Standard available macroeconomic models did not help forecast the last financial crisis or help to respond to the long-lasting recession that followed. So what type of model would help us understand what came before and after the financial crisis?
Mervyn King, the institute’s 2015 Ta-Chung Liu Distinguished Visitor explored this question in an informal talk for about 60 students and faculty members.
“Despite the biggest stimulus ever seen in the world, we have seen a recovery that is very slow, left a gap between where we thought we would be ten years ago and where we are,” remarked the former governor of the Bank of England. “What kind of model might generate this result?”
Competing explanations have been put forth to explain the slow recovery, but they are incomplete or circular, he said. We have to make a story with the economics behind it to explain observed facts,” he noted. “I’m trying to put the economics back into this.”
King said a financial or economic crisis could be defined as “a reaction to the realization that a big mistake was made.” Many existing macro models “are not helpful about why the [mistake or] misperception has built up. There must be something to explain why misperceptions could exist and why the correction takes a long time as well.”
Students enjoyed several opportunities to hear and learn from King, a policymaker and influential scholar. He spoke with students in Anil Kashyap’s class at Chicago Booth. He also spoke to a crowd of students and professionals at an event cosponsored with Chicago Booth’s Initiative on Global Markets. That talk explored the relationship between currencies and nations.
King’s visit was made possible by the generosity of Ernest and Joan Liu, who established a visiting scholar’s post in honor of Ernest’s father, Ta-Chung Liu.
The elder Liu was an expert on the Chinese economy and a distinguished econometrician at Cornell University who, like King, channeled his scholarly expertise into public service and policymaking. King later said that he much enjoyed his visit to Chicago and the interaction with faculty and students.
The institute is grateful to the Liu family for supporting his visit.
—Robin Mordfin