Vítor Constâncio: 2012 Bernácer prize award ceremony in honour of
Nicholas Bloom
Speech by Mr Vítor Constâncio, Vice-President of the European Central Bank, on the
occasion of the Awarding Ceremony of the Germán Bernácer Prize for Promoting Economic
Research in Europe to Nicholas Bloom, Madrid, 24 September 2013.
* * *
I wish to thank Marie Hoerova for the help in preparing this text.
Ladies and Gentlemen,
It is a pleasure for me to be part of this session to award the 2012 Germán Bernácer Prize to
Nicholas Bloom, Professor of Economics at Stanford University. Nicholas Bloom has made
influential contributions to the academic debate in two broad areas, both of which are of great
relevance for central bank policy-makers. First, his research on the effects of policy and
economic uncertainty on business cycles helped us understand better some of the key
contributing factors to the protracted slump in output during what has become known as the
Great Recession. Second, his research on the determinants of good management practices
at the firm level provided important insights on how to support long-term economic growth
and competitiveness, including in the European context.
The financial and economic crisis that started in the summer of 2007 brought about
unprecedented challenges for central bank policy-makers. Some well-accepted paradigms
and widely used models have come to be questioned. It is of course the fact of life that
central bankers operate in an ever-changing and, to use one of the keywords from Professor
Bloom's research, uncertain world. It is thus an important responsibility of a central bank to
ensure that relevant new insights from academic research find their way into the actual
conduct of monetary policy. The Eurosystem attempts to cope with this responsibility by
fostering a constant intellectual exchange with the research community. The ECB organises
great many seminars, conferences and workshops where the most recent research findings
can be discussed, and invites leading scholars to visit and conduct research in the ECB, for
example by means of the Wim Duisenberg Fellowship. Moreover, the ECB supports
promising young researchers by funding five Lamfalussy Fellowships each year. The aim is
to promote policy-relevant research that meets the highest academic standards. The ECB
also leads and co-ordinates research efforts through Eurosystem research networks to
obtain research output which is necessary for ECB decision-making but which is as of yet
unavailable at universities or other research institutes. I will come back to activities of one
such research network at the end of my remarks.
Research by Nicholas Bloom analysing the effects of uncertainty shocks on the economy is a
prime example of a policy-relevant research output. Published in Econometrica in 2009, it
could not be more timely.1 The unprecedented level of uncertainty has been one of the key
distinguishing features of the Great Recession. Economic uncertainty refers to an
environment in which little or nothing is known about the future state of the economy. There
is a variety of sources of economic uncertainty, ranging from wars, acts of terrorism and
natural disasters to changes in economic and financial policies. Professor Bloom highlighted
the adverse effects of heightened uncertainty on economic activity. Uncertainty leads firms to
cut back or defer hiring and investment decisions. It also drives consumers to put off buying
new goods. As a result, uncertainty can escalate financial stress and recession, as well as
stall labour market recovery.2 What was new was the attempt to measure general and event
uncertainty through a variety of indicators, avoid the trap of reverse causation with the
economic fluctuations it was trying to explain and insert the variable in a DSGE model.
Professor Bloom's work on uncertainty inspired further research on the effects of uncertainty,
including on the links between uncertainty and monetary policy.3 For example, the idea that
changes in uncertainty may interact with monetary conditions and can drive global financial
cycles was one of the themes in this year's Jackson Hole Economic Policy Symposium, the
annual gathering of prominent central bankers, finance ministers, leading academics and
financial market players from around the world.4
Because of its latent nature, uncertainty is difficult to quantify and has to be measured
indirectly using a variety of indicators. Here, too, Nicholas Bloom, together with Scott Baker
of Stanford University and Steven Davis of the University of Chicago, made an important
contribution in developing an economic policy uncertainty index for the US, Europe and other
major economies. The measure has been used not only in academic papers but also by
investors and financial professionals.5 It has also been subject to intense discussions in the
blogosphere in view of some of its political uses. The difficulties in finding good indicators
controlled to avoid reverse causation and the use of political events provided fodder for the
debates. Professor Bloom's work on measuring uncertainty stimulated more systematic
analysis of uncertainty indices also at the ECB. We developed our own composite
uncertainty indicator which combines four components: systemic stress, uncertainty of
private households and firms, political uncertainty and financial risk aversion.
