Gita Gopinath on Trade, Currencies, and Economic Transformation

24:27Tyler Cowen:Should we as economists be happy to see stablecoins introduced into Argentina becoming significant, possibly over the longer run supplementing or even replacing the peso? Is that good or is it bad? It harms their state capacity too much? Or what do you think? So, you know, the way I think about it is that, I mean, some of these innovations serve as a bit of a disciplining device, right? The fact that a country, people in the country have an option to hold their money in more stable forms of currency is a disciplining device on the government and what it can do and therefore puts pressure on having good policies in the country.

25:06Right now, we know, but do we want to move to a situation where Argentina is dollarized? By the way, that was Millet initially actually, I mean, he campaigned on the grounds that he was going to have a move to dollarized economy and he hasn't done that. I would say that I think that's good. I mean, because first of all, there is no panacea in terms of saying this because you're dollarized, you are safe or you're a well-managed country. I mean, the two main dollarized economies of the world, Ecuador, El Salvador, are all in programs with the IMF because ultimately, if you don't have the right fiscal policies, you're going to end up needing a bailout in any case.

25:45So that's not a panacea. And of course, I am of the view that monetary policy is still very valuable for stabilizing economies. And so if you can get the credibility and the central bank independence, then having your own currency gives you much more ability to stabilize your economy.

26:07Tyler Cowen:But take, say, the euro area. Both Milton Friedman and Paul Krugman thought the euro was a mistake. They disagree on many other things. there was a major euro crisis. What did Friedman and Krugman get wrong? If fixed exchange rates aren't so great, why not just let the different European nations have floating rates to some extent? You know, maybe Benelux would be a fixed rate, but the others let them float. Same argument. You know, the origins, as you know, there's the origins of the formation of the European Union and then the euro was a political contract. Sure, but we as economists, should we be happy about the euro or regret it?

26:42If we say we could ask ourselves the same question about saying, well, in the U.S., let's take the United States. It's a large country. There's states like California, very, very high income and states that are much less high income. We are part of a currency union. You know, is there an argument to be made that it would be better if everybody didn't have? No. So there is, again, this optimal currency area argument. And in the case of Europe, the way I think about it is if they can get increasingly to the goal of actually being truly integrated in terms of their product markets, you know, have much less regulation that prevents trade across the borders of countries, you know, then in that case, these are the benefits from having that.

27:25So at this point, I don't think the debate of whether the euro is useful is really not that important anymore. I think that we are here and there is a lot that can be gained if the European Union and the euro countries were to be truly integrated in the sense of having a lot more trade across the waters, a lot less restrictions. Right now, as we know, that there is an issue with not having enough scale in their companies. All of that can be fixed. So I think that's the more interesting question than whether the euro makes sense.

27:56Tyler Cowen:But there's countries that are not on the euro, right? And they face decisions. So Denmark has had a very strict peg, but they don't actually formally use the euro. And that's a choice they face. Iceland faces this choice, Armenia. And we as economists, I would be inclined to tell them not to enter the eurozone and to stay put. That seems like a pretty important choice. And what would you tell them? I mean, again, this is very country-specific, because there are countries that could gain the credibility by actually tying their hands with their currencies. and they get the access to the markets and they get better terms for it and they get funding from the union.

28:34That's been very helpful for a lot of countries to get transfers. That helps from their own personal perspective. That can be helpful. But if you're a country otherwise that's well-managed, no need for resources from other countries or anything of that kind, then in that case, your flexible exchange rates are helpful.

28:52Tyler Cowen:Now, Scott Sumner argues we shouldn't be worried about trade imbalances at all. We don't worry about them across American states. A lot of the EU has a pretty big current account surplus. Not many people are worried about that. Yet when it comes to China, the talk is all about trade imbalances. And Scott argues that's more of a political project than an actual economic argument. Do you agree with Scott or not? I would agree with Scott along the following lines, which is that the trade imbalance in and of itself is not something that we should be focused on. I think what we care about is welfare and involves jobs and consumption, what's inflation, purchasing power, and so on.

