UBRARIBS
Digitized by the Internet Archive
in
2011 with funding from
Boston Library Consortium IVIember Libraries
http://www.archive.org/details/interviewofstanlOOblan
2
DEWEY
HB31
.M415
Massachusetts Institute of Technology
Department of Economics
Working Paper Series
Interview of Stanley Fischer
By Olivier Blanchard
Working Paper 05-1
April 9, 2005
1
Room
E52-251
50 Memorial Drive
Cambridge,
MA 021 42
paper can be downloaded without charge from the
Social Science Research Networl< Paper Collection at
This
http://ssrn.com/abstract=707821
MASSACHUSETTS INSTITUTE
OF TECHNOLOGY
APR
2 6 2005
LIBRARIES
Interview of Stanley Fischer, by Olivier Blanchard.i
Abstract
Stanley Fischer
the
first in
academia
at
is
a macroeconomist par excellence.
After three careers,
Chicago, and at MIT, the second at the World Bank and at
the International Monetary Fund, the third in the private sector at Citigroup, he
is
starting a fourth, as the
head of the Central Bank of
Israel.
This interview, to
be published in Macroeconomic Dynamics, took place in April 2004, before the
start of his fourth career.
This interview took place long before Stan had any idea he would become Governor of
the
Bank of Israel,
a position he took
reflect this latest stage.
up
in
May 2005. We have not changed the
text to
Introduction.
The interview took place
in April
New York City, where I was
2004
in
my office
at the
Russell Sage Foundation in
We completed
spending a sabbatical year.
it
while running
together in Central Park during the following weeks.
Our meeting
I
was not
Fischer
I
at
Russell Sage
sitting
had
was just
like the
many meetings we have had over the
with a Master of the Universe, a world VIP, but with the same Stan
first
met
in 1973
when he was
a young associate professor, fi-eshly
imported firom Chicago. There was the same abihty to
talk
and
years.
to explain
listen carefully, the
same
ability to
simply and straightforwardly. In addition there was the accumulated
wisdom of a professional
life
spent developing and applying macroeconomics to the very
real world.
When I
arrived as a
PhD
student at
MIT in
1973,
it
was
clear that Stan
would quickly
play a central role in the department. Within a few years, he was one of the most popular
teachers,
and one of the most popular
thesis advisers.
suspect that the only time for research he had
most were
his technical skills
—he knew how
We flocked to his office,
was during
the night.
and
I
What we admired
to use stochastic calculus...
—
,
his ability to
take on big questions, and to simplify them to the point where the answer, ex-post, looked
obvious.
When Rudi Dombusch joined him
in 1975,
macro and
international quickly
became
and
the
most exciting
very
this is
fields at
much what we
When I came back to MIT
MIT. Imitation
the most sincere form of admiration,
is
all did.
in 1982, this time as a faculty
member, Stan had acquired
near-guru status. Teaching the advanced macro courses with him, and writing 'Lectures
'
on macroeconomics", which we finished
intellectual adventures
micro-founded and
usefulness.
nice to
As
life.
of promises, that
full
the years
that
it still
was one of the most
we
sells surprisingly
understood
its
as a textbook,
architecture
it
quickly
had passed, Stan had taken more and more
brief return to
to
Washington
Managing Director of the IMF, where he remained
front lines during the
others.
From
in
I
in
1994
to
until 2001.
newspapers and magazines: While
Mexican
the peeks
became one, and
it is
in the
to
economics of
jump
fi-om
and became Chief Economist of the World Bank. After a
MIT, he then returned
been well documented
its
interest in applying theory to the
working with Rudi on hyperinflations, being involved
to the real world,
and
well today.
peace with George Shultz in the Middle East. In 1988, he decided
academia
exciting
We both felt there was a new macroeconomics, more
While we had not thought of it
know
real world,
of my
in 1988,
crisis,
become
macroeconomic theory even
at
Deputy
That part of his hfe has
at the
IMF, he was on the
the Russian crisis, the Asian crises, and
got of him during those times, what strikes
remained the same as he had been
First
MIT: calm,
in the middle of the
me most
many
is
how he
careful about the facts, analytical, using
most intense
fires.
Many thought
and hoped that he would become the managing director of the IMF.
Antiquated rules and country politics prevented
it
from happening. The
IMF
out to be the private sector's gain. In 2002, Stan joined Citigroup, where he
President of Citigroup International.
remains one of the wise
men
He is
still
of our profession.
active in
is
loss turned
the
macro policy debates, and
Interview.
O:
I
When and why did you decide to go into economics?
was
a schoolboy in
what was then Southern Rhodesia,
The educational system was
Zimbabwe.
specialize during the last
physics, math,
scientist or a
friends of
two years
parents.
an economist.
He
me
O:
teacher
was
sure
I
me
1
maybe
a
of
should become
Also, amazingly enough,
think
1
I
we
took an
This sounds very unusual.
where students have
and was hooked by Keynes' use
I
had decided
and
The
to specialize.
studied Hicks' Social Framework, and
In the vacation between school
understood the book.
the LSE.
We
was extremely good.
General Tlieory
or
my last year at high school.
the British sixth form,
introduced to Keynes.
would become an engineer
a few lessons, which were interesting -
An economics course in high school.
