In recent years, few organizations have had a more important role
in international affairs—and few have come under such scrutiny—as
the International Monetary Fund. And because of his role as the
IMF's number two, Stanley Fischer has been one of the most influential
policymakers in world circles.
Whether it's a crisis in Asia, the former Soviet countries, Latin America or Africa, the IMF is expected to analyze the situation and recommend a solution.
Needless to say, the former MIT professor and World Bank
economist has been busy. But he took time recently to visit
with Arthur Rolnick, the Minneapolis Fed's director of Research,
about some of the world's trouble spots and also about some
of the criticism leveled at the IMF.
ROLNICK: I would like to begin by asking you about the economic
health of the world economy. The financial crisis that the world suffered
a year or two ago appears to be over; most economies seem to be on the
mend. What's your assessment? Are there challenges still ahead? [Interview
conducted in October 1999.]
FISCHER: The world economy is in much better shape than
it was a year ago, even six months ago. The big three, the United
States, Europe and Japan are all turning in better growth performances
than expected at any point in the past year, and the Asian crisis
countries are recovering fast. But the situation is not as good
in some of the developing countries. Much of Latin America is in
recession, parts of Africa are doing badly, and the crisis countries
need to continue the reforms on which they have started.
ROLNICK: While more work needs to be done, some have questioned
the role of the IMF in dealing with such problems. Indeed, this
was the focus of our 1998 annual report. [See "Asking
the Right Questions About the IMF"].
What role, if any, should the IMF have in promoting economic welfare
around the world? Currently the IMF is acting as an international
lender of last resort. The authors of the annual report essay argue
that such a role could be better provided by the central banks around
the world, and that central banks have done that as a course of
action. The authors think that a better role for the IMF, a role
that the central banks aren't playing and can't easily play, is
that of an international bankruptcy court. Do you disagree?
FISCHER: The IMF plays many roles in promoting economic
welfare around the world—we lend to countries that have balance
of payments needs; we undertake surveillance, that is, analyzing
and reporting on the state of the world economy and on each member
country's economy, to governments and increasingly to the public;
we provide technical assistance, particularly on monetary, exchange
rate, and fiscal policies and institutions, as well as on financial
systems, to our 182 members; and, in the words of the Articles of
Agreement, we serve as "a permanent institution which provides the
machinery for consultation and collaboration on international monetary
problems." Through these activities, we are a powerful force for
good economic policies—for macro-economic stability and pro-market,
especially pro-trade, structural policies—around the world.
Now, on the lender of last resort and bankruptcy court issues:
The central banks and fiscal authorities of the major industrial
countries indeed have the primary obligation to stabilize the world
economy, by stabilizing their own economies. Sometimes, as in the
fall of 1998 when the Fed cut interest rates, the decisions they
make will reflect the potential impact of global economic conditions
on their national economies, and their stabilizing role in the world
economy is more apparent.
The IMF has neither the mandate nor the instruments to play that
role. But it does have the mandate and ability to lend in foreign
currencies to countries that are temporarily in need of foreign
exchange. In the words of the IMF's Articles of Agreement, those
loans are made "under adequate safeguards" (typically, conditions
on the borrower's policies) to enable the borrowers "to correct
maladjustments in their balance of payments without resorting to
measures destructive of national or international prosperity." In
that strictly limited sense—in providing foreign exchange to
a central bank that, although it may be a lender of last resort
in its own currency, is short of foreign currency and of course
cannot create it—the IMF can be seen as acting as a lender
of last resort, for countries in balance of payments difficulties.
As to the idea of an international bankruptcy court: Sometimes,
either as a result of adverse external shocks, or its own poor policies,
or as a result of a panic among investors or for a combination of
these reasons, a government may be unable to make scheduled payments.
A distinction is often made between illiquidity and insolvency.
