Why Keynes is important today
Peter Temin, David Vines 14 November 2014
The current debate on the efficacy of Keynesian stimulus mirrors the resistance Keynes met with when initially advocating his theory. This column explains the original controversy and casts today’s policy debate in that context. Now that concepts of Ricardian equivalence and the fiscal multiplier are formally defined, we are better able to frame the arguments. The authors argue that a simple model of the short-run economy can substantiate the argument for stimulus.
Macroeconomists have largely failed in explaining and recommending policies since the Global Financial Crisis of 2008. Today when thinking about fiscal policy they cite Ricardian Equivalence to deny the efficacy of Keynesian analysis (which was abandoned in the turbulent 1970s that signaled the end of rapid growth). They seem unaware that they have revived the views of Montagu Norman, Governor of the Bank of England, in 1930.
Global crisis Macroeconomic policy
stimulus, Ricardian equivalence, Keynesianism
Reconciling Hayek's and Keynes' views of recessions
Paul Beaudry, Dana Galizia, Franck Portier 01 June 2014
Hayek viewed recessions as working out excessive investments; Keynes viewed them as demand shortages. This column argues that they may not be as mutually exclusive as many think. Recessions may reflect periods of liquidation but this may be associated with inefficient adjustment involving unemployment and precautionary savings. Stimulative policy may be desirable even if it delays the full recovery.
There remains considerable debate regarding the causes and consequences of recessions. Two views that are often presented as opposing, and which created controversy in the recent recession and its aftermath, are:
recession, Keynesianism, Hayekian recession
The return of schools of thought in macroeconomics
Simon Wren-Lewis 24 February 2012
Just five years ago, macroeconomists talked about a new synthesis, bringing together Keynesian and Classical ideas in a unified, microfounded theoretical framework. Following the Great Recession, it appears that mainstream macroeconomics has once again split into schools of thought. This column explains why macroeconomics, unlike microeconomics, periodically fragments in this way.
Frontiers of economic research Macroeconomic policy
Keynesianism, Schools of thought, New Classical economics, freshwater, saltwater
Fiscal policy: What does ‘Keynesian’ mean?
Jonathan Portes 07 February 2012
What does it mean to be a ‘Keynesian’? This column argues that, like so much in economics, the label has become politicised. The cost is an impoverished policy debate that is resulting in millions of avoidable job cuts.
I joined the UK Treasury in 1987 and subsequently went to Princeton, where I studied with Rogoff and Campbell. Eventually, I ended up in the Cabinet Office, advising the Prime Minister, on the eve of the 2008 crisis. At no point during this period, however, did I think of myself as a ‘Keynesian’. Nor was it really a meaningful question. You might as well have asked a physicist if he was a ‘Newtonian’. Keynes was a great figure (indeed, one of the greatest Britons of the 20th century) and you had to understand his insights to understand macroeconomics; but the debate had moved on.
Macroeconomic policy Politics and economics
Europe’s new fiscal compact treaty does not outlaw Keynesianism and is a stepping stone to more progress
Jacob Funk Kirkegaard 06 February 2012
Europe’s new fiscal compact is seen by some as the death of Keynesian government spending. This column argues that such analysis is simply wrong. It says that there is still room for government spending in extreme situations, but that there are now more safeguards to maintain stability, reduce contagion, and placate German taxpayers.
In record time since the idea was first mulled over at the EU Council on 9 December 2011, Europe has compiled a new Fiscal Compact Treaty.1 Angela Merkel on the night of its final approval on 30 January called it a “masterpiece”. It is perhaps unsurprising, though, that not everyone agrees.
Germany, Keynesianism, Eurozone crisis, Stability and Growth Pact, Fiscal Compact Treaty
Germany spending is not the cure
Alberto Alesina, Roberto Perotti 17 June 2010
Many analysts blame Germany’s fiscal prudence for worsening the crisis. This essay argues that the monomaniacal focus on aggregate demand is based on slightly outdated and oversimplified Keynesianism. The real constraint on European growth is not Germany’s fiscal policy. It is the supply side rigidities that plague all European nations – especially those at the heart of this crisis. The demand side matters, but is it foolish to think that German budget deficit of 5% instead of 3% of GDP would solve Europe’s problems.
A widely held view in Europe goes more or less as follows. After the shock of reunification, Germany has sought to enhance competitiveness through a variety of means. The policy was remarkably successful, turning the “sick man of Europe” into a highly competitive economy. One implication, however, was an imbalance with the rest of Europe. Germany’s current account surplus find its counterparts in, amongst other places, current account deficits in southern Europe, especially Spain, Portugal, and Greece.
Germany, Keynesianism, fiscal austerity, Eurozone rescue
Farewell to the natural rate: Why unemployment persists
Roger E. A. Farmer 06 January 2010
Most policymakers subscribe to the existence of a natural rate of unemployment. This column provides a visual history of unemployment, vacancies, and inflation in the US and says there is no natural rate. It suggests the economy can rest in any equilibrium on the Beveridge curve, as decided by the confidence of households and firms that pins down asset values.
Is the new-Keynesian approach (Clarida, Galí, and Gertler 2000) right? Here I suggest that US data on inflation, unemployment, and vacancies is best viewed through the lens of old-Keynesian theory.
A dynamic (literally) description of the data
Here I provide a video of data that illustrates how events unfolded in real time. I proceed to connect these data with three strands of research.
unemployment, Beveridge Curve, Keynesianism