Hartar Blog

It is refreshing to see top academics questioning some of the assumptions that economists have been using in their models. Krugman , Brad DeLong  and many others are opening a methodological debate about what constitute an acceptable economic model and how to validate its predictions. The role of micro foundations, the existence of a natural state towards the economy gravitates,... are all very interesting debates that tend to be ignored (or assumed away) in academic research. I would like to go further and add a few items to their list that I wished could become part of the mainstream modeling in economics. In random order: 1. The business cycle is not symmetric. Most macroeconomic models start with the idea that fluctuations are caused by a succession of events that are both positive and negative (on average they are equal to zero). Not only this is a wrong representation of economic shocks but is also leads to the perception that stabilization policy cannot do much. Interestingl...

In a recent post Paul Krugman refers to the potential link between rising levels of debt prior to the 2008 crisis and the current discussion on secular stagnation. The argument can be illustrated by the chart below (borrowed from Krugman's post). Quoting from Krugman's post:  "Debt was rising by around 2 percent of GDP annually; that's not going to happen in the future, which a naive calculation suggests a reduction in demand, other things equal, of around 2 percent of GDP" In summary, increasing debt ratios area unsustainable and the adjustment can have a negative effect on growth. The argument is probably right but when it comes to assessing the real impact on growth I think we need to do a more careful analysis before reaching that conclusion.  Here is where I think the reading of the previous chart becomes more complicated: Why was debt going up? For some this is simply a reflection of excessive spending that directly feeds into demand. The fact that it is ex...

It has been surprising to see how over the last five years some have been holding to their economic theories even if the facts kept proving them wrong (Yyperinflation? Confidence and austerity?). At the end, it seems that ideology dominates much of the macroeconomic analysis we see these days. But what is more surprising is how broad this phenomenon is and how the general economic commentary that one reads in the press cannot move away from those theories either. One statement that will not go away is the constant reference to "printing money" which is not only incorrect from a factual point of view (most of the increase in the monetary base corresponds to reserves not to bank notes being printed) but also misleading when it comes to the understanding of the role of central banks. Even those who support central bank actions during the crisis have to add a sentence at the end to warn us about the danger of so much liquidity. And austerity, as much as the data has disproven the...

I have written before about the investment dearth that took place in advanced economies at the same time that we witnessed a global saving glut as illustrated in the chart below. In particular, the 2002-2007 expansion saw lower investment rates than any of the previous two expansions. If one thinks about a simple demand/supply framework using the saving (supply) and investment (demand) curves, this means that the investment curve for these countries must have shifted inwards at the same time that world interest rates were coming down. But what about emerging markets? Emerging markets' investment did not fall during the last 10 years, to the contrary it accelerated very fast after 2000. This is more what one would expect as a reaction to the global saving glut. The additional saving must be going somewhere (saving must equal investment in the world). As interest rates are coming down, emerging markets engage in more investment (whether this is simply a move along a downward-sloppin...