In memoriam - Emmanuel Farhi

Emmanuel Farhi has passed away, aged 41.

Tenured at Harvard only 5 years after his PhD at MIT, he was the best macroeconomist, and undoubtedly one of the best economists, of his generation. As an economic theorist clearly on the Nobel track, Emmanuel transformed the theory of taxation, macroeconomics, and international finance.

Emmanuel was born on September 8, 1978 in Paris. His father, André Farhi, was like him an economist and his mother, Danièle Debordeaux, a social policy specialist.

His PhD, obtained in 2006, conceptualized, in collaboration with Ricardo Caballero and Pierre-Olivier Gourinchas, the consequences of global financial imbalances generated by a shortage of safe assets in high-savings countries and the resulting inflow of liquidity to the United States. This imbalance was a harbinger of the 2008 crisis, so much so that it contributed to the real estate boom and the increase in securitization in the United States. With Ivan Werning, Emmanuel also lay down in his thesis the foundations for a progressive taxation of wealth and capital in order to build a reasoned debate on a very sensitive subject. The first sentence of the article says it all: "One of the biggest risks in life is the family you are born into." These authors have also enabled us to better understand the dual role of taxation as a redistributive tool (from the richer to the poorer) and as a social insurance (from the active to the unemployed, for example) made necessary by the heterogeneity of individual trajectories. 

After his PhD, Emmanuel went on to publish a series of articles that transformed Keynesian macroeconomics. He did so by analyzing the conditions of its validity and its limits, never falling into the trap of thought-hindering prior beliefs. His work made explicit microeconomic imperfections at the root of macroeconomic failure, the only way to build a normative analysis and thus to formulate economic policy recommendations. He notably focused on slow price adjustment, the difficulty for the Central Bank to bring nominal interest rates below zero when cash guarantees a steady nominal value, the solvency constraints of banks and companies, the liquidity available in the economy, and (with Xavier Gabaix) economic agents’ behavioral anomalies. His work, which will continue to be relevant in the post-Covid economy, had a sole purpose: contributing to the common good and improving our economic policies.

Emmanuel notably came up with the idea of using fiscal policy to lower real interest rates when the Central Bank can no longer adjust nominal rates downwards: an increase in VAT recreating some inflation, accompanied by a decreasing trajectory of labor taxes to neutralize the impact of this consumer price adjustment on firms pricing response. Very technical for the layman, but innovative ideas to guide public policy, which only deep thinking can provide.

His insatiable curiosity then led him to the foundations of international finance. His work with Matteo Maggiori focused on a world in which risk-free assets, one of Emmanuel's favorite themes, are provided by one or more reserve countries. This work illustrates Emmanuel's ability to capture in a very simple model the essence of an important issue not previously understood. A country – say, the United States, whose dollar has long served as a reserve currency - caters to an investment demand from investors across the rest of the world. Having to provide the liquidity demanded abroad when needed may eventually lead to a risk of sovereign default and thus undermine confidence in that currency; or else the dominant country does not provide that liquidity and its currency may be overtaken by another currency: this is the "Triffin Dilemma". Emmanuel and Matteo analyzed the possibility that a multipolar world be more unstable than a world with a single reserve currency, reconciling the Keynesian stance with that of financial stability.

With his former student, David Baqaee, Emmanuel had been working recently on exciting new methods to analyze macroeconomics as a network of interacting industries and to see how economic shocks have cascading effects, with implications such as the tripling of the oil shock impact in the 1970s, or the current devastating economic effects of the coronavirus pandemic.

I have had the privilege of working with Emmanuel since his doctoral years. We began with the link between liquidity and financial stability: first analyzing the consequences of financial bubbles on economic booms and recessions; then working on the idea that the high level of short-term bank debt prior to 2008 was an equilibrium herd behavior forcing central banks to implement monetary rescues. Both studies called for macro-prudential regulation, which has been implemented over the past decade. We then analyzed the vicious circles (or doom loops) created by the mutual financial interdependence between banks and their sovereigns, a major current concern in Europe. More recently, we have stressed the need for sound policies to deal with the growth of shadow banking. In recent months, we were working on "monetary industrial policy", focusing on the strategies of states such as the United States and now China to attract savings and economic activity to their territory.

Emmanuel was always a creative and rigorous collaborator in his quest for the common good, and his generosity, humor and communicative cheerfulness made him a dear friend.

Emmanuel never stayed in his ivory tower. Member of the French Government’s Conseil d'Analyse Economique from 2010, he was involved in French intellectual life. A few hours before his death, he took part in a meeting of the French president’s “commission of experts on the major economic challenges" which Olivier Blanchard and I have the honor of chairing. His intellectual qualities and his always well-argued dialogue made him a much sought-after advisor to public decision-makers and to  French institutions, such as the Banque de France, who awarded him a prize in 2013 and who he actively advised, and foreign ones, for example central banks.

Emmanuel remained very close to France, where he returned as often as he could. He appreciated his home country’s culture and art of living. A lover of French poetry and literature and an avid opera-goer, he was very sociable and full of humor. A pure product of the French meritocratic republican school, he was also committed to the scientific life of his country. He came several times a year to the Toulouse School of Economics (TSE), where he shared his passion for economics with our young researchers and students. He sat for a long time on TSE’s scientific council and was a member of its board of directors. He organized numerous conferences in France and in Europe, such as a very successful one last September at the Central Bank of Luxembourg with the world's leading experts on the international monetary system.

With all his talent, Emmanuel could have been more than full of himself. He instead always remained modest and attentive to others. “Emmanuel was a real role model for me. I admired his extraordinary intelligence and his depth of mind whenever we talked about research, of course, but also the attention he paid to young researchers, his humility, generosity and kindness.” This is how Nicolas Werquin, a young TSE researcher, so accurately summed Emmanuel up in one of dozens of testimonies that I have received over the past days.

My thoughts go out to Emmanuel’s mother, Danièle Debordeaux, his partner Micol, his family, as well as to all his students, collaborators and the whole scientific and professional community. We have lost an unparalleled thinker and a great human being.


Jean Tirole

TSE Honorary Chairman