Department of Economics

The most interesting developments of the last 20 years

Economics is a very vast field of analysis, encompassing almost all human activities. Among the most important contributions in the last 20 years are the following:

  • Research in microeconomic foundations of macroeconomic theory;
  • The emergence of behavioral economics as the research program that investigates the relationship between psychology and economic behavior;
  • The emergence of experimental economics, which has changed the traditional view of economics as a primarily "a priori deductive" science; 
  • An increased interest in research in topics previously not considered to be within the domain of economics, such as the importance of culture, religion and institutions in the pursuit of wealth; even within traditional areas of economic research, there has been a shift toward studying the influence of “non-economic” forces. Economists much more frequently have studied institutions, including not only organizations, such as trade unions, or rules based on formal laws and regulations, but also customs, implicit rules and standard practices. Specific research about the transition economies has done much to stimulate broader research on institutions. 
  • The tendency of economic research, even where institutions are not the focus, to show much more sensitivity toward contextual factors than it did 20 years ago, when results were frequently interpreted as context-free, as though market forces operated everywhere the same way;
  • The development of political economy as a formal analysis of election processes, legislatures and so forth;
  • An increased importance of game theory;
  • The emergence of new growth theory, with a focus on the determinants of technological progress, the role of increasing returns to scale and the process of creative destruction;
  • Significant advancements in monetary theory, with a concentration on problems of price level determination dominated by representative agent models, overlapping generations models and ad-hoc modeling strategies;
  • Significant advancements in applied fields such as labor economics, transition economics, law and economics;
  • The rise of real business cycle models, with a focus on non-monetary factors, such as technology and productivity changes as the driving forces behind business cycles;
  • The emergence of the dynamic stochastic general equilibrium models in modern macroeconomics;
  • The development of contract theory, in which the allocation of resources is no longer ruled by the price system but by contracts among asymmetrically informed partners, with adverse role, moral hazard and non-verifiability playing decisive role;
  • The emergence of evolutionary economics, in which the question is not how economic resources are optimally allocated in equilibrium, but instead, why and how knowledge, preferences, technology and institutions change throughout history; 
  • Significant improvements in data quality and availability; the discipline is much more concerned with deriving evidence from data than with abstract proofs based on axioms and logic. Moreover, the use of data is much more instrumental, with an emphasis on learning the answers to interesting questions about the world rather than merely providing a vehicle for the display of complex econometric techniques. In much of labor economics and applied microeconomics, careful analysis of high-quality data has supplanted the privileged roles once accorded to theory and econometric method.
  • Fundamental changes in the development of empirical economic research, especially in the ways in which the profession thinks about identification. Natural experiments, instrumental variables and randomization have become essential parts of research. Instead of simply relying on the assumptions of empirical models, economists now seriously think about where the data variation comes from. The most extreme direction in this respect is the rise of field experiments, in which economists use the classic scientific method of randomization of treatment—in this case, of individuals, families or communities.
  • In contrast to descriptive research of the past, a new approach that emphasizes the estimation of causal effects (for example, the impact of a particular policy on a particular outcome), and, in contrast to the structural approach that predominated 20 years ago, the current approach's reliance on analyzing particular events in which the usual econometric problems of endogeneity and unobservable factors may be mitigated. This new approach requires more attention to the institutional details of the situation under study.  


The most important contributions to the field by the department or by department members

Faculty of the Department of Economics at CEU have published in top journals in economics and finance, in leading field journals and in multidisciplinary journals.

Laszlo Matyas developed methods, procedures and models dealing with economic data sets that track the behavior of a large number of individual economic agents (firms, households, individuals) over time. The seminal book edited and co-authored by Laszlo Matyas dealing with such panel data sets is now in its 3rd edition and is the main reference book in this field (The Econometrics of Panel Data: Fundamentals and Recent Developments in Theory and Practice, Mátyás, Lászlo; Sevestre, Patrick (Eds.), Springer Netherlands, 1995).

Peter Kondor studies frictions within financial markets. Much asset-pricing research assumes that markets are frictionless and that households can trade costlessly. In practice, however, trading involves frictions such as asymmetric information, costs to enter markets and agency problems between professional asset managers and their investors. Because of frictions, prices can deviate from fundamentals, and markets can fail to be perfectly liquid. 

John Earle's research focuses on the firm-level and worker-level effects of public policies, particularly under conditions of structural and institutional change, and he has written widely on labor markets, political economy, firm performance, privatization and corporate governance, entrepreneurship, industry dynamics, organizational practices, and the consequences of restructuring for employees. Much of his work develops and analyzes large micro-databases for multiple economies in Central and Eastern Europe.

Gabor Kezdi’s research looks at sources of significant differences in knowledge and beliefs across households with respect to the effects that these have on income inequality. He also focuses on the sources of the severe disadvantages that poor and minority people experience in the labor market and in schools. 

Miklos Koren studies economic growth and international trade. His early research analyzes reasons behind higher output volatility in poor countries. More recently, his research has focused on understanding how importing firms are affected by imported inputs and technologies.

