Crises happen. We need to think about crisis management
Putting academic theory into practice is key if economists are to play their part in securing stability, says Lucrezia Reichlin
As a Professor of Economics at London Business School, Lucrezia Reichlin is regularly asked the same question: is another financial crisis on the horizon? But she’s the first to admit that she and her fellow economists deal in probabilities, not certainties – and no one can see around corners.
“Economists didn’t forecast September 2008 because they didn’t see the accumulation of risk building up,” she says. “We all bear responsibility for that, but that’s not really a matter of forecasting – it’s understanding what’s going on at present.
“At the time, the importance of the interaction between financial markets and the real economy wasn’t well understood. There’s more awareness now, though we are perhaps underestimating risks that are different from the ones we’ve seen in the past. Crises happen. We need to think about crisis management.”
Is there value to economic forecasting?
Reichlin’s observations are based on more than academic theory. Before becoming Chair of London Business School’s economics faculty in 2008, she was Director-General of Research at the European Central Bank (ECB), with responsibility for divisions covering forecasting, monetary policy and financial analysis.
During her four years at the ECB in the lead-up to the great financial crisis, she saw monetary policy and the role of the central bank shift. More dramatic changes have occurred since.
