Economics has lost one of its greatest talents: the French economist Emmanuel Farhi passed away unexpectedly last Thursday at the age of 41. Farhi had left deep marks in various areas of economics within 15 years; not only the chief economist of the International Monetary Fund, Gita Gopinath, saw him as a “future Nobel laureate”.

Emmanuel Farhi was a professor at Harvard and an extremely hard-working and well-read scientist. Only a few of his numerous works can be viewed here. Its versatility has certainly benefited from its impartiality. “I don’t see my work in a particular tradition,” he said once. “I’m looking for inspiration from different sources and different traditions.”

Safe investments, interest and taxation

Together with his colleague Ricardo Caballero, Farhi had worked intensively on the economic consequences of the long-observed strong demand for safe investments. This demand is considered to be a major cause of the long-term decline in interest rates on safe investments. Caballero and Farhi have hypothesized that this strong demand can fuel a recession if interest rates fall to zero; they called this phenomenon a “security trap”. In his opinion, the US is overwhelmed in the long run with the role of the main producer of safe investments as its economic weight in the world decreases, Farhi said in an interview. Like many French economists, he was interested in questions of an international monetary system and the role of the dollar as a global currency. “There are few academic papers on this today,” he said last year. “I think that’s a mistake.”

The Frenchman also warned that a scarcity of safe investments in the form of government bonds from countries with good credit ratings would favor attempts to consider private investments as safe, which would subsequently prove to be unsafe. Financial stability had moved Farhi very much; he has published several works with the Nobel Prize winner Jean Tirole (most recently this one).

Farhi was concerned with the question, also discussed by German economists, why interest rates on safe investments are falling, but returns on equity have largely remained constant in recent years (for example here). “There is a lot of speculation as to what is behind this long-term fall in returns on safe investments,” he said. “One thing that I think is important, but which is sometimes overlooked in these discussions, is the fact that not all returns have dropped in parallel … Something special is happening with safe investments.”

He also saw an increase in the return on equity in the United States from corporate profits that result not from economic performance but from growing market power. This topic, which is widespread in America, is gradually spilling over to Europe. The Frenchman was also the author of several papers on the question of optimal taxation, if you drop the assumption that companies and private households always behave completely rationally.

Foundations of a new macroeconomics

In recent years, Farhi, who originally wanted to become a mathematician, turned to pure economic theory, which he considered out of date in many ways due to new mathematical processes and a large number of previously unavailable economic data. Together with his colleague David Baqaee, he committed himself to a far-reaching research program in which he dealt with, among other things, the question of whether the long-used overall economic production functions have a theoretical foundation at all. In simple terms, these functions in textbooks result in the production of goods and services by combining the factors of production labor and capital, taking productivity into account.

Over half a century ago, economists at the University of Cambridge in the so-called “capital controversy” showed that these functions can only be used under very limited conditions, which, however, did not particularly interest the mainstream economy. “Cambridge (UK) had won, but the controversy was too exotic and too complicated,” said the Frenchman in retrospect. “It did not lead anywhere.” Farhi, who also dealt intensively with the work of old masters who are neglected today, and Baqaee show how, based on the knowledge of our time, this topic can be dealt with fruitfully in modern network economies.

Farhi and Baqaee’s research program, which Farhi called “Macro as explicitly aggregated Micro”, hides fundamental questions. The old macroeconomic theory early used very detailed, but also very uncritically composed aggregates such as macroeconomic consumption, macroeconomic investment or macroeconomic capital stock and mostly very simple assumptions about the behavior of these variables were used (“The changes in private investment are dependent everything from changes in interest rates “).

Almost half a century ago, promoted primarily by Robert Lucas, the criticism of simple aggregations of individual economic behavior into macroeconomic variables began to usher in the end of the old macro. However, the next problem was that the new macroeconomic analysis was based for a long time on models that focused on a representative individual.

The criticism of this new simplification led above all to the consideration of more heterogeneity in the treatment of consumer decisions; now not all people in business behave like a “representative individual”. Farhi wanted to apply this principle even more and more fundamentally to macroeconomic models, questioning, among other things, how the concept of productivity is used today. “Davis Baqaee and I derived a new measure of productivity in the event that there is no complete competition, but market power,” said Farhi.

For modern network economies, such an approach is also very appealing because of the large amount of data available about companies, especially since companies are very heterogeneous and market power is increasingly becoming an issue again. But this approach also places high demands on modeling – for this reason alone, many economists are likely to be overwhelmed with such topics.


Most recently, the Frenchman was involved in several works on the Corona crisis. In a work for Brookings, he argued that politics should not respond to a second wave with a second lockdown, the economic consequences of which could be devastating. However, the authors are not satisfied with an overall view of the American economy, but break it down into 66 different industries that are examined. The authors do not recommend taking no measures against the virus at all; however, they primarily focus on precautionary measures in private life that are intended to prevent the virus from spreading.

Another work is more theoretically oriented, which in turn looks at the American economy with a view to individual branches and in which the authors make interesting simulations. For example, they derive an inflation potential of at least 10 percentage points from the virus-related supply restrictions, but this is neutralized by the considerable demand restrictions. Their conclusions for optimal economic policy are interesting, if certainly controversial. After all, stimulating overall economic demand is only about a third as effective as in a “normal” recession.

Farhi’s life

Emmanuel Farhi had attended several elite universities in France when he was young, but then moved to the United States, where he wrote his doctoral thesis at the renowned Massachusetts Institute of Technology (MIT) and received a professorship at the famous Harvard University at the age of 31. He also worked in policy advice. He also belonged to a German-French group of economists who, a few years ago, had submitted proposals for the further development of the euro zone.

Farhi was an economist who was committed to developing the most efficient models possible; he often got his ideas from business practice. He once said to a student: “Models are like magic. You want to give people the impression that you can pull a rabbit out of a hat, but you don’t want to let them know how to put it in. You have to surprise them! ”Even experienced economists have always surprised Farhi with his wealth of ideas. After the death news spread over the weekend on Twitter, there was great dismay. “RIP Emmanuel Farhi, a shooting star. Super brilliant, super nice, super humble. We loved you and should have said it more often, ”wrote Olivier Blanchard. Erik Berglof of the London School of Economics stated: “A huge loss for the subject – and for the world. Thought bigger and braver than most. He could have taken us to new places – and maybe he will if we catch up with him. ”

Keywords: Corona, Coronavirus, equity, Emmanuel Farhi, financial stability, Gita Gopinath, Jean Tirole, capital controversy, macroeconomics, market power, network economies, production function, productivity, Ricardo Caballero, Robert Lucas, safe assets, safety trap

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