If the problem is illiquidity, the government, given access to liquidity
in the short run, will be able to service its debts fully. If the
problem is insolvency, the country will need to write down some
of its debts. Now this is reasonably clear conceptually, but there
are two problems in applying the distinction: First, that there
is no legal framework for sovereign bankruptcy; and second—and
related—that whether a government in such circumstances is
able to service its debts is typically a political question, one
of whether it has the political power and desire to do so.
The suggestion that the IMF should act as a bankruptcy court says
that when a country gets into a foreign exchange crisis, someone
should step in and try to decide whether the problem is one of liquidity
or insolvency. If it is illiquidity, possibly because of a panic,
the realization of a bad equilibrium in which it is rational for
each private creditor to head for the exits because others are doing
so too, then there is a case for public lending or for a temporary
halt to payments, to try to stop the panic. If it is insolvency,
if the judgment is reached that the country cannot in practice service
the debts, then the bankruptcy court could help organize orderly
workout procedures, as in the case of a bankruptcy for a company.
This could reduce both the need for official financing and also
the moral hazard associated with official lending to governments
in trouble, by making the potential risks of lending to sovereigns
clearer to private creditors.
Sometimes the foreign exchange crisis could be the result of private
borrowers in the country who had borrowed in foreign currency getting
into trouble. Normally such problems should be handled through the
bankruptcy laws of the borrower's country. But sometimes contagion
may result in creditors running on private borrowers in that country
as a group, hence producing a foreign exchange crisis. Here too
there could be a case for a time out, and—with some variations—for
some type of temporary stay on payments.
At present, there is no bankruptcy procedure for sovereigns, and
no one has the right to impose a stay on international payments.
Despite the arguments for an international bankruptcy court or procedures,
I don't see a mass movement of support for the idea developing right
now. But we have seen the damage that financial panics can do, and
people do understand that we need to ensure that private creditors
participate in the solution of foreign exchange crises, and that
we do not yet have the right framework for that.
Things are very much in a state of flux. For instance, Ecuador
recently defaulted on its external debts. Possibly a very complicated
legal situation is emerging. We don't know how that is going to
be resolved. And there will be other cases like that where a country
has gotten too deep into trouble for the public sector to be willing
or able to provide sufficient financing to take care of the problem.
The private sector has to contribute, and what legal framework will
emerge 10 years from now I don't know. It could involve some form
of official agreement that liabilities need to be restructured,
and some set of procedures for doing that. But to talk of a bankruptcy
court is probably too grandiose.
I'd like to make one more point, that the general notions behind
the lender of last resort and bankruptcy court views of the IMF
are complementary, not substitutes. For there will sometimes be
a need for official lending to countries when the private sector
is heading for the exits, but the official lending will only be
a viable solution if we find ways to ensure the private sector is
also appropriately involved in resolving the crisis.
ROLNICK: I want to pursue the moral hazard problem because
it closely relates to the "too-big-to-fail" problem that most central
banks face today. If the market thinks a central bank will rescue
a large bank in order to prevent a financial panic, it creates moral
hazard; the large banks that are too big to fail have an incentive
to take on more risk than they would otherwise. Critics of the IMF
assert that in its role of international lender of last resort,
the IMF has, in effect, encouraged international investors and bankers
to make too many risky loans. How would you answer these critics?
Do you feel you are able to contain moral hazard?
FISCHER: We need to take a very careful look at the sort
of risks that are being borne by international lenders. Equity investors
have been at risk and taken losses in every one of the crises. So
too, by and large, have bondholders. The moral hazard issue doesn't
seem to arise there in any serious form. It has been more problematic
in the areas of short-term bank lending and other short-term lines
of credit. But there's been some progress in those areas. For instance,
before we gave assistance to Brazil in March '99, it was required
that the commercial bank lenders agree to roll over their lines
of credit. They did that voluntarily, for they understood that if
they acted collectively, and with the support of the official financial
package, they could help stabilize the situation.
