Maurice Obstfeld as the New Chief-economist of the IMF – What Can We Expect From Him?

Maurice Obstfeld as the new Chief Economist of the IMF – what can we expect from him?


In the period 2006-2008 the IMF was confronted with its most serious challenge. Previous problems were all local, and the task of the IMf was to solve the problems before it could infect other parts of the global economy. Now it had to deal with a genuine macroeconomic problem. The fragility of the global financial sytem was a direct threat to the stability of the global economy as a whole. However, the most important economies in the world, did not ask the IMF for help – not even for some coordinational activities. It was the G-20 who tried to organize a global effective demand increase. It failed, however. The USA, China, India and Brazil decided to stimulate their economies, while the eurozone decided to cut government expenditures, in a desparate attempt to stick to the budget rules as established in its Stability Pact.

Fortunately the global depression took not very long -but the eurozone got into serious trouble. Its banks stayed fragile, and its economy went into a long period of depression. Especially for the Mediterranean economies the economic, social and psychic effects on the people were significant. In a shrinking market they could not compete against the North-western European economies. Greece showed the worst results, and the speaking heads of the financial markets feared a sovereign default. Then the eurozone leadership asked the IMF for help. Several eurozone economies were in bad shape too, and the IMF was assumed to have the money and the authority to give conditioned help.

Oliver Blanchard

At that time Oliver Blanchard was the Chief Economist of the IMF. Many economics students know him from his popular textbook on macroeconomics (Blanchard et al. 2011). But close reading of his book leads to the conclusion that the text is methodologically speaking a chaos. He mixes up different interpretations of the concept of time: sometimes the typical neoclassical idea of logical time, and in other cases the typical heterodox idea of historical time. He interprets Keynesian analysis as short run, and neoclassical analysis as medium run, which is typical neoclassical – and in sharp contrast with Keynes. In such a construction it is difficult to see that in the neoclassical view both periods – short run and medium run – start at the same moment. So, if we want to solve the crisis in the neoclassical way, we must reduce the influence of the government from the first moment. But if we build a short run period in our analysis, which pretends to reflect Keynesian ideas, then we should start with an increase in effective demand. According to Keynes that means that the crisis will be solved within a few years. But according to the neoclassical approach this makes the crisis even worse.

It is interesting to see that Blanchard as the Chief Economist of the IMF showed this ambiguity regularly. At one moment he agreed with the eurozone leadership in its neoclassical strategy, but at other moments he warned and suggested that the effective demand should be stimulated. It made the IMF a weak partner of the other two parties in the so-called Trojka – Eurozone leadership and European Central Bank – , both dedicated to the neoclassical strategy. In the case of Greece the IMF took firmly the side of its partners in crime, and offered financial help under the conditions of sharp expenditure cuts and liberal reforms only. For a genuine Keynesian it was no wonder that this strategy made the Greek situation worse – thereby making political Left more popular.

This year Oliver Blanchard withdrew, and was succeeded by Maurice Obstfeld. It is very important to see what we can expect from this economist. Before we discuss his views, we will make a distinction between equilibrium and disequilibrium economics (Keizer, 2015). Then we will discuss the question, which kind of economics will be the most realistic for the near future.

Future imbalances require heterodox approaches

The neoclassical analysis dominates Western economic thinking. It is based on the idea of the homo oeconomicus, an idealtype of person, who is assumed to be economic, rational and non-social. The analysis based on this idea shows that a free market economy has the tendency to return to market equilibrium. So, if there are disequilibria on some or many markets, governments should not intervene – just wait and let the markets do their job. Heterodox economics rejects this idea, and states that free market economies are unstable, and in need for intervention, mostly by governments (with the Austrian School as the exception) (Keizer, 2015). So, in order to understand complex market economies, including its institutions, we need a broader framework, and a more sophisticated foundation than the familiar homo oeconomicus. Examples of heterodox economic schools, which have barely space in the academic educational programmes are the radical economic approach, the post-Keynesian perspective, the evolutionary-economic approach, behavioural economics and social economics.They all have a different understanding of the crisis, but do barely play a role in the political discussions – the decision-makers have no knowledge of these alternative views.

In some economies the crisis seems over, but in other areas it is still going, with far-reaching consequences for the people. Greece, Italy, Spain, and recently also Great Britain shows the emergence of a new kind of political Left. Most Dutch politicians suggest that the crisis is over – but meanwhile the world around the Netherlands looks more unstable than ever. Important sources for new disturbances are The Chinese economic decline, the new Russian unreliability, the ‘Arab Spring’, the sharp reductions in the oil price. Moreover, most financial and monetary experts agree that the global financial system is still very fragile. Positive news from the large Stock Exchanges is at odds with the other news – as if the financial investors are aliens, who are not aware of what is going on in the world.

