The MONROE work plan is being carried in the frame of seven work packages (WPs). Management (WP1) and dissemination (WP7) work packages provide the broad canvas for the whole duration of the project and ensure its good functioning. Two theoretical work packages (WP2 and WP3) investigate in depth the role of R&I and R&I policies as well as the possibilities for their consistent representation in current state-of-the-art macro and regional-economic models. Empirical (WP5) and modelling (WP4) work packages use the methodological framework developed in WP2 and WP3 in order to build specific modelling tools or modules that incorporate R&I and R&I policies as well as to estimate empirically all main parameters of these models on the basis of existing European country, regional and micro-level data. The resulting empirically validated and estimated modelling toolkit will be used for the analysis of specific R&I policies and programmers as well as for the construction of a meta-model that will serve as a basis for the interactive online tool.
WP1: Project management and advisory board
Project Coordination is a crucial overarching WP that will ensure that the MONROE project realises its high ambitions and provides deliverables on time and of the highest quality. This will have a dedicated sub-WP for Project Management and coordination of a high-level Project Advisory Board including key theoretical and modelling experts.
Work on this WP has consisted mainly of setting up the project’s management infrastructure in support of the other WPs. To streamline communication and collaboration between the partners, PBL, as leader of this WP, has set up frequent skype meetings with the WP leaders. Also toward this direction, we created a project account with Asana, which is a project-management website and application.
WP2: Examining mechanisms of policy in models with endogenous growth and productivity.
This WP aims at creating a theoretical and methodological framework for the representation of R&I policies in various types of macro-economic models. The work will include analyzing the importance of financial constraints on R&I and growth; analyzing the optimal policies of countries in which technology transfers are more important than domestic innovation; exploring the interaction between R&I and adoption in medium frequency growth, and studying the effects of potential economic policies.
The primary aim of this WP is to explore and evaluate current and potential R&I policy mechanism to support R&I and economic growth. This is done by using frontier innovation and growth theory in order to develop new models useful for applicable policy recommendations for national and EU policymakers.
In the context of WP2 our research work has focused on the following topics:
- Reviewing the emerging literature on medium term cycles, attempting integration between growth and business cycle macroeconomic models. Reviewing literature on small open economy models, especially for non-frontier countries. Development of a conceptual framework in which to study medium term cycles in small open non-frontier economies. Several modelling attempts of integrated growth and business cycle models, with and without a small open economy. Selection of what we think the best model could be and rigorous analytical study of this model. Coding of the model with Dynare software in order to calibrate and simulate it in a flexible way, useful to describe European and non-European small open economies struggling to catch-up with the world technological frontier. Gathering useful data from European countries that would be usefully analysed within the framework of the model.
- Modelling productivity catching up driven by complementarities between the technology embodying “engineering services” input, and human capital.
- Studying the implication of skill/unskill augmenting technical change in a DSGE model with growth.
- Reviewing the existing theoretical and empirical literature on the links between competition, institutional quality and innovation, and proposing a way to account for the links between market competition in space, the role of region-specific institutional quality and sectorial innovation in a context of a simple theoretical spatial computable general equilibrium (SCGE) model.
The work carried out in this WP is encapsulated in the following four working papers:
- Paper on examining medium frequency cycles in non-frontier countries (University of St. Gallen)
- Paper examining productivity fluctuations in countries which only perform technology transfer rather than R&D (University of Surrey)
- Paper on market imperfections and institutional bottlenecks in incentivising R&I (PBL)
- Paper introducing endogeneity in the complementarity between information technology and skill biased technical change. (University of Surrey)
WP3: Addressing the challenges of building, using and estimating models with endogenous productivity.
Working with models with endogenous productivity presents a number of challenges that are not faced by more standard models. For example, in models in which R&I leads to structural change, the resulting model will not possess a balanced growth path, and hence the model cannot be simulated or estimated by standard techniques. In this WP, the aim is to solve some of these technical difficulties, for the benefit of future researchers in the field. In this work package objectives on the appropriate modelling of endogenous growth are included such as
i) Developing methodology for estimating DSGE models without balanced growth.
ii) Developing methodology for simulating DSGE models featuring spatial heterogeneity and spatial diffusion of technology.
iii) Introducing capital product and process innovation into CGE models
iv) Human Capital formation, Intangible Assets
Our work under WP3 so far can be summarized in the following research strands and outputs
- Literature review on the relation between human capital, education and productivity growth
- Consideration of different measurements of human capital and collection of Associated data
- Development of a methodology to incorporate human capital and intangible assets in the CGE model
- The theoretical description of modelling human capital is accompanied by on-going empirical work. The relationship between labour productivity and education has been estimated using EUROSTAT data for all EU MS. In particular we used the labour productivity per hour worked and the share of low, medium and high skilled employees to total employment to estimate the linkage between the skilled level and the labour productivity. Preliminary results support the argument that an increase in the share of the high skilled employees to total employment has a significant positive impact on labour productivity.
- Empirical estimation on the relationship between wage rate and education level. The annual earnings by different education level from the latest structure of earnings survey 2014 have been used to estimate the relationship between the wage rate and the education level. Preliminary estimates showed a significant positive relationship between the wage rate and the education level. Workers at the higher education level have on average a 2.4 higher wage rate than the workers at the lowest education level. Another estimation that has been performed is on the relationship between the stock of knowledge and the multi-factor productivity. We used the multi-factor productivity and a proxy for the stock of knowledge measured either from the cumulative number of patents from the cumulative value of the total R&D expenditures. Preliminary results support the argument that there is a positive relationship between the stock of knowledge and multi-factor productivity. It is estimated that an increase of 1% on the stock of knowledge results to a 0.1% increase in multi-factor productivity. The analysis is currently extended in order to take into account the spillover effects of foreign patents or foreign R&D expenditures to country’s multi-factor productivity.
