Lucrezia Reichlin’s career has taken her in many different directions and it has also come full circle. She began in research and econometrics, working to create models based on data to better forecast the economy by understanding the characteristics of business cycles and why events like recessions take place. She later joined the European Central Bank and was there at the beginning of the 2008 financial crash, affording her a front row seat to a show that no one saw coming. Today, she is back in academia and with a lot of lessons learned.
At a glance
Title: Professor of Economics at London Business School
Field: Econometrics and macroeconomics
Current focus: Bridging data, modelling and decision making in addition to monetary policies and the business cycle
Side gig: She founded the Ortygia Foundation in Sicily
Ahead of the curve: She is one of the pioneers of big data and economics
Fresh water pass: Both a runner and a swimmer, she likes to stay active - but salt water only, please
An early bloomer: By her late teens, she had made the decision to pursue economics
Predicting the unpredictable
Reichlin’s work and research has focused on a broad set of questions but at its core, she has largely been concerned about simply understanding the economy. She uses the knowledge available today to better predict tomorrow.
As she sees it, economics is much more than mathematics. It is a way to better comprehend society as a whole and is something not to be looked at in isolation. Having a foot in academia, policy and practice has been essential to Reichlin in not only finding answers, but in getting the questions right.
“To understand the interplay between economics and institutions to me is a very important thing,” says Reichlin. “It’s important to understand how the financial sector is important for economic performance and we have a very poor understanding of that.”
She uses the word “abstract” to explain some of her early research, while in fact she was at the forefront of what is now known as big data. Models that bridge data with decision making, policy making and changes in the business cycle are now used by governments and institutions around the world.
Reichlin co-founded Now-Casting, a company that monitors macroeconomic conditions in the largest economies around the world. They do this by pulling data from a variety of sources that look far beyond GDP numbers.
“Now-Casting means forecasting on the present,” she says. “We don't know the future but we don't know the present either because we don't have timely data about the current state of the economy but you could use all kinds of other information.”
We don't know the future but we don't know the present either because we don't have timely data.
No longer business as usual
Looking at business cycles specifically has also been an important aspect of her work and, according to Reichlin, it is indicative of the evolution of the economy. In a world with 24/7 news cycles, rising protectionism and separatism, it can be difficult to distinguish what to worry about and when. While she sees the threat of separatism as a “low probability event,” she understands where the fear and uncertainty are coming from.
“Each country has big issues to solve,” she says. “There is this illusion that if we go back within our national frontier, we would be more able to solve them but it’s the opposite. We need to stick together.”
A crash course in monetary policy
Reichlin worked as the Director General of Research at the European Central Bank where in addition to ECB strategy and research, she examined the role of the relation between the financial sector and the macroeconomy. She had held the position for three years in September 2008, the beginning of the worst financial crisis in recent history, or as she refers to it “the day that changed the world.”
Governments were not the only ones called to intervene and save banks. At the height of the crisis, central banks replaced the normal market activity by providing financing, or liquidity, directly to banks. In the years since the crisis, she has spent time writing about the relation between the ECB’s monetary policies and the effects they had on bank behavior during that time.
“The central bank as an institution needs to not only do monetary policy effectively but also to guarantee the financial stability of the system,” she says. “And so there is this tension between doing too much and doing too little.”
The world of monetary and fiscal policy looks much different than it did in earlier years. In fact, when Reichlin first started in monetary policy, the central bank had one tool: the short-term interest rate.
“Today we are actually in a completely different world,” she says. “It has become a very interesting area not only for policy but also for research because we are really experimenting with a new set of tools. As macroeconomists we are living in very exciting times.”
Reichlin thinks that the ECB was very much at the frontier of what sometimes feels like almost a new field entirely.
Reichlin watched as an entire industry had to rebuild and redevelop. Not only does she welcome this level of change, she sees more on the horizon, particularly around the introduction of technological advancements in the financial sector. While she doesn’t believe we’re heading towards a cashless society as some argue, she does think the underlying systems are ripe for disruption.
As macroeconomists we are living in very exciting times.
Moving economics forward
It’s no surprise that with a career as rich and diverse as Reichlin’s that she is not afraid of change. It is precisely this preparedness to welcome change that she credits as the force behind her own motivation and success. While she has seen some positive change in the field of economics in recent years, it’s an area where she feels there is still room to grow both in terms of better communication and increased diversity.
“Our profession has to do a better job of explaining to people what we are researching and what the key insights are of years of research,” she says. “We are too inward looking, talking to our colleagues, and not talking to the public at large enough. You have to have courage to change.”
As for diversity, Reichlin sees mentoring and the presence of role models as a key component of this, showing to the younger generation what can be accomplished and how to get there.
“Even at the European Central Bank there were no senior women and now increasingly there are, and I see that at London Business School as well,” she says. “So there is kind of a multiplication effect. This becomes more normal.”
And who was her mentor? “I’m a self-made woman,” she smiles.