Archive

Recent claims, particularly in Paul Krugman’s column and blog, on the superiority of the Hicks-Modigliani version of Keynesian economics calls for a re-thinking of the issues raised in the early controversies over what Joan Robinson called “bastard Keynesianism”.

Adair Lord Turner’s powerful comments about the global economy’s addiction to private debt are continuing to reverberate around the world.

Who wields supreme power over the ECB? This column analyses the recent ruling by the German Constitutional Court that the ECB cannot act as lender of last resort. Although seemingly couched by the referral of this decision to the European Court of Justice, this is a bid for power and the return to the pre-crisis paradigm of ‘ultra posse nemo obligatur’.

In this “New Economic Thinking” interview, EBRD Chief Economist and Special Adviser to the President Erik Berglof, who also is a member of the Institute for New Economic Thinking’s Governing Board, discusses the report’s findings with Institute President Rob Johnson.

A showdown has taken place within Italy’s governing coalition.

Institute for New Economic Thinking grantees Christian Belabed and Thomas Theobald and their co-authors have revived this old theory as a hypothesis to explain the apparent statistical link between rising income inequality and current account deficits.

We invited Thomas Scheiding from Cardinal Stritch University to review what we know about the scholarly communication process in economics. Tom has written forcefully on the history and economics of economic literature (see for instance, his 2009 JEM article). His latest is a study of the scholarly communication process in physics (an article in Studies).

Inflation targeting insufficient: central banks and governments must manage the quantity and mix of credit created

Sometimes new tools are what we need to create new thinking.

Two separate narratives have emerged in the wake of the Global Financial Crisis. One interpretation speaks of private financial excess and the key role of the banking system in leveraging and deleveraging the economy. The other emphasizes the public sector balance sheet over the private and worries about the risks of lax fiscal policies. However, the two may interact in important and understudied ways.

Last week the “Macroeconomics in Perspective Workshop” was held at the Department of Economics of the Université Catholique de Louvain (UCL), in Louvain-la-neuve, Belgium

Reflections of the Université Catholique de Louvain “Macroeconomics in Perspective Workshop”

India’s economic leaders are determined to rein in skyrocketing inflation, but the country’s volatile political landscape may prevent reforms from taking hold.

Lazonick discusses how we evolved from a society in which corporate interests were largely aligned with those of broader public purpose into a state where crony capitalism, accounting fraud, and corporate predation are predominant characteristics.

Fears that bank regulation or capital controls could lead to a “balkanisation” of global capital markets are overstated and should not constrain policy action to address the problems created by volatile short term capital flows and excessive credit creation, says Adair Turner, Senior Fellow at the Institute for New Economic Thinking and former chairman of the United Kingdom Financial Services Authority.

Bubbles have become a major focus of discussion in today’s financial markets. But very few people actually define what they mean when describing this financial phenomenon.

The Institute will host the Winter School on Law and Finance at Columbia University’s Global Center in Paris on January 6-9, 2014.

Did the so-called “Scandinavian approach” offer a better alternative than the Geithner plan?

Corrado DiGuilmi and Laura Carvalho, grantees of the Institute for New Economic Thinking, have individually been exploring two possible alternative analytical entry points: mean field methods from physics and stock flow consistent modeling from accounting. The idea behind their grant is to work together to combine these two approaches, the first bottom-up and the second top-down.

This paper analyzes equilibrium, dynamics, and optimal decisions on the factor bias of innovation in a model of induced innovation.

This research project discovers how real people, not just the abstractions of traditional economic theory, respond to various possible policy interventions aimed to bring climate change under control and thus which policies will have the biggest impact.

This research project studies the pricing and liquidity implications of sentiment and disagreement as origins of radical uncertainty in financial markets.

This research project develops a new field of anthropology: the anthropology of financialization, focusing on China and two main institutions of financialization, management consultancies and fund managers.

This resarch project examines the economic theory, policy, and international political economy of cross border finance in the run up to and in the wake of the global financial crisis of 2008.