29:34People even wake up in the morning saying, okay, my current account deficit is too big or my current account surplus is too big. If all of your policies that were delivering good outcomes for your country were to bring along a deficit or a surplus, that's perfectly fine. There are lots of good reasons to be running deficits and surplus as we know. There's nothing that tells you that you shouldn't. The problem arises when you have policies that countries have in place that are inconsistent with any kind of a balanced growth model, and they manifest themselves in these trade deficits and supplications.

30:08So this is what I'm saying as an economist. Now, of course, from politicians' perspective, there are other arguments for why they would point to it. So what we have seen historically over and over again is that whenever you had these increases in these deficits and supplices, you've had trade wars or protectionism, calls for protectionism. That's what happened during Reagan's time, 1980s. That's what led to the Plaza Accord and then all the adjustments that followed after that. Then you also do worry about the possibility of crises. The great financial crisis was preceded by growing imbalances.

30:48And there was a sense in which all this big savings glut, all this money flushing around, all these large surpluses and deficits were part of the problem. I would say we are now in this third wave of concern about imbalances. So to be clear, it's not the imbalance itself. As an economist, I would say that it's not the imbalance itself. You don't wake up and say, this is what I'm trying to prevent. I'm trying to prevent us from having a deficit. I want us to have balanced trade. I think that's bad economics.

31:14Tyler Cowen:But say China is channeling what would have been wage income into investment, and that's plausibly the case. Now, it may be politically unstable in the sense that we Americans object to it, but that's not an argument per se, right? We have a choice as to whether or not we should object to it. It doesn't seem that rigorous to say, well, this will cause another financial crisis like 2008. There's just not real evidence for that. So Scott Sumner would say, let's just be happy. We have cheaper goods. We send them paper. We get back stuff and go our merry way. And why is that wrong? Okay. So then I would, a few things.

31:53So can go into these differences between trade deficits and supplices versus what I would call sectoral imbalances. right? The fact that manufacturing is, China's running a big manufacturing surplus, which is different from a trade surplus itself, or that it has big EBI production. What we do recognize, again, is that we do a pretty bad job in moving or helping workers that have lost out, have lost their jobs in certain sectors, right?

32:21Tyler Cowen:But we're at full employment now. We're very close to it. Yeah, but it's, again, we're at full employment right now, but we've had this period of time when we had communities that were deeply affected by, and not just trade, I mean, automation was a big part of it too. But we don't do a great job in terms of getting people back into jobs. And that can affect, I mean, depending upon your ideal welfare function for the country, if you care a lot about those people, then obviously, in that case, that's something that should matter in your policy decisions. But in the case of China, I mean, I would say firstly that we are very far in both the case of the US and China.

32:58We're very far from the world where countries are doing good policies. And this is all about comparative advantage. And this is all about this would be the outcome we would have in a world where every country was doing the right policy. We're very far from that. China's surpluses are a reflection of things going wrong in China. It's not a reflection of strength in China. It's a reflection of weak consumption. It's a reflection of misallocated resources going into different sectors. They did that with their property markets. Now they have a huge property market problem that they haven't been able to fix in five years.

33:33They have this now with other markets, including the EVs and other sectors. They have the problem with inflation being too low. They're trying to do so-called anti-involution policies, bringing companies together and telling them you've got to keep prices higher than what you're doing right now. So this is not the world where we have the plain good policies, and this is all comparative advantage, and this is the outcome that we see. So I wouldn't push the argument that we should be just happier with cheaper goods from China.

34:04Tyler Cowen:Should there be a digital euro? And if so, how do we control or regulate access so there's not too much disintermediation of private sector banking? It seems the more people can use the digital euro, the more disintermediation you get. If only a few parties can use it, maybe that's fine, but there's hardly any advantage to a digital euro. How do you think about those trade-offs? I have a particular view on the whole discussion on digital money broadly. I mean, in this space, stablecoins comes in too, which is the closest to digital money because it's basically backed one-to-one by a fiat currency and can be used for payments, unlike the others.

34:43There is the question, do we need this technology? The best argument I've heard from it is that, okay, well, it's going to help cross-border payments because that's where the true frictions are. But if you look at the data in terms of the actual cost of doing a transfer using stable coins, when you include the on-ramping and the off-ramping into fiat currency, it's not clear at all that this is a cheaper way of doing it. Then there is the argument that we need to be able to do 24 hours banking and we need to tokenize all the assets so that we can move them at fractional amounts at infinite speed.