Well, this
originally specialized in
studied at the LSE, and told
used Samuelson's introductory book.
economics course during
I
to
At some point I had a conversation with the son
He had
gave
I
Rhodesia, later yet
which meant you had
of high school.
and chemistry, thinking
mathematician.
my
British,
later
college
I
I
was
read the
of language, although I'm not
to study in
England and ended up
at
O:
Why LSE? Why not the US?
We
didn't think of the
My teachers
LSE
told
me
US
then.
the choice
partly because the person
there
and
partly because they
For us England was the center of the universe.
was Cambridge
who had
or the LSE.
introduced
were willing
to give
me
me
I
ended up at the
to the subject
had gone
a very early decision (the
academic year in the southern hemisphere ends in December instead of June).
Although the LSE had the reputation
economics.
We
for being left wing, that
and he was very good.
economics course.
I
goes up and
it
it
recall his
goes
showing
appointed date, and
I
was an
I
his slides early in 1963
at the
life
The
crisis
that's
why we're
took place on the
Did you pick up a sense of that excitement?
LSE, this was
my first experience
took advantage of London and of the continent. But
about academic
And
again.
crisis in 1964. "
and saying: "You
was very impressed.
exciting time at LSE.
had a great time
first
Frank Paish taught an applied
down and then it goes up
going to have a balance of payments
O: This
of the
took very conventional courses. Richard Lipsey taught the
principles course,
see
was not true
and
intellectual
life.
I
of the big world,
was
and
I
quite unsophisticated
That was not something you picked up
in
my
aim
high school — good as
of studying
In retrospect
I
LSE was then
report.
was
to get
It
was
It
thought the main
who was
was
at the LSE,
the
main
intellectual force
monetary policy in the UK.
But
featured a three-gear view of monetary policy:
which
and the beginning
The
suggested that monetary policy worked, and was later seen
gear drastically enough,
the period in
I
intellectual excitement there at the time.
as the beginning of the revival of
qualifications.
as a teaching institution.
midst of the controversy about the Radcliffe committee
Richard Sayers,
behind the report.
was
through the exams.
realize there
in the
it
it
you could have an impact.
was believed
of a
new
in the
Still, it
UK that monetary
if
it
was
full of
you changed
marked
the
end
of
policy didn't work,
era in which monetary policy has increasingly been
seen as a powerful driver of the economy.
Karl Popper
was
the
dominant
force
in the
everyone became a Popperian in methodology.
was
there,
though
the economy.
And
I
there
was
a lot of
But he looked
much
about production functions.
I
Curve
Phillips of the Phillips
didn't take a course from him, but
I
did see his machine of
work being done on the
Other memories include a lecture by Bob Solow.
the time.
philosophy department, and
Phillips curve.
He must have been about 40
at
younger, and was very funny, even in talking
remember him
saying:
"When
I
say K,
I
mean
.
Kuznets. Capital
is
that thing that Kuznets measures. "
when someone
occasion being incredibly excited
econometric model was.
then
described the economy.
economy. And
it
together,
was obvious
a three year degree),
know whether
I
was
that
real idea of
when I
graduated.
where
at the
Touche.
wrote the
gone to
I
Israel to
work
end of the
I
stood in the
first
degree,
for the
and
at the
So
class.
it
first
it
and
summer, where
I
yet.
third years
I
I
(it
didn't really
had
won
of the first year.
an
But
I
.
did very well.
I
had
got a telegram indicating that
to
I
planned to work in a bank
turned out that
going to be an academic until after the
O: So passion was not there
I
end
took a long time.
had gotten a scholarship and should come back
know I was
meant you could control the
it
and you didn't get course grades. So
eventually happened, but
It
...
set of equations that
a good student or an average student.
O: (laughing)
me what an
was immensely important.
economic history prize and some other prize
had no
remember on one
explained to
you had a
That was really exciting,
At the LSE then you wrote exams only
was
also
That you could use data to estimate parameters, and
you put the whole thing
if
I
do graduate work. So
first
degree
I
I
didn't
No
it
was not
what we
did.
there.
I
really liked the subject, but research
That came
later,
with the graduate studies
did a master's degree at LSE, up to that point
that
it
was what
these great professors did
at
was not
central to
MIT. Even though
I
my view of economics was always
and
do.
Your job
as a student v/as to
study what they said.
Was MIT
O:
the logical choice for
you when you wanted
go on or was
to
Chicago in the picture?
To me, MIT was the
MIT?" And
was
at
I'd
logical choice.
Everybody said "Why do you want
say "Samuelson and Solow." Even though Harry Johnson,
LSE while
I
was
there,
got in there and
O:
who
recommended Chicago, and even though we read
Friedman's restatement of the quantity theory,
I
go to
to
I
thought
MIT was
the best.
And
went there.
How was MIT?
Because
first
I
hadn't thought of going to graduate school until after completing
degree,
I
had done
a one-year master's degree at the LSE.
prepared
when I went to MIT than most
quickly.
The
faculty
of the students. But that
So
I
was
wore
member I was most close to, almost by geographic
my
better
off pretty
accident.
was Miguel Sidrauski who was a Chicago graduate, an Argentine, who
an Assistant Professor
the
same year
We
arrived.