This research project seeks to develop a theory of how bubbles and crashes can arise even when all agents are rational, informed, and trading in perfect markets.

This research project develops a novel framework to capture both instantaneous and dynamic contagion mechanisms arising in financial networks when balance sheet linkages across entities exist.

This research project uses statistical physics and network analysis to understand and explain the contagion and panic effects associated with crises that are unexplained in standard economic models.

This research project explores the sources of and remedies for financial instability as well as the relationship between traders’ choice of a price-setting mechanism and market structure and the relationship between market freezes and the amount of intermediation in the market.

This research project investigates the reasons behind the US financial crisis by applying the tools of the history of economic thought to the postwar evolution of US antitrust law and economic

This research project integrates two research paradigms to understand the degree to which financial markets can be reformed in order to nurture value creation and :capital development” rather than value extraction and destruction.

This research project contends that Piero Sraffa tried to develop an economic theory that could stand up as an alternative to the orthodox theory of value and provide a foundation for the Keynesian and post-Keynesian alternatives.

This research project establishes a long-run global picture of economic inequality as revealed by fiscal records and analyzes the long-run drivers of inequality as well as the distributional impact of banking crises.

This research project incorporates recent US data to update empirical analyses of regional growth and utilizes case study strategies of American regions to investigate the underlying causal mechanisms of inequality.

This research project follows freed slaves from when they first applied for their land under the Southern Homestead Act until 1900 to learn how access to free land influenced their economic progress.

This research project addresses a need for a more comprehensive estimation of the distributional impact of various policies attempting to limit carbon emissions in the United States.

This research project replicates a large number of studies by teaching replication to students, with the results included in a wiki project about the replicability of research.

This research project provides insights into how the lending market and resale market for asset-backed securities could have broken down during the 2008-2009 financial crisis, leading to a near-collapse of the banking sector and to a significant decline in real loan activity.

This research project explores the interaction between group identities and decisions to engage in collective action to secure access to public goods, such as education.

This research project proposes a large-scale simulation of how distress and growth propagate through the real economy via a network of trade credit between firms.

This research project aims to change the conventional wisdom about how global banks take and manage risks and generate ideas that are both innovative and useful to realistic thinking about policy.

This project studies a broad array of financial institutions to discover the impacts of financial regulations on functionally efficient finance, productivity growth, and income distribution.

This research project builds on theory indicating that credit flows to the real sector have systematically different effects from financial flows to asset markets.

This research project studies contagion among financial institutions and the role of financial market regulation in weakening or strengthening the transmission of financial turmoil across institutions.

This research project develops a model of foreign exchange markets in which agents’ expectations are explicitly modeled and evolve over time and examines how these models perform in terms of capturing the behavior observed in the experiments with human subjects.

This research project designs and evaluates new strategies that can address the issues of financing human capital investments by developing and estimating a unified framework.

This research project proposes linking emission fees to actual temperatures, thereby helping to break the policy stalemate and reach agreement on an effective policy.

This research project creates a systematic and publically available database of macroeconomic and structural conditions in all IMF loan agreements signed after 1987.

This research project analyzes the role of investment in the operation and performance of three broad high-technology sectors: communication technology, biopharmaceutical drugs and medical technologies, and wind power, solar power, electric vehicles, and the smart grid.

This research project introduces heterogeneous microeconomic behavior into a demand-driven stock flow consistent model to study the links between microeconomic financial fragility and macroeconomic instability.

This research project analyzes the country-specific effects of inequality within a stock-flow consistent macro model and within a DSGE model with heterogeneous and interacting households.

This research project seeks to understand the linkages between the changes in the financial economy and the behavior of households in the real economy.

This research project organizes a systematic database of policies implemented in response to crises, focusing on fiscal and monetary measures, in order to identify policy action rather than simply looking at endogenous outcome variables.

This research project addresses in depth the questions of the nature of economic uncertainty, with the aim of revisiting from a new perspective many of the questions that have been raised by the recent crisis both in finance and macroeconomics.

This research project captures systemic risk of the credit market by combining information about the level of fragility of individual economic entities with the network structure of their mutual credit exposures.

