Tuesday, October 29, 2013

Paul Krugman — CURRENCY REGIMES, CAPITAL FLOWS, AND CRISES [draft]

6. Conclusions
Fear of a Greek-style fiscal and financial crisis has loomed over much of our policy discourse over the past four years, and has played a significant role in shaping actual policy, constituting the principal argument for austerity in countries that don't face any current difficulties in borrowing. However, despite repeated warnings that crises of confidence are imminent in floating-rate debtors – mainly the  United States, the UK, and Japan – these crises keep not happening. 

Part of the explanation for the failure of disaster to strike on schedule lies in the DeGrauwe point:  countries that borrow in their own currencies are simply not vulnerable to the kind of self-fulfilling liquidity crises that have afflicted euro debtors. What I have pointed out in this lecture is that the difficulties with crisis warnings don't stop there. Rather remarkably, nobody seems to have laid out an explicit story about how the predicted crisis would play out. The claim is that interest rates would rise, causing a severe economic slump, but how is this to be reconciled with the ability of the central bank to set short-term rates?

My answer is that claims about the vulnerability of floating-rate debtors to crisis haven't been given any specificity because they do not, in fact, make sense. Simple macroeconomic models suggest that a loss of confidence in a country like the United States, taking place at a time when interest rates are at the zero lower bound, should, if anything, have an expansionary effect. Nor can one appeal to the lessons of history: cases resembling the hypothesized crisis scenario are rare, and those that exist don't support the notion that Greek-style crises can take place under a very different currency regime. You may find it implausible that conventional wisdom, backed by so many influential people, could be wrong on so basic a point. But it's not the first time that has happened, and it surely won't be the last.
CURRENCY REGIMES, CAPITAL FLOWS, AND CRISES
Paul Krugman
Draft of Mundell-Fleming lecture, 27 October 2013
(h/t y in the comments)

3 comments:

Anonymous said...

Notice that he claims that the idea of centralness of monetary sovereignty comes from... orthodox economists (de Grauwe) which simply a lie. Galbraith was right: economics comes second, the thing they really care about is their reputation, hence the blatant rewriting of history and silence about the heterodox contributions. Disgusting.

Matt Franko said...

"you may find it implausible that conventional wisdom, backed by so many influential people, could be wrong on so basic a point. "

Not I.

paul meli said...

""you may find it implausible that conventional wisdom, backed by so many influential people, could be wrong on so basic a point. "

It is implausible that Conventional Wisdom™ could be right.

The sum of opinions does not equal truth.