Maurice Obstfeld

Like Blanchard he wrote an important textbook on “Foundations of International Macroeconomics (Obstfeld & Rogoff 1996). This makes it possible to see what he considers to be important topics and perspectives in his specialization. The book counts 806 pages, and has played an important role in prestigious university programmes under the heading ‘International Finance’. This course title shows how Obstfeld approaches the international economic relations: a phenomenon, which is dominated by the global financial market. On the international level labour is quite immobile, goods are more mobile, but capital is very mobile. Therefore, capital is the decisive factor, and his book does not pay much attention to the goods market, and barely to the labour market.

A second characteristic of the book is its continuing emphasis on the micro-foundations of its analyses. Without being explicit it is clear that the authors refer to the assumed homo oeconomicus. It means that the global economy is not approached from a global perspective – it is just the aggregate of economies of many countries. This country perspective has far-reaching consequences for the IMF-policies. The typical micro methodology implies that a global economy, which is out of balance must be restored by many countries, who improve the competitiveness of their economies (Keizer, 2015). The book appears a very sophisticated expression of this typical neoclassical thinking, without any reference to serious alternatives. Even the macroeconomics of Keynes is not discussed and compared with the neoclassical approach.

A third characteristic of the book is the absence of a serious discussion of the institutions. Labour markets are not discussed, and therefore social security matters do not matter. The discussion of welfare states versus free market economies is completely ignored.

A fourth characteristic is the minor attention it pays to the problem of a currency area. The texts imply that a currency area needs a government, that is responsible for the implementation of the one and only fiscal policy, which is budget balance.

A last and interesting characteristic is the broad attention it pays to the socalled trilemma. According to Obstfeld and Rogoff there is a trilemma in the relationships between the degree of capital control, the exchange rate regime and the monetary policy regime. If capital flows are free, and the exchange rate is fixed, monetary policy cannot be used to manipulate the interest rate. In case of a regime of floating exchange rates, and capital flows are still free, monetary authorities are independent and can implement monetary policies of their liking.

If we would make a more realistic analysis of the global economy, we might be able to construct all sorts of dilemma’s, trilemma’s and even hexalemma’s. These include the labour market regime, the social protection regime and the degree of trade protection, for instance.

By leaving out so many important topics and relationships, the book is politically highly biased. If the IMF attracts the best and the brighest economics students, who had to study neoclassical finance rather than genuine international economics about the global economy, we must be pessimistic about the quality of the policy advice of the IMF in the near future.

The book is published in 1996 – long before the crisis. May be Obstfeld himself has been through a crisis and had switched to a more pluralistic stand. Reading Obstfeld, Cho, Mason (eds.) (2012) there is not any sign of such a reversion. It is all standard neoclassical.

In his textbook there is one sentence, which could function as a straw to be clutched: p.632: “the key result that fixed exchange rates are optimal when financial disturbances dominate is likely to hold in more complete models”. Out of the blue we read a text, which expresses the insight that in turbulent periods fixed prices might contribute to the stability of the economy as a whole rather than preventing micro-markets from returning to their equilibrium.


It is shocking to discover that the most important economist, who is involved in global economy matters, essentially denies its existence! “There is no such thing as a global economy”. There are many global markets, of which the capital markets are the most important ones –period. To me such a position means the end of macroeconomics. What is left is microeconomics, which can be applied to persons, organizations and markets. If every person and every organization is trying to improve its competitiveness, it is at the benefit of everyone.

It is easy to predict that for Obstfeld and his allies it will be difficult to understand politically important economists, who have a different economics education. The economists of the Chinese Central Planning Bureau, for instance, have developed sophisticated radical economic analyses. Some other countries are advised by economists, with ample knowledge of the post-Keynesian ideas and concrete policy advices (Keizer, 2015). The Greek case has shown us the lack of understanding of the Trojka. Not only the IMF-economists, but all economists in the world would profit from an extensive economics programme of a pluralist type.


Blanchard, O., A. Amighini, F. Giavazzi, Macroeconomics (2011), a European Perspective. London: Prentice-Hall.

Keizer, Piet (2015), Multidisciplinary Economics, A Methodological Account, Oxford: Oxford University Press.

Obstfeld, Maurice, Kenneth Rogoff (1996), Foundations of International Economics, Cambridge, Massachusetts: The MIT Press.

Obstfeld, Maurice, Dongchul Cho, Andrew Mason (eds.) (2012), Global Economic Crisis: Impacts, Transmission and Recovery, Cheltenham: Edward Elgar.

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