita incomes. This effect has significantly decreased after the inclusion of the East German states in 1995. Furthermore, we find that the German fiscal system provides almost perfect insurance for state government budgets against asymmetric revenue shocks; also, its redistributive effect with regard to the tax resources available to state governments is very strong.

• Jürgen von Hagen, 2009. "The Monetary Mechanics of the Crisis," Policy Contributions 335, Bruegel.

Abstract In response to the financial and economic crisis, central banks, unlike in the 1930s, have created enormous amounts of money. There are fears that this will lead to inflation, but it is base money (the central bank''s liabilities) that has expanded; total monetary aggregates have not. By contrast, in the 1930s, base money remained stable and monetary aggregates dropped. The reason for this is that in a crisis the relationship between the base money and monetary aggregates is altered. The money multiplier drops. It is therefore necessary to create more base money so that monetary aggregates remain stable. This is what central banks have done in the current crisis and rightly so. They have learned the lessons of the Great Depression. This framework helps understand differences across countries. The crisis affected the euro area money and credit supply process much less than the US and the UK. Therefore, the European Central Bank was right to respond to the crisis with a less expansionary monetary policy than the Bank of England and the Federal Reserve. However, stabilising the money supply may not have been enough to stabilise the supply of credit.

• Schuknecht, Ludger & von Hagen, Jürgen & Wolswijk, Guido, 2009. "Government Bond Risk Premiums in the EU revisited: The Impact of the Financial Crisis," CEPR Discussion Papers 7499, C.E.P.R. Discussion Papers.

Abstract This note looks at US$ and DM/Euro denominated government bond spreads relative to US and German benchmark bonds before and after the start of the current financial crisis. The study finds, first, that bond yield spreads before and during the crisis can largely be explained on the basis of economic principles. Second, markets penalise fiscal imbalances much more strongly after the Lehman default in September 2008 than before. There is also a significant increase in the spread on non-benchmark bonds due to higher general risk aversion, and German bonds obtained a safe-haven investment status similar to that of the US which they did not have before the crisis. These findings underpin the need for achieving sound fiscal positions in good times and complying with the Stability and Growth Pact.

• von Hagen, Jürgen and Valeriya Dinger (2009), “Does Interbank Borrowing Reduce Risk?,” Journal of Money, Credit, and Banking, Vol. 41, No. 2-3, March-April, pp. 491-506.

Abstract In this paper we investigate whether interbank exposures create incentives for interbank monitoring as “signalled” by reduced level of risk undertaking of the interbank borrowing banks. We present a model of the credit market based on asymmetric information and moral hazard. Assuming that banks have monitoring costs benefits compared to depositors regarding the lending activities of the other banks, we show that interbank lending induces the borrowing banks to engage in less risky lending activities than banks that finance themselves predominantly in the deposit market. We empirically test the implications of the model on a large sample of banks from 10 Central and Eastern Europeancountries. The results of the empirical analysis generally confirm the implications of the model.

• Robin Pope, & Reinhard Selten, & Sebastian Kube, & Jürgen von Hagen, 2009. "Managed Floats to Damp Shocks like 1982-5 and 2006-9: Field and Laboratory Evidence for Chinese Interest in a Single World Currency," Bonn Econ Discussion Papers bgse26_2009, University of Bonn, Germany. 

Abstract This paper’s field evidence is: (1) many official sectors rapidly forget the damage of the 1982-85 exchange rate liquidity crisis and reverted to what caused that crisis, namely a closed economy clean floats perspective; and (2) the 2006-2008/9 exchange rate liquidity shock would have been more drastic but for central bank currency swaps. This evidence is bolstered by a laboratory experiment that incorporates more aspects of real world complexity and more different sorts of official and private sector agents than are feasible in econometric or algebraic investigations and employs a new central bank cooperation-conflict model of exchange rate determination , and is within an umbrella theory of Pope, namely SKAT, the Stages of Knowledge Ahead Theory. SKAT allows for risk effects from stages omitted in normal models, including those from (a) difficulties of agents in evaluating alternatives in a complex environment in which the assumed maximization of expected utility is impossible; and (b) preference for safety and reliability is not trivialized. Our joint field plus laboratory evidence indicates that official sectors should maintain an international exchange rate oriented perspective, or better yet, a single world currency as recommended by Zhou Xiaochuan, head of the People’s Bank of China. To avoid rapid forgetting of havoc from isolationist clean floats and the value of stable exchange rates, a new syllabus, as under the SKAT umbrella, is fundamental in the education of official sector members in order to furnish them with a coherent alternative intellectual framework to current university education that excludes liquidity crises.