More generally, the issue we call PSI—private sector involvement—is
now high on the agenda of the IMF and the official sector. We are
trying to work out methods of ensuring private sector involvement
in the solution of financial crises, both because that should help
reduce moral hazard, and because we will not have enough money to
resolve crises solely with official financing. At present, we are
concentrating on four country cases that happen to be before us:
Ecuador, Pakistan, Romania and Ukraine. Each case is different,
we are working with each country, and we are seeking to draw lessons
from that experience—indeed some of those lessons are already
becoming clear. As we move ahead, we will have to try to develop
more general rules for dealing with PSI.
The general principle though is clear: If a country has not managed
its policies and its external debt well, and if a very large-scale
public support package is necessary to enable it to continue servicing
its debts, the public sector will not be willing to provide financing
on such a scale. The private sector will have to contribute in some
I should also add that I do not believe that the Asian crisis
was a result of moral hazard due to the belief of investors that
the IMF could effectively insure their investments, or as it is
sometimes put, that the Mexican rescue caused the Asian crisis.
I believe that most of the lenders to the Asian countries simply
couldn't imagine that those countries would get into a crisis of
the magnitude that they did, that there could be fragilities in
countries whose overall growth record in the last 30 years constitutes
one of the great economic successes in all of history. In support
of this view, as several researchers have shown, if you look at
the micro-structure of capital flows to Asia, you do not find that
flows went into the types of assets most likely to benefit in a
crisis from a potential IMF program. I believe moral hazard was
a factor in the case of Russia, where investors could have believed
that the country was too important to be allowed to fail.
Nonetheless it did fail. That case, and that of Ecuador, plus
the fact that most investors took severe losses in Asia, should
help reduce the moral hazard potentially associated with official
lending. Of course, in a situation in which insurance is available,
it is rarely optimal to get rid of moral hazard entirely: The strategy
should be to balance at the margin the benefits of public sector
lending against the risks associated with its moral hazard, while
seeking also to reduce moral hazard by improving the incentive structure,
for instance by ensuring appropriate private sector involvement.
ROLNICK: Critics have raised questions about your policies
toward Argentina. You've been lending to Argentina for many years.
Has the IMF contributed to stabilizing that economy or has moral
hazard been undermining this objective?
FISCHER: Certainly since the shift to a currency board
in Argentina, the Fund has played a constructive role in helping
stabilize the economy. Argentina has achieved a great deal in this
decade, and the Fund is accepted there as playing an important role
not only in providing precautionary financing, but equally important,
helping give credibility to the macroeconomic framework, which is
agreed with and monitored by the Fund. Argentina has a precautionary
arrangement with the IMF at present, in which they don't actually
borrow from us, but as they perform well they accumulate the right
to borrow. So they have access to a line of credit at the IMF.
I don't believe that the moral hazard issue has bulked large in
the Argentine case—for we should remember that moral hazard
is not something that you either have or don't have, rather it's
there to some extent. As I said before, the two questions should
be: Are the net benefits of Fund assistance positive? Are we doing
what we can to minimize moral hazard?
ROLNICK: To insure that the net benefits are positive,
you need to manage moral hazard. Managing moral hazard for a central
bank is a very difficult challenge. I would think it would be even
harder for the IMF.
FISCHER: You manage the moral hazard in part by trying
to make sure that the countries you support have very good policies,
to make a future crisis unlikely. More generally, we should look
at where the moral hazard could arise. I do not believe there is
moral hazard on the side of policymakers—they are not taking
undue risks because the IMF safety net is there. I've never met
a policymaker who's been anxious to have an IMF program—perhaps
that's because officials who get their country into a crisis usually
lose their jobs. Often I wish countries would come to us sooner
than they do, before a crisis has struck, rather than after. On
the side of investors, controlling moral hazard is very much a matter
of private sector involvement.
ROLNICK: What about Russia? Putting the problem of the
misuse of funds aside, how do you deal with moral hazard in this
FISCHER: Russia was the one place where some investors
could reasonably have believed that the country was too big to be
allowed to fail. Even so, they should have stopped to ask themselves
why in that case they were getting such enormous spreads. It turned
out the view that Russia would be rescued financially was wrong.
