faith in the risk - reducing potential of the securitization and a blinkered gaussian mind - set. 14 in short they used models – often of great sophistication – but poorly combined them with judgement and experience. as we noted, many have reached a relatively positive assessment of policy models, and of the re - constructive abilities of the profession. indeed, some others argued that the mistake was actually in not following models ’ prescriptions closely enough. for instance john taylor maintained that during the early 2000s, monetary policy in the us was set looser than that implied by the taylor rule. this, he claimed, caused the build - up of debt and risk - taking, which ultimately led to the onset of the great recession. likewise, michael wicken concluded that “ … the financial crisis was brought about more by a failure to employ modern macroeconomics than by its failings. if used sensibly, it will lead us out of the crisis. ” 15 on the other side, those who criticize the types of macroeconomic models popular at central banks have argued that they mistook beauty for truth and were too complex and opaque to be used quickly. more recently stiglitz posed another question highlighting one important flaw of models : why does the economy not quickly return to full employment, as one would have expected in an equilibrium model? why do we persist in using models with such strongly counterfactual dynamics? more specifically the list of model troubles could include : linearity, rational expectations, complete markets, limited agent heterogeneity and financial imperfections. 16 on a more general perspective, some set the discussion in terms of the fact that some models give the impression of the possibility to fine tune or socially “ engineer ” the economy whereas less standard approaches – also inspired by other disciplines – see the economy rather as an everevolving social system for which one can merely set the broad framework conditions and institutions. this goes back to an old debate started indeed with ludwig von mises, who first discussed the concept of catalaxy, and made popular later on by friedrich hayek who elaborated on that concept and defined it as follows : “ … the order brought about by the mutual adjustment of many individual economies in a market ”. hayek particularly stressed his view in that respect in his lecture to the memory of alfred nobel, the pretence of knowledge in which he forcefully challenged all those who believed that government had the wisdom or ability to successfully plan the

or collectively trapped in a suboptimal equilibrium. ladies and gentlemen, let me first thank the organisers of this conference for inviting me to deliver the egon and joan von kaschnitz lecture. it is an honour for me to speak to an audience of distinguished academics who have shaped the intellectual debates in the field of international economics and finance over the past decades. central banks today operate in a highly interconnected world. to fulfil our mandates we have to both anticipate and react to swings in global commodity markets, trends in foreign demand and spillovers from international financial markets. and in recent years, these swings and adjustments have occurred more rapidly and with higher amplitudes, further complicating the life for central bankers. our reaction functions therefore become commensurately more complex, tied not only to how domestic markets for products, labour and capital adjust to shocks and react to policy impulses, but also crucially to adjustments in cross - border bis central bankers ’ speeches markets. this requires a profound understanding of the international macroeconomic adjustment process. in particular, during the past two decades, policy discussions in fora such as the imf, the g7 and g20 have been predicated on three key assumptions about that process. the first assumption, in response to shocks hitting individual economies, is that a reallocation ( or “ rotation ” in policymaker parlance ) of aggregate demand across economies would sustain an appropriate pace of global growth. the second assumption is that freely floating exchange rates would support such shifts in demand and generally act as shock absorbers in the global economy. and the third is that cross - border capital flows bring the benefit of risk - sharing and make international adjustments smoother, in addition to supporting an efficient international allocation of capital. the starting point of my remarks today is the recognition that recent theoretical and empirical research has started challenging these three assumptions. first, the capacity of the global economy to generate growth is under question. in an environment of low global growth, export - led strategies may be relevant for one economy, but in the aggregate they are bound to fail and they risk leading the global economy into a high saving, low real interest rate trap. there is in other words a fallacy of composition. we lack a clear vision of the combination of demand and supply side policies, and the broader design of the global economy, which will support growth beyond the short - term impulse provided by fiscal or monetary policy at the individual country level. second,