Jordi Galí: “The Federal Reserve will resist Trump’s pressure”

“It caught me by surprise and I share it with two giants of macroeconomics!” exclaims Jordi Galí. Professor at the UPF, researcher at the CREI (Centre for Research in International Economics) and academic at the BSE (Barcelona School of Economics), he yesterday won the XVII Frontiers of Knowledge Award in Economics, Finance and Business Management awarded each year by the BBVA Foundation, an award that some consider to be the prelude to the Nobel Prize. Olivier Blanchard, former chief economist at the IMF, and Michael Woodford, professor at Columbia University (New York), were the other two winners. As the jury’s motivations point out, “the monetary policy model that emerges from their research is used in all central banks around the world to make decisions.”

In recent years, have central banks increased their sphere of influence beyond simple monetary policy?

Yes, it is a process that began gradually in the 1990s, and in which central banks did indeed come to play a crucial role. And this is accompanied, I would say, by two trends. One is their independence from governments. And secondly, a very clear mandate of inflation targets of around 2% and stable. And all this, equipped with a series of analytical instruments that did not exist before and that have allowed the degree of sophistication of monetary policy to reach unthinkable levels.

We saw it in the pandemic and in the Great Recession of 2008.

The response of the central banks was very aggressive and forceful, and within their capabilities, they did everything they could to stimulate the economy, even creating an arsenal of new instruments of what we now call unconventional policy, which were largely inspired by some of the work associated with this prize. And also, in the recent episode of high inflation after the rapid recovery after the pandemic, the war in Ukraine, the boycott of energy purchases from Russia, etc.: we are already on track to reach the 2% target. And this without there being a recession.

Can the US Federal Reserve become a counterweight to Trump's economic policy?

We will not see from the Federal Reserve what we are seeing in the Administration, this volatility, this uncertainty, these erratic policies. The Federal Reserve is very clear about its role and will exercise it with absolute independence from all the pressures it may receive. I am very clear about this.

Is there an optimal monetary policy?

It depends on the type of disturbance affecting the economy at any given time. It is not the same if it is a supply shock or a demand shock. In some cases, it may be justified to stabilise with planning and as quickly as possible, but in other cases a compromise must be reached to distribute the costs between inflation and economic activity. Communication plays a very important role in influencing the expectations of economic agents.

You are a neo-Keynesian. What do you think of the recent rise of liberalism that advocates reducing the role of the State?

I am a very orthodox economist, in the sense that I believe that the intervention of public powers must always be justified. There are certain functions that only the State can perform, such as street lighting, security, or an efficient judicial system, etc. I believe that macroeconomic stabilization is one of these public services. Even academics who could not be more liberal, such as Hayek, recognize this role of the State, because individual agents, by themselves, have no incentive to make decisions that contribute to stabilizing the economy.

He has also studied the effect of increased productivity on employment.

I have analysed the short-term effects of technological innovation and productivity increases. And yes, there is no doubt that, in the short term, it can have a negative effect on employment. But this is not independent of the response of monetary policy. Alan Greenspan, when he was president of the Fed, was very clear about this. In the second half of the 1990s, with the internet revolution, the GDP growth rate was very high and he let it flow, because it was based on very strong increases in productivity that were not inflationary, since they were accompanied by cost reductions. On the other hand, in the long term, the increase in productivity can have consequences on inequality. We will see this in the coming years with the artificial intelligence revolution.