Rajan Reviews Experiences at Fund, Discusses Next Moves

• Author: Raghuram G. Rajan
• Pages: 1-8

Raghuram G. Rajan, Economic Counsellor and Director of the Research Department at the IMF since September 2003, will be returning to the University of Chicago's Graduate School of Business in January as the Eric J. Gleacher Distinguished Service Professor of Finance. As Rajan neared the end of his term, he discussed his experiences at the IMF and his plans for the future with the Editor of the IMF Research Bulletin.

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Research in General

Before joining the Fund in September 2003, what was your general perception of the research done in the Research Department? What did you see as its strengths and weaknesses?

Before joining the Fund, I had been at the Research Department a few times to give talks, including at the Annual Research Conference (ARC). I had some sense that there were a group of people doing good work here, but I wasn't intimately aware of all the research being done. I was, however, familiar with the work of Research Department people who published in my own area of research-banking and corporate finance-such as Enrica Detragiache and Shang-Jin Wei. So, I came to the department in learning mode.

Your main specialization was in corporate finance, while the focus of IMF is on macroeconomics. Which were the challenges and the opportunities of seeing problems from "a different angle"? Did not being a macroeconomist faze you? What were the objectives you set out for yourself and the department?

First, it seemed to me that not only the academic profession but also multilateral institutions were becoming increasingly focused on the political economy of reforms. So trying to understand how reforms were devised and carried out was important, especially given the great interest in notions likePage 2 country ownership. Under what kind of circumstances did reforms become more feasible, and could we understand the political underpinnings of the problems even better? Closely tied to these issues was the role of institutions in the process of reforms. Achieving institutional change had become central to our mandate. Regarding countries' policies, we know that not only growth but also well-functioning institutions are important in achieving stability.

Second, we needed to spend more time on low-income countries, including countries such as India and China, which are becoming a much bigger part of the world economy.

Third, we needed to do more on the financial sector in terms of research and operational work in the Fund. So these were the areas that I wanted to put more emphasis on. I also had a very strong sense that, because I had expertise in banking and corporate finance, but not in macroeconomics, I should be very careful not to disrupt the continuity of research in the Fund, which provided the organization with valuable support in carrying out its mission. Instead, I should attempt to enhance it. Among the issues concerning ongoing research here, two were quite central. One was modeling, on which we've made considerable progress. Regarding this, I would like to acknowledge the contributions of my predecessor, Ken Rogoff, who did an incredibly farsighted job in setting up this process, and of Douglas Laxton, Gian Maria Milesi-Ferretti, and Tamim Bayoumi, who took it forward. I also think the work we have done on exchange rates is very important. I think we understood, to some extent, the macroeconomic underpinnings of exchange rates, but understanding their financial underpinnings was a greater challenge, and putting more effort into such research is an important way to improve our understanding of exchange rate determination.

I also came here with a very strong view that the Research Department should not try to be an academic department, because by doing so it would get none of the benefits of being in a multilateral institution but all of the costs. We really could not replicate what was going on in academia without being in Cambridge or San Francisco. Instead, we should draw on our rich store of contacts and experience to produce research that would be far more interesting to academia. In other words, we should make the best of being at the center of policy formulation. Our research therefore should become more closely tied to the work of the Fund's area departments (those covering the various regions of the world). We have sought to support surveillance, stabilization, and reform efforts by focusing more on applied work, without, however, insisting that every piece of work meet this test. I continue to believe it is very important for our economists to be seen not as working in an ivory tower but instead as doing work that is closely connected to issues at the Fund.

Clearly, I also came here with a sense of my own inadequacies. I had taken courses in macroeconomics in graduate school but had not done any research in macro. Obviously, if you haven't done research and haven't touched this stuff for 12 or 13 years, you will have forgotten a lot. One confession I have to make is that during the couple of months before I joined the Fund, I diligently read Ken Rogoff and Maurice Obstfeld's massive international macroeconomic textbook and a bunch of other macro textbooks. I also have to say that economics has an underlying commonality: optimization with constraints is basically what we do in all branches of the discipline, and the single biggest common concept in economics is that of general equilibrium, which is how we distinguish our answers to problems from those of laymen. The other thing I thought was very important was to play to my strengths-the set of tools, techniques, and knowledge I came with-but not try to speak knowledgeably about things that I didn't fully understand yet. I think that one of things you learn early in life is that since you cannot know everything, it is very important to admit it when you don't know and be willing to learn.

What would you consider your main achievements during your tenure? What work you are proudest of?

Frankly, I think that the main achievements during my tenure will be judged by others in the future. I can tell you, however, that there are a number of things I feel we have done on aspects of political economy. We certainly have started some work on improving our understanding of the political economy of reforms in developed countries. Some of this work done for the WEO (World Economic Outlook) was, I think, quitePage 3 influential. The OECD (Organization for Economic Cooperation and Development) replicated that work, confirming many of the results. That was a good start, and I think we are now in the process of extending this work to developing countries and finding out how reforms take place and under what circumstances. It think this research is very promising-it takes advantage of the capabilities of the Fund and can be very beneficial to its work.

"Many important issues are vigorously debated in battles fought inside the Fund, but outsiders are unaware of this."

We have done a fair amount of work on institutional...