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India should consider itself lucky to have a man of Raghuram Rajan’s intellectual prowess to head its central bank, as announced this week, at such a precarious moment. Rajan will need all his academic and operational experience (professor at the University of Chicago, chief economist at the IMF, chief economic advisor at the India’s finance ministry) to rise to the occasion. He will also need one more attribute that I will discuss at the end of this piece.
In a now famous presentation made at the August 2005 Jackson Hole conference, Rajan, then at the IMF, argued presciently that financial sector development in the preceding years had counter-intuitively led to a concentration of systemic risk. Rajan was roundly criticized for coming up with a message starkly opposite to the groupthink of that period, which embraced the notion of the “great moderation”. His ability to recognize the hubris of the era made him stand out as the global crisis unfolded in the following years."
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