How to Study and Steer the Economic Crisis

In the long list of names of Italian economists working in Washington, Chiara Scotti is among the most cited and influential. «I don't really feel that way », the Italian researcher demurs, but her role really is strategic, at the head of the Financial Stability Assessment Section of the Federal Reserve, the American central bank. «I head one of the four section of the Office of Financial Stability Policy and Research, a body created in 2013 to support the Board on decision concerning financial stability,» Scotti explains. She was hired by the US monetary authority in 1998, after a Bocconi Degree in Economics with a thesis supervised by Carlo Favero, now director of the University's Department of Finance, and a PhD at the University of Pennsylvania. «My team studies what kind of shocks can shake markets and institutions and how the can threaten liquidity and other financial services,» she says. It is a kind of economic analysis that is vital to support decision-making in US monetary policy, whose interventions reverberate across the global economy.

How's it like to work in an environment where everybody knows one's work can have macroscopic consequences?

Working at the Fed is very stimulating and everybody tries to do the job to the best of his or her abilities, by taking into account all the factors in play, in a truly collegial spirit. The whole system is organized horizontally: also the economists that have just been here for a few months are asked to hold briefings before Governors or the Chair. To be part of very high-level team is the necessary condition to take important decisions, in a focused but relaxed environment, where interpersonal relations are rather friendly.

Indeed, before being a site for policymaking decisions, the Fed is a specialized research center that competes with the best universities, attracting talent from all over the world...

The Fed is an ideal place to do research by virtue of many assets: availability of large data sets, access to funds to participate in and organize conferences, the support of research assistants, college graduates who work here for a couple years before going to grad school. But what really makes the Fed special is a solid base of top-notch economists, who are published on the best research journals, and work on policy that supports monetary decision-making. The intertwining of politics and research is in my view extremely productive. Political decision-makers set the research agenda, thereby spurring researchers to come up with original and state-of-the-art solutions to emerging problems. Research helps politics determine the strategies and implement innovative interventions, such as quantitative easing or macroprudential policies, to cite the most recent.

How do analysts and researchers sit together with the actors of policymaking around the legendary long table of granite and mahogany?

Everybody contributes to the final objective, which is to take optimal decisions in monetary and financial policy, taking from each according to his capabilities and technical skills. What counts it the quality of ideas and methodological rigor. The strength of the Fed is to be able to combine the skills of more than 300 economists, making it one of the largest departments of economics in the world.

What kind of selection process did you have to go through in order to become part of the Fed?

I simply had to show I was well prepared for the job, because here it really doesn't matter which gender you are or what country you come from, what counts is what you do and your potential. During the last year of my PhD program, like all candidates I prepared a packet containing my CV, recommendation letters of my PhD advisors, previous employment experience and the job market paper, i.e. a research paper which is part of the PhD dissertation. Each year in January, at meetings universities and institutions look at these dossiers and invite post-grads to a first interview, and if they pass that, they get called for fly-out at the interested university or institution, where they introduce themselves and their research objectives.

Among the papers you authored there are a few devoted to illustrating analogies and differences between the ECB and the Fed in dealing with the economic crisis. Could you sum up the main conclusions that can be drawn from your studies?

Over the last years I closely investigated the unconventional monetary policies adopted by the main central banks, including the Fed and the ECB, during the period when interest rates hit the zero lower bound, the floor of nominal rates. The way the two central banks operate is different and so have been the policies developed for monetary adjustment. In the US, the Fed started implementing forward-guidance policies and large-scale asset purchases (LSAPs) in 2008. In Europe, with the financial system revolving around banks and the sovereign debt crisis, the ECB had to focus on policies to boost liquidity first and then started to purchase government debt. In my papers, writtten with John Rogers (also economist at the Fed) and Jonathan Wright (Professor at the Department of Economics, John Hopkins University), I have studied the effects of these strategies on domestic and foreign market. Expansionary monetary policy is effective in improving financial conditions, not only reducing the interest to be paid on government debt, but by devaluating the currency and reducing the term premium.