I
happened
same apartment building in Cambridge, and became very
the
Miguel was a
terrific
with the student
lot
MIT
at
is
with Miguel in
Foley.
mentor.
relationship of the
a very nice one, because
my
first
summer
you
Don
worked
So
really got into things.
My MIT
for
experience
Patinkin,
was
who
young
assistant professor
are so close in age.
vv^as
end
visiting
truly formative.
of his
MIT and
to live in
friendly.
I
worked
second year at MIT.
v^^^as
a
him and Duncan
as a research assistant for
Tragically Miguel died of cancer at the
also
I
The
started as
one of
my
1
heroes.
The professors were great and the
courses were great. The department emphasized good teaching, and most of the
professors
were
available
if
you wanted
to talk to them.
And we had enough
term papers to do to be drawn into research. Samuelson used to say interesting
things in class
teacher,
and throw out
who made you
interesting problems.
was an
excellent
understand the economics that was represented in his
phase diagrams, and Bob Solow did that
too.
and had a big influence on the students.
influenced us.
Sidrauski
Frank Fisher taught econometrics,
And
there
were many others who
No less
class
important,
above
me
I
was with
there, as
Mike Rothschild, Joe
was
The
whole host of people whose names you
in particular included a
know. Bob Hall was
Ray
a really remarkable group of fellow students.
Bill
Nordhaus, Avinash
and others who
Dixit,
Bob Gordon,
made
their
mark.
Avinash Dixit could do the Times crossword puzzle in about 10 seconds.
Bob
Fair,
Merton arrived a year
me, and
we
later
shared an office for a year.
was on macro. Why?
O: Your thesis
I
after
Stiglitz
focused on macro as a graduate student, as
was
I
had
at the
macro because
I
rationalization.
Maybe it was because I had read Keynes'
intrigued.
I
in the 1930s,
had
and
this
that these
guys had saved
it
I
think
I
liked
may be an
ex -post
General Hieory
and was
interested in big questions but that
image of the world as we knew
LSE.
having nearly collapsed
it.
My thesis was actually on lifetime portfolio choice. We were very much into the
was about
the
microfoundations of portfolio choice and saving, in the presence of
life
microfoundations
insurance.
In part
of
I
macro
at
the
.
Then, you
and
that
topic
chose that topic because Paul Samuelson was working on
lifetime portfolio choice at the time, as
O
time,
moved to Chicago.
was Bob Merton.
I
went
to
Chicago as a post-doc, financed partly through Al Harberger's Latin
America workshop.
year as post-doc
I
It
was
went
the best university that
to the
Money Workshop,
made me an
My
offer.
first
Harberger's Latin American
workshop, the trade workshop, Milton Friedman's money course, and no doubt
much else.
That was also the year
I
met Rudi Dornbusch and Jacob
other outstanding students, including
combine MIT's
O:
Mike Mussa.
Frenkel,
Chicago enabled
and
me
to
with the policy relevance that Milton Friedman typified.
analytics
MIT was more in theory mode?
That was the impression
I
had
at the time.
I
remember a discussion
the faculty during the student disturbances at Harvard in 1968
"we know
a lot of economics, but
And Chicago
then
was
we
don't
extraordinary group of students.
I
when
know much about
the perfect antidote for this.
at
I
MIT with
said that
the economy."
Plus Chicago too had an
taught micro with Harberger and later taught
macro.
But as
at
I
reflect
on the question,
I
realize
I
must have been thinking
MIT, rather than what was happening there in the
was when Franco Modigliani and
his students
late 1960s.
of
what
After
all,
I
did
that
were working on the FRB-MIT-
Perm macromodel, and Bob Solow was
tractable analytic
models
the devotee
How central was Milton Friedman in all of this?
To
the macro? Absolutely central.
workshop. In those days
run,
it
was
O: But did
But, as
it
It
was
his
regretted that they did not have people from another
us.
Bob Gordon
who would
an
be?
It
in particular. Later,
was
all
right for
assistant professor, although
change the way you did macro? The
I
I
decided that
them
to
if
pursue a
benefited in the long
way you thought about macro?
of topics?
did have a long-run impact.
Phil Cooper, an
MIT
his thesis committee,
I
started
fellow-student,
Chicago Business School.
O:
Macro was the money workshop.
at times difficult.
Your choice
It
I
few of
Chicago wasn't Chicago,
particular line.
of using small
to get to the essence of a problem.
O:
tradition except for a
-par excellence
I
working then on monetary
who became an
also talked a lot to
Assistant Professor at the
Rudi Dombusch, and served on
and wrote a few papers with Jacob
You went back to MIT
in 1973?
rules with
Frenkel.
During the time
was
I
at
Chicago
Hebrew
University.
And we had
When
went back
to
I
interesting
Hebrew
The
MIT
had taken a
I
month
sabbatical at the
very seriously thought about Uving in
in the fall of '73,
two year interlude on
six
way
the
I
thought that
Israel.
might be an
it
and teaching
to living in Israel
at the
University.
first
course
I
when
co-taught
I
got back to
That was intimidating.
with Paul Samuelson.
chalk and explaining things better than me.
