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Wednesday, May 02, 2012

Searching for Stanley Fischer

Recent rumors that Mark Carney, current head of Canada's central bank, is under consideration for the job of Governor of the Bank of England reminds me of an idea (and an article title) I had years ago but put on ice. 

One of the great under-explained phenomena in modern macroeconomics has been the success of the Israeli economy over the last ten or so years.   Despite small problems like the second Infitada, a whole bunch of wars in neighboring countries, and the collapse of the economy of their largest trading partner, the U.S., Israel has had strong growth rates, little inflation, falling and then steady unemployment, and maintained a strong currency over the last decade.

One of the key pieces of this puzzle is the policy of the Israeli Central Bank. (It should be noted that, while there have been street protests about the cost of living, they have only intermittently targeted the Bank, which has expressed sympathy with their concerns on several occasions).  In 2005, Israel appointed Stanley Fischer as the new Governor of the Central Bank.  Fischer's credentials were sterling.   One of the leading macroeconomists of his generation, he was a professor at M.I.T. (where, interestingly, he advised the theses of future luminaries like Ben Bernanke and Greg Mankiw).  He also served as Chief Economist of the World Bank and as Deputy Managing Director of the I.M.F.  He was seen as the perfect leader for the ICB, overqualified even, except for one thing.

Fischer wasn't Israeli.

This turned out not to be a problem for Israel, as the Law of Return allowed Fischer to acquire Israeli citizenship.   (This has become a joke among Israelis – an April fool’s day equivalent in the Jerusalem Post had Fischer taking the job of head of the central bank of Zambia, where he was born.)  And it has been a major success story. He’s been voted the world's best central banker on a number of occasions and Israel has seen incredible macroeconomic success despite a difficult external atmosphere. 

What the story suggests -- and what applications of relatively basic monetary economics second -- is that countries should consider and probably favor foreigners when selecting central bank chairmen.   When Ben Bernanke's term is up, the President should not limit himself to looking among domestic nationals for a replacement.  And, further, creating an international market for central bank chairs would be a smart form of aid, providing an ex ante method for avoiding financial and balance of payments crises, reducing the need for ex post support from institutions like IMF or the ECB.

Some thoughts supporting the idea below...

  • Most modern central banks are independent from the executive branch with some kind of lengthy tenure to create trust among investors that monetary policy will not be used to exploit fixed investments or to aid incumbent office holders.   As Alberto Alesina and Larry Summers famously showed, central bank independence produces lower inflation than political central banks.  Foreign central bankers may be considered even more independent of domestic political pressure than ordinary independent central bankers.
  • When an economy is faced with a particularly acute challenge, like the U.S. was in 2007, the relevant examples that provide guidance are likely to be foreign, as it’s unlikely that your economy just went through a similar crisis.  For instance, the U.S.’s banking crisis was similar to Sweden’s in the 1990s and probably more famously, Japan’s long-term crisis (on which Ben Bernanke expertise has been useful, although it may be more useful if the Fed’s policies were closer to his recommendations for Japan.)
  • As Matt Yglesias argues, there are likely substantial benefits from learning how to be a central banker on the job.  We might benefit from hiring someone who has seen first hand how financial institutions respond to central bank decisions.

  • While international governance of transitional countries has had an, er, a mediocre-to-poor record in recent years, the international community has been pretty good at running central banks.   For instance, central banks in Iraq and Bosnia, maintained stable currencies despite huge amounts of internal conflict and are considered among the greatest successes in the otherwise mixed record of late-20th and early 21st century state building.   This is something a foreigner can do. 

Appointing a foreigner to run your central bank may seem weird.  But it shouldn’t be.  The market for the people who become central bankers -- commercial bankers and economists – is international.   For other professions in which the government hires people from a truly international labor market, we see governments hiring foreigners.  For instance, the market for football coaches is international, and the current coach of the U.S. Men’s National Soccer team is German and one his predecessors is Serbian.   And that’s not just a product of our relative lack of interest (although it’s growing!) in the sport.  England has had Italian and Swedish managers, Portugal has had a Brazilian manager, Greece's national side was long managed by a German and so on.   And there is some precedent for doing this at lower levels inside central banks.  For instance, probably the most respected member of the Bank of England’s Monetary Policy Committee is Adam Posen, an American.   And the Fed can and does hire non-citizens, although it gives preference to citizens.

 Countries that take advantage of the international market for bankers and economists when hiring central bankers – both heads and important staffers -- would get substantial benefits.  But if all countries did this, it would also have benefits for the international system.  A great cause of financial instability over the last fifty years has been bad central banking – inflationary runs caused by excessive recourse to the printing press, punishing deflations caused by too little money creation etc.  We think very little of using the tools of the international system like the IMF or bilateral bailouts like the U.S. intervention in Mexico in the 90s, as an ex post solution to a financial crisis.  Creating a cadre of international experts in central banking may provide an ex ante method of controlling the effects of bad central banking.    And it's not likely to take the form of colonialism.   Countries would likely turn to economists and bankers who specialize in their specific types of problems.  Countries that lean heavily on extractive industries might turn to Chilean or Norwegian bankers who have dealt with the problem of Dutch disease.   Small export driven countries (or small countries that seek to be export driven) would likely to turn to bankers from Israel and Singapore.  And so on.  Given the dominance of U.S. economic departments, there may be more American-trained central bankers, but as 68% of American economics PhDs are foreign-born, that wouldn't necessarily mean more Americans.

So when we search for a new central banker, I think we should be searching for Bobby Stanley Fischer.



Posted by David Schleicher on May 2, 2012 at 08:45 AM | Permalink


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Fair and interesting thesis (we should consider non-Americans). 2 points:

1) I'm not sure there's a cause-and-effect relationship between Fischer's actions as Governor of the ICB, and the economic stability of Israel. One could just as (more?) easily argue that Israel's unique economy (heavily tech-based in an odd global downturn in which technology has continued to thrive, not nearly as finance-based as US/EU) has allowed for the ICB to take easy actions (such as raising interest rates, a move that many believe would have been catastrophic/Depression-causing) in the US.

2) Given the strength of populism/nationalism in the United States, I'm not sure it's politically practicable (or desirable) to have a non-native presiding over the Fed. Given the outcry against "Helicopter Ben," one can only imagine how much worse this would have been had he been an Israeli national or Chinese national (Fox News and Ron Paul would be having a field day, no matter what the course of action was). Canada and the UK are just about the only nationalities I can think of where this might work. The last thing we'd want in a crisis is a Fed Chair who is completely hamstrung by his/her national identity and populist politics.

Posted by: DD | May 2, 2012 5:15:22 PM

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