For the celebration of Alexander Swoboda upon his retirement
After listening to several of the presentations this morning, I was reminded that in my graduate economic studies at Harvard in the early 1950s I escaped any course in econometrics or mathematical economics – the last year that was possible for a PhD candidate. Times have changed. Today every central bank has a retinue of mathematically trained economists. When I became President of the Federal Reserve Bank of New York and then Fed Chairman, I had to worry about administrative budgets. Every few years there were requests for bigger, faster, and more expensive computers. A big part of the rationale was the demands of the economic staff for time to run more and more regressions. Today, computing power is much, much cheaper and faster, but I wonder how much the added regressions have contributed to a better monetary policy. In my view, there is a lot more to making monetary policy than economic theorizing and econometric equations. I think it is still true that the models all show a quicker and bigger response to any tightening of policy by the real economy than by any, even muted, response of prices. Taken at face value that rather restrains enthusiasm for restrictive policies of policy-makers, even though the longer term inflationary consequences are unfortunate. The fact is that basic economic understanding is important for central bankers, but so are other qualities – judgment, understanding of market (and political) moods and psychology, the ability to communicate and perhaps more important, to convey a sense of credibility. When Ben Bernanke was appointed Chairman of the Federal Reserve, there was much commentary on his long study and writings about the Great Depression, all relevant. I was even more impressed by the fact that he had been chairman of his local school board – always a difficult and often contentious position; good training for the Federal Reserve. My old friend, Henry Wallich, was perhaps the best (and certainly bestknown) economic scholar on the Fed Board when I was Chairman. Reflecting his personal and family experience in Germany in the 1920s, he, to put it mildly, was inflation-averse, and took every opportunity to cast his vote for tighter money through his fourteen years on the Board. He confided in me more than once that he felt the most important single qualification for a central bank was a
sense of conviction and – to use his own slang word – “guts,” defined as a willingness to tighten money, when the technical and economic analysis was ambiguous. Of course, central bankers, whether as highly trained as an economist as Henry was, or not, need to understand the basic lessons: the importance of money, the lags between action and reaction, the role of expectations, and much else. These days, there are ample opportunities to bring on to the central banking staff highly educated and talented economists to keep the policymakers informed. But not all economists are well equipped to understand and deal with the practicalities of markets and judgments about what is possible and what is not, and the learning process certainly works both ways. I happened to be present to hear newly installed Chairman Bernanke deliver a thoughtful “inaugural lecture” on what economics has contributed to central banking thinking, and the reverse, over the decades that the Federal Reserve has existed. That is precisely the subject matter of this panel. Not surprisingly, he pointed out some crucial lessons of economic analysis, but he also emphasized specifically how much the economics profession learned (or relearned) during the 1970s and 1980s about the importance of price stability as the sine qua non of successful monetary policy and a prerequisite for sustained growth. The man we are celebrating today, Alexander Swoboda, epitomizes the important school of economists that well understands the contributions – and the limitations – of economic analysis in approaching practical problems of financial and economic policy. That is why his writings, and for me his more informal reflections, have been so challenging and important. We were able to talk the same language, to evaluate what was going on amid all the turbulence of the real world, and to consider the pros and cons of what to do amid the inevitable uncertainties. In his leadership of the Graduate Institute of International and Development Studies here in Geneva he consistently and effectively helped bridge the gap between scholars and practitioners to the benefit of both. I am delighted to join in the celebration of those achievements today. I do so in the expectation that mere retirement from this place will by no means mark the end of either his intellectual contributions or his friendship with us all. I cannot fail to recognize the role that Manijeh – with her enthusiasm, her energy and good spirit – has played in Alexander’s life over the course of their long and loving marriage. We have had the benefit of sharing in the glow of that special relationship – long may it shine.