MIT was monetary economics
He would
Then,
1
insist
on taking the
sort of eased into the role
with which you are familiar. You came in 1973, right?
O: Right.
.
.
.
And
73.
gradually
I
became a decent
teacher.
I
taught the introductory macro,
got a lot of students over the course of time.
Coming from Chicago where
money workshop was
money workshop
so central,
I
built
Modigliani was the star attraction.
persuaded
my
I
up
the
loved advising on theses.
colleagues to bring Rudi Dornbusch to MIT.
Rochester and then went back to Chicago.
interested in the real world.
Very pure.
within a few months of coming to MIT.
made
a
huge
difference.
So
I
had
at
terrific
He was
He
Our
MIT.
very analytic.
wrote his
'^
Franco
Then
He had
in 75,
and
Not very
an
ideal setup.
article
that also
elder colleagues, terrific students,
great contemporary colleague in Rudi. Probably
I
taught at
overshooting"
collaboration grew,
the
and a
O: Did Israel recede as an option?
We
always maintained a close contact, and took several sabbaticals there.
we made up
after
At
back.
came
I
live in the States,
around 1975,
more than once every two weeks
close to changing our
or so...
But
we
didn't look
we
never really
minds because MIT was such a wonderful place
And because we liked Boston. And
be.
O:
least not
our mind to
But
to
our kids were growing up
When did you shift towards more applied topics?
should have mentioned that one of the things that got
economics, peculiarly, was that
Dag Hammarskjold was an
in high school.
Dag Hammarskjold was
in the then-Belgian
Congo, right next door.
was
world and
world.
to use
I
my
parents had brought
realized that economics
what
I
had learned. That
me up
economist.
When
I
killed
knew he had done good
in the
to believe
I
should do good in the
would help you do good. So
factor
interested in
man. Then he was
this great
I
me
was probably
there
I
always wanted
and moved
me
over
the course of time.
My
first really
spent a
month
intense applied
there in 1979.
work was when
They gave
me
I
visited the
Bank of
Israel
and
a lot of applied questions, since they
were suffering from high
George Shultz asked
economy.
I
had
me
in the
My
opportunity came in 1983
when
an advisory group he was creating on the
Israeli
inflation.
join
real
meantime become somewhat
of
an American expert on
the Israeli economy.
That was
It's
when
I
got into the policy game.
It
was
a very fortunate introduction.
extremely unusual to have the Secretary of State take some young guy he
doesn't
role.
know and
Herb
economy.
Stein
On
him have an
active
were appointed as George Shultz's advisers on the
Israeli
appoint him as an adviser, and then
and
I
the occasions
Herb and
George Shultz's authority behind
believes this."
As a
us.
I
let
traveled to Israel,
And we
we
essentially
had
could say, "The Secretary of State
professor, that didn't especially impress me. But
when you
say "the Secretary of State believes" to a government that depends on the United
States,
they are not listening only to the economics.
Was
the shift to
moved
in a similar
O:
Well, there were
more applied
topics in the air in the 1980s
?
Rudi Dornbusch
way at the same time.
all
those high inflations around, and we'd studied and taught
about them. There were countless conferences on what to do about inflation and
that
seemed
to
working with.
be the general policy problem of most of the countries
Also, foreign travel
was
exciting.
I
went
to
we were
Japan in 1981,
together with Ben Friedman and Jeff Sachs, on a trip organized by Ezra Vogel of
Harvard.
I
had never been
to the East.
There was
this incredibly exciting
economy, Japan, which was doing the most amazing things, growing by leaps
and bounds.
It
was
these opportunities
exciting.
So
I
can't quite explain
came along and they were
my
transition, except that
interesting.
I
guess
it
was
a
combination of being interested in the real world, wanting to be useful, being
able to travel,
and being given interesting problems.
O: That's the right transition to the next stage: the World Bank.
The World Bank was another opportunity
very happy to take the
O:
I
to be in the policy world,
and so
I
was
offer.
What did you know about development at the time?
had studied development and taken development economics
fields in the
MIT
generals.
And on
the
macro
side,
I
did
know
as one of
my
the economies of
developing countries. Also, at that time, the main issues were stabilization and
the debt
crisis,
and I knew a
At the World Bank,
I
lot
about them.
got into structural adjustment
visited China, visited India for the first time.
I
and associated
issues.
I
spent ten days in China and met
Zhou Ziang, then the
impressed by
premier, about six months before
how much
he
knew about western
Tiananmen Square.
He
economics.
told
was
I
me that my
views differed from those of Milton Friedman and from those of Lawrence Klein.
I
couldn't imagine that the Prime Minister
was. Visiting India
I
was gripped by
I
grew up
life,
I
living
also
the
was
to
town
Africans.
understand a
World Bank
is
these matters, but he
And that problem hasn't left me.
the problem of development.
among
all
also a wonderful experience.
in a very small
began
was studying
in
Northern Rhodesia for the
first
me
So the development issue was with
lot
both about the
way
13 years of
all
my
the time.
organizations work, because
an unusually complex organization, and also about the
problems confronting the world.
And
so
I
left
with a
much
better idea of
what
mattered and what needed to be done.
