Understanding the works of Ken Rogoff

Minneapolis Fed  has a very useful publication called – Region. It is a quarterly publication. The one thing to look forward in this publication is interview of a leading economist. This interview is not like the usual interviews of economic views but is like a literature survey of the covered economists’ main works. 

I have not come across a better source where we get to know the main ideas of all prominent economists minus all the maths models etc. I had pointed to Christina Romer and David Romer’s interview. Here is a list of all the previous interviews. You can subscribe the magazine here

The recent edition has an interview of Ken Rogoff, one of the best macroeconomists we have. Rogoff offers plenty of insights on his research and issues to be resolved after this crisis. Rogoff has done path-breaking research in virtually everything under the sun.Each insight is worth seperate posts.

  • Exchange rate forecasting (where he says it is pretty random and cant be forecasted over short to medium term),
  • Exchange rate regimes (where he found countries that say they have floating exchange rates (de jure) in reality they don’t (de facto). Infact he also found that countries that say fixed actually have floating exchange rates as they have 2 exchange rates- one official which is fixed and other in black markets which is floating with latter being more important for policymaking.
  • Financial globalisation – Indirect benefits are very important to understand the importance of financial globalisation (I posted on the landmark paper here)
  • Financial crisis (He along with Carmen Reinhart has done some superb research on the subject where they see how various macroeconomic variables look in times of crisis; Here is their landmark paper – is this time different?; Urbanomics also has a nice summary)
  • Internal and external Debt (he calls it forgotten history of domestic debt)
  • Central banking (His paper set the tone for central bank independence and inflation targeting). He says Fed should remain what it is – a central bank and should not be given extra responsibilities:

There’s this incredible tendency to try to say that since the Fed does things really well, why don’t we have it do everything?

Unfortunately, people don’t realize that part of the reason the Fed does things really well is because it’s picked out a very clear theme, that it can be depoliticized to some extent. The Fed has a relatively small but elite staff that is highly professional, very flexible and dynamic. If all of a sudden you burden the Fed with many other responsibilities, you introduce a plethora of administrative problems. It’s a very different thing having a staff of 10,000 from having a staff of 2,000 or 3,000. It may sound the same, but it is absolutely not.

As the Fed is pushed to play a larger role in regulation, in particular, it is going to be harder to maintain its independence. If the Fed is going to be making decisions on individual banks, senators and representatives will call up and lobby shamelessly. It is not so easy to defray that.

Until 10 years ago, the governor of the central bank of China had almost 1 million employees; they’ve managed to divest some of them since. While we wouldn’t get up to there proportionately in our economy, if you listen to some of the bills in the Senate and the House, it’s almost as if they wish we could do that.

He points IMF and World Bank suffered from the same problem. They ended up doing many things and did not focus on their main activity. He then looks at UK example:

Let’s look at England, as a good example of what can go wrong. The Financial Services Authority was separated from the Bank of England when Tony Blair first came to power 10 years ago. The Northern Rock deposit run last summer makes this look like a fiasco. But what, really, is the problem with the FSA? The problem is that it is effectively run by lawyers and accountants, with too little access to good economic analysis. Now U.K. politicians are talking about bringing significant regulatory power back to the Bank of England. Some measure of recalibration may be appropriate, but the real issue is to improve the quality and depth of economic analysis at the FSA.

I think if you look carefully at the problems in the United States—what is wrong with the SEC? Why do we have to take powers from the SEC and other agencies and try to channel everything to the Fed? It really comes down to needing better economic analysis. Now, that is not going to be easy, because federal government pay grades are absurdly low. But it is a much better solution than overextending the Fed. 

He argues for more economists at FSA and SEC but I am not sure how could they have helped things. The entire policy ideas are based on rational economics theory and markets are anything but that. Fed has a team of sharpest economists but they all believed all was well and markets know the best.

  • IMF and crisis: He was a Chief Economist of IMF from 2001-03 and says IMF did warn US of the huge global imbalances that were ignored:

Of course, the United States has always been very open to criticism and letting people sort of punch at it. But I don’t think the United States has ever taken anything to heart in policy choices. There was a lot of criticism of the U.S. current account deficit during the early 2000s. Maury Obstfeld and I wrote a series of papers arguing that the global imbalances posed serious risk, particularly given the growing complexity of derivatives markets. We made this point in our very first paper, presented in the summer of 2000 at the well-known Kansas City Federal Reserve conference held each year in Jackson Hole, Wyoming. I followed through on this at an official level as chief economist at the IMF from 2001 to 2003, as did my successor Raghu Rajan.

Yet a sequence of Treasury secretaries and the Federal Reserve chairman just dismissed the concern. Alan Greenspan, following essentially exactly the same logic as in my work with Obstfeld, reached the conclusion that the U.S. current account deficit simply reflected greater financial globalization. Yet that was exactly the point of my earlier papers with Obstfeld; reasonably calibrated models suggested that the U.S. current account had become quantitatively too large, even taking into account growing financial globalization. (This was our “The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?” paper, also published in 2000.)