- The newly designed human capital representation is being incorporated for all countries represented in the GEM-E3 model
- Theoretical work on the representation of public R&D on technologies
- Preliminary runs for baseline projection
- Describing the approach to and application of spatial heterogeneity in a DSGE model framework.
- Studying the joint and distinct representation of product and process innovation in a CGE model. In contrast to most of the previous research, in our model we study a setting where the equivalence between product and process innovation does not hold.
Tangible outputs of WP3 to date are the following three working papers:
- Working paper describing the approach to and application of spatial heterogeneity
- Working paper describing the method of introducing capital product and process innovation
- Working paper describing the methodology to incorporate human capital and intangible assets in the CGE model
WP4: Construction of models for policy with endogenous productivity.
The objective of this WP is to improve models that are used for applied policy analysis and are already quite advanced in representing endogenous technical change mechanisms. This WP will develop a set of macroeconomic modelling tools that will capture in adequate detail the peculiarities of the R&I policies and programs and that will enable the evaluation of their short, medium, and long term effects on key economic and welfare variables such as economic growth, employment, competitiveness, sustainability etc. at sectoral, country and regional levels.
All deliverables for this WP are scheduled for the second reporting period. Although work has already started on the various models, there is not much to report at this stage in terms of actual output. However, main contributions have come from Cambridge Econometrics that have:
– Investigated the feasibility of forming a link between degree of competition and level of innovation in their model, building on the literature review done by other partners.
– In line with the findings, they have started building in technology spillovers to E3ME, based on patents data. Based on recent patent data, we have developed spillover matrices.
– Started forming the baseline and writing a baseline report. The baseline will be the reference scenario to which other scenarios as part of work package 6 will be compared. The baseline includes EU projections for a series of indicators related to the economy, energy and environment.
– Carried out a literature review on the measurement of human capital and elaborated an approach to better account for human capital in the E3ME technological progress indicators
– Updated the model’s time series data to include the most recent time-series data.
– Started writing a paper on automation scenarios to contribute to the scientific output of the project
– Conducted peer reviews of deliverables from partners and contributed to the literature review
WP5: Parameterisation and estimation of models for policy with endogenous productivity.
The successful integration of research and innovation in macroeconomic models requires a proper calibration of the new model components. Given the relative scarcity of available empirical studies on elasticities and other parameters of innovation-related and human capital-related functions, each modelling team will dedicate effort to improve the model calibration. The tasks in this work package will contribute to make the novel methodologies more reliable for policy assessment, providing empirical counterparts of the mathematical functions used to represent the creation, innovation and diffusion phases of technological progress. The aim is also to supply new evidence for the parameterization of macro-models with endogenous research and innovation, based on the most recent available data.
Work so far under this WP has consisted largely of literature review, data collection and the creation of datasets. With respect to the latter, PBL has prepared a regionalized (at the level of NUTS2) version of EU-KLEMS growth accounting database for EU28. The data has been constructed by collecting and harmonizing various regional data sources both from Eurostat, ESPON and national statistical offices. Regional data has been used to split the national EU-KLEMS datasets to the level of regions. This unique dataset will be used in MONROE to prepare econometric estimations of endogenous growth parts of the regional economic model EU-EMS (European Economic Modelling System). Cambridge Econometrics and E3M have been developing spillover matrices based on patents data.
Empirical work has been carried out mainly by E3M who have sought to estimate:
- The relationship between labour productivity and education using EUROSTAT data for all EU member states.
- The relationship between wage rate and education level
- The relationship between the stock of knowledge and the multi-factor productivity.
The one deliverable scheduled for this period (D5.1 – Internal Report on Data Plan) was submitted on time.
WP6: Scenario definition, simulations of R&I policies and programs, results and policy recommendations
The primary aim of this WP is to explore and evaluate the societal benefits generated by public funding for research and innovation, so as to provide practical policy recommendations to policy makers. Three different modelling approaches will be used to assess a comprehensive range of scenarios that are designed to represent different future funding programmes. The outputs from the modelling, including estimated impacts on major societal challenges, will be consolidated to provide a clear set of policy recommendations to key decision makers.
Work on WP6 is meant to be carried out wholly in the coming months, so we do not have anything to report at this stage.
WP7: Communication, dissemination and exploitation
The MONROE Project will have an over-arching work package dedicated to the communication and dissemination of the project activities and outputs (WP7.1) and to commercialise the technical and societal innovation and impact within the project (WP7.2). One major part of this WP will be the construction, dissemination and further exploitation of the interactive internet tool for the assessment of impacts of R&I and R&I policies and programmes (WP7.3). These cross-cutting WPs will have dedicated plans and be led by partners tasked with the integration of these themes across the MONROE project activities and deliverables.
Work that has been carried out so far consists of a Communications and Engagement Plan, as well as on a comprehensive Plan, devised to maximize the impact and innovation potential of our research. Toward this end, we identified six core areas: (i) the maximisation of the connectivity between the work packages, (ii) the enactment of the engagement strategies for the work packages, (iii) the development of materials, (iv) the continuous training of researchers and partners, (v) the dissemination of project results, and (vi) the evaluation of activities. Moreover, the internal and external communication strategies were laid out.