Home > Uncategorized > Links, the Levy Institute was right edition

Links, the Levy Institute was right edition

The Levy institute is a Post-Keynesian think tank. What did these economists, before 2007, write about financial stability and the role of the central bank? Should we have listened to the economist their warnings?

1) In 2006, Dimitri Papadimitriou, Edward Chilcote and Genarro Zezza warned about the detrimental macro-economic consequences effects of the unavoidable end of the (credit driven) US of A housing bubble. In hindsight: things turned out better than they expected because in the autumn of 2008 the current account deficit of the US of A declined, almost overnight, from -6% of GDP to -2% of GDP (a combination of lower oil prices and lower imports).

2) Also in 2006, Eric Tymoigne argued that central banks should watch asset prices more closely and should concentrate on their core business, i.e. financial stability, instead of focusing solely on low and stable consumer price inflation. In hindsight: this is exactly what the ECB is increasingly doing.

3) In 2003 L. Randall Wray and Dimitri Papadimitriou argued that deflation is not just about consumer prices or even the GDP price level (which also includes investments in new fixed assets, government consumption like expenditures on primary education and export prices)  but also and especially about prices of existing assets. We should however understand deflation as a (toxic) symptom – if we want to remedy the consequences of deflation we should look at its origins, i.e. severe and chronic lack of demand which can’t be easily cured by just flooding the economy with money. Profound social, political and economic changes may be necessary (like the post 1937 variant of the New Deal). In hindsight: read the whole thing.  

4) Frederic Lee reminds us (1996) that prices which ‘solve’ an economic model might not be conceptually consistent with prices which are set by real world enterprises and states that economists – neoclassical and Post-Keynesian alike – can not refrain from the difficult quest of searching for the real micro-foundations of price theory, i.e. price concepts which enable model solving but which are also consistent with real life price setting by individual enterprises (instead of just being consistent with micro-theory).

  1. Paul Davidson
    October 27, 2014 at 7:33 pm

    In my 2002 book FINANCIAL MARKETS, MONEY AND THE REAL WORLD ,page 117 I indicated that the growth of nonbank financial intermediaries offering assets such as derivatives ” have encouraged saver households to reallocate their portfolio from holding less (government insured) bank deposits towards holding more liabilities issued by non bank financial intermediaries. This has permitted a significant expansion of debt obligations on the part of debt households and enterprises. This suggests that a sudden switch by many households [holding these debt obligations]v to a fast exit strategy at a future date could cause a horrific liquidity problem unless the central bank is alert to pouring as much liquidity as necessary into the system, quickly and promptly.”

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