You
O:
It
was
stayed at the World Bank for two years?
originally a two-year
term and
it
did think about staying, and giving up
ready to give up
MIT.
It
MIT
was hard
to myself,
what
tenure,
and
readjusting.
difference does
I
it
ended up being two and a
my MIT
tenure.
for family reasons,
we
half years.
But because
I
I
was not
decided to go back to
remember going to theory seminars and saying
make whether
this
should anyone care about that theorem and so
guy
forth.
is
right or wrong,
But
I
why
did somewhat
readjust.
I
was obviously more
my involvement with Israel.
my
tried
hand
I
interested in the policy side of things.
began writing a column
at writing occasional
columns
interested in both international problems
for
for
an
Italian
I
continued
newspaper.
American newspapers.
and American problems but
I
was
I
became
I
tagged as an international expert more than a macro expert.
When
but
I
got back everyone thought
would
revolutionize development at MIT,
The younger generation, which came not so long
didn't.
I
I
after,
including
Abhijit Banerjee, probably did.
Do you
O:
think
we have
today the macro tools
we need
understand the
to
world?
The quantity theory goes a very long way
in dealing with inflation.
And
the
intertemporal budget constraint, and the equation for debt dynamics, take you
further along.
of
guys
who
. .
Td say
the political
try to get policies
This became clear to
me
economy
the
were
work
exciting,
of Michael
and
I
much
done and the question
is
harder. There's a
how they
get
bunch
them done.
even before the World Bank, when, in 1985,
involved in the implementation of the
was
is
Bruno and colleagues. Discussions about how
But
was
That stabilization
Israeli stabilization.
learned a tremendous amount.
I
I
to
learned even
do
it
more
watching the administrative and poHtical
had
to
be fought in making
program work.
the
O:
battles that
How much does it matter at those critical moments to have people with clear
minds?
Oh!
It
matters entirely.
politicians wouldn't.
about.
Some
These guys
of the fights
okay we've done
If
The Bruno team understood what
it
it
worked
as well.
So, yes,
it
were very vigorous;
politicians
now so let's open up for business
central
way
in a
fight
always think "Well
again in the same old w^ay."
bank governor soon
probably would not have worked.
matters to have people
was doing
knew what to fight about and what not to
you hadn't had Bruno appointed
stabilization,
it
It
certainly
after
the
would not have
who understand the environment in which they
are working.
O:
I
think
we
are
was not enough?
coming
to the
IMF.
Being chairman of the
MIT department
Being chairman of
MIT was
only partly inspiring.
description of the role of the
Dean
faculty as the fire hydrant
to the dog.
is
an academic
at
It
common.
academic
on Middle East peace during
initiatives
was
And
for
then
I
I
fear
institutions
I
I
my
but
to the
it
had
I
did a
lot of
which looked very prescient
work on
until recently.
much influence in practice.
World Bank
I
had a good idea
I
of
was ready
what
these
Having studied and taught macro and about macro
was probably
lots of
1990-93.
took to that job like a duck to water.
in the
were about.
stabilization,
Having
has not had
joined the IMF.
Having been
it.
it
that,
is
quite involved in various academic /quasi-
the economics of Middle East peace,
But unfortunately
dean
institution: the
wasn't quite like
certain elements in
I
You know Alfred Kahn's
students
better suited for the
all
IMF than
over the Fund, and in
for the
many
World Bank.
of the
member
country governments, helped.
Having Larry Summers
as Undersecretary of
Treasury certainly helped, since
we were
just a terrific place to
friends.
It
was
work.
I
had an enormously
take to
critic
me irutially.
of the
arrived.
It
gifted boss in Michel
took a while
IMF when
I
arrived.
till
I
Camdessus,
we hit it off.
may
I
who however
think he thought of
well have criticized the
IMF
did not
me
as a
before
I
But within about a year or two our relationship was a very good one.
Within a few months of
my arriving, we had the Mexico crisis, which was a
learning experience for everyone, including the
O:
Was this because the mechanisms
Well,
it
was a
different sort of crisis,
US treasury.
of the crisis
and the
were
first
it
couldn't.
It is
much
different?
economic
administration. The U.S. tried to handle the crisis
that
on
its
crisis for
The US
dealing with countries in
As you know,
harder for one country to impose conditions on
crisis,
It
O:
I
was
set off
was.
an end. But he had seen
Was
IMF had
its
a
members
sign
team and a way
up
of
crisis.
was subsequently
by massive
including from Michel Camdessus.
the entire crisis than
to
also realized that the
the Mexican crisis
of the 21st century.
the Clinton
own, and then realized
another than for an international organization to have one of
to those conditions.
good
there a sense that
I
called the first financial crisis
capital flows.
He was
so
I
much
thought western civilization as
this particular
you were
all
learned a lot in that
calmer throughout
we knew
it
coming
play before.
flying without a parachute, that this crisis
was more complicated than you understood?
Yes.
Events would happen.
You knew
realizing
background.
it
There are 47 factors in the
implies can be quite intense.
The key
Always.
to
managing a
matters.
necessarily going to be
I
why they issued
would be very
devaluation was less
making the devaluation less likely
Fortunately the Mexican
the m.arket within six months.
1995, but that
seemed
and worse.