This research project constructs new measures of slavery as a state-sanctioned property rights institution and documents how slavery impacted economic development in US history.

This research project deepens the understanding of the history of economics as a discipline by making economic texts of historical importance available to students and scholars and by translating the important historical works of economics into English.

This research project reinterprets the events causing the British Industrial Revolution by showing that the Glorious Revolution of 1688-1689 was significant in causing the divergence of political institutions which led to the divergence of economic institutions and policy.

This research project analyzes the history of the concentration of bank regulatory authority within the Federal Reserve and explores the public policy issues arising from that concentration.

This research project examines the value of political connections between corporate groups in Italy and the National Fascist Party (PNF) during the years of Mussolini’s rise to power (1921-1929).

This research project uses reflexivity thinking to develop a theory of reflexive economic agents whose behavior is central to both the theory of innovation and to the explanation of phenomena such as bubbles, cascades, and herding that are inconsistent with DSGE/rational expectations macroeconomics.

This research project focuses on the role of the representative agent in recent macroeconomics and general equilibrium theory, with a particular emphasis on how different the situation was in the economic theorizing of the first neoclassical synthesis during the 1950s.

Does it matter if the Rational Expectations Hypothesis is unrealistic?

We analyse the link between income distribution and the current account for the period 1972-2007. We find that rising (top-end) personal inequality leads to a decrease of the current account, ceteris paribus.

Given the choice, would you accept to live in a society where happiness and prosperity is guaranteed for all on the condition that one single person be kept permanently unhappy? Is the well-being of thousands of people “worth” the sacrifice and suffering of a single innocent child? Such is the dilemma to which the inhabitants of the utopian city of Omelas are confronted in Ursula Le Guin’s philosophical short-story “The Ones Who Walk Away from Omelas”. In her parable, most people are ultimately able to come to terms with the atrocity. The few citizens who cannot end up walking away from the city — nobody knows where they go and they are never heard from again.

What is most demoralizing to participants in the financial markets? Falling prices? Constant volatility? How about a vacuum of trust?

More than five years after the fall of Lehman Brothers we are still dealing with the problem of high unemployment, the worst kind of “waste” in economic theory. Is there a better approach?

The main goal of the macroeconomist is to understand the sources behind business cycles and the behavior of financial markets in the modern economy.

I’ve already blogged on how undergraduate education evolved at MIT in the postwar era here and here, but since Mike Konczal and Paul Krugman make the case that, to bring introductory economics closer to the real world, macro should be taught before micro as Samuelson did in the first 13 editions of his Economics textbook, it may be worth returning to it.

What happens when a market-based economy becomes a market-based society?

In the past decade, the volume of literature in the history of economics has been of 500 articles and just under 50 books a year. The graph below traces the count in two year intervals (articles left axis, books right axis). The absolute volume is stable but given the growth of economic literature in the period, stable might be rebranded as static.

Household indebtedness in the United States grew dramatically during the decades leading up to the financial crisis.

The Bank of England took the first step in putting the brakes on the surging property market as it scrapped the United Kingdom’s flagship initiative that encourages mortgage lending, introduced earlier this year by Treasury minster George Osborne.

Germany’s economic policies are under attack from all sides.

Historians like labels. X history. History of y. The labels carve out subjects, set boundaries in time and space, at times even suggest methodological commitments.

Jan Kregel on the Continuing Risk of Derivatives

Most of us probably think of management consultancy as a technocratic function, helping companies fix internal problems in order to become more productive. But Institute for New Economic Thinking grantee Kimberley Chong thinks about it in a different way, by viewing management consultancy through the lens of cultural anthropology.

The short answer is yes. For the long answer I will make you sit through seven paragraphs.

In response to widespread discontent among students, employers, and university teachers, a project to create a new core curriculum for economics was launched at a seminar hosted by HM Treasury today. The CORE curriculum project, funded by the Institute for New Economic Thinking, convened the meeting, which was attended by academics, policymakers, business leaders, and students from around the world.

