IMFS Working Lunch with Athanasios Orphanides
"The Forward Guidance Trap"

Book Presentation with Nouriel Roubini

„A few years ago everything was going up but now we’re going from boom to bust,“ economist Nouriel Roubini is convinced. In a book presentation on March 23, the professor emeritus of economics at New York University nicknamed Dr. Doom in the course of the Global Financial Crisis, outlined a series of medium to long-term potential challenges the world is facing – „megathreats“, the title of his book. With the current private and public debt levels reaching unprecedented levels, he warned that the „debt crisis may be the worst we’ve ver seen but it’s just one of the megathreats coming toward us“.

Among these megathreats, Roubini also includes deglobalization and protectionism. „There is less cooperation and more confrontation“, he said. In his view, the rising economic and geopolitical rivalry between China and its allies and the United States might lead to new cold war and could have severe repercussions in various respects. According to Roubini, governments will spend more on defense but also upgrading technological systems against cyberattacks will cost billions of dollars. Furthermore, the aging population in developed and also in emerging markets causes financial pressure. At the same time, restrictions on migration will accelerate wage inflation.

Roubini warned that the geopolitical tensions also impede action against another megathreat: the global climate change. „My view is we have to fight five wars, not one,“ Roubini concluded, lining up the so-called hot wars and the global climate change with new global pandemics, the end of globalization and the rising income and wealth in equality. „Because of this, you get a structurally higher budget deficit.“ In Roubini’s view, „this pulls a pressure on central banks to monetize“. He sees central banks in a trilemma between inflation, stagflation and financial instability.

Regarding another important development, the technological advances in AI machine learning, Roubini argued that this might lead to potential growth but there are also side effects as the AI affects jobs across many industries, destroying overall jobs and wages.

In sum, after a long period of Great Moderation, „now there is the era of stagflationary instability“, Roubini warned. Whether there is a way out of this situation, Axel Weber, President of the Center for Financial Studies, who moderated the event, wanted to know. „There are solutions but all have pros and cons,“ Roubini said. In view of the looming threats, „my book is a bit of a wake-up call.“

IMFS Working Lunch mit Joseph E. Gagnon
"25 Years of Unemployment in Advanced Economies: Lessons for Monetary Policy"

Central banks should raise their inflation target to 3 percent. This is the conclusion Joseph Gagnon, Senior Fellow with the Peterson Institute, draws from his research on the development of the unemployment rate and inflation. „I don’t think Americans would reject 3 percent inflation if that meant less unemployment“, Gagnon said during his IMFS Working Lunch on March 1.

In his paper, Gagnon analyzed the unemployment rate in advanced countries in the time span from 1997 to 2019, observing the shape of the Phillips curve. Based on his findings, he argues that even without a higher inflation target, central banks need to use a broader range of economic models and should verify their estimates of the natural rate of unemployment by running the economy hot from time to time in order to see nascent inflationary pressure before throttling back. „Central banks could have done better“, Gagnon said. The Federal Reserve System, along with other central banks, has adopted a dual mandate, pursuing the economic goals of price stability and maximum employment.

„For more than 25 years, central banks in advanced economies allowed unemployment to be higher than needed to keep inflation low, resulting in trillions of dollars of lost output.“ According to Gagnon, this error arose from an incorrect model of inflation combined with inflation targets that were too low. As Gagnon suggested, central banks should also place less faith in any one model and instead experiment occasionally to learn how fast economies can grow without high inflation.

Regarding the current situation with inflation rates rising, Gagnon expects inflation in Europe to come down faster than in the United States. In his opinion, it’s a puzzle why macroeconomists didn’t see inflation coming in the U.S. with the massive stimulus package of the Biden administration as a measure against the corona pandemics.

PIEE Working Paper 22-17
Joseph Gagnon and Madi Sarsenbayev
"25 years of excess unemployment in advanced economies: Lessons for monetary policy"

Book Presentation with John H. Cochrane
"The Fiscal Theory of the Price Level"

Slides of the presentation (PDF)