August 22, 2003

U of C professor appointed IMF's chief economist

Leading Chicago economist Raghuram Rajan, the Joseph L. Gidwitz Professor of Finance in the Graduate School of Business, was appointed chief economist of the International Monetary Fund (IMF) last July.

Horst Köhler, the Managing Director of the IMF, notified the IMF Executive Board of his intention to appoint Rajan to the position of economic counselor and director of the research department at the IMF on July 2, 2003. Professor Rajan will succeed Kenneth Rogoff, the current chief economist, when Rogoff resigns his post to take a position at Harvard University.

In a press announcement, Köhler endorsed Rajan as being at the forefront of solving banking and financial sector issues. "With his exceptional rise within the economics profession as well as with his extensive experience, Mr. Rajan will bring a strong and proven record of intellectual leadership to the IMF," Köhler said, "As economic counselor, I am confident that Mr. Rajan will help the Fund meet its responsibilities in supporting its members in an increasingly complex and challenging global environment."

Rajan, an Indian citizen, has already served as a consultant to the IMF, in addition to the Federal Reserve Board and the World Bank. Rajan earned his Ph.D. in economics at the Massachusetts Institute of Technology and had professorships at M.I.T., Northwestern and the Stockholm School of Economics before coming to Chicago in 1991. One of his many honors includes the inaugural Fisher Black Prize by the American Finance Association in January 2003, which is given to the person under 40 who has contributed the most to the study of finance.

According to Rajan, he was chosen in part because of the IMF's recent focus on his study, financial economics.

"Where (the IMF) can help developed countries is in facilitating the coordination of economic policy amongst them. It can also play a role by being insistent, even if not always effective, on the things these countries should do (and more important, not do) so that their economies, as well as the world economy can recover smoothly," Rajan said. "Short-run policy fixes are typically not very effective. It makes more sense to focus on medium term issues like increasing labor market flexibility (an important issue in Europe) or improving the quality of the financial sector (important to Japan)."

As for his experiences at Chicago preparing him for his new position, Rajan said, "I think Chicago teaches you to ask questions and to not be afraid of seeming ignorant. The willingness to learn, it seems to me, should be the best preparation for any new activity."

One of Rajan's publications, the 2003 book Saving Capitalism from the Capitalists, argued big business was rigging the world's free market to further widen the gap between the rich and the poor. The book's ideas are popular among third world nations that depend on the IMF for loans and economic advice, but unlikely to be favorable with the U. S. government, the leading voice in the IMF's executive board.

Luigi Zingales, the Robert C. McCormack Professor of Entrepreneurship and Finance at the GSB, collaborated with Rajan on Saving Capitalism from the Capitalists. He strongly supports Rajan's appointment to the IMF, calling his colleague a very disciplined, smooth intellectual that the IMF needs to lead it away from its image of being too economically ideological and insensitive to the problems of developing countries.

"By choosing (Raghuram) Rajan, (the IMF) has signaled an intention to deviate from this line." Zingales said. "Not only because (Rajan) was raised and born in a developing country and he is still very emotionally attached to it, but more importantly because with his work (and not ultimately with our book) he showed an interest in doing something about it. While (Rajan) believes in markets, he understands the cost markets impose on people and is sensitive to this cost. (Rajan) has done seminal research in banking (another topic very important for the IMF) and together we have done research on both the causes and the effects of financial development, topics that are very important for the IMF."

Another of Rajan's colleagues, George Constantinides, is the Leo Melamed Professor of Finance at the GSB. Constantinides, who presented Rajan with the Fischer Black award, believed the prize was an indication of Rajan's appointment, and hopes Rajan's abilities will revitalize the policies of the IMF.

"Whereas I have not conducted joint research with Rajan," Constantinides said."I think that I am reflecting the views of our entire finance and economics group, in saying that we are most proud of his accomplishments and we look forward to having him back as colleague after his undoubtedly successful tenure at the IMF."

Rajan previously taught the GSB courses Cases in Financial Management in Autumn 2002 and Theory in Financial Decisions III in Spring 2003. He will be on leave after summer quarter and will take his post as Economic Counselor on October 1.