Monday, February 3, 2014

Kenneth Rogoff holds the 14th L.K. Jha memorial lecture – “There is no protection against human nature.”

“Policy Debates in the Aftermath of the Financial Crisis” was the title of 14th L.K. Jha (a former governor of the Reserve Bank of India) memorial lecture, hosted by the the Reserve Bank of India.

Kenneth Rogoff gave this talk on December 17, 2013. He summarizes the current economic situation and gives some insights into today's hot economic topics. Here is a summary in Q&A form:

Can economists predict the future?

I agree, my question is stupid. The answer is obviously no. I was just looking for a question to place this nice quote:

“Whenever you see economists saying that they are absolutely sure about something, you can be absolutely sure that they don't know.”

Is the world suffering a lack of innovation?

We hear this very often. “The Internet hasn't contributed much in economic terms.”, “Since the industrial revolution, nothing revolutionary happened”, etc.

Kenneth Rogoff doesn't adhere to this suggestion.

“I am very skeptical that innovation has actually slowed [and should be responsible for today's low growth environment].”

“The idea that we run out of ideas is improbable.”

Should central banks worry about inflation?

Reading the financial press, you sometimes get the impression that we fear inflation more than death.

Kenneth Rogoff doesn't share this opinion. He says that we tend to overstate the impact of inflation on economic development. It might even have a negative impact, since inflation targeting can limit the flexibility of monetary policy.

“Our price indexes don't necessarily do a great job of measuring, over long periods, what really changed.”

“Inflation targeting [by central banks] became a little too much of a religion in advanced economies and a little bit too inflexible.”

Has the financial system become safer since the financial crisis?

Kenneth Rogoff says, financial reforms since the crisis have not been fundamental. With regards to the current state of the world economy, he warns about continuously high debt levels in the private and public sector and a still uncertain situation in Europe.

“They [financial regulators after 2008/09 the financial crisis] were not trying to redesign the system. They were not trying to revolutionize things.”

“It's [the European sovereign debt crisis] not over until it's over. It's still work in progress.”

A possible solution to achieve a more robust financial system would be a greater use of indexing of financial securities.

“We would have a much more robust financial system if we would have more indexing [of financial securities to inflation and other indexes].”

Can we predict monetary policy?

The question is, again, somewhat trivial and Kenneth gives the obvious answer – No, we can't. The reason is that central bankers are subject to extensive lobbying.

“It's hard to predict monetary policy. It helps some people and it hurts some people. So there's a lot of lobbying.”

How should countries stimulate their economies when growth is low?

First, central banks can't do everything, politicians must act. Second, they should focus on infrastructure investment because this is auspicious in the long term.

“Monetary policy [in Europe] has been very helpful to provide a bridge. But that bridge has to go somewhere.”

“If you are growing slowly and interest rates are really low, that's a good time to build your infrastructure.”

Does quantitative easing work?

The short answer is – We don't know yet.

“This [quantitative easing] is a very experimental policy.”

“It [quantitative easing] works great on my blackboard. But it is not exactly clear what happens [in reality], as we don't have enough experience.”

I liked the lecture. Kenneth Rogoff's talk is very clear and straightforward. You can review the event here.