Wednesday, March 21, 2012

What Adjusts?

More teaching: We're starting on the open economy now. Exchange rates, trade, international finance, the balance of payments. So one of the first things you have to explain, is the definition of real and nominal exchange rates:

e_R = e_N P*/P 

where P and P* are the home and foreign price levels respectively, and the exchange rate e is defined as the price of foreign exchange (so an appreciation means that e falls and a depreciation means that it rises).

This is a useful definition to know -- though of course it's not as straightforward as it seems, since as we've discussed before there are various possibles Ps, and once we are dealing with more than two countries we have to decide how to weight them, with different statistical agencies using different weightings. But set all that aside. What I want to talk about now, is what a nice little example this equation offers of a structuralist perspective on the economy.

 As given above, the equation is an accounting identity. It's always exactly true, simply because that's how we've defined the real exchange rate. As an accounting identity, it doesn't in itself say anything about causation. But that doesn't mean it's vaacuous. After all, we picked this particular definition because we think it is associated with some causal story. [1] The question is, what story? And that's where things get interesting.

Since we have one equation, we should have one endogenous (or dependent) variable. But which one, depends on the context.

If we are telling a story about exchange rate determination, we might think that the endogenous variable is e_N. If price levels are determined by the evolution of aggregate supply and demand (or the growth of the money stock, if you prefer) in each country, and if arbitrage in the goods market enforces something like Purchasing Power Parity (PPP), then the nominal exchange rate will have to adjust to keep the real price of a comparable basket of goods from diverging across countries.

On the other hand, we might not think PPP holds, at least in the short run, and we might think that the nominal exchange rate cannot adjust freely. (A fixed exchange rate is the obvious reason, but it's also possible that the forex markets could push the nominal exchange rate to some arbitrary level.) In that case, it's the real exchange rate that is endogenous, so we can see changes in the price of comparable goods in one country relative to another. This is implicitly the causal structure that people have in mind when they argue that China is pursuing a mercantilist strategy by pegging its nominal exchange rate, that devaluation would improve current account balances in the European periphery, or that the US could benefit from a lower (nominal) dollar. Here the causal story runs from e_N to e_R.

Alternatively, maybe the price level is endogenous. This is less intuitive, but there's at least one important story where it's the case. Anti-inflation programs in a number of countries, especially in Latin America, have made use of a fixed exchange rate as a "nominal anchor." The idea here is that in a small open economy, especially where high inflation has led to widespread use of a foreign currency as the unit of account, the real exchange rate is effectively fixed. So if the nominal exchange rate can also be effectively fixed, then, like it or not, the domestic price level P will have to be fixed as well. Here's Jeffrey Sachs on the Bolivian stabilization:
The sudden end of a 60,000 percent inflation seems almost miraculous... Thomas Sargent (1986) argued that such a dramatic change in price inflation results from a sudden and drastic change in the public's expectations of future government policies... I suggest, in distinction to Sargent, that the Bolivian experience highlights a different and far simpler explanation of the very rapid end of hyperinflations. By August 1985,... prices were set either explicitly or implicitly in dollars, with transactions continuing to take place in peso notes, at prices determined by the dollar prices converted at the spot exchange rate. Therefore, by stabilizing the exchange rate, domestic inflation could be made to revert immediately to the US dollar inflation rate. 
So here the causal story runs from e_N to P.

In the three cases so far, we implicitly assume that P* is fixed, or at least exogenous. This makes sense; since a single country is much smaller than the world as a whole, we don't expect anything it does to affect the world price level much. So the last logical possibility, P* as the endogenous variable, might seem to lack a corresponding real world story. But an individual countries is not always so much smaller than the world as a whole, at least not if the individual country is the United States. It's legitimate to ask whether a change in our price level or exchange rate might not show up as as inflation or deflation elsewhere. This is particularly likely if we are focusing on a bilateral relationship. For instance, it might well be that a devaluation of the dollar relative to the renminbi would simply (or mostly) produce corresponding deflation [2] in China, leaving the real exchange rate unchanged.

