Archive for December 4th, 2009

Global imbalances to get bigger?

December 4, 2009

Kevin O’Rourke, Professor at Trinity College Dublin has posted a nice article on the global imbalances issue.

There is widespread agreement that one of the root causes of the Great Credit Crisis of 2008 was the interaction between global imbalances and under-regulated financial systems. The savings of surplus countries created a wave of money which washed into deficit countries, looking for high returns while simultaneously helping to keep interest rates low. Where financial industries were allowed sufficient latitude, the result was excessive leverage and risk-taking, and ultimately catastrophe.

Nicely put.

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Difference between Old Keynesian and New Keynesian economics

December 4, 2009

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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