And
there
didn't prevent
-
and
it
was very
that
a signal
There was another
were days
I
felt
in
November
few months the Mexican
the crisis
crisis.
costly.
period in
jittery
for a
that
Mexico was back
would
And
had ever happened because
just get
worse
when Asian markets
For instance, there was a day in January 1995
most insane things
great shape.
it
relatively quickly.
tanked as a result of contagion from the Mexican
of the
was
The problem was
right...
was soon overcome. Nonetheless,
chaotic.
game theory
costly for Mexico, therefore implying that a
was over
crisis
events in
tessobonos: because that
That was quite
likely.
you hadn't thought was
You could understand
critical.
understand fully
that a devaluation
crisis
out which of
crisis is to figure
In every crisis something takes prominence that
terms.
discover about tessobonos.
they existed. But the difference between knowing something and
what
them really
You would suddenly
I
I
thought
this is
one
thought Asia was in
O: Did you have the sense that you understood
in the
I
at least the basics?
For example,
how
severely the
Mexican or the Russian or the Asian crisis?
thought
I
did; possibly
financial sector
had been
didn't initially understand just
I
hit.
Initially, in
an old-fashioned balance of payments
trouble.
We knew the
way. But
in the
would be
almost
all
Asian
Thailand, the Asian crisis looked like
crisis.
government was going
crisis,
I
don't think
to bail out the banks.
I
We knev^ the banks
to
have
initially
to bail
were
in
deep
them out
in
some
appreciated just
Financial system weaknesses
most of the
critics.
The
I
central in
couldn't get quite as excited about moral hazard as
issue
was prominent
in the case of Mexico.
important to help Mexico come back to economic health quickly.
who had
terrific hit.
why
were
it
the crises of the 1990s, except Brazil.
In dealing with the crises,
see
how costly
And
invested in Mexico, except for the tessobono holders,
Given
that,
and given the contagion
in so
many
But
it
was
everyone
had taken
countries,
I
a
couldn't
people thought investors believed they would always be bailed out in
future crises. So
I
couldn't figure out
why so many
people argued that investors
hadn't learned their lesson about the dangers of investing in emerging markets
from
this crisis.
I still
believe that today.
O:
What else did you
The importance
away from the Mexican crisis?
government and having very good
of having a coherent
technocrats - Mexico
steadiness,
take
had them, but many countries
and the steadiness
don't.
of the team, with lots of
President Zedillo's
American support
course helping them stay steady, was very very important.
granted at the time, because the team I'd worked with in
previous
crisis
experience,
was
Israel,
But that
also very steady.
I
is
of
took that for
which was
not a
my
common
feature.
Following the Mexico
what
to
do
crisis,
short term borrowing.
don't think
I
I
knew
of
Seemed
payment
to
internalized fully
that
was
We
0:Why?
But
I
statistics
and transparency
suspect the main lesson
deficits of 8 percent of
how dangerous
I
took
(laughing).
the fixed exchange rate system
the proximate cause of the problem.
crisis,
I
GDP financed by
me a good lesson to have learned
system was a standing invitation to a
that stage.
focused on
financial sector.
away was: Don't run balance
was.
got into the whole architecture discussion and
to prevent future crises.
and more macro and on the
I
we
don't think
I
But that such a
internalized fully at
All the Asians
were doing well with more or
What I hadn't
they could adjust in time.
of a firm peg.
been
in place, the
financial
with
this
If
it,
you
really
more
peg the exchange
I
was
the
more
costly
I
from
to depart
it is
still
it
something
that,
O:
rate,
it
me
and
and the
economy
entire structure of the
The longer you
stay
Argentina suffered from
the political
economy
of strong
much you could do
a while to figure that out
struck by the Israeli experience,
thought
I
the political
but there wasn't
crisis,
took
rates,
then the longer the peg has
this system.
knew how dangerous
One reason
at that stage.
adjusted
was
system depend on the continuance of the peg.
pegs was by the time of the Argentine
it
pegged
figured out
the entire economic policy
problem, in spades.
about
less
is
where they pegged the
because
rate,
but
a few times, then began a crawl, and eventually floated; Poland did
similar.
But
Israel
whereas the Mexicans
had enough
control over capital flows to
manage
didn't.
What about the later crises?
The Asian
States,
followed by the Russian
and then the
frightened.
Brazil
crisis,
was
crisis,
the
crisis in the
stabilizing, there
till
March
was an almost
1999,
at times
-
it
became
clear that
physical pressure hanging over us.
once read an account of some aspect of the Korean
remember that event
when
United
and
Brazilian crisis, certainly kept us busy,
From about October 1997
couldn't fully
LTCM
and then
crisis,
realized that
and wondered why
I
I
was because we were
dealing simultaneously with the Indonesian
same
crisis,
which was
at
its
height at the
time.
The Russian
was
crisis
gathering, especially
be done to stop the
particularly
It
crisis
was
saw
from May 1998, but there was nothing
from happening. The
the attempted debt restructuring in July 1998.
guaranteed.
We
dramatic.
just a matter of
how
last
the storm clouds
that in the
hope was the IMF loan plus
When that failed,
it
end could
the collapse
was
would happen, and what
the
consequences would be for Russia and the rest of the world.
