nout wellink : the interaction between economic science and policy making speech by dr nout wellink, president of the netherlands bank and chairman of the basel committee on banking supervision, on receiving an honorary doctorate at tilburg university, tilburg, 12 june 2008. * * * i would like to congratulate center with its 20th anniversary, but also with its academic record. i consider it an outstanding achievement that you are in the top three economics faculties in europe and number 24 in the world. i can only hope that you achieve your objective of entering the top 20 soon. as for me, i am especially grateful to receive an honorary doctorate from this renowned catholic university. being a roman catholic myself, i deem it appropriate to start with a confession. at the start of my professional career, i was asked to become an academic here at the tilburg university. i hesitated for a while, but eventually i declined the job. at first, i therefore sensed a slight feeling of guilt concerning the honour that is being conferred upon me today : to receive academic recognition exactly from this university, where with a little twist of fate i could have spent my working life, contributing to scientific knowledge. but then, on further reflection, i started to like the idea. although i did not become a full time academic, i have always kept a strong interest in scientific research. in fact i believe that throughout the years my policy work has benefited greatly from scientific input. the organisers have interpreted this fact the other way around, when they emphasize my contribution to the application of scientific insights in solving real world problems. i thank them for this. i accept my honorary doctorate with delight. i would like to dedicate it to the interaction between economic science and policy making. tensions between economic science and policy? in my view, the interaction between science and policy has brought tremendous progress in both fields. we should be careful to maintain and improve this interaction when possible. although this point may seem to be self - evident at first sight, it is questioned by some. several observers notice an increasing gap between highly formalised theory and the practical needs of policy making. an illustration of such a perceived gap in my own field of monetary economics is given in a recent overview paper by gregory mankiw, who himself has been an academic as well as chairman of the council of economic advisors in washington. on the basis of a thorough review in a highly - ranked journal, he concludes that recent developments in macro economic modelling have had “

close to zero impact on practical policy making ”. another example has been given by my british colleague mervyn king with respect to modern communication strategies. he argues that the success of such strategies in stabilising inflation expectations at a low level is not yet fully understood from a scientific perspective. his claim is, therefore, that monetary policy is ahead of economic science in that respect. let me be clear on these points. there are indeed limits on the extent to which policy judgement can be based on science. in almost any policy decision, experience, intuition, “ fingerspitzengefuhl ”, or whatever name we can put to it, plays a crucial role. perhaps the role of these elements has even increased in recent times. the outside world has become increasingly international and the economic system has become more complex. let me give you just one example. at dnb, it is our job to assess the pass - through of the credit market crisis of the past year onto the real economy. the scientific approach would be to rely on model estimates. but unfortunately, the degree of uncertainty that always surrounds such estimates jumps to even higher levels in times of financial stress. this illustrates that our judgement cannot be based on science alone. but does this imply that there is a gap between science and policy? i do not think so. after all, our research department has responded to the gap in our knowledge by shifting its attention to economic interactions under extreme events. i would therefore rather stress a natural interaction between science and policy than the existence of a gap. fostering the interaction between science and policy on the interaction between science and policy, a first thing to note is that macro - economic science actually emerged from the need to address practical policy issues related to the great depression in the 1930s. science and policy perform complementary tasks. without any understanding of how the real world operates, it would be rather difficult to influence it. similarly, it seems less relevant to understand what is going on, if these insights are not used for better policies. scientists and policy makers therefore need to make efforts to understand each other. policy makers can learn from structuring their thinking and ensuring its consistency. scientists can learn from incorporating the flexibility and practical relevance that is needed for solving real world problems under political constraints. i therefore do not believe in a model in which universities focus exclusively on science while policy making institutions abstain from any role in scientific research. the potential synergies between both functions are large, but it takes continuous efforts to realise