• Robin Pope & Reinhard Selten & Sebastian Kube & Jürgen von Hagen, 2009. "Prominent Numbers, Indices and Ratios in Exchange Rate Determination and Financial Crashes: in Economists’ Models, in the Field and in the Laboratory," Bonn Econ Discussion Papers bgse18_2009, University of Bonn, Germany.

Abstract The prior paper in this sequel, Pope (2009) introduced the concept of a nominalist heuristic, defined as a focus on prominent numbers, indices or ratios. In this paper the concept is used to show three things in how scientists and practitioners analyse and evaluate to decide (conclude). First, in constructing theories such as purchasing power and interest parity to predict exchange rates and to advocate floating exchange rates, economists unwittingly employ nominalist heuristics. Second, nominalist heuristics have influenced actual exchange rates through the centuries, and this finding is replicated in the laboratory. Third, nominalist heuristics are incompatible with expected utility theory which excludes the evaluation stage, and are also incompatible with prospect theory which assumes that, while the evaluation stage can involve systematic mistakes, the overall decision situation is ultra simple. It is so simple that: a) economists and psychologists can mechanically model and identify what is a mistake, and b) decision makers can maximise. However, contrary to prospect theory, in the typical complex situation, neither a) nor b) holds. Assuming that a) and b) hold has resulted in the 1988 crisis from applying the Black Scholes formulae to forward exchange rates and contributed to sequel financial crises including that of 2007-2009. What is required is a fundamentally different class of models that allow for the progressive anticipated changes in knowledge ahead faced under risk and uncertainty, namely models under the umbrella of SKAT, the Stages of Knowledge Ahead Theory. The paper’s findings support a single world currency rather than variable unpredictable exchange rates subjected to the vagaries of how prominent numbers, ratios and indices influence events via the models of scientists and practitioners.

• Jürgen von Hagen & Jean Pisani-Ferry & Jakob von Weizsäcker, 2009. "Exit: Time to Plan,"  Essays and Lectures 343, Bruegel.

Abstract Summary:As the crisis recedes and economic growth resumes, budgetary policy, monetary policy, and policies addressing the financial sector will have to move out of crisis mode and back towards normality. This paper attempts to define such an exit strategy. To do so, it first assesses the desirable order and pace at which the extraordinary support measures should be withdrawn. Second, it explores how the proper incentives can be put in place at European level for such an exit strategy to be implemented in coordination between the various institutional actors. On that basis, a set of recommendations is put forward:· Bank recapitalisation and restructuring should be completed in all EU countries as a matter of urgency. In order to provide member states with suitable incentives for this, the European Commission and central banks should provide clear deadlines for the phasing out of liquidity support and guarantees. Furthermore, for a limited time until 2014, debt levels should be calculated net of bank capital held by governments, to accommodate bank recapitalisation within the European fiscal framework.· In view of the public finance costs of large deficits, budgetary consolidation should be given priority over monetary tightening. For this to succeed, governments need to start fiscal consolidation swiftly in 2011 with the withdrawal of the stimuli. Consolidation should be continued steadily through a ''European Sustainability Programme'' for the next five years, to be adopted by the European Council in spring 2010.· The enforcement of budgetary consolidation is to be achieved through the Stability and Growth Pact, guaranteeing consolidation rates of at least 0.5 percent of GDP per annum. Within the framework of the European Sustainability Programme, each government should present to its parliament by summer 2010 a medium-term budgetary plan that includes a debt target for end 2014 as well as annual minimum and maximum consolidation objectives.· EU governments and central banks should make a one-off commitment to coordinating their exitstrategies, in order to prevent a double-dip recession while ensuring a timely exit. The framework for sucha temporary (e.g 2.5 years, renewable once) coordination mechanism could be set up under Art. 100 of theTreaty.· Central banks, and especially the ECB, should send clear signals to budgetary authorities about the extent of fiscal consolidation required to avoid a premature monetary tightening. However, central banks should stand ready to increase interest rates to fend off potential inflationary threats as they emerge.· In order to avoid the build-up of financial instability in the context of exceptionally low short-term interest rates, preparations should be speeded up for the creation of the ESRB and for the definition of a macroprudential policy framework. Ideally, both the institution and the operational framework should be in place by summer 2010, not least to supervise a well-timed phasing-in of more stringent and anti-cyclical buffers for banks.

• Jürgen von Hagen & Jean Pisani-Ferry & Jakob von Weizsäcker, 2009. "A European Exit Strategy," Policy Briefs 344, Bruegel.