I hope that the Russian default has helped reduce the belief that
any country is too big to fail. But I wish that it hadn't been necessary
to spread this crisis to Latin America to make the point.
ROLNICK: To the extent a central bank can anticipate a
financial crisis, the better it can manage moral hazard. How successful
have you been in forecasting trouble spots? It seems like a daunting
FISCHER: The record in Asia was mixed. We did see the crisis
coming in Thailand, and we did issue repeated warnings to the Thai
authorities. But as you rightly say, and as the intensive econometric
work on early warning indicators confirms, it's in general very
hard to predict crises. The more old-fashioned crises, those dominated
by the current account, were easier to foresee. Those in which the
capital account played a major role, and in which financial sector
weaknesses were critical in deepening the crisis, were harder to
predict. We are, of course, continuing to try to strengthen our
surveillance work and our work on crisis indicators, but we should
also recognize that almost by definition, we will not be able to
predict all crises—and that leads to the view that policies
and institutions need to be made as strong as possible, to reduce
the risks of a crisis, and then to minimize the damage if one occurs.
ROLNICK: How successful were your monitors in Mexico?
FISCHER: Obviously, Mexico was a case of a crisis not well-enough
foreseen, despite the famous article by Rudi Dornbusch and Alejandro
Incidentally, one thing that stands out as we seek to draw the
lessons of the recent crises is the importance of the exchange rate
ROLNICK: Is there an optimal exchange rate system?
FISCHER: It turns out that in every one of the major crises
of the last five years, Mexico '94, and Thailand, Indonesia and
Korea, Russia and Brazil, the country had a fixed or pegged exchange
rate in place prior to the crisis. That is a weighty piece of evidence
suggesting that fixed exchange rate systems are crisis prone. There's
another piece of evidence that I find equally persuasive: Some countries
that might well have had crises but had floating rates—I'm
thinking of Turkey, South Africa, Israel, Mexico in 1998—were
badly affected, but suffered much smaller crises.
These facts take you in the direction of the bipolar approach
to exchange rate systems for countries integrated into the international
capital markets, namely either peg hard, or float.
ROLNICK: It sounds like you prefer currency boards. What
FISCHER: Once a country has decided to peg hard, the main
benefits of retaining its own currency are seigniorage, and the
option to unpeg at some future date. Retention of the option to
unpeg is likely to be quite costly in terms of interest rates, and
so if some solution to the seigniorage problem can be found, countries
may well want to dollarize or euro-ize or join some other bloc.
I believe the example of the euro will be a powerful force pushing
toward the creation of currency blocs.
ROLNICK: Why don't we just go back to the gold standard?
Some would argue that world economies were more stable under the
gold standard. Comments?
FISCHER: It's hard to quarrel with nostalgia for what the
19th century must have been like. But there is no good reason to
tie the growth of the world's money supply, and global inflation,
to the vagaries of gold production. Nor is there good reason to
waste real resources to produce gold for use as money. And there
is reason to think we can do better than the gold standard: The
United States has certainly done so recently, and the development
of the inflation targeting approach to monetary policy suggests
most countries will do so in future too. It may be hubris to believe
that human beings can do better than depend on the supply of gold,
but we certainly should be able to do so, and are doing so now.
ROLNICK: How about the criticism that the European monetary
union will hinder multilateral agreements with the rest of the world?
FISCHER: I don't think that the currency aspects of the
euro pose any particular problems for trade. Europe became a free
trade area before the euro was invented, and Europe's trade agreements
apply to the entire EU, not just the euro area. Of course, there
is an issue of whether regional trade arrangements, like those of
the EU and NAFTA, and many others, are on balance positive or negative
contributions to the development of the world economy. We all recognize
that regional arrangements have the potential for creating distortions
relative to multilateral global arrangements. But if the creation
of regional agreements can be combined with ongoing multi-lateral
efforts, then they are likely to represent a positive contribution
to the world economy. By and large, the IMF has supported regional
trade arrangements, but not those that—at the same time as
they free trade within the region—raise external barriers.