Institute for New Economic Thinking grantee James K. Galbraith will be awarded the 2014 Leontief Prize.

Why does Benn Steil’s history of Bretton Woods distort the ideas of Harry Dexter White?

Adair Lord Turner, former Chairman of Great Britain’s Financial Services Authority and current Senior Fellow at the Institute for New Economic Thinking, argued in a keynote address to the Federal Reserve Bank of Chicago on Thursday that central banks must be equipped in future to address the dangers of excessive private sector leverage, using both pre-emptive interest rate policy and macro-prudential policy tools.

In our two papers, we analyze how changes in personal and functional (wages versus profits) income distribution interact to produce different macroeconomic outcomes in different countries. On the basis of a stock-flow consistent model calibrated for the United States, Germany, and China, simulations suggest that a substantial part of the increase in household debt and the decrease in the current account in the United States since the early 1980s can be explained by the interplay of rising (top-end) household income inequality and certain institutions (e.g. easy access to credit, privately financed education and health care systems).

Adair Lord Turner, former Chairman of Great Britain’s Financial Services Authority and current Senior Fellow at the Institute for New Economic Thinking, will argue in a keynote address to the Federal Reserve Bank of Chicago on Thursday that central banks must be equipped in future to address the dangers of excessive private sector leverage, using both pre-emptive interest rate policy and macro-prudential policy tools.

Studies in psychology, neuroscience, biology, and many of the social sciences have long illustrated that human beings react very different from what economics textbooks tell you to expect when they are operating under conditions of radical uncertainty.

We develop a three-country, stock-flow consistent macroeconomic model to study the effects of changes in both personal and functional income distribution on national current account balances.

In this interview, Eric Weinstein explores many creative ways that physics and more sophisticated forms of math can be used to rescue economics from itself and restore its now tarnished reputation.

The destruction of trust is not an accident.

This workshop has the dual aim to expose mathematicians to new research problems in economics and economists to new techniques and developments in mathematics.

The rescue of Cyprus was a microcosm of how the nations of Europe have failed to work together to adequately address their ongoing financial crises.

In the aftermath of the 2008 financial crisis, distrust in the financial sector was widespread. Even after the mess appeared to be cleaned up, the uncertainty over whether the worst was over remained real.

Finance is built on trust. It is based on promises about tomorrow, often paper promises backed by nothing other than words on a page. When trust in those promises breaks down, so too does the financial system. That is the lesson of thousands of years of history.

In standard economics, inequality in outcomes is typically attributed to inequality of inputs, for example, from differences in education. Yakovenko thinks about inequality in a different way by extending some ideas from statistical physics.

The United States government openly flirting with a default on its debt is, to the financial system, like a Pope wondering out loud about the existence of God.

When Greece’s sovereign-debt crisis threatened the euro’s survival, U.S. officials called their European counterparts to express bewilderment at their inability to resolve the issue.

Inequalities in skills are fundamentally linked to economic and social inequalities.

So, most Nobel Prize exegetes went a long way, this week, toward explaining that asset pricing is not primarily born out of theoretical reflection but out of prize-deserving empirical work.

In the aftermath of the global financial crisis, few would dispute the risks of excessive borrowing. But which debts should one worry about – public or private? This column presents new research on the interplay of public and private debts since 1870 in 17 advanced economies. History demonstrates that excessive private-sector borrowing plays a greater role than fiscal profligacy in generating financial instability. However, when the credit boom collapses, the government’s capacity to alleviate the downturn is limited by the prevailing level of public debt.

This episode features grantee D’Maris Coffman of the Centre for Financial History talking about her organization’s commitment to a New Financial History and what the fruits of their approach can tell us about modern debt crises and sustainable debt levels.

Advisory Board members Carmen Reinhart and Kenneth Rogoff today issued a response to recent criticism of their paper “Growth in a Time of Debt.”

This episode features Pier Carlo Padoan, Chief Economist and Deputy Secretary-General of the OECD, talking about the euro zone crisis, Europe’s structural problems, and how uncertainty has damaged economic growth in Europe.