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The classroom and the real world: Claudia Buch on the intersection of academia and policy

24th February 2023: Claudia Buch, Vice-President of the Deutsche Bundesbank, addresses a group of economics instructors at Hochschule Bonn-Rhein-Sieg. The occasion? Pedagogical pioneer CORE Econ is launching Die Wirtschaft – the German edition of The Economy – and celebration is in order.

To set the stage, Buch paints a vivid picture of economic turbulence in Germany: high interest rates erode bank portfolios, rising costs of energy burden household finances, and technological, social, and political changes – digitalisation, demographic change, and geopolitical developments – place further pressure on an already vulnerable financial system.

Against this grim backdrop, Buch illustrates how her work as a macroprudential policymaker in this chaotic time resonates strongly with the teachings of CORE Econ.

She describes how, consistent with the philosophy of CORE Econ, data and evidence are central to the policy cycle. Using the example of recent policy action by the German Federal Financial Supervision Authority, Buch highlights the scenario analysis that goes into setting objectives, the analysis of the business cycle, banks’ capital buffers, and risk levels that informs policy choice, and the repository of Bundesbank data that aids policy evaluation.

I find myself thinking back to my first dip into the pages of The Economy, and my fascination with the hockey stick graph that immediately confronted me. Indeed, this was but a glimpse of the CORE Econ experience, where economic puzzles and phenomena are introduced and answered not with abstruse mathematical expressions, but with real-world data, and then with relevant modelling.

Buch then turns her attention to market frictions, which are crucial to her work on financial stability. In particular, she warns of highly inter-connected banks that may take on imprudent levels of risk with the expectation of a government bail-out in a time of untenable financial stress. She is pleased that CORE Econ doesn’t shy away from forefronting such imperfection in markets. In fact, Buch has co-authored a CORE Insight on Too big to fail: lessons from a decade of financial sector reforms.

At this, I recall that my first exposure to the economics of price-setting in The Economy came in the context of firms with market power, rather than the manicured supply and demand curves of perfect competition. Externalities and information asymmetries were not relegated to further reading, but actively addressed throughout – be they in the context of climate action, credit constraints, or labour markets.

Finally, Buch emphasises the importance of learning from past economic experience. ‘Economic history is rife with examples of a malfunctioning financial system,’ she laments, and wholeheartedly endorses the incorporation of these instances in economics pedagogy. Extreme cases, she postulates, are ‘the best way to understand the financial system.’ CORE Econ concurs, evidenced for example by the inclusion of detailed coverage and modelling of the Oil Shocks, the Great Depression, and the Financial Crisis of 2008.

As Professor Buch’s speech concludes, I feel a tinge of pride. As a current undergraduate student, it is a point of great satisfaction to have confirmation that the material I am being taught is current, relevant, and strikingly representative of the work of an economist. The classroom and the real world, I realise, may not be so different after all.

Authors

Gaurav Khatri

Stone Centre/ExploreEcon award winner.

Gaurav Khatri

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