Out of the Corridor: Keynes and the Crisis
Posted: 15 Jul 2009
Date Written: July 2009
We should learn from Keynes to focus on the macroproblems of our day. Today's problem is the financial crisis and the resulting great recession. Neither the standard Keynesian policies of decades past nor the monetary policy doctrine of recent years provides useful solutions. Dynamic stochastic general equilibrium theory is part of the crisis wreckage, but turning to old or to New Keynesian theory will be of little use. A balance sheet recession requires that policy address the problems in the private sector's capital as well as its income accounts. We need serious theoretical work on problems of system stability using, for example, agent-based methods. Monetary theory needs to develop analysis of processes in which intertemporal budget constraints are violated. Network theory will be useful in that quest.
Keywords: Keynes, Keynesian policy, Minsky, Interest targeting, Corridor stability, Balance sheet recession, Financial crisis, Financial networks, Leverage dynamics, Deleveraging, Positive (adverse) feedback loops, High inflation
JEL Classification: B22, E12, E44, E61, G20
Suggested Citation: Suggested Citation