Measurement difficulties were also an issue Professor Bloom had to tackle in the second
strand of his research, namely in his research on the role of management practices in driving
productivity and growth differentials across companies and across countries. Due to an
absence of good quality data on management practices, little prior research was conducted
on this important topic. To address this gap in the literature, Nicholas Bloom, together with
John Van Reenen of the London School of Economics, developed a methodology for
quantifying management practices. They carried out a large research project which used a
new survey approach to measure management practices in a systematic way in more than
4,000 manufacturing firms across Europe, the US and Asia. The aspects of management
practices their approach focuses on are systematic performance monitoring, setting
appropriate targets, and providing incentives for good performance. They showed that firms
with better management practices are larger, more productive, grow faster, and have higher
survival rates. A conservative estimate indicates that differences in management practices
2
See Nicholas Bloom, 2011, "The uncertainty shock from the debt disaster will cause a double-dip recession",
VoxEU.org, 22 August; and Scott Baker, Nicholas Bloom and Steven J. Davis, 2012, "The Rocky Balboa
recovery", VoxEU.org, 20 June.
3
There is a vast body of literature that builds on Nicholas Bloom's uncertainty research. I will only name a few
papers which involved ECB researchers. Using German data, Popescu and Smets find that uncertainty
shocks are less important drivers of business cycles compared to financial risk aversion shocks; see Adina
Popescu and Frank Smets, 2009, "Uncertainty, risk-taking and the business cycle in Germany", CESifo
Economic Studies 56(4), 596-626. Bekaert et al. document that a lax monetary policy in the US decreases
both risk aversion and uncertainty, with the former effect being stronger; see Geert Bekaert, Marie Hoerova
and Marco Lo Duca, 2013, "Risk, Uncertainty and Monetary Policy", Journal of Monetary Economics, 60(7).
4
See Hélène Rey, 2013, "Dilemma not trilemma: The global financial cycle and monetary policy independence",
paper presented at the Jackson Hole Economic Policy Symposium. Incidentally, Hélène Rey was the 2006
Germán Bernácer Prize winner.
5
For more details on the construction of the measure see Scott Baker, Nicholas Bloom and Steven J. Davis,
2012, "Measuring economic policy uncertainty", working paper, Stanford University.
account for a significant proportion (10-30%) of the differences in productivity between firms
and between countries.6
Their research did not stop at documenting the impact of the differences in management
practices. They also offered suggestions for policy interventions that could encourage the
uptake of good management behaviour. Competitive and flexible markets enable managers
to re-optimise resources within and outside the firm more easily. Educational standards
matter as well. Better-managed firms have better educated workers and they use them more
efficiently. Moreover, better educated managers have necessary skills to adopt
state-of-theart management practices and adapt to changing environment. This enables them to
maintain and improve their global competitive position. Multinational companies also have a
strong positive effect, as they transplant their management styles to the countries in which
they operate.7
These research-based conclusions highlight a key role of structural reforms in the wake of
the global economic crisis. Countries with more competitive market conditions, better
education and more investment in R&D and innovation policies can maximise the beneficial
impact of managerial capital on productivity and growth. From the policy perspective,
competitiveness issues have been identified as one of the root causes of the economic crisis
in Europe and have therefore been explicitly included in the surveillance processes
established at EU/euro area and G20 level. To further advance research in this area, the
Eurosystem established the Competitiveness Research Network (CompNet) at the end of
2011. The network's objective is to develop a more consistent analytical framework for
assessing competitiveness, one which allows for a better correspondence between
determinants and outcomes. To do so, the network functions as a unique forum in which
different approaches and measures of competitiveness can be discussed, researched and
developed, and eventually reconciled. Developing a framework which includes a
complementary use of micro and macro data can lead to improved analyses of
competitiveness issues.8
I am confident that Nicholas Bloom will continue making extraordinary contributions to this
and other research areas in the coming years. I herewith extend my sincerest
congratulations to you - Nicholas - for winning the 2012 Bernácer Prize.