ROLNICK: When it comes to lending among nations, there
are some who believe that the growth of developing countries is
being hindered by the burden of unpayable debt, and that the best
economic recourse would be to cancel all such debts—an idea
supported by the economist Jeffrey Sachs. What is the stance of
the IMF regarding these so-called Jubilee economics?
FISCHER: At our annual meetings in September, the IMF and
the World Bank, and other international lenders, including bilateral
lenders, reached agreement on a plan to reduce the debts of the
HIPCs—the heavily indebted poor countries, about 41 of them.
The HIPC debt-reduction plan is complicated, because we had to think
about how to prevent the same problem arising in the future, and
because it takes resources to write off debts. The HIPC plan will
provide debt relief to countries as they implement good policies,
particularly policies directed at reducing poverty, and that should
help prevent the return of the problem at some future date—though
of course governments and policies change. There were financing
problems for almost all the agencies involved in the provision of
debt relief; the IMF's problem was solved in large part through
a complicated operation that frees up some of the hitherto unrealized
capital gains on part of the gold stock we hold.
ROLNICK: On the subject of trade, Chairman Greenspan was
in Minneapolis in early October and he argued for open trade, even
if it meant a country unilaterally opened its borders. Would you
agree with this prescription? How far should the world move toward
FISCHER: The argument for free trade is not only one of
the basic results of economic theory, it also has a great deal of
empirical support. Opening to international trade is one of the
keys to growth. So I'm strongly in favor of any moves toward freer
trade, including unilateral moves.
There may be a need for some safeguards, though one has to be
aware that anti-dumping rules are often abused.
ROLNICK: How important is it that rules of law are in order
before the IMF gets involved in economic policy? For example, I
think most economists would agree that having effective laws to
protect property rights is a necessary ingredient for a well-functioning
economy. More generally, should the IMF be just as concerned about
a country's institutional structure as it is about a country's economic
FISCHER: We should indeed be greatly concerned about a
country's institutional structure, including the legal framework,
and we often provide advice on institutions in areas in which we
specialize, such as the tax or financial systems. We encourage countries
to get help from others in other areas, such as the legal framework.
But the issue of when and how to get involved is rarely as clear
cut as your question implies: Usually there are some institutions,
and some legal framework, and the question is where to put the emphasis.
Our colleagues in the World Bank specialize in many of the institutional
areas. We can contribute not only to macroeconomic stability but
also to overall governance by strengthening the institutions that
deal with macroeconomic and financial issues. For instance, we contribute
by encouraging simple things like getting a predictable monetary
policy, getting a treasury system that operates so that the government
gains control over spending. Getting central banks to publish accounts,
getting governments to publish decent fiscal accounts-those are
all elements of the basic legal framework that come along with the
On the establishment of property rights, we (and I'm sure also
the World Bank) would make that concrete by discussing with a government
what is needed to encourage both domestic and foreign investors,
and then trying to help put the necessary institutions in place.
ROLNICK: To what extent does the IMF worry about a country's
sovereignty when it intervenes in a country's economic polices?
FISCHER: That's a difficult issue, but it has to be realized
that there is no IMF agreement with a country unless that country's
government agrees, and unless the Executive Board of the IMF—representing
our 182 members, and thus the international community—approves.
It is interesting how much more is now accepted as being potentially
on the table when a negotiation takes place as compared with a decade
ago. Somehow it is increasingly accepted that international norms
and standards have a place in the way countries run themselves.
Somehow it's increasingly accepted that outsiders are entitled to
raise issues of corruption in a country. The change is probably
related to the end of the Cold War.
As this change takes place, we must respect countries' rights
to do their own things their own way. But we should also recognize
that a country is a complicated entity, and that the international
community can play a constructive role in strengthening a particular
view about the right economic policies within a country.
ROLNICK: You have mentioned the IMF board and the IMF's
182 members. How are members represented at the IMF?