35:24Again, what's the true value of that? It's somewhat unclear. But there is somehow this sense that we are in this equilibrium. There is private money in the form of private stable coins coming out. And by the way, one thing I do like about stablecoins is that they're finally putting pressure on the banks, on the traditional banks, to actually pay attention to the prices that they charge for their services, especially across border. So I love that. That's a good competitive fringe argument for them. But over and above that, what is the benefit of all of this?

35:55Tyler Cowen:But it would be weird if money stopped evolving, right? Money evolves over centuries, millennia. To think that we'll never have digital monies seems highly counterintuitive. And if we're going to have them, shouldn't we have quality ones through central banks, like the European Central Bank, which at least talks about doing it. And thus, we should do it because the alternative is worse. We'll get it worth digital money. Okay. So firstly, Tyler, we have digital money. We're not, all of the banking that happens is based on ledgers and it's all digital. But truly digital programmable money, right?

36:28You could do that with the ledgers that exist too. It's not as if the technology doesn't exist. This is about whether you want to use blockchain technology versus another technology. There are many, we've come so far from using any kind of physical cash. It's all digital right now.

36:42Tyler Cowen:But it's also about giving more people direct access to central bank payment systems, right? That's where the disintermediation would come in. Yeah, but the question is that, I'm not sure. I mean, what is the need for that, right? Why do they need to have accounts with central bank? So if you want to go along and say, okay, well, now it exists, this exists, and should there be central bank digital currencies? I think the concern there is that if you are in a world where it's all privately issued stablecoins and for some reason we all gravitate to that world and at some point, you know, one of the stablecoin issuers decides that, well, we're going to not be linked to the dollar but linked to something else.

37:19That's the kind of difficult scenario that one would need to worry about. And then you're saying, okay, well, again, the central bank digital currency works like a competitive fringe and says that we're there, we can step in when there's any misuse of this kind of power that the private firms may have. Again, I mean, there's a reason why central banks everywhere are still scratching their head about what exactly they should do about this. If you think of the countries that have introduced central bank digital currencies, you think of China. Nigeria has experimented with it. There hasn't been much take-up at all.

37:52Tyler Cowen:Again, this is August 2026. Some of my friends are quite worried, whether correctly or not, that possibly the marginal buyer for U.S. treasuries today is both private and with some leverage. Some people say, oh, this is UK hedge funds. I don't know if that's true or not. But if I want to set their minds at ease and tell them the treasury market is going just fine, what argument should I make back to them? Alternatively, you might agree with them, but what's your view? Well, I guess if I were truly trying to be the advocate for saying, don't worry as much about treasuries, I would just say that the alternatives could look worse.

38:25I mean, the question is, if you want safe assets and where would you put it? There is the US, which has the most liquid, largest treasury market. But then if you look outside and you say, you know, one country that looks very, very good is Switzerland, but it is so tiny in terms of relative scale of its market that you're not going to, you're going to lose money when you put your money in there. The markets are very small. If you get France or Germany or, you know, any other country, Japan, it's not as if you would look around and you'd say that there are great alternatives. But that said, that's if I was trying to make an advocate for the treasury versus others.

39:01But I do think there is a problem. We have a problem in America with our fiscal situation, with what's happening with debt, with treasuries. I suspect more and more people are going to go into the short end in terms of what they hold as opposed to the long end. And you can see that with yield curves going up because it is the case that this isn't, you know, if you look at debt trajectories compared to other countries, including France or Germany or Japan and the others, it's the U.S. debt trajectory going forward that is particularly concerning in addition to what the levels that we're seeing right now.

39:36Tyler Cowen:I have another group of friends and they say that AI or artificial general intelligence, it will raise US productivity maybe by half a percentage point a year. This will be like 1995 to 1998 and the budget won't balance, but debt to GDP will converge at a ratio at something like 100, 120 percent and things will just be fine. Do you agree? I mean, if indeed, I guess what I would say is that if what you said is true and we do get growth going up persistently by half a percent or so, I mean, yeah, that would absolutely help in terms of the debt to GDP trajectory, just in terms of the math. I think that's very helpful.

