Rogoff: What is important is that the slowdown is simultaneously taking place in all the major industrial economies of the world—in Europe, Japan, and the United States—and this is placing a great strain on other economies. If growth were slowing only in the United States, other countries could export to Europe and Japan. But this is not what is happening. Thus, it is more important than ever that industrial country policymakers adopt a global vision of the impact of their domestic policies and not simply look inward.
Rogoff: Monetary policies are certainly very important as a first, flexible line of defense. But the scope for fiscal policy is somewhat limited, especially when we face such an uncertain environment. Fiscal policy is a fairly inflexible tool. Once in place, it creates its own political dynamic that is very difficult to reverse, whereas monetary policy can turn on a dime. You can lower interest rates 2 percent over the course of a couple months and then raise them 3 percent over the course of the next couple of months. So, in the current environment, monetary policy is the most important, and fiscal policy less so. It’s also important to put structural reforms in place—for example, making labor markets more flexible in Europe and addressing the bad loan problem in Japan.
Rogoff: The Research Department has many roles to play. The IMF’s surveillance role is very important and probably has become even more important with the global downturn. I don’t want to do anything that takes away from that effort. Nonetheless, a key goal of mine is to strengthen and reenergize our policy research through encouragement and guidance. I also think it is important that the department be visible externally. It strengthens the IMF’s credibility in the outside world by having a strong research presence. I don’t necessarily mean just in the narrow sense of academic journals but more broadly in the policy world. To this end, I am working very closely with management and our Executive Directors—representing our 183 member countries—to determine what issues we should be working on.
Rogoff: I think it has greater implications for surveillance of financial markets, which will be handled, in the first instance, by the International Capital Markets Department. In terms of research, we will continue to conduct research on financial markets, undoubtedly at times jointly with the International Capital Markets Department. After all, you can’t even think about the modern world without thinking about financial markets. Fortunately, we have very good relations with the International Capital Markets Department, and Gerd Häusler [its Director] and I get along very well. I find a lot of synergy in our approaches to things. There is also another major research center in the IMF—the IMF Institute—which is comparable in size to the Research Department and is conducting a lot of interesting work. We hope to expand our cooperation with the IMF Institute, which is under the leadership of Mohsin Khan. He and I worked together as colleagues at the IMF in 1982–83, and he has given me a lot of valuable advice during my transition back to the IMF.
Rogoff: We are a very small department, so it’s hard to cover everything. But poverty is extremely important, and, for that reason, we are organizing a poverty conference in March. We also have a number of projects under way dealing with problems in African countries such as the implications of commodity price fluctuations for exchange rate policy. I’m sure a lot of our other research will also have implications for the poorest countries in the world. We will want to keep our eye on macroeconomic developments and other areas where the IMF is likely to have the most influence, but clearly, the World Bank, with its poverty mandate, will be the central place for more microeconomically oriented poverty research.
Rogoff: I have worked on a broad range of issues—exchange rates, monetary policy, and determinants of the current account. But if I had to pick one, I would say my work in the 1980s on international debt issues and international financial architecture was the most relevant. The paper I wrote with Jeremy Bulow in 1988, which ran in IMF Staff Papers, was probably the first one to identify the moral hazard problem in international lending that creditor country governments face.
My most cited paper is undoubtedly the one I wrote in 1983 at the IMF on the importance of having an independent central bank to maintain low inflation and of having a central bank governing body that is very conservative on inflation, maybe more so than society on average. It is sometimes nicknamed my “conservative central banker” paper.
My early work on exchange rates focused mainly on industrial country exchange rates. When I was at the U.S. Federal Reserve Board in Washington at the beginning of the 1980s, I wrote what was then a radical paper showing that it was very difficult not only to predict exchange rates but also to explain why they went up or down after the fact. That paper—which Paul Krugman described as an anti–neutron bomb because it destroyed the models but not the authors who created them—was written when the floating experience was only seven or eight years old, but it pretty much remains true today. Since that time, I have also done work on developing country exchange rates, most notably my 1995 paper with Maurice Obstfeld entitled “The Mirage of Fixed Exchange Rates,” which cautioned sharply against relying on a fixed exchange rate as a substitute for macroeconomic adjustment.
