Stanley Fischer was the Renaissance man of contemporary macroeconomists. He was among the most influential theorists of his generation. He taught many of the leading economic policymakers of the era, including the former chair of the Federal Reserve, Ben Bernanke, and ex-president of the European Central Bank, Mario Draghi. With his friend and colleague, the late Rudi Dornbusch, he co-authored a path-breaking textbook on macroeconomics. Above all, perhaps, while at the IMF he managed the financial crises of the 1990s and early 2000s.
After obtaining his PhD at MIT in 1969, Fischer taught at the University of Chicago before returning to MIT as a professor. He was, therefore, ideally equipped to reconcile the free-market traditions of the former with the Keynesian ones of the latter. The result was his seminal article Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule, published in 1977.
Fischer, who has died aged 81, was born into a Jewish family in Northern Rhodesia (now Zambia). His parents moved to Southern Rhodesia (now Zimbabwe) when he was 13 years old. In 1960, he visited Israel as part of a winter programme for youth leaders, where he studied Hebrew. Subsequently, he studied economics at the London School of Economics between 1962 and 1966 before going to MIT. He was a dual national of the US and Israel.
In the words of Olivier Blanchard, his friend and colleague at MIT, “Stan saw early on that the right model of fluctuations combined a central role for expectations, together with important distortions, an essential one being nominal rigidities.” This rescued the arguments in favour of interventionist macroeconomic policy and was, therefore, the foundation stone for the “New Keynesian” macroeconomics that now guides central banks around the world.
A complementary area, on which his work was just as “foundational” — according to his former pupil Maurice Obstfeld of the University of California, Berkeley — was “policy credibility”. This, too, has become a guiding principle of modern policymakers. In this vein, Mervyn King, former governor of the Bank of England, notes that, “he was instrumental in helping to promote the cause of Bank independence when he delivered the key paper at the Tercentenary conference of the Bank of England in 1994.”
While at MIT, he co-authored another seminal paper, also published in 1977, on “Comparative Advantage, Trade, and Payments” with Dornbusch and the Nobel laureate Paul Samuelson. According to Kenneth Rogoff of Harvard — also a pupil of Fischer’s — this “provided the basis for the modern empirical work on gravity and trade, which has come to dominate international trade research”.
Rogoff adds that Fischer’s textbook with Dornbusch (now, updated by Dick Startz of University of California Santa Barbara, in its 13th edition) was “the first to show how to think about the supply shocks that ravaged the global economy in the 1970s”. Also highly influential was Lectures on Macroeconomics, a graduate macroeconomics text, co-authored with Blanchard.
His most important of many policymaking roles was as first deputy managing director of the IMF from 1994 to 2001. This turned out to be a period of devastating financial crises, including the Tequila shock which began with the decline of the Mexican peso in 1994. Even more important was the Asian financial crisis, which began in 1997 and was followed by a Russian default in 1998 and Brazilian and Argentine currency crises thereafter.
Lawrence Summers, who was at the US Treasury at this time and became Treasury secretary, argues that Fischer “was to international financial crises what [Walter] Bagehot was to banking crises”. He was, he declares, a major architect of the strategy of large-scale, heavily conditional lending as the key tool of crisis response.
Moreover, he adds, “no developed-country financial official before or since has been as widely trusted and respected by emerging market policymakers” as he was. This was due to his intellect, but also to his character — integrity, candour and deep respect for the victims of financial crises.
His experience and abilities made his candidacy for the position of managing director of the IMF, to replace the disgraced Dominique Strauss-Kahn in 2011, credible. On the merits, he was the best candidate. But nothing could break the cartel between the US and Europe, which guaranteed the choice to the latter.
Inevitably, the fund’s actions during his time were criticised. An emergency lender is bound to make what hindsight judges to be mistakes. Fischer thought the IMF had to give policymakers the benefit of the doubt. In some cases, notably Argentina in the late-1990s, I thought this was a mistake. But one had to respect the blend of intellectual rigour with commitment that characterised his approach.
After leaving the IMF, the job that meant most to him was that of governor of the Bank of Israel, a position he held from 2005 to 2013. He had to navigate the turbulence of Israeli politics and the global financial crisis, and did so with great success. According to Jacob Frenkel, a distinguished predecessor in this role, the Bank of Israel, “did not ‘fall behind the curve’” in deciding when to loosen and when to tighten policy.
Fischer held other important positions. He was chief economist of the World Bank, before going to the IMF, vice-chair of Citigroup and vice-chair of the Fed, under Janet Yellen.
What made Fischer exceptional was his combination of abilities. He was a first-class theorist, rigorous analyst, superb manager, loyal friend, supportive boss and a decent human being. Not least, says King, he “always wanted to be where the action was and where he could help people make better policy decisions. It is rare to find someone with that commitment, and even rarer when it is combined with outstanding accomplishments as an economist”.