Here, of course, we have only one equation. But if we interpret it causally, that is already a model, and the question of "what adjusts?" can be rephrased as the choice between alternative model closures. With multiple-equation models, that choice gets trickier -- and it can be tricky enough with one equation.

In my opinion, sensitivity to alternative model closures is at the heart of structuralist economics, and is the great methodological innovation of Keynes. The specific application that defines the General Theory is the model closure that endogenizes aggregate income -- the interest rate, which was supposed to equilibrate savings and investment, is pinned down by the supply and demand of liquidity, so total income is what adjusts -- but there's a more general methodological principle. "Thinking like an economist," that awful phrase, should mean being able to choose among different stories -- different model closures -- based on the historical context and your own interests. It should mean being able look at a complex social reality and judge which logical relationships represent the aspects of it you're currently interested in, and which accounting identities are most relevant to the story you want to tell. Or as Keynes put it, economics should be thought of as
a branch of logic, a way of thinking ... in terms of models, joined to the art of choosing models which are relevant to the contemporary world. ... [The goal is] not to provide a machine, or method of blind manipulation, which will furnish an infallible answer, but to provide ourselves with an organised and orderly method of thinking out particular problems.
Much of mainstream macroeconomics assumes there is a "true" model of the world. Connected to this, there's an insistence -- shared even by a lot of heterodox macro -- on regarding some variables as being strictly exogenous and others as strictly endogenous, so that in every story causality runs the same way. In the canonical story, tastes, technology and endowments (one can't help hearing: by the Creator) are perfectly fixed, and everything else is perfectly adjustable. [3]

Better to follow Keynes, and think about models as more or less useful for clarifying the logic of particular stories.

EDIT: Of course not everyone who recognizes the methodological distinction I'm making here agrees that the eclecticism of structuralism is an advantage. Here is my teacher Peter Skott (with Ben Zipperer):
The `heterodox' tradition in macroeconomics contains a wide range of models. Kaleckian models treat the utilization rate as an accommodating variable, both in the short and the long run. Goodwin's celebrated formalization of Marx, by contrast, take the utilization rate as fixed and looks at the interaction between employment and distribution. Distribution is also central to Kaldorian and Robinsonian theories which, like Goodwin, endogenize the profit share and take the utilization rate as structurally determined in the long run but, like the Kaleckians, view short-run variations in utilization as an intrinsic part of the cycle. The differences in these and other areas are important, and this diversity of views on core issues is no cause for celebration.

EDIT 2: Trygve Haavelmo, quoted by Leijonhufvud:
There is no reason why the form of a realistic model (the form of its equations) should be the same under all values of its variables. We must face the fact that the form of the model may have to be regarded as a function of the values of the variables involved. This will usually be the case if the values of some of the variables affect the basic conditions of choice under which the behavior equations in the model are derived.
That's what I'm talking about. There is no "true" model of the economy. The behavioral relationships change depending where we are in economic space.

Also, Bruce Wilder has a long and characteristically thoughtful comment below. I don't agree with everything he says -- it seems a little too hopeless about the possibility of useful formal analysis even in principle -- but it's very worth reading.

[1] "Accounting identities don't tell causal stories" is a bit like "correlation doesn't imply causation."Both statements are true in principle, but the cases we're interested in are precisely the cases where we have some reason to believe that it's not true. And for both statements, the converse does not hold. A causal story that violates accounting identities, or for which there is no corresponding correlation, has a problem.

[2] Or lower real wages, the same thing in this context.

[3] Or you sometimes get a hierarchy of "fast" and "slow" variables, where the fast ones are supposed to fully adjust before the slow ones change at all.


  1. "the interest rate, which was supposed to equilibrate savings and investment, is pinned down by the supply and demand of liquidity, so total income is what adjusts"

    That is really cool. I have really got to read GT from start to finish.

    What are model closures?

  2. See, now that's why I do this blog.

    Formally, a model is a system of N simultaneous equations with M endogenous variables. To close a model is to