“Take questions seriously,” says Prof. Dr. M. Hashem Pesaran, Honorary Doctor at Maastricht University

Prof. Hashem Pesaran was awarded an Honorary Doctorate from Maastricht University by SBE  Honorary Supervisor Prof. Franz Palm (left)
37th Dies Natalis Maastricht University, 14 January 2013
Photo: Harry Heuts

“It all started with a very simple question,” says Prof. Hashem Pesaran, Distinguished Professor of Economics at the University of Southern California and Emeritus Professor of Economics at the University of Cambridge, a world leading scholar in time series and panel data econometrics.

Prof. Pesaran, who received last week an honorary doctorate from Maastricht University for his “outstanding academic achievements” and “inspiring contribution” to many of the research studies carried out at the University’s School of Business and Economics, has an outspoken preference for an applied approach to econometrics.

“I develop methods because they help me solve concrete problems, not the other way around,” he explains. “In this way, I am slightly different from theoretical academics who focus on abstract issues, which may be conducive to answering intermediate questions but not necessarily any particular question of imminent importance.”

The real question for Prof. Pesaran came back in 1998, at a time when the world was still suffering from the effects of the Asian financial crisis of 1997. He was working as a consultant for Oliver Wyman in Germany and a bank manager posed the question: “What would be the impact of a shock in Turkey or Latin America on the loan portfolio of our bank?”

“That was the beginning of my research on global modelling,” says Prof. Pesaran, “and much of my recent research originated from this very simple question. Many of the econometric techniques I have developed in one form or another attempt to provide answers to this and other similar questions.”

Prof. Pesaran is convinced that the effects of shocks need to be analyzed and understood on a global scale, whether in terms of risks or benefits, and that national economic issues have to be considered not only at a national but also at a global level.

Interview with Prof. Hashem Pesaran
Photo: Joey Roberts

Global interdependencies

As a consequence, an important part of his current effort is devoted to the development of econometric tools such as the GVAR to study global economic and financial interdependencies between countries, regions, firms or consumers over time. The GVAR approach, for example, has been used to characterize and quantify the big shifts that are taking place from the West to Asia, in particular China. There are many other applications, some of which are collected in a GVAR Handbook to be published this year by Oxford University Press.

“Most existing economic models are closed models, something which has always seemed odd to me,” says Prof. Pesaran.

The challenge in elaborating global models, however, lies in the fact that changes do not all happen everywhere at the same time: different variables change in different parts of the system at different times, making the entire system more complicated to study.

“Furthermore,” he remarks, “it is not enough to model the interconnections that are taking place; we also need to analyze how these interconnections are changing over time, and as a result the global economy. That’s a more challenging task that hasn’t been developed much yet, but I’m sure it will.”

How to quantify economic relationships?

Prof. Pesaran is passionate about his work and smiles often when he remembers the highlights of his career. “Many things happened by chance, believe me,” he says.

“I was born in Iran, in the south-western city of Shiraz, celebrated for its wine and wise poets such as Hafez and Saadi. At the age of 17, I was awarded a full scholarship by Bank Markazi (The Iranian Central Bank) to study in the UK in order to train as an accountant. When I arrived at the University of Salford, which was a young and modern university, I had never heard of economics as a subject of study but chose the brand new course that was being offered as a joint honours degree in economics, mathematics and statistics. Without realizing it at the time, I was fortunate to become acquainted at an early age with the fields in which I am now a specialist.”

After obtaining his PhD in Economics at the University of Cambridge, Prof. Pesaran returned to Iran and worked for the Central Bank of Iran, where he eventually became head of research. In this capacity, one of his tasks was to write the annual report covering the entire scope of economic activity in the country. “This gave me the opportunity to learn in depth about the Iranian economy,” he says.

As part of his job, he saw the need to develop a language for econometrics in Iran. “Econometrics was very new in those days, even in Europe. Some of the terms that are now used in Iran were actually invented by me, I made them up,” he notes laughing.

Prof. Pesaran gave a lecture on Global Economic Interdependencies at Maastricht University School of Business and Economics
37th Dies Natalis 14 January 2013
 Photo: Joey Roberts

It is during this period of the early 1970s that an interesting request reached his desk. “Oil prices had gone up by four times and oil exporting countries, including Iran, were earning a lot of money. But the high price of oil also made them worried about a possible decline of demand. The Shah of Iran received a letter from the King of Saudi Arabia containing an interesting econometric question: ‘What is the quantitative importance of a large rise in oil prices on demand for oil in the industrialized economies?’ This was precisely how Ragnar Frisch had defined one of the primary purposes of econometrics: “How to quantify economic relationships?’”