You have to remember that the financial services sector lobby is extremely powerful in the United States, not only in Congress but in the media. Unfortunately, officials have not always counterbalanced them in an effective way.

This is precisely the point I made above- economists and policymakers were not willing to listen. BIS economists raised the same issue. For Rogoff’s views on financial sector excesses see this as well.

  • Moral hazard: He says moral hazard is a very important issue as financial sector seems to have overgrown and deserved the punishment.

The financial services industry had been taking in 30 percent of corporate profits and 10 percent of wages despite representing only 8 percent of GDP (at its peak, and that is counting insurance). Why should a supposedly efficient financial system be soaking up so much of GDP? It is quite possible that a lot of what has happened to our overbloated financial system needed to happen anyway, albeit one would have expected the process to take five years instead of five days.

He then questions monetary policy and the perfect market models:

Macro and finance have been dominated by the perfect markets paradigm because it’s very convenient, and we got a lot of nice results and it’s been constructive. But I think the advocates of that approach have all too often argued, “Well, OK, we know markets aren’t perfect, but it’s hard to do better than this in a constructive way. Besides, whatever we’re missing maybe isn’t so important.”

But for many policy issues and especially for monetary policy, one cannot work only with models featuring perfect financial markets. Consider the fact that a lot of the inflation targeting literature employs models with perfect financial markets. So it’s not exactly amazing that scholars wedded to this approach find that there is never a good case for looking at housing prices, above and beyond their effects on output and inflation. Yet empirical researchers have long argued that there is considerable danger whenever asset price inflations are accompanied by sharp rises in indebtedness. The doctrinaire inflation targeters dismissed this perspective, but hopefully they are rethinking things now. This is another reason why optimal inflation targeting models are simply too fragile.

Fortunately, the financial crisis is going to stimulate a lot of further research seeking better practical monetary policy models. Happily, at the same time as the financial crisis has confronted us with fascinating new problems, it will encourage a lot of talented young students to go into economics research instead of the investment banking sector, where they might have gone until recently.

I hope so. All this is pretty much what Otmar Issing also pointed that inflation targeting central banks have real fancy economic models. Also read Wolfgang Munchau on the central bank models. I plan to write a more detailed post on the monetary policy models.

Excellent reading.

3 Responses to “Understanding the works of Ken Rogoff”

  1. Losing Weight…Yeah Right! » Blog Archive » What Would Andrew Jackson Do? | Ba Forex Says:

    […] Understanding the works of Ken Rogoff « Mostly Economics […]

  2. mcshalom Says:

    They Bail Out, We Opt Out.

    All of Our Economic Problems Find They Root in the Existence of Credit.

    Out of the $5,000,000,000,000 bail out money for the banks, that is $1,000 for every inhabitant of this planet, what is it exactly that WE, The People, got?

    If Your Bank Doesn’t Pay Back Its Credits, Why Should You Pay Yours? Or Else …

    If the Banks Get 0% Loans, How Come You Don’t?

    At the Same Time, Everyday, Some of Us Are Losing Our Home or Even Our Jobs.

    Credit is Mathematically Inept, Morally Unacceptable.

    They Bail Out, We Opt Out

    Opting Out Is Completely Anonymous.

    The Credit Free, Free Market Economy

    Is Both Dynamic on the Short Run & Stable on the Long Run, The Only Available Short Run Solution.

    I Am, Hence, Leading an Exit Out of Credit:

    Let me outline for you my proposed strategy:

    Preserve Your Belongings.

    The Property Title: Opt Out of Credit.

    The Credit Free Money: The Dinar-Shekel AKA The DaSh, Symbol: .

    Asset Transfer: The Right Grant Operation.

    A Specific Application of Employment Interest and Money.
    [A Tract Intended For my Fellows Economists].

    If Risk Free Interest Rates Are at 0.00% Doesn’t That Mean That Credit is Worthless?

    Since credit based currencies are managed by setting interest rates, on which all control has been lost, are they managed anymore?

    We Need, Hence, Cancel All Interest Bearing Debt and Abolish Interest Bearing Credit.

    In This Age of Turbulence The People Wants an Exit Out of Credit: An Adventure in a New World Economic Order.

    The other option would be to wait till most of the productive assets of the economy get physically destroyed either by war or by rust.

    It will be either awfully deadly or dramatically long.

    A price none of us can afford to pay.

    “The current crisis can be overcome only by developing a sense of common purpose. The alternative to a new international order is chaos.”

    – Henry A. Kissinger

    They Bail Out, Let’s Opt Out!

    If You Don’t Opt Out Now, Then When?

    Let me provide you with a link to my press release for my open letter to Chairman Ben S. Bernanke:

    Chairman Ben S. Bernanke, Quantitative [Ooops! I Meant Credit] Easing Can’t Work!

    Yours Sincerely,

    Shalom P. Hamou AKA ‘MC Shalom’
    Chief Economist – Master Conductor
    1 7 7 6 – Annuit Cœptis
    Tel: +972 54 441-7640

  3. Interview of Raghuram Rajan « Mostly Economics Says:

    […] Ken Rogoff […]

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