FISCHER: There's an executive board that includes 24 executive
directors, representing these 182 countries. Eight of the largest
shareholders in the IMF represent themselves and the other 16 executive
directors represent constituencies of several countries. Countries
vote in proportion to their shares in the IMF.
ROLNICK: How is that share determined?
FISCHER: Basically by a formula related to their role in
the world economy; for example, the U.S. share is about 17.5 percent,
Japan about 6.5 percent.
ROLNICK: When the IMF board votes, are some more equal
FISCHER: Yes, by virtue of the fact that each executive
director votes the number of shares held by the country or countries
he or she represents. In that sense, the United States, which is
by far the largest shareholder, is more equal than others. Furthermore,
for some critical items, an 85 percent majority vote is needed.
So the United States has a veto on those issues; so does any other
grouping of countries that can get more than 15 percent of the vote
on the issue.
ROLNICK: You mentioned that one of the members is China.
China appears to be coming on the world market now as a real economic
force. I find it interesting that while China is not a democracy,
it's moving toward a market-oriented economy. History has shown
that the two usually go hand in hand. Comments?
FISCHER: It is clear that rising income levels increase
the demand for democracy, and that China is a freer society than
it was two decades ago when the reforms began. That trend should
and will continue. China has an extraordinary recent record of growth:
In 20 years GDP has grown by a factor of more than six, which is
astonishing. I don't doubt that further growth and prosperity will
bring more freedom. If you look around the world there are no advanced
industrial countries that don't have democracy.
ROLNICK: What is the IMF's role with China and the Chinese
FISCHER: Our role has been one of giving advice, not lending.
However, the World Bank does make loans to China. We provide technical
assistance in a variety of macroeconomic and financial areas; we
write the annual Article IV report on their economy; and we also
provide a lot of training for Chinese officials. China is a voracious
user of technical assistance; they focus in on an area, decide what
help they need, and get the relevant institution to provide it—they
know how to use it.
ROLNICK: This goes back to some fundamental questions about
the IMF's role in the world economy. I think many are confused between
the mission of the IMF and the mission of the World Bank. When you
mention how the IMF provides technical assistance, it sounds like
the World Bank speaking not the IMF.
FISCHER: The Fund is and should be fundamentally a macroeconomic
institution. The focus of our expertise is in monetary policy, exchange
rate policy, fiscal policy—that plus the financial sector is really
the essence of our work. The Bank's work is much broader. It is the Bank
that should be taking the primary role in other structural areas, and
in poverty reduction. Of course, we have to work very closely with the
Bank, to make sure that the macroeconomic implications of the anti-poverty
and social safety net aspects of overall economic programs are taken into
account in IMF programs, and that these essential elements of economic
policy are being adequately dealt with in countries with whom we are working.
And in our surveillance work, we should report on developments in important
areas even if they are beyond our primary operational expertise—such
as trends in poverty, or spending on education and health.
Within the realm of our primary expertise, we do provide technical
assistance to countries. The technical assistance tends to be effective
because in the Fund, as in the World Bank, we have people who have
had experience in many different countries, and have had the opportunity
to see what works and what doesn't. There's nothing more effective
in recommending some particular approach than to explain how it
worked in some other country. In giving policy advice, one good
example is worth a thousand theorems.
ROLNICK: Let me switch back to central banks for a moment.
It looks like central banks have been fairly successful in following
a low-inflation policy, with the United States and Germany leading
the way. What advice do you have for central banks?
FISCHER: Well, most of them are managing pretty well without
my advice. The inflation-targeting framework that is being used
in many places now looks to be a very successful way of running
monetary policy—with the proviso that in targeting future inflation,
the central bank needs also to take into account that there is,
in the short run, an output-inflation trade-off. The central banks
using the inflation-targeting framework recognize this by targeting
inflation a couple of years out rather than trying to hit the inflation
target on the nose in the very short run, which is inherently impossible.
That gives time to take the short-term trade-off into account. Other
countries may have much shorter lags because of inflation rate history,
so they might aim at an inflation rate one year out.