Rogoff: Yes and no. Certainly the paper was very influential in making people realize how an agent intending to be a good samaritan can sometimes get drawn into negotiations and be exploited. I was motivated by the fact that international financial institution loans to highly indebted countries expanded sharply during the debt crisis of the 1980s, while private sector lending sharply contracted.
But I have been surprised since then by how effectively the international financial institutions have been able to enforce their seniority over the years, despite running up very large positions against some of the client countries. During the Asian crisis, there was a lot of talk about moral hazard, but those loans have been largely repaid, and the IMF’s position today is highly liquid. Moral hazard is undoubtedly an issue that we must think about, but it is far more subtle than most critics of international financial institution lending seem to appreciate.
Rogoff: It is very important for graduate students to become familiar with recent technical developments and stay up-to-date in the field. You have a lifetime to learn the policy side of things, and if you’re interested, you will. As for the technical side of economics, if you don’t become engaged when you’re in graduate school, you probably never will. I am not saying that one stops learning after graduate school; I myself have undoubtedly learned a lot more since graduate school than I ever did in graduate school. It is critical, however, to be able to read papers in the field, even highly technical ones. It is also important to expand your horizons and maintain your creativity. If you look at the backgrounds of policy advisors, they are sometimes very practical and sometimes surprisingly esoteric.
Rogoff: It doesn’t do much good to be able to see 10 moves ahead if you’re not able to see the right move 1 move ahead. But chess is probably more like policy-making than academics. As an academic, if you say 10 crazy things and 1 thing that is really brilliant and creative, you can have a reasonable scorecard at the end. In a chess tournament you would have 1 win and 10 losses. So chess is much more about consistency within a game and across a tournament, and academics is much more about your wildest, most creative moments.
Rogoff: Often, being sensible can lead you to the wrong answer. As policymakers, we try to be levelheaded and sensible, and sometimes that narrows our thinking too much. You really need to be able to think “outside of the box.” Over time, it is the crazy ideas that often prove right; that said, it is a real art and skill to be able to guess which crazy ideas.
Rogoff: There has been a remarkable convergence of thinking within my generation of macroeconomists. The whole debate about Keynesians versus monetarists and real business cyclists versus new Keynesians is a dead issue. There is much more of a modern synthesis, as represented, for example, in my 1996 book with Obstfeld, Foundations of International Macroeconomics, which is used by a wide range of people. I think that we were able to write a book like ours largely because many of the debates of the 1970s and 1980s had been somewhat resolved. One issue that was resolved probably more in favor of the Midwestern schools is that rational expectations are key; when making policy, you have to take into account how markets and prices will react. Another issue that was resolved very much in favor of the Keynesians is that you can’t think about a world without nominal price rigidities and wage rigidities.
For a long time, the real business cycle school—including [Robert] Lucas, [Ed] Prescott, [Tom] Sargent—rejected the idea that there were any nominal rigidities in the economies. Now all of them, Lucas included, have nominal rigidities in their models. With the emerging consensus (embodied in my book with Obstfeld and, for example, in Michael Woodford’s recent book), we might even see a reemergence of large-scale macro models, which were held back for many years by the disagreements about the basic building blocks. Now that there is more agreement about the building blocks, we can get ahead with work on building multi-country macroeconomic models that allow us to analyze global macroeconomic policy implications. This is certainly a topic the Research Department hopes to take on, though I admit development of such models can take many years.
Rogoff: I certainly have an unusual background—a career that spans from Bobby Fischer [former world chess champion] to Stanley Fischer. Being a chess player is much more like being an artist. It’s a bohemian life, and I could have gone that way. But I am happy I chose to pursue economics. Why did I give up chess? The reason was threefold: I wanted to do something more important with my life; I didn’t want to travel so much; and I didn’t think it was great for my social life. Then, of course, I became an academic economist, which seemed to share the same three faults. But I’m happy to be here in the IMF, because at least on the first count, I don’t have to worry about whether what I am doing is useful or not.
Rogoff: Less than you might imagine. One of the great strengths of the institution has been its stability and adaptiveness to the needs of the world and its members. My foremost impression when I was here in the early 1980s was the excellent and vibrant staff. It still is absolutely excellent and vibrant, and I think that is the core of what the IMF has to offer to the world. That said, I think the biggest, and most welcome, change has been the institution’s greater transparency and openness, which is critical for creative thinking.