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Proving Greenspan Wrong Shows Why Rey Became Worthy to Bernanke

March 27, 2013

Professor of Economics at the London Business School Helene Rey

Professor of Economics at the London Business School Helene Rey said, “It’s a nice mix of theoretical thinking and interesting data. You can actually look at big issues that impact the daily lives of people.” Photographer: Simon Dawson/Bloomberg

Helene Rey made a side trip on her way to the hospital to give birth to her daughter in September 2006: She stopped off at the main office of London Business School, where she teaches economics, to turn in a report on a doctoral defense.

“If I hadn’t, the student couldn’t have graduated,” she said.

Rey’s dedication has led to posts at Harvard University, the University of California at Berkeley, the London School of Economics and Princeton University. The department chairman who hired her there, Ben S. Bernanke, is now chairman of the Federal Reserve. Just yesterday, she became the first woman to win the Yrjo Jahnsson Prize, for a European economist under age 45 whose research is significant to Europe.

It was at Princeton that France-born Rey co-authored a paper showing how the U.S. position at the center of global finance gives it an edge to borrow cheaply and safely in the short term and make high-return, riskier investments. The study addressed concerns about the nation’s ballooning current-account deficit: By 2004, then-Fed Chairman Alan Greenspan was warning that foreigners might be unwilling to keep buying dollars.

The research caught the attention of economists at the Fed and the International Monetary Fund, and spread through academia.

‘Very Influential’

“The work will become very influential,” said Nobel laureate Christopher Pissarides, a professor at the LSE, who taught Rey in the late 1990s. “As the world economy is becoming more and more open, trade is growing very fast, investments abroad and borrowing and lending become more widespread; her work and the models she has provided give us a better framework to study these implications.”

With fellow economics professor Pierre-Olivier Gourinchas at Princeton, Rey, 43, challenged the traditional way of assessing a country’s financial position by examining just imports and exports. Instead, they argued, the explosion of international finance meant a country’s investments and debts also should be considered.

“Before 2007, the crisis that people were forecasting was that at some point, the U.S. will not be able to borrow anymore and there will be a collapse in the dollar,” said Gourinchas, now a professor at Berkeley. “That’s the crisis we didn’t have. We said, ‘Wait a minute, these trade deficits, they may not be as bad as they look.’ On the financial-income side, the U.S. is doing fantastically well.”

‘Exorbitant Privilege’

Rey and Gourinchas had a lot of back and forth with researchers at the Fed, the IMF and elsewhere who were interested in their data and conclusions. Among their findings: The U.S. enjoys an “exorbitant privilege” from the returns on its assets held in the rest of the world.

“What came out of their research that was useful to me was that I have a better understanding of the sustainability of the U.S.’s net international position,” said Nathan Sheets, formerly the Fed’s director of international finance and now global head of international economics at Citigroup Inc. in New York. “At the margin, it makes me a bit less worried about an abrupt shift in the dollar.”

Rey’s push into thinking about money beyond the confines of a domestic economy was an outgrowth of her fascination with its relationship to language when she was a Ph.D. student at the LSE. At the time, economists were reconsidering the role of money in economic models to give it more prominence.

Language, Money

“I was kind of struck by this idea that there were these analogies,” she said in an interview at her London Business School office, where work tables overflowing with papers share space with a two-seat sofa. “If you want to dialogue with someone, or you want to make a transaction with someone, then it’s going to be very useful if you choose a medium of exchange that a lot of people use.”

Rey was born and raised in Brioude, “in the middle of nowhere” in south-central France, where her father was a civil engineer and her mother a teacher. She was a good student, and in the French school system that meant she was encouraged to focus on mathematics. She found she liked the rigor of the subject.

While that grew into an enthusiasm for physics, the social element of economics proved more intriguing. As a relatively young field, she said economics is easier for newcomers to do work on important subjects and make a contribution.

“It’s a nice mix of theoretical thinking and interesting data,” she said. “You can actually look at big issues that impact the daily lives of people.”

