Finance

This paper, which is prepared for the Inagural Conference of the Institute for New Economic Thinking in King’s College, Cambridge, 8-11 April 2010, questions the preeminence of theory over empirics in economics and argues that empirical econometrics needs to be given a more important and independent role in economic analysis, not only to have some confidence in the soundness of our empirical inferences, but to uncover empirical regularities that can serve as a basis for new economic thinking.

The purpose of the paper is to argue for attention to be paid, not only to choice of theory, but also to choice of theoretical approach, in order to address issues posed by the crisis.

Since the outbreak of the Asian financial crisis more than a decade ago, world leaders have been searching for ways to make the global financial system more resilient, less crisis-prone, and better able to play its essential role in supporting broadly-shared growth.

As Carmen Reinhart and Kenneth Rogoff remind us in the title of their book, This Time is Different: Eight Centuries of Financial Folly, financial crises are nothing new (Reinhart and Rogoff (2009)). However, they often come as a surprise to many people because in most countries they appear only periodically.

The current debate on new Global Financial Architecture is, in a way, the continuation of the debate that was intensified consequent upon the Asian crisis.

Many people regard the recent financial crisis as a painful addition to an already massive body of evidence that demonstrates the inadequacy of today’s economic models of “rational” markets.

Eugene Fama, one of the founders of the so-called “Efficient Markets Hypothesis” (EMH), articulated early on the basic narrative that underpins it: “competition… among the many [rational] intelligent participants [would result in an] efficient market at any point in time [in which] the actual price of a security will be a good estimate of its intrinsic value” (Fama, 1965, p. 56).

The current economic and financial crisis, and it is both, has already imposed great costs on the global economy. Nor is there any guarantee that we have seen the worst and that recovery is now assured.

Economic theory has modeled itself on theoretical physics. It has sought to establish timelessly valid laws that govern economic behavior and can be used reversibly both to explain and to predict events.

The world economy in 2008-2009 has passed through the most severe economic downturn since World War II. This global recession was preceded by the collapse of some of the largest financial institutions in the world.

The Institute for New Economic Thinking convened many of the world’s most distinguished economists, academics and thought leaders at its inaugural Conference at King’s College, University of Cambridge.

This is not intended to be a purely historical paper. I am interested in the light the Keynesian and Hayekian interpretations of the Great Depression throw on the causes of the Great Recession of 2007-9 and in the policy relevance of the two positions to the management of today’s globalizing economy.

Learn to read, understand, and evaluate professional discourse about the current operation of money markets at the level of the Financial Times.

This lecture series is based on Brunnermeier and Sannikov’s research papers “The I Theory of Money” and “Redistributive Monetary Policy”

The aim of the two-semester sequence is to explore a coherent alternative to neoclassical and post-Keynesian theory that does not rely in any way on concepts of utility maximization, rational choice, rational expectations, or perfect/imperfect competition.

Some years ago, in the aftermath of the “great financial crisis” (GFC) of the first decade of the twentieth century, Paul Krugman famously remarked that “most macroeconomics of the last thirty years was spectacularly useless at best and positively harmful at worst”. It is the premise of this set of lectures that it is possible to do better, much better.

Many thought the financial crash was a final blow to capitalsim. Why does it still reign supreme? Anatole Kaletsky outlines the shape of things to come.