DSGE Models are being thrashed everywhere. These are actually based on New Keynesian thinking which had become a vogue till this crisis. The New Keyensian thinking merges Keynes ideas (markets can fail) with classical economics (rational human beings). Wikipedia nicely explains it:
Two main assumptions define the New Keynesian approach to macroeconomics. Like the New Classical approach, New Keynesian macroeconomic analysis usually assumes that households and firms have rational expectations. But the two schools differ in that New Keynesian analysis usually assumes a variety of market failures. In particular, New Keynesians assume prices and wages are “sticky“, which means they do not adjust instantaneously to changes in economic conditions.
Wage and price stickiness, and the other market failures present in New Keynesian models, imply that the economy may fail to attain full employment. Therefore, New Keynesians argue that macroeconomic stabilization by the government (using fiscal…
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Alex Cukierman of Tel Aviv University has written an excellent paper comparing Old Keynes thinking with the New Keynesian thinking. The paper is mainly on differences and similarities between Great Depression and Great Financial Crisis.
He begins the paper reviewing developments in macroeconomics from Keynes to Friedman to New Keynesian. He then compares the GD with GFC which is pretty much known by now.
There is a nice discussion on the policy lessons from the two episodes. He divides it into two:
- Lessons learnt from GD which have been applied in GFC usefully – Monetary expansion, Fiscal Policy expansion, bank runs have disappeared, no to trade protectionism
- Lessons from GFC which are Open Issues now- i-bank runs, leverage, too big to fail, risk mismanagement, liquidity trap revisited
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The latest attempt comes from Neel Kashkari (the new “NK” at the Minnesota Fed, the previous one being Narayana Kocherlakota).
In 1967, Friedman´s “centerfold” for the role of monetary policy was:
“Provide a stable background for the economy”
NK´s “top of the list” role:
“Creating and maintaining a stable monetary environment”
In perfect agreement.
To Friedman, that meant:
keep the machine well oiled, to continue Mill’s analogy. Accomplishing the first task [avoid monetary disorder] will contribute to this objective, but there is more to it than that.
Our economic system will work best when producers and consumers, employers and employees, can proceed with full confidence that the average level of prices will behave in a known way in the future-preferably that it will be highly stable.
Under any conceivable institutional arrangements, and certainly under those that now prevail in the United States, there is only a limited…
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A Benjamin Cole post
“The Federal Reserve has reduced the federal funds rate repeatedly from nearly 10% in 1989 to about 3% recently. According to conventional wisdom on Wall Street, that is evidence that monetary policy has been extremely easy, that the Fed has done all it can to stimulate the economy, and that it is pushing on a string, as another ancient cliché has it. This wisdom may be conventional, but it is incorrect.”—Milton Friedman, The Wall Street Journal, October 23, 1992.
It was October 1992, inflation as measured by the CPI was running at about 3.2 percent, and real GDP was expanding at about 4.0%.
Yet the title of Friedman’s op-ed concerning the Fed? “Too Tight For A Strong Recovery”
The monetary master added, “It is hard to escape the conclusion that the restrictive monetary policy of the Federal Reserve deserves much of the…
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Fascinating piece on how ice-cream moved from being a dish of aristocracy to being a dish of masses.
Britain’s blistering heat wave has created a record-breaking demand for the treat that, over the course of the last century, has become a summer favorite the world over: ice cream. Sales have increased 100 percent year on year, and London is even hosting an ice-cream themed pop-up exhibition, fittingly titled ‘Scoop’.
Just 350 years ago, ice cream was a rare delicacy, reserved for kings and the richest of aristocrats. To enjoy it a person had to be able to afford refrigeration, which in the pre-industrial world was arduous and expensive.
But thanks to technological and scientific progress, ice cream has become available to pretty much everyone.
Back then, to refrigerate foodstuffs, people needed the land to build an ice house (to store the ice), freshwater access, and servants to cut and hull the ice…
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Most might ask why is this important? Well it is, because earlier banks were designed and constructed with a solid structure, tall walls etc to give people a feel that bank is secure:
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