40:14Tyler Cowen:But do you think it will? At this point, I cannot say that that will necessarily be the case for the following reasons, because even if the technology seems wonderful, I used it a lot, impressed with it. But as you can see, there's a lot of pushback against the use of AI. whether there will be widespread adoption is to be seen, how much more can this technology penetrate, you know, the way it gets used. I think there's question marks around that. And also, we could have a financial market correction that could have, even if the technology is wonderful, as we know that, you could have a correction, which then later on, you could have something better, but you could go through a correction.

40:52And in this difficult time, given everything else that's happening in the world economy, I don't know whether we are going to be on this glide path to just having half a percent higher growth.

41:03Tyler Cowen:Now, I have yet another group of friends who think that as AGI approaches, you probably end up with stagflation because real interest rates are quite high because the private demand for capital is so extreme. And that may even crowd out government borrowing to some extent. And some people will be losing their jobs. And you end up with pretty high inflation and some degree of unemployment. and that's an altogether new problem for central bankers. Agree or disagree? That seems a bit odd. I mean, I would think that if this is going to deliver the productivity boom. But there's an intermediate period where you get the demand for capital, which right now is very high, but the productivity gains from AI in this moment, we would agree, are quite small.

41:44Tyler Cowen:So for a while you have stagflation and then a radical deflation later on. So we're talking about now where we could have this period where with the build-out of all the AI infrastructure, we would get the demand-side effect, and I believe that is correct. I mean, I think that as of now, we are seeing the effect of the build-out of AI, which is more of a demand story, affecting prices and inflation, and there is. It's not a huge amount, but you're certainly seeing that show up, but you're going to see it increasingly. If the scales of investment that are projected actually materialize, There are some question marks around that too.

42:22But yes, in that case, the concern for, if it's a purely demand-driven shock, of course, for central banks, that tends to be an easier problem to manage in the following sense, which is, you know, worse as that there's no trade-off between inflation and output gaps or inflation and employment. That is true when you have a demand-driven increase in inflation. The concern is if you have a supply shock, then obviously you do have a trade-off in that case. But if it's a demand-driven inflation shock, then the right thing to do is to tame demand. But we shouldn't see.

42:58Tyler Cowen:But it's private sector stimulus, right? It's hard to tame that demand. People want to build all these data centers and compute. And real interest rates are high, and maybe that's bad for borrowing economies. We all know what the Volcker disinflation did to make the third world debt crisis worse back in the 80s, right? Are we going to see a rerun of that? And then the IMF will just be super busy over the next 10 years? No. So firstly, I think, I mean, I do hear about this fact that AI spend is insensitive to interest rates. I think that is a, you know, on the margin argument. If it turns out, if Kevin Warsh at Jackson Hole were to say that we are going to now start raising interest rates going forward, and that's because we're in an inflationary environment, I bet that that will change if there will be an effect on AI spend.

43:43So I don't think that that's the case. It's a matter of degree of shift that's going to happen. Debt crises and so on. So that's a good question. It's been very interesting because when I was at the IMF, I spent a lot of time on debt restructuring. The G20 created the common framework, which is basically how do we restructure a country's debt and do that with a platform that brings in official creditors and multilaterals and the private sector and so on together. So So, I mean, that seems like an efficient way to do it. So, yes, so that platform was created, the G20 was created. And I think what has been in a way surprising is that we haven't had those many debt crises, despite everything we've seen up and down and sideways in terms of shocks.

44:26That does not mean it won't happen. With interest rates going up even more than we've seen, we could see more countries in debt crises. Though I think the new question right now is what is the framework in a world where developed country bond markets are in trouble, real trouble? And I don't think we have that. And when I see what Secretary Besant is doing, it clearly seems like there's not that framework. But that could be an important area maybe in terms of thinking about, well, what would that look like?

44:59Tyler Cowen:What do you think the future of academic economics looks like if, say, an advanced AI could write a top five paper within two years with maybe modest human assistance, but nonetheless could do most of the hard work? That seems quite plausible today. Have I seen such a paper? I have not. But certainly you can write for third-tier journals today. It's probably doing a lot of that. And again, two years, progress is extremely rapid. Two years ago, you know, it didn't know how many R's were in strawberry. And now they prove math theorems or disprove them. And things like differences and differences, they're quite automatable.

