Language and Inflation

Macroeconomic controversy is largely a tale of three cities - Chicago and the two Cambridges - or more accurately a tale of the cultures and policy prescriptions associated with those cities. In the four decades between the General Theory and the monetarist counter-revolution, economists were \u27normally\u27 distributed around orthodoxy (the Keynesian Neoclassical Synthesis, the ISLM model etc.) with the Chicago version of the Quantity Theory two standard deviations from the mean in the right tail, and the \u27true believers\u27 in Cambridge England an equal distance from the mean in the left tail. The preferred method of orthodox research involved \u27formalist\u27 tools (a label that can be stretched to include econometrics and Walrasian equations). Penetrating the veil of macroeconomics reveals some successful language revolutions at work. ISBN: 033373045

Friedman and the Walrasian Equations of The Natural-Rate Counter-Revolution

From the 1930s, economic controversy has been a tale of three cities (Chicago and the two Cambridges) and three General Theories. In the 1930s, there were, in addition to the General Theory of Employment (Keynesian Macroeconomics), two other revolutionary attempts to don the mantle of generality: the General Theory of Method (the formalist revolution, involving structural econometrics and Walrasian general equilibrium) and the General Theory of Value (organised around the concept of monopolistic, or imperfect, competition). The Keynesian and formalist general revolutions became symbiotic and dominated the post-war landscape of economists. In contrast, the monopolistic competition revolution did not readily lend itself to general equilibrium formalism and, so far, has yet to achieve its promise (Tinbergen 1967, 268). ISBN: 033373045

The Rise of the Natural-Rate of Unemployment Model

With respect to political mythology, the Northern spring of 1968 is chiefly remembered (like its forerunner of 1848) as a \u27springtime\u27 of youthful and hirsute left-revolutionary fervour. This revolutionary wave could plausibly include a US President amongst its victims, broken by the weight of office. In contrast to all this tragedy and melodrama, with respect to influence over economic policy and all that flows from that, the most revolutionary call to arms of that time, was Milton Friedman\u27s American Economic Association (AEA) Presidential Address. Neither youthful nor hirsute, he was an advocate of floating exchange rates, monetary targeting, low if not zero inflation, the abandonment of fine tuning, lower taxes and less regulated markets. ISBN: 033373045

The long swings in economic understanding

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The Problem of Money Illusion in Economics

Money illusion in economic theory has been an assumption rejected for academic economists for quite some time. However, with the gradual diffusion of behavioural economics based on experimental research this has changed. Now, it has become a respected fact to accept money illusion as a stylized fact of human behaviour. However, it still needs a better understanding why monetary phenomena especially related to financial markets play an important role in understanding the real economy, the production, consumption and exchange of commodities and services. The author of this paper suggests that financial markets are particular engaged in intertemporal valuation problems which are common to any kind of economic activity. Since money is the unit of account, accounting problems related to the uncertain nature of future economic development makes a continuous readjustment of valuations in money units necessary. However, financial markets are imperfect as Minsky has pointed out. Because of these imperfections the possibility of significant long-lasting valuation problems emerges. One reason for this is that in standard economic reasoning the problem of intentional cheating is neglected. Furthermore major innovations like e.g. the ICT revolution with the Internet or the introduction of securitization as a means to redistribute risk as general purpose innovations make valuations of the long term to medium term impacts on the economy extremely difficult. The recent financial market bubbles are significantly related to such general purpose innovations. If monetary policy fails to control for irrational exuberance of investors about the future benefits and profits of such innovations, this inherently embodies the risk of a financial market shock, if expectations of the general public have to adjust after overoptimistic prediction about the future economic development. The author, however, considers that there are some early warning indicators which would give the possibility of timely action of policy makers to control financial market bubbles. The complacency of monetary authorities of the past decades to do so, has not primarily a diagnostic problem to deal with money illusion, but even more so with vested interests of insiders of private investors on the institution to control unlawful behaviour. By weakening the regulatory framework, failing to establish transparency and accountability of agents eager to get rich as fast as possible without taking into regard the rules of good governance the current global financial crisis of institutional failure to contain the instability of financial markets to an acceptable social level. Money illusion is so as well an expression that unfounded optimism about the self-regulatory discipline of market participates is sufficient to stop financial markets get out of control to an historical unprecedented level.Money Illusion; Imperfect Financial Markets; Regulatory Failure; Behavioural Finance

Foretelling the future

Forecasting ; Time-series analysis ; Econometric models

"Keynesian Fiscal Stimulus: What Have We Learned from the Great Recession?"

What have we learned from the Great Recession about Keynesian fiscal stimulus? This article contains five sections that develop the following five points: (1) There is confusion about what constitutes Keynesian fiscal stimulus; (2) Economists are deeply divided about fiscal stimulus; (3) A fundamental error has been committed by an influential economist in estimating the recession magnitude of the Keynesian multiplier; (4) A fundamental error has been committed by two influential economists in their analysis of the impact of the 2008 tax rebate on consumption spending; (5) Advocates of fiscal stimulus in recession should support keeping government debt low in prosperity.fiscal stimulus, fiscal policy, Great Recession

The ghosts I called I can\u27t get rid of now : The Keynes-Tinbergen-Friedman-Phillips Critique of Keynesian Macroeconometrics

This chapter offers a fresh perspective on the much publicised dispute between those followers of Keynes who presented econometric evidence in favour of a Phillips curve trade-off, and those monetarists who presented counter econometric evidence. Contrary to common perceptions, the collapse of the Keynesian Phillips curve was a vindication of a common critique of macroeconometric practices, which was jointly authored by John Maynard Keynes, Jan Tinbergen, Milton Friedman and A.W.H. \u27Bill\u27 Phillips. This analysis is informed by the usual sources, plus two sources which had been thought to be no longer in existence (Phillips\u27 private papers and the London School of Economics (LSE) Methodology, Measurement and Testing (M2T) Staff Seminar records), plus two essays by Keynes (1938a, 1938b) which have been overlooked in this context. ISBN: 033373045

The History of Macroeconomics from Keynes’s General Theory to the Present

This paper is a contribution to the forthcoming Edward Elgar Handbook of the History of Economic Analysis volume edited by Gilbert Faccarello and Heinz Kurz. Its aim is to introduce the reader to the main episodes that have marked the course of modern macroeconomics: its emergence after the publication of Keynes’s General Theory, the heydays of Keynesian macroeconomics based on the IS-LM model, disequilibrium and non-Walrasian equilibrium modelling, the invention of the natural rate of unemployment notion, the new classical attack against Keynesian macroeconomics, the first wave of new Keynesian models, real business cycle modelling and, finally, the second wage of new Keynesian models, i.e. DSGE models. A main thrust of the paper is the contrast we draw between Keynesian macroeconomics and stochastic dynamic general equilibrium macroeconomics. We hope that our paper will be useful for teachers of macroeconomics wishing to complement their technical material with a historical addendum.Keynes, Lucas, IS-LM model, DSGE models