“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.