45:34Tyler Cowen:And have the human work for a week and set the agents on the problem and come back with a review of economic studies piece. In fact, do 30 of those a year. Yeah, well, review of economic studies is a top five. But in this case, what I would say is that, you know, as economists, we are a social science. And we've always for decades wanted to be associated with the science part of it, because that makes us look more impressive, maybe. But maybe what's going to happen now is we're going to be associated more with the social side of the social science. And I see that. I mean, again, we'll see what happens in two years and what the technology can do.

46:10But as of now, it's very good at coding. It's very good that once you set up a problem and ask you to solve it, it'll do it very well. But it doesn't have a good sense of what are the right ingredients to throw into the model because there's no, there's an art to it. And so therefore, I'm waiting to see whether that's the case, whether there is good new insights that can come out of just an AI written paper.

46:37Tyler Cowen:Quite a few of the graduate students, especially from MIT, seem to be taking jobs at Anthropic or maybe OpenAI. What does this tell us about the future of the academic job market? Will there be an increasing brain drain of the smartest people into the private sector, which of course does pay a lot more? Well, I think there are actually two things that are also encouraging that shift, which is the other factor is what's happening with funding, what's happening with the National Science Foundation grants, what's happening with the tax on endowments, what's happened, right? And so that is leading us everywhere, including at Harvard, to hire fewer faculty.

47:19So there is less demand. There's going to be less academic positions available because of what we're seeing right now in terms of the policies coming out of this administration. Maybe that's a good thing. Who knows? But that's what the facts are. And so that's what the market is. And then on the other hand, you have where the jobs are and where the money is much higher in AI. So I think we're going through this period where, I mean, I can see why more good students and more PhD students and someone would be looking for jobs in the private sector.

47:48Tyler Cowen:And immigration is tougher also, as you must know. But does that mean there's a kind of golden age of academic economics that lies immediately behind us? And now, more or less, at least for humans, it's just going to get worse? I mean, I think that maybe is my own prognosis. But do you agree? There's one sense in which this feels a bit like the golden age for economics because of the big transformations that are taking place. You know, there's AI, but there's what we just talked about, the debt markets. There's what's happening with demographics. There's numerous areas where it seems like the whole global economy is churning and shifting.

48:27And therefore, I think we all wake up, in a sense, very curious and excited about what we should be trying to help answer. Yes, so this is not the great moderation period when we were, I think, writing papers on the derivatives. But this is the period where we have big structural changes. So this is a good period. And I think it's the responsibility of everybody, including economists, to engage on what we're going through in terms of major transformation.

48:54Tyler Cowen:Now, you're from a family from Kerala. Why does Kerala keep on electing communists? And how communist are they, really, at this point? It's been a long time, right? Are they just another party, in essence? Or is there something still communistic about them? Yes. So as you know, in every part of the world, what is, you know, whether you're a liberal or not liberal, or whether you're a Democrat or Republican, I mean, that definition of that just adjusts over time. So first of all, in the case of Kerala, with the exception of one election, the government in Kerala has always switched between being communist for one term, and then it goes to the Congress party for another term, right?

49:32So the label of the Congress Party is, you know, it's Congress Party. It doesn't say it's communist. But if you look at the policies of Congress, there are quite a lot to the left in the state of Kerala. So just to clarify to what you said, which was that we do have in Kerala, it switches between the Communist Party and Congress Party, the exception of one election since independence. Why do they tend to be very left-leaning? I mean, this goes to the history of Kerala also in terms of the Maharajas and the way things were done and the communist levels of education were highest in Kerala for a long period of time.

50:00So there are many factors behind it. And Kerala does benefit from repatriated income from the Middle East. They get a lot of it. That also helps. But they are moving. I mean, Kerala is actually moving towards doing more and more, you know, encouraging businesses and the private sector and so on. I think they're also moving in that direction. But what they do have is a very large social safety net.