Robert Leili is interested in studying the interaction between forecasting and decision making, and the various objectives that a forecaster might have when producing a forecast. He has developed econometric methodology for predicting binary outcomes, which has a variety of applications from loan approval decisions to agricultural sorting problems. 

Andrzej Baniak has analyzed the conditions under which industry self-regulation is a good regulation tool within countries that are characterized by a low degree of law and order. He also has studied the desirability of interventionist harmonization of legal standards across mutually interdependent jurisdictions that want to adapt law to their local conditions as well as to synchronize it with other jurisdictions. 

Almos Telegdy studies how privatization affects firm efficiency, employment and workers' wages in transition economies. He has also studied what types of firms are selected into privatization programs in Romania and has found that the main concern of politicians has been that of preventing a decline in employment rates within privatized firms, even if doing so results in decreased productivity.

Julius Horvath has studied different issues connected with an effort to establish or to break up monetary unions. More recently, he has studied the effects of borders on price dispersion, as well as effects of political symbolism of money. 

In addition, department faculty have received a number of prestigious national and international awards and have been appointed to influential positions within organizations and on boards.

  • Peter Kondor received the Smith Breeden Prize in Atlanta at the annual meeting of the American Finance Association in January 2010. One of the most prestigious prizes in the field of finance, it was awarded for the best article published in 2009 in the Journal of Finance; he was also Robert S. Hamada Fellow at the Graduate School of Business at the University of Chicago in 2007-2008.  Miklos Koren was Peter B. Kenen Fellow at Princeton University in 2007-2008, and he received the Herrnstein Prize for his PhD dissertation at Harvard University in 2005. He also received the award for "Best Paper on Frontier and Newly Emerging Economics," at the Forum for Research in Empirical International Trade in 2009. He is also President of the Hungarian Economic Association.


  • Laszlo Matyas is a member of the European Economic Association Research Committee and an associate editor of the leading journal, European Economic Review. Gerardo della Paolera is the President of Global Development Network. Jan Vincent Rostowski is Minister of Finance of Poland. Peter Mihalyi and Andras Simonovits received Officer's Cross of the Republic from the Hungarian government in 2007. Julius Horvath is a member of the Slovak Accreditation Board and heads its Social and Behavioral Sciences section. He is also President-Elect of the Slovak Economic Association. Katrin Rabitsch received the Young Economist Award from the Austrian Economic Association. John Earle is a member of International Advisory Board of the Kyiv School of Economics, a member of the Executive Committee of Comparative Analysis of Enterprise Data (CAED), COST Network Chair of the Management Committee, President Elect of the Association for Comparative Economic Studies, and a member of the Editorial Board of the Journal of Comparative Economics.


The most interesting emerging/new developments  

  • Many technical changes are taking place, since economics is a field in which re-tooling is of extreme importance;  
  • Some of the advances mentioned in Section 1 are under further scrutiny; for example, an extreme form of "microfoundations" is currently being criticized for looking at the economy as a single-agent decision problem. Recent contributions in behavioral and evolutionary economics are starting to explore the implications of different behavioral assumptions at the individual and macro level;  
  • In response to the recent financial crisis, some of the traits of mainstream thinking have been heavily criticized, such as the concepts of rational expectations and the efficient market hypothesis; 
  • Economists have “invaded” a number of other disciplines. This “economic imperialism” occurred to some extent on a theoretical level in the 1960s-1980s, through work by the Chicago School; recently, we have seen an extension in the use of empirical techniques developed by economists, in principle applicable to any situation where a clear hypothesis can be specified and sufficient variation exist in available data.
  • We have been observing changes in geographical emphasis: since at least the Second World War, the economics profession has been overwhelmingly dominated by American-based researchers working on US data and issues. This is still true to some extent, but economists in Europe (including Eastern Europe) and East Asia (generally US-trained returnees) have become much more influential than they were previously, and even the top journals show much more interest in other countries’ experiences and in explicitly comparative work. Transition has played a role in this regard in stimulating interest, perhaps especially in the relationship between policy variation and economic outcomes across countries.
  • Economics is becoming more interdisciplinary in exploring a wider variety of topics and in engaging in collaborative efforts with scholars in political science, sociology, law and other disciplines. Economists have also become much more active in public policy schools, which have grown enormously in student enrollment and in influence both within and outside of the profession.  


And when will the textbooks reflect these new developments?

Thank you for this interesting synthesis regarding the most interesting development in Economics for the last twenty years. I think many of the theoretical underpinnings (and material interests) behind the monetarist school are still in place in economic's textbook. Universities still teach students based on assumptions that are either not made explicit or that have simply prove wrong: the Mankiw (widely used in CEU nowadays) could provide several examples of this.

How do you envision the process through which the reference materials could be reformed so they also reflect the flaws of the mainstream economic thinking? For how long will students have to continue learning models that have proven wrong? When will the textbooks begin reflecting the critics and shortcomings of, for example,   the assumptions of rational expectations and the efficient market hypothesis?