Global capital markets were hit very hard after the Russian devaluation and debt
default in
debt
August 1998, and
crisis
was
in
spreading
September
it
seemed
industrialized
to
that the
country
emerging market
markets.
financial
Fortunately the Fed acted resolutely by cutting interest rates in October 1998.
was followed
seemed
a bit later
by the ECB, and a few months
later the global crisis
to be over.
Of course, we did much more than deal with
crises at the
IMF.
I
during the transition process of the former Soviet-bloc economies, and
helped those countries a
in the headlines,
Jordan.
It
where
lot.
I
And
was
I
there
think
we
then there were other economies that were not
thought
we made
a positive difference, for instance
So
my
time at the
enough
fortunate
IMF was
to
historical interest,
really
an absolutely fabulous experience.
I
was
be at the center of a financial storm in a period of immense
with highly talented colleagues.
was
It
a great privilege to be
in that position at that time.
O:
I
On to your most recent move, you joining Citigroup
decided to leave the Fund at an age
debated long and hard, very hard,
institution, or
institution.
I
decided
I
something
at
which
I
That's
a benefit.
how
attractive.
Working
I
decided.
Bob Rubin,
would
could
still
to
work
at
and
to
sit
have another
home,
on boards
for
act as
Jeff Shafer,
which
in the private sector
an economic
my
is
my hand at
previous experience
it
interested me.
the alternatives, Citigroup looked the
and other colleagues
I
- or joining a financial
never been in a private sector and
And among
career.
an academic or research
like to join a financial institution, to try
might be good, and
I'd
I
among going
becoming an independent -
adviser, take part in conferences
would be
when
I
knew, were
very interesting. Our team
is
as
most
there.
good
as
you
are
going to find anywhere. The challenges are intellectually as tough as you are
going to find anywhere. The organizational problems in an organization of
280,000 people are
more severe than you
are going to find almost anywhere.
And
I
am. able to continue to
do economics because among other assignments,
the head of the country risk committee.
the guys are doing finance,
what
is
human
interactions all
intellectually very exciting,
I
Is
US and
am
think about finance, because a lot of
we
think about the macro because
going to happen in the
fascinating
O:
1
I
I
other economies
around the
all
So
are talking about
the time. There are
it is
a very exciting,
try to dismiss
an argument by
place.
life.
having been an academic an enormous plus or minus?
used to say in the IMF,
saying that
it
when someone would
was academic, "You mean
from the
the conclusions follow
assumptions and the arguments are logical?"
At the IMF
my
background was probably an
more important, and
my MIT
career.
It is
macroeconomist.
trading.
Some
fortunately
of
It
I
do have a
immensely useful
to
ideal
Here the finance side
is
from various stages
of
lot of finance
have the
probably doesn't matter that
them are very good
fit.
at trading,
don't have a macroeconomic framework in mind.
intellectual
much
sniarts.
We
can have good conversations, and
we
for the guys
who
of a
are
even though they probably
What
they have
They probably do have some framework but
and
framework
it is
is
experience,
not the one
probably educate each other.
I
have.
But
I
do and they don't think Hke
and they are
better at
what
O: Are there weaknesses of being an academic in a place like that?
Do we
think
don't think like they
they do, and
am probably better at what
caricature
academic
is
would be
that
that
we
dither.
A
possible weakness of being an
I
don't think
to
make
decisions even
most academics would be
problem when put in a situation where decisions have
didn't like
making
same
IMF.
O:
do.
you don't understand you have
you don't know everything. But
to this
I
do,
Do we see both sides too much? Are we a bit slow?
too much.
The
I
I
at the
How
decisions, that isn't
At the end
often did
you
of meeting
find
you had
to be
made.
where they would end up.
you had to make a
to
make
decision.
It
when
subject
If
they
was
the
So you
did.
much
less
a decision based on
information than you'd have wanted?
much
of the time. That's almost the definition of a
In a
crisis,
you
find yourself saying,
look for the d or the
many
people's lives
e.
we
have
to
b...
or
But things are collapsing now.
and well-being
situation has to be saved in
to bailouts, but in the
choose a or
will
some way, you
c.
crisis.
In a
crisis
You would always
And
if
they collapse,
be even more badly damaged.
The
and you
object
object to moral hazard
end you ask what's the best among several
difficult
You would
choices.
few more days or weeks
like a
about
to think
it
but you
don't have that time.
It's
same here
the
are not sure of
One
of the
Very
fallacy
what
many
rational,
commit
in the private sector.
strengths of
If I
of:
out
when you
happening, for you are never sure; you have to take
committed to
the fallacy
many
is
You cannot sit something
Bob Rubin
is
that
he
is totally
money
yesterday
of us are inclined to commit.
Of
I
calm about
that.
That means he does not
probabilistic thinking.
lost
bets.
made
course,
a mistake yesterday.
if
you
lose
A
money every
day for a year you probably made a mistake.
O: Back to academic economics.
I
ami very
happy
the field seems to
recognize, or at least
was
is
way
come back
to dealing with a
trying to deal with a world that
a long period during
about the
How do you see the state of macro today?
the world
I
world
to
do about
it.
