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He argued that in the short run central banks need quick answers to specific questions, but whether they can be obtained depends largely on research progress made long before.
Economics sometimes failed to give us the necessary tools to address policy challenges during the recent crisis and he argued that there needs to be a stronger link between economic policy and economic thinking.
He outlined a number of examples where economics and practical policy making came into friction. He concluded by arguing for a new paradigm:
"From a policy perspective I think it is clear that we need more realistic frictions in our toolbox. Many of the frictions I have mentioned have been studied already, but a key requirement from a policy perspective is that they should not be studied independently, as is often done, but integrated into a general framework. We need to be able to think about behavioural issues, financial frictions and macroeconomics inside a common set-up. Central banks also need economists trained to think along all of these different dimensions and able to tackle the substantial degree of complexity posed by these problems, which should be part of the curriculum.
In line with policy-makers’ concerns for robustness, it is essential that several paradigms and approaches can be developed in parallel. The recent economic crisis was also in large part a crisis in economic thinking, paralysing policy institutions when they needed to act. With a more pluralistic approach, it is more likely that new conceptual tools can be found when the standard ones are not helpful. Of course a balance must be found between plurality, which brings robustness, and proliferation, i.e. too many approaches, which would prevent comparability.
The very nature of a crisis invariably means that it is understudied before it unravels. It is not surprising that the period of the “great moderation” did not generate a lot of studies on crises. One way to anticipate potential problems and important topics would be at least to understand crises of the past, working with economic historians. At a minimum, let us hope that a lot of economists will continue working on the latest crisis after it is over, instead of going back to “business as usual”.
Because of the frictions I mentioned at the beginning, it may be necessary for central banks to stimulate research on topics and approaches relevant to them. The MaRs network has been very successful at promoting some of the new approaches and tools that we need, in particular by building an aggregate framework incorporating financial instability. We would now find it desirable that this approach takes root in academic circles, and can permeate the development of a new paradigm, influencing research and teaching. In other words, we invite other researchers, both in academia and in policy institutions outside the ESCB, to follow up on the progress already made to establish closer links between current policy challenges and economic thinking."