He succeeded, proof of which is that the department now has the Pentti J.K. Kouri Career Development Associate Professor of Economics. Today, rather than attempting to elaborate on Kouri’s contribution, I think this is a good opportunity to address some issues on the state of macroeconomics and policymaking, which is the purpose of the conference, and are two aspects to which Rudi and Pentti contributed a lot. If they were here with us today, their deep insights and provocative ideas, regardless of whether we agreed with them or not, would certainly make us think. Changes in the world economy, macroeconomics, and policymaking More than 30 years after Kouri’s influential work, the world has changed dramatically, and so have economic theory and policymaking, especially in emerging market economies. There is a growing role of markets in the determination of prices, in particular interest rates and exchange rates. There is much greater trade and financial integration, which is a source of greater interdependence cross economies, but is also a source of much greater opportunities for developing countries. Finally, financial markets are much more sophisticated, which is also a source of vulnerabilities and opportunities. There has been also a profound evolution of macroeconomics. Developments, such as rational expectations and dynamic inconsistency, changed the views on what macroeconomic policies could achieve. They were also the basis for the discussion of rules versus discretion, and the general preference for the conduct of policies under flexible rules, or constrained discretion.

1 On models and theory Macroeconomics has increasingly moved towards models more rigorously specified, with sound micro-foundations, with all general equilibrium interactions, and explicit informational constraints. However, there will always be tensions between rigor, realism and flexibility. There are many tradeoffs. The costs of these tradeoffs are often subtle. The tendency to base models on ever more rigorous grounds, although a logical trend, has undesired effects. The incentives for younger academics – the very ones who are supposed to push the borders of knowledge, and who must publish or perish – limit their capabilities for innovation. The required rigor ends up necessarily threatening realism. Nobody expects a model to explain all the complexities of the real world, but the problem is that it can overlook elements that are crucial to understanding and preventing economic disasters like the one we faced some years ago. It  1  2  For further discussion on these issues, see De Gregorio (2009). BIS Review 84/2010  may be more rewarding from an academic standpoint to write an equilibrium model explaining some particular phenomenon, than trying to formulate a model that properly represents all the distortions of said phenomenon. It is harder and less rewarding for an academic to formulate distortions – of which the real world has plenty – than to use elegant general equilibrium competitive models to explain important stylized facts with a minimum number of new ingredients. Only a handful of academics are able to think rigorously out of the box, and Kouri was one of them.