Macroeconomics, because
which arguments were more about methodology than
worked
- the rational expectations revolution or the
That tension
we
just
is
a useful
is
reflected
in
know
our book Lectures in
allowed in those somewhat {laughing) inconsistent
chapters in the end of the book.
There
can
can recognize. There
equilibrium revolution - seemed set to conquer the world and you didn't
what
I
I
was very happy
macroeconomics.
to
have them in the book.
I
see
two evolutions today. One
lot of really relevant
than
it
years,
There
also
is
much more."
think that
I
AER
the
is
bunch
is
of researchers
split
split is still evident,
today
in our use of data. For
many
think
is
we
should be able
to
happening and we are learning a
lot
available
me
very happy,
between freshwater
convergence
very healthy for the profession.
likewise, even the JPE,
much
I
is
also clearly
pick
and find myself even
if
vs.
up
the
And
I
ami glad that
all
makes a
this
happened.
Many
Summers prominently among them, and many
O.
:
The next question
that you've had.
When I had
was
related.
Are there big
to deal
typically a
is
Tell
worked on something.
that
I
I
QJE
I
saltwater
frequently,
think
we
are
is
really
way better
off.
Larry
credit,
others at the National Bureau.
us about macro seen from the various seats
we
are not
was more impressed by
was useful than by
don't
the
not reading the articles
people get the
holes, big issues that
with a problem,
model
So
difference."
is
under way.
then at least interested in the conclusions and saying "Gee, this
interesting. Gee, this really
who do a
better
I
The second, which makes
beginning of the end of the great
And
a
much progress
Well, finally this
from these large databases.
economics. While the
is
we now have
said "with the data
understand
that there
and very good work, which
has ever been.
we
is
know what the
the fact that
working on?
the fact that there
nobody had ever
big holes are. Are
we working on
The
the right issues?
right issues in
macro are the ones about what determines
long-term growth, what determines productivity growth, what determines
some economies have
very intensely, and
before,
Let
me
that
I
is
1
these structural problems.
and how
to
make
take the risk of saying something that
we
always makes
raore or less
know
I
Forgetting political
The hard
working on
part, as
I
it
said
things happen.
cringe at
the policies that
me nervous, but now I've said
O: Including Africa?
are certainly
think with considerable insight.
the political economy,
think
We
why
when
I
hear
it:
Which
would work. Saying
is
that
it.
economy
issues,
we know what should
be done?
You're
right.
I
am
less
convinced of that for Africa than
have to ask myself why.
underestimated
creation,
of
to be
to
human
done on two
am
for Asia.
We
capital.
things:
Then
I
have
human capital
closely correlated issue of the creation of institutions supportive
activity
working on them
don't expect
comes down
how much work needs
and the
economic
It
I
is
and growth. So those
certainly not right.
some blinding
would work on x, y and
z,
revelation to
issues are there. But to say
Everybody
emerge
we could all do
is
working on them.
that will say that,
things much,
nobody
if
much better.
So
is
1
only people
O:
You
just focused
on
the long run, not
the Lucas argument that
understand
I
think
we
it
is less
it
on the short run
important?
at
all.
Are you buying
Or do you think we
actually
well enough?
are in
somewhat
of the Lucas argument.
One
better shape
is:
on the short-run. There are two aspects
In the long run growth
is all
that matters. That's
Adam Smith.
is
why
people worked on growth theory for so long. The other proposition
is
that
consumer surplus
is
five
something that has been understood since the days of
recessions don't really matter because the loss of
decimal places down. That strikes
w^elfare function.
growth problems
So that
aside,
say "well, you need to
prosperity so
economy
O:
One
I
again.
last
can use
is
tell
me as a problem with the calculation or in the
not what leads
we know
a lot of
me how
fiscal
That
me
to focus
on growth.
It's that,
what to do on the macro end. You may
to get fiscal
budgets balanced
at times of
policy actively in recessions." Well that's political
And there it's harder.
question here.
You can answer
it if
you want. Advice
to
young
researchers.
It is critical
to get yourself the right set of tools
O: You used to say this
when I was
a student.
when you
are young.
You haven't changed your mind.
I
haven't changed
my mind
profession, there are people
I
on
this topic in the least.
know who
you need
you look
are extremely gifted, but
their lives apologizing for not being able to
like the late Charlie Kindleberger,
If
manage
do econometrics or
to
surmount
to get yourself the self-confidence of
who spend
algebra.
Some
that.
at our
all
Some,
don't.
knowing you can handle
And
these
techniques, and can operate at a fully professional level.
Once you've got
that,
and important -
potentially important.
then you need to find a problem that
I've
how often friends who worked on things I
to
have
hit a jackpot.
One
gas pipelines in Canada.
though he was
interested.
Once you've done
it
both interesting
been surprised over the years by
didn't think mattered, later turned out
of
my MIT
graduate student friends wrote a thesis on
It
seemed
to
me
as totally lacking in interest,
But his ship came home in 1973.
believe your topic has the potential to be important at
should certainly find
is
And
some
so,
time.
even
you need
to
And you
interesting.
that once,
it
becomes
problems as you do more research.
ti836
ri28
easier
and
easier to find interesting
Date Due
Lib-26-67
MIT LIBRARIES
3 9080 02618 3738