ROLNICK: As you know, there is an ongoing controversy in
the literature about the importance of having a time-consistent
policy. Without a strong and credible commitment to a low-inflation
policy, for example, an economy will experience more inflation than
is optimal. Is credibility important and, if it is, how can central
banks achieve it?
FISCHER: John Taylor and Bennett McCallum long ago pointed
out that there are many ways of getting around the time inconsistency
problem. Obviously, central bank reputation is one such mechanism.
The people who run central banks are concerned about the reputation
of their banks, and, they tend to worry about the longer-run, not
only the short-run trade-offs. But the hand of the central bank
will be strengthened if it is given a clear mandate and framework
within which to operate. That means central bank independence, a
clear mandate emphasizing price stability and, of course, transparency
and accountability—the need for the central bank to explain
to the public and their representatives what they are doing and
why, and the method of ensuring accountability from country to country,
depending on its system—those seem to me the best ways to deal
with the time consistency problem.
ROLNICK: The chairman and others have worried about an
overvalued stock market. That is a tricky issue for economists to
assess. Are you concerned about the stock market in the United States?
FISCHER: Everyone has to be concerned about the level of
the stock market, which is very high, according to many indicators.
But you have to ask two questions. First, if there were a serious
decline in the stock market, which is entirely possible, could the
United States deal with it? At present, the U.S. economy has reserves
of policy capacity that no other economy in the world has. The fiscal
situation is so strong that if needed, the United States could cut
taxes very quickly. They have interest rates that, unlike those
in Japan, have lots of room to be cut if necessary. So that while
obviously we should worry about the high level of stocks and our
inability to explain them, except for the disappearance of the equity
premium, the United States would have the ability to change policies
if necessary to deal with the potential negative effects of a major
stock market decline.
The second question is whether the United States should be taking
anticipatory action. Here one is struck by the problem of there
being only one tool of monetary policy, namely, interest rates.
This fact tends to drive economists to the view that you should
use interest rates to affect the stock market only if you believe
that the stock market is contributing to inflation. Another possibility
is to develop regulations aimed more directly at the stock market.
Everybody says that's impossible, but it is striking that central
bankers don't hesitate to get out and try to affect lending for
ROLNICK: Do you have specific recommendations? Increasing
margin requirements, for example?
FISCHER: That's one, but I keep being told it doesn't work.
ROLNICK: Let me give you another explanation for the behavior
of the stock market. Our bank directors keep telling me that we
are in a new economy. They claim that productivity gains are much
stronger than are currently measured. They point to the information
revolution, the Internet and new ways of using inputs more efficiently
as the driving forces behind the strong economy and the stock market.
How much weight would you give to this view?
FISCHER: There does indeed seem to be a shift in the productivity
trend, one which if maintained will result in more rapid growth
of both potential and actual output. I believe, though, that even
taking account of these impressive improvements in productivity
growth, it's difficult to generate explanations for stock market
levels as high as those we've observed lately. Of course, it's bothersome
to be in a position where it's difficult to account adequately for
so central an economic phenomenon as the worldwide stock market
ROLNICK: Some economic historians point to examples like
the harnessing of electricity at the turn of the century. At that
time we also saw some very high price-earnings ratios. Yet this
turned out to be a harbinger of economic growth, not an economic
FISCHER: You can't rule that out. The problem, as you well
know, is that these examples are raised repeatedly when the economy
is doing well for a while. And there were more recent periods of
rapid technical change, such as in the 1950s and 1960s when the
benefits of wartime technology were being harvested by the civilian
ROLNICK: Does this make you more optimistic about the world
economy given that information is readily available to all economies?
Is there a reasonable chance that over the next few decades we will
see economic miracles in the developing countries that have lagged
so far behind the rest of the world?
FISCHER: Well, that's very interesting, because the effects
of the technological revolution point in different directions. Politically,
the communications revolution is one of the biggest events ever.