Harvard, Berkeley

She landed at Princeton in 2000 as an assistant professor. Senior faculty included former Fed Vice Chairman Alan Blinder and former IMF Chief Economist Ken Rogoff. She also served as a visiting or assistant professor at Harvard in Cambridge, Massachusetts, and Berkeley, and lectured at the LSE.

Gourinchas said the pair’s different habits at Princeton made their collaboration almost a 24-hour project. He had small children at the time and would work during the day, while Rey, a “late-night owl,” would continue into the early hours. That’s ended now that she has a child of her own, he said, though the two still collaborate.

A fellow of the British Academy and council member of several economics societies, including the European Economic Association and the Royal Economic Society, Rey won the Bernacer Prize in 2006, recognizing her as the best European economist under age 40 working in macroeconomics.

Significant Contribution

In 2012 she won the inaugural Birgit Grodal Award, given by the EEA to a European-based female economist who’s made a “significant contribution” to the profession. Pissarides, when was the association’s president, announced the creation of the award in 2011.

He said he remembers being impressed by Rey’s ability to work as a “mature economist” at the LSE. She asked big questions that other students, more risk-averse and worried about getting a degree, would shy away from.

“She would go and get the data, and try to understand it by sitting at a computer for hours on end,” he said. Now, “she’s the leader in the field on the sustainability of current-account imbalances, something that’s going on all the time, especially when we have so many imbalances in the global economy.”

Current-account data measure trade balances, income from foreign investments and government cash transfers. The U.S. deficit will equal 3.1 percent of gross domestic product this year, down from 6 percent in 2006, according to an IMF forecast.

System Overhaul

Rey’s work should inform thinking on political issues as officials consider an overhaul of the world financial system, said Maurice Obstfeld, an economics professor at Berkeley.

“Reforming the International Monetary System,” by Rey, Gourinchas and Emmanuel Farhi, was commissioned as part of France’s role as president of the Group of 20 nations in 2011. Among the report’s recommendations were making permanent the swap lines central banks put in place during the financial crisis and giving the IMF more firepower.

Philip Lane, professor of macroeconomics at Trinity College in Dublin, said Rey’s work on the forces creating cross-border international flows can guide policy to ensure stability as economies recover.

“It’s about making the world more robust for the next crisis, both avoiding it and dealing with it in a better way,” Lane said. “This isn’t going to be the last crisis the world ever sees.”

Stable Footing

Rey also pursues policy work in her position on the board of the Autorite de Controle Prudentiel, the French banking regulator. That gives her insight into the stability of the region’s banking system and its prospects for returning to a stable footing.

While the biggest item on the policy agenda is a banking union, the outlook for its implementation, along with revamping bank oversight, is waning as the crisis drags on, she said.

“As time goes by, all the announcements we made are becoming weaker,” Rey said. “There’s a loss in momentum in the will to do things.”

Since she left secondary school, Rey’s working environment has been about 10 percent women, she said. Her older brother taught her to play soccer, and that helps her be more comfortable when her gender is in the minority. She still plays -- preferring offensive positions -- when London Business School students organize a game, which isn’t as often as she’d like.

Stumbling Block

Women trying to advance their careers can hit a stumbling block when they have children, and workplaces need to do more to recognize the “persistent shock” that accompanies the experience of becoming a mother, she said. Promoting women also requires allowances for flexibility, as they are more likely to be the “residual claimer” of child-care issues.

Her ability to manage parenthood along with her career is helped because her husband, Richard Portes, is also an academic, which provides more leeway in schedules. And her involvement in policy has been “quite lucky,” though she’s been more limited lately because of time constraints.

Women’s career progress still can be hampered by the insularity of all-male environments, and by women being reluctant to put themselves forward, she said. For instance, the naming in July of Luxembourg’s Yves Mersch to the European Central Bank’s executive board drew protests on the absence of female candidates and the first objection by the European Parliament since the central bank was founded in 1998.

“People don’t want to think very hard, so they come up with their own friends, and they’re all boys,” Rey said. “There are plenty of qualified women, the networks exist, and then there’s self-inhibition. That’s why I think it’s good to show that things can be done.”

To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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