Abstract This Policy Brief was adapted from a paper written by the three authors and presented by Bruegel Director Jean Pisani-Ferry at the informal ECOFIN Council meetings in Gothenburg, Sweden, on 1 Oct. In the brief, the authors argue that bank recapitalisation and restructuring should be a matter of urgency for EU member states and that governments should not undertake the necessary fiscal and monetary policy exit until problems within the financial sector are addressed. The authors also recommend that European states set debt targets to be reached by the end of 2014 and explain that proper incentives are necessary to ensure that an exit strategy, once implemented, is done so in coordination between various institutional actors. Such a policy framework should be in place by summer 2010, the authors say, in order to avoid a buildup of financial instability during the process.

• Zimmermann, Klaus F. & Burda, Michael C. & Konrad, Kai A. & Schneider, Friedrich & Schneider, Hilmar & von Hagen, Jürgen & Wagner, Gert G., 2009. "The Petersberg Declaration," IZA Policy Papers No. 1, Institute for the Study of Labor (IZA).

Abstract Against the background of the worldwide financial market and economic crisis, leading German economists urge policymakers to maintain the reform course in labor market policy. The experts warn not to jeopardize the clearly positive effects of the recent reform efforts. The "Petersberg Declaration" also proposes an economic orientation of German immigration legislation and an improvement of the market for social services, which has so far been dominated by voluntary work. Moreover, the welfare state should encourage risk-taking as a key factor for mobility, innovation, and growth.

• Jürgen von Hagen, “Coming of Age: Report on the Euro Area” (with Jean Pisani-Ferry, Philippe Aghion, Marek Belka, Lars Heikensten, and Andre Sapir) Bruegel Blueprint 4, Brussels: Bruegel 2008.
• von Hagen, Jürgen and Haiping Zhang (2008), "A Welfare Analysis of Capital Account Liberalization," Review of International Economics, Vol. 16, No. 3, August, pp. 576-590.

Abstract We develop a model of a small open economy with credit market frictions to analyze the consequences of capital account liberalization.We show that financial opening facilitates the inflows of cheap foreign funds and improves production efficiency. However, capital account liberalization has important distributional consequences. Specifically, it may be impossible to use public transfers to fully compensate the loss of those who are negatively affected by capital account liberalization.This explains why financial opening often meets fierce opposition even though it leads to efficiency gains for the economy as a whole. From a practical perspective, capital controls should be lifted gradually for a smooth transition.

• von Hagen, Jürgen and Stefan Niemann (2008), “Coordination of Monetary and Fiscal Policies: A Fresh Look at the Issue,” Swedish Economic Policy Review, Vol. 15, No. 1, pp. 89-124.

Abstract A large literature has studied the coordination of monetary and fiscal policies in the context of macroeconomic stabilization. The general result from this literature is that coordination is desirable but that the welfare gains which can be achieved from it are negligible. In this paper, we take a fresh look at the issue. We consider coordination inthe context of the longer-term orientation of monetary and fiscal policies and, hence, their impact on the economy’s steady state. We present a dynamic game, in which a fiscal authority sets its budgetary targets while the monetary authority sets its inflation target, and study the interaction between the two. We find that policy externalities betweenthe two authorities are potentially large. Excessive central bank conservatism leads to high levels of public debt and reduced welfare. This speaks in favor of coordination in the sense that the institutional design of the central bank should be devised taking into account the characteristics of the fiscal authority.

• von Hagen, Jürgen (2008), “European Experiences with Fiscal Rules and Institutions,” in Elizabeth Garrett, Elizabeth A. Graddy, and Howell E. Jackson (eds.), Fiscal Challenges - An Interdisciplinary Approach to Budget Policy, Cambridge: Cambridge University Press.

Abstract Fiscal Challenges: An Interdisciplinary Approach to Budget Policy brings together leading experts from a range of disciplines to explore the problems of budget policy. The authors, including top economists, political scientists, historians, psychologists, and legal scholars, together provide a unique, multidisciplinary introduction to the subject. In addition to in-depth analysis of congressional budget procedures and the economics of federal deficits and debt, Fiscal Challenges explores important recent developments in budget policy at the state level and in the European Union. The goal of the volume is to offer readers wide-ranging perspectives on the many different academic disciplines and perspectives that bear on the evaluation of budgetary procedures and their reform.

• Jürgen von Hagen & Charles Wyplosz, 2008. "EMU''s Decentralized System of Fiscal Policy," European Economy - Economic Papers 306, Directorate General Economic and Monetary Affairs, European Commission.