It is no longer possible for a country to keep from its citizens
the things that could happen if they joined the world. No doubt
the end of the Cold War owes much to the communications revolution.
Greater integration with the world economy should open the potential
for much faster convergence of income levels. But the technological
revolution could widen the gap between those who learn to be familiar
with the new technologies, and those who do not have the resources
or the education to do so. Something like what has happened in the
advanced economies, where wage gaps appear to have widened with
differences in the ability to work with computers, could happen
among countries too. That makes it all the more urgent to improve
technical education and training in developing countries.
ROLNICK: One of the missions of the Minneapolis Fed is
to promote economic literacy. We recently hosted a national conference
where the then-vice chair of the Federal Reserve System, Alice Rivlin,
was our keynote speaker. As an author of a successful college textbook,
what is your view on the need for economic literacy?
FISCHER: It's extraordinary when you visit a country to
see what a difference it makes to have well-trained economists and
a public that understands economic issues. I believe our profession
promotes a very useful way of thinking-about societal problems as
well as purely economic problems. There are counterintuitive results
in economics, like the benefits of free trade, like the fact that
the more rapid creation of nominal balances reduces the supply of
real balances, which are important for understanding policy issues.
Whatever you are doing to increase economic literacy, we need more
of it all over the world.
ROLNICK: Who were your mentors and what schools of thought
have influenced you over the years?
FISCHER: I was very lucky. I had my graduate training at
MIT and my first job was at Chicago, and I had the best of both
worlds. In macroeconomics, I was a student of Paul Samuelson and
Franco Modigliani at MIT, and also too briefly of Miguel Sidrauski,
who died very young. Then at Chicago, I had the benefit of taking
part in the Money Workshop with Milton Friedman, and finding among
the students there when I arrived Rudi Dornbusch, Jacob Frenkel
and my IMF colleague, Mike Mussa. Don Patinkin at the Hebrew University
was another mentor, not only in economics. I benefited greatly from
working with Rudi Dornbusch. The combination of MIT and Chicago
was at that time as good as you could get for training as an economist;
Rudi had it in the reverse direction to me.
To apply the knowledge gained from study and research later to
policy is wonderful. Almost every day you see a problem about which
you can say, "Oh yes, I recognize that one." Of course, it's rarely
exactly as formulated before, but still the formal training gives
you a framework for organizing your thinking. Obviously, we in the
Fund are working in a world of political economy: We're advocating
policies and trying to persuade countries to adopt them, so a lot
of game theory models come in very handy. But they're only useful
in combination with sound advice. The base has to be simple macroeconomics,
like the open economy IS-LM models for which Robert Mundell received
the Nobel Prize. You also need the more sophisticated models you
learned in advanced courses to warn you of the limitations of the
basic models. But without the basic framework, you—or at least
I—have a very hard time figuring out what's going on.
ROLNICK: When you're not busy with your work here at the
IMF, how do you spend your leisure time?
FISCHER: I jog as often as I can. I like sitting on beaches.
I read as much as I can, especially history and biography. And I
really enjoy talking with people.
ROLNICK: Thank you, Mr. Fischer.
More About Stanley Fischer
First Deputy Managing Director, International Monetary Fund, since 1994
Killian Professor and Head of the Department of Economics
at the Massachusetts Institute of Technology
Vice President, Development Economics, and Chief Economist
World Bank, 1988-1990
Consulting appointments with the U.S. State Department,
Department of the Treasury and the Bank of Israel
Assistant Professor of Economics at the University of
Visiting positions at Hebrew University, Jerusalem, and
the Hoover Institution at Stanford University
Author and co-author of several books, among them Macroeconomics and Lectures in Macroeconomics, and the editor
of other books, including Securing Peace in the Middle
Doctorate in economics from MIT
Bachelor's and master's degrees in economics from the
London School of Economics
Fellow of the Econometric Society and the American Academy
of Arts and Sciences, a Guggenheim Fellow, Research Associate
of the National Bureau of Economic Research and Member of
the Council on Foreign Relations
Born in Zambia