Another econometric question oil-producing countries were asking at the time was, “How much of the increased oil revenues should be spent domestically and how much invested abroad for future generations?”; a question which remains pertinent to many major oil exporters.

“These were exciting times,” comments Prof. Pesaran, who recalls writing a piece in English for the Iranian Oil minister (Dr. Jahangir Amouzegar who later became a Prime Minster under the Shah) for a speech to be given at the UN “on the topic of ‘Cooperation, not Confrontation’. It was a great experience to attend the UN General Assembly. I was only 29.”

Chance struck again when a fellowship offer from Trinity College Cambridge gave him the possibility to leave Iran before the Islamic Revolution of 1979 and to further pursue his career in the UK.

By that time, econometrics had become an important field of study not only in the UK, but also in the Netherlands, Scandinavia and the US. The Dutchman Jan Tinbergen and the Norwegian Ragnar Frisch had received the Nobel Prize in economics in 1969 for their contributions to econometrics and for developing the first macroeconometric model (in the case of Tinbergen) after World War I. The development of national accounts (pioneered by Professor Richard Stone at Cambridge) gave further impetus to the use of econometric techniques worldwide.

“[John Maynard] Keynes was very influential in Cambridge, where he had many disciples. He was perceived as being critical of Tinbergen’s work, but I did not agree, and I wrote an article entitled “Keynes on Tinbergen” (jointly with Ron Smith) to clarify the nature of Keynes’ criticism, which was less directed at Tinbergen’s approach as such than at the tools that had been used at the time. You can be against particular tools used for surgery in the past, for example, without being against surgery itself.”

Prof. Pesaran gave a lecture on Global Economic Interdependencies at Maastricht University School of Business and Economics
37th Dies Natalis 14 January 2013
 Photo: Joey Roberts

The role of universities 

Nowadays, in a world which is becoming increasingly interconnected and undergoing changes at high speed and on a large scale, new ideas and techniques are required to analyze the volume and complexity of data sets available. Emerging economies are asking for distinct econometrics models to understand specific types of data sets such as village data or mini-credit data.

In Western economies, econometricians and financial analysts are developing tools to handle high frequency data, such as scanner data, credit data or intraday financial data.

“The amount of data means that the discretionary method of analysis is no longer effective,” says Prof. Pesaran. “We need to develop automated methods to handle real time data. We are moving towards real time econometrics.”

“At the Journal of Applied Econometrics, ranked amongst the top five econometrics journals worldwide, we receive 600 new submissions a year in many areas of applied econometrics,” comments Prof. Pesaran, who founded the peer-reviewed journal in 1986.

“It is very important to publish the research, because that’s the only way to achieve progress,” he stresses. “When I work as a consultant for international agencies or private companies, I always try to ensure that I can make the results of my work public, even though they’d rather keep it for themselves.”

In the professor’s eyes, universities provide “a unique service” in disseminating knowledge, “because no other institution does that so comprehensively.”

Another advantage of universities as research institutions is that they allow for interdisciplinary approaches to tackle econometric problems. “The questions have become so complex that many different skills are required to answer them.. We need to think bigger and set up teams to consider economic problems that are being faced at the national and global levels. Econometrics is not like literature or mathematics, you cannot do it on your own.”

That is why Prof. Pesaran devotes much of his time to securing research grants for post-doctoral research programmes and putting research teams together. “I am optimistic that with the tools that are becoming more available, the increasing availability of data, and a better understanding of the techniques we have, we can solve other problems which we haven’t yet considered,” he says. “Hopefully younger generations can lead the way.”

In a world characterized by global interdependencies, Prof. Pesaran seems to be eminently inspired by the 13th century Persian poet and philosopher Saadi from his birthplace of Shiraz, whose words, which he was pleased to see written in the entrance hall of the United Nations building in New York, he proudly quotes:

“The sons of Adam are limbs of each other,
Having been created of one essence.
When the calamity of time affects one limb
The other limbs cannot remain at rest.
If thou hast no sympathy for the troubles of others
Thou art unworthy to be called by the name of a human.”

By Sueli Brodin
Editor Talkin’Business 

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