Abstract This paper reviews the macroeconomic use of national fiscal policy in EMU and examines the rational and scope for a collective insurance system which redistributes income among countries in response to asymmetric cyclical shocks. The analysis of the record of national fiscal policies before and after the adoption of the Maastricht Treaty finds evidence that the quality of fiscal policies has improved in two ways: they are more clearly countercyclical - or less procyclical - and they are more readily used to restore competitiveness than to attempt to boost demand when competitiveness is eroded. These observations suggest that fiscal policy remains a useful instrument. One question is whether it can be augmented - or perhaps substituted for - with a collective insurance system. Collective insurance is one alternative to external borrowing and lending and therefore one way to deal with the concerns that the SGP is meant to address. We examine in more detail two collective insurance systems: tax revenue sharing and unemployment insurance sharing. We find that the earlier is more promising and examine in some detail how it could be set up. It is no panacea, though. Any insurance mechanism entails moral hazard and that moral hazard can, at best, only be mitigated, not eliminated.

• von Hagen, Jürgen and Haiping Zhang (2008), “Financial Frictions, Capital Reallocation, and Aggregate Fluctuations,” Journal of Economic Dynamics and Control, Vol. 32, No. 3, pp. 978-999.

Abstract We address an important business cycle fact, i.e., the amplified and hump-shaped responses of output to productivity shocks, in a dynamic general equilibrium model with financial frictions. Models with financial frictions in the current literature have either the amplification mechanism or the propagation mechanism. Our model shows that the dynamic interaction of borrowing constraints, endogenous capital accumulation, and capital reallocation among agents with different productivity constitutes a mechanism through which the effects of productivity shock on aggregate output are amplified and propagated, more in line with the empirical evidence than other related models in the literature.

• von Hagen, Jürgen and Jizhong Zhou (2008), "The Interaction Between Capital Controls and Exchange Rate Regimes: Evidence from Developing Countries," International Economic Journal, Vol. 22, No. 2, pp. 163-185.

Abstract The choice of the exchange rate regime and the capital account regime are among the core macro economic policy decisions for developing countries, with important repercussions for a country''s macro economic stability, ability to attract foreign capital, and international trade. Existing literature has considered the determinants of these decisions, taking the capital account regime as given when considering the exchange rate regime and vice versa. This paper provides an empirical analysis of the interaction between the two regime choices treating both as simultaneously endogenous. Using a panel data set for developing countries in the 1980s and 1990s, we estimate a simultaneous-equations panel mixed logit model for the joint determination of both choices. We find strong influences from the official, de jure exchange rate regime on capital account policies, but only weak feedback effects. Using de-facto exchange rate regimes, the influences in both directions are similar to each other.

• von Hagen, Jürgen, Alan Ahearne, and Birgit Schmitz (2008), “Current Account Imbalances in the Euro Area,” in Anders Aslund and Marek Dabrowski (eds.), Challenges of Globalization, Washington, D.C.: Peterson Institute for International Economics.

Abstract The dispersion in current account balances among countries in the euro area has widened markedly over the past decade-and-a-half, and especially since 1999. We decompose current account positions for euro area countries into intra-euro-area balances and extra-euroarea balances and examine the determinants of these balances. Regarding intra-euro-area balances, we present evidence that capital tends to flow from high-income euro area economies to low-income euro area economies. These flows have increased since the creation of the single currency in Europe. We construct a novel data set regarding extra-euro-area balances. The data set contains, for the euro area and the most important member economies, exports and imports to and from the 10 respective most important trade partners outside the euro area. This allows us to study the determinants of the extra-euro current account and its interaction with intra-euro area trade balances. We estimate a model of the trade balance of the euro area and individual euro-area countries with the rest of the world. We find that a real appreciation of the euro against the currencies of its main trading partners appears to have a substantial effect on the euro area’s net exports in the long run, though the immediate effect is small. Our estimates for individual countries suggest that the adjustment to a real appreciation of the euro would not be equally distributed across euro-area countries. In particular, Germany would bear the largest share of the adjustment, while the other large euro-area economies would be relatively unaffected. Finally, we find that the introduction of the euro seems to have changed the dynamics of trade balance adjustment in three of the larger euro-area economies. 

• Jürgen von Hagen & Iulia Siedschlag, 2008. "Managing Capital Flows: Experiences from Central and Eastern Europe," Papers WP234, Economic and Social Research Institute (ESRI).

Abstract The countries of Central and Eastern Europe went from being largely closed to being largely open to international capital flows. This paper discusses their experience with capital account liberalization and coping with large capital inflows. We start with a discussion of basic economic characteristics and the real convergence achieved so far, and then discuss the pace and sequencing of capital account liberalization and the degree of international financial integration over the past decade. We then analyze trends and patterns of capital inflows in these countries in recent years. These stylized facts are useful for understanding the macroeconomic implications and policy challenges of coping with large capital inflows, which we discuss next. Finally we conclude with policy implications for emerging Asian economies.