50:23Tyler Cowen:And both Kerala and many parts of Sri Lanka, they seem to have much higher social indicators than many other parts of South Asia. There's better rights for women, however imperfect that may be. There's higher literacy. Public health indicators are much better. Why is that? And since it's Sri Lanka and Kerala, which are, at least in parts, ethnically or culturally similar, it doesn't seem it would be the Communist Party or some very particular concrete explanation. It seems more general. Oh, that's a good question. And I can tell you what I think, but the honest truth is I haven't exactly investigated this particular question.

51:00I just know that in the case of the, you know, the Maharajas of Kerala were very big on educating women. And there's some reason to think that that filtered through. There's also important large communities in Kerala, which were what I come from, which is matriarchal and not patriarchal. Not the head of the family, but in terms of who gets the property, the women and not the men. And I suspect that that plays a role. I mean, because in all of India, it's a patriarchy, except in some of these communities in Kerala. Though, like you, I would say that it's an imperfect patriarchy. There is still a lot that doesn't really seem fair to women.

51:41But there are some of these unique characteristics about it. And I think, you know, when I was growing up in India, I do remember having a lot of friends who made the point that their parents tried very hard to have a son. While I always grew up with the sense that girls were very important because, again, the matriarchy kind of lineage. And so maybe that plays a role too. But I am at this point way outside my area of expertise.

52:07Tyler Cowen:But you grew up in Calcutta with a Carolyn family. Is that correct? I was born there. I was very young when we moved out. What was I? Maybe three years old or four years old or something. And you went to an all-girls Catholic school? Yes. What's your view of unisex education? Do you have one? It worked for you, right? I'm in favor of it. You know, my poor son, I don't know if he was poor, but I was very excited to send him to Roxbury Latin School because it's an all-boys school. And I thought that was great as an education. But my take on the single-sex one was it was great because we did everything.

52:40Like, there was no roles defined in what girls can do and boys do. You know, when we put up a play, the girls were in the play, they acted, but they also built the stage. They did it all. And I don't know. I think that's cool.

52:55Tyler Cowen:Very last question. Now, your IMF tenure ended in 2025. You're back at Harvard, presumably recovering to some extent. and for your future. What do you plan on doing next, working on next, writing next, researching next? What for you is coming up? Thank you. Yeah, no, first of all, I'm really excited to be back and in the thick of all the discussions here. And, you know, given the times that we live in, I think these are very interesting times to be an academic too. And so, yeah, I mean, you know, I'm working on digital money, stable coins, because of my work on dollar dominance. I'm curious to know how this can affect dollar dominance or not.

53:35I mean, that's what Bulgaria, but also working on a project on AI.

53:40Tyler Cowen:What's your AI project? The AI project is, which I've just kickstarted, is actually looking at the impact of AI on jobs. Everybody else is doing that. But there is one difference, I think, that's not coming up in the conversations, which is people are tracking what the effect is on what's happening to jobs right now with the advent of AI. But what we've seen through past cycles of automation is that something like 85 % of automation-related job losses happen in the first year of recessions. So there's a sense in which there's a latent buildup of the fact that a pool of workers who, when there's a recession and you're in cost-cutting mode, companies lay off and then you have jobless recoveries.

54:21We saw that after the great financial crisis. So with my co-authors, I am working on trying to understand, to see what we can do right now in terms of tracking what that latent pool could look like. But I'm also interested in AI and financial markets and frictions and so on. And the last thing that I'm doing is I'm launching a global economics lab at Harvard with the mission to help advance an international economic order that benefits people everywhere. I mean, the way I see it is that we're at obviously a historic time in terms of the global economy, big transformations, shifts of protectionism, geopolitics, AI.

54:59And because now economics and politics are kind of getting a bit intertwined, I think it's harder for other institutions and multilateral institutions to be able to do full justice to the big questions that we face. And I think independent researchers have a role to play here.

55:15Tyler Cowen:And so that's what I am investing in. Great. Gita Gobanath, thank you very much. Thank you, Tyler. Thanks for listening to Conversations with Tyler. You can subscribe to the show on Apple Podcasts, Spotify, or your favorite podcast app. If you like this podcast, please consider giving us a rating and leaving a review. This helps other listeners find the show. On Twitter, I'm at Tyler Cowen, and the show is at Cowen Convos. Until next time, please keep listening and learning.