Why do nearly 80 countries choose to fully or partially peg their exchange rates against the U.S. dollar, and how much independence of their monetary policy do they give up by doing so?
Answers to queries like these can be elusive, whether you’re someone who feels like conversations about macroeconomics on the nightly news go over their head, or even an academic economist.
“Without having an empirically relevant model of exchange rates, it is impossible to credibly answer questions that concern, for example, the costs and benefits of common currency areas, such as the Euro Zone, which eliminate exchange rate fluctuations between their country-members,” said Oleg Itskhoki, UCLA’s Venu and Ana Kotamraju Professor of Economics. “Similarly, questions about the optimal exchange rate policy and the costs and benefits of partially managed exchange rates require such a theoretical framework as well.”
In new research, Itskhoki has developed new frameworks that will drive considerable thought in the field going forward. For these ideas, the 39-year-old whose research focuses on macroeconomics and international economics won the John Bates Clark Medal from the American Economic Association. The award is given to an economist under age 40 who is judged to have made the most significant contribution to economic thought and knowledge.
“This is the first time a UCLA faculty member has won this prestigious award,” said Jinyong Hahn, chair of the economics department. “Oleg Itskhoki is a star in the field of international economics who solved important puzzles in exchange rates and made it possible to understand the relationship between foreign trade and income inequality.”
Although he hailed from a family of physicists and inherited the family interest in the field, Itskhoki was born in the Soviet Union and grew up during the turbulence of transition-era Russia, during which the legacy of government control over science cast a long shadow. Seeing his older sister’s success in the more stable field of economics, Itskhoki followed in her footsteps.
He appreciated the opportunity to delve into scientific work that left his professional options open, giving him the security of knowing his economics research qualified him for a broader scope of work outside of academia than high-level physics specialization might have. And the puzzles and problems inherent in international economics policies fascinated him more and more the deeper he got into exploring them — especially since the field granted him more independence to follow his curiosity than he might have as part of a lab with rigidly established priorities.
“I truly enjoyed the work and as I went through school, I found myself more and more absorbed by it,” said Itskhoki, who came from Princeton University to UCLA in 2019. “I still am today — I feel so lucky having made what feels like a hobby I love into my life.”
In the official award citation listing Itskhoki’s research highlights, the association emphasized his key insight that financial market noise, rather than economic fundamentals, may be the main driver of exchange rates. This idea offers a unifying theory that solves five of the field’s major exchange-rate puzzles and provides a framework that many believe will serve as the definitive lens through which economists examine these issues going forward.
“Through his masterful application of empirical and theoretical tools, Itskhoki has revisited classic questions in both international finance and international trade, resolving long-standing puzzles and offering new economic insights into important phenomena in international economics,” the committee concluded.
Although the Clark Medal does not include a monetary award, it reflects an enormous vote of confidence from the entire field of economics. The Clark Medal is considered second only to the Nobel Prize in terms of prestige and it has long served as a precursor to winning that honor as well. Earning such a visible sign of respect from his peers means a lot to Itskhoki.
“It’s completely crazy — these things don’t happen. Well, they happen to somebody, but you never expect it to be you,” Itskhoki said. “The biggest, most pleasant part of it all is hearing from so many people that they were teaching my papers — and enjoying teaching them! I am so grateful to hear my work is influential in some ways.”
Crediting his mentors, colleagues and predecessors in the field, Itskhoki chooses to view his victory as a communal rather than personal victory. (His family, including his sister who inspired his professional journey with her own, couldn’t be prouder, he said.) Itskhoki is especially delighted to see “UCLA” now appear among the home institutions of Clark Medal winners, a list which has long been dominated by schools like Harvard and MIT.
“UCLA is a very special place, where public service, research and teaching are deeply valued,” Itskhoki said. “I find that so inspiring, and I couldn’t be prouder to see schools like us and UC Berkeley coming into their own as top national institutions for economics.”
Teaching remains a passion for Itskhoki — in addition to doctoral courses in macroeconomics at both the national and international level, Itskhoki also teaches an international finance course for third- and fourth-year undergraduates.
“Economics are in the news every day — for example, they were a big part of the COVID crisis conversation — and we discuss it all: the trade war with China, tax reform, inflation, food prices and the best way for governments to respond to it all,” he said. “The models we created cited by the American Economic Association has answers to some of these questions, and I try to keep everything grounded in real-world events. Whether or not we know it, economics affects us all so it’s important to see the state of thinking on these topics.”
As he looks to the future, Itskhoki doesn’t think in terms of awards or honors; he focuses on the next challenges he wants to tackle in his research.
“There is still a lot of work to be done on exchange rates; in particular we are now studying optimal exchange rate policies for the government using the insights from our earlier work," Itskhoki said. “I am also fascinated by the topic of the new high-tech industries and AI technologies and the associated questions of productivity and welfare measurement in the world with proliferation of AI.”