• von Hagen, Jürgen, Klaus F. Zimmermann, Michael C. Burda, Kai Konrad, Friedrich Schneider, Hilmar Schneider, and Gert G. Wagner (2008), “Petersberger Erklärung: Anstöße für eine zukunftsgerichtete Arbeitsmarktpolitik,” Wirtschaftsdienst, Vol. 88, No. 12, pp. 814-815.

Abstract Anlässlich der Gründung des Instituts zur Zukunft der Arbeit (IZA) 1998 legten wirtschaftspolitisch engagierte Ökonomen ein Thesenpapier zur Arbeitsmarktpolitik vor (vgl. Petersberger Erklärung: Anstöße für eine zukunftsgerichtete Arbeitsmarktpolitik, in: WIRTSCHAFTSDIENST, 78. Jg. (1998), H. 11, S. 652 f.). Zehn Jahre danach sehen die Autoren weiterhin Handlungsbedarf. Hier wird ihre Erklärung dokumentiert.

• von Hagen, Jürgen, Mark Hallerberg, and Rolf R. Strauch (2007), "The Design of Fiscal Rules and Forms of Governance in European Union Countries," European Journal of Political Economy, Vol. 23, No. 2, pp. 338-359.

Abstract This paper examines the development of fiscal rules and budget procedures in EU countries, and their impact of public finances since the mid-1980s. It presents a new data set on institutional reforms and their impact in Europe. Empirical pattern confirm our prediction that more stringent fiscal rules exist under large coalition governments, while the centralisation of budgetary procedures is the main form of fiscal governance elsewhere. In addition, the centralisation of procedures does not restrain public debt in countries more prone to a rules-based approach, whereas more stringent fiscal rules seem to support fiscal discipline in almost all EU countries.

• von Hagen, Jürgen and Tai-kuang Ho (2007), “Money Market Pressure and Banking Crises,” Journal of Money, Credit, and Banking, Vol. 39, No. 5, pp. 1037-1066.

Abstract Identifying banking crises is the first step in the research on determinants of banking crises. The prevailing practice is to employ market events to identify a banking crisis. Researchers justify the usage of this method on the grounds that either direct and reliable indicators of banks'' assets quality are not available, or that withdrawals of bank deposits are no longer a part of financial crises in a modern financial system with deposits insurance. Meanwhile, most researchers also admit that there are inherent inconsistency and arbitrariness associated with the events method. This paper develops an index of money market pressure to identify banking crises. We define banking crises as periods in which there is excessive demand for liquidity in the money market. We begin with the theoretical foundation of this new method and show that it is desirable, and also possible, to depend on a more objective index of money market pressure rather than market events to identify banking crises. This approach allows one to employ high frequency data in regression, and avoid the ambiguity problem in interpreting the direction of causality that most banking literature suffers. Comparing the crises dates with existing research indicates that the new method is able to identify banking crises more accurately than the events method. The two components of the index, changes in central bank funds to bank deposits ratio and changes in short-term real interest rate, are equally important in the identification of banking crises. Bank deposits, combined with central bank funds, provide valuable information on banking distress. With the newly defined crisis episodes, we examine the determinants of banking crises using data complied from 47 countries. We estimate conditional logit models that include macroeconomic, financial, and institutional variables in the explanatory variables. The results display similarities to and differences with existing research. We find that slowdown of real GDP, lower real interest rates, extremely high inflation, large fiscal deficits, and over-valued exchange rates tend to precede banking crises. The effects of monetary base growth on the probability of banking crises are negligible. 

• von Hagen, Jürgen, Karl-Martin Ehrhart, Roy Gardner, and Claudia Keser (2007), “Budget Processes: Theory and Experimental Evidence,” Games and Economic Behavior, 59:2, 279-292. 

Abstract This paper studies budget processes, both theoretically and experimentally. We give a sufficient condition for top-down and bottom-up budget processes to have the same voting equilibrium. Furthermore, at a voting equilibrium, it is not always true, as often presumed, that a top-down budget process leads to a smaller overall budget than does a bottom-up budget process. To test the implications for budget processes of voting equilibrium theory, we conduct a series of 128 voting experiments using subjects in a behavior laboratory. The experimental evidence from these experiments is well organized by voting equilibrium theory, both at the aggregate level and at the individual subject level. In particular, subjects display considerable evidence of rationality in their proposals and votes. More complete information and fewer spending categories lead to greater predictive success of voting equilibrium theory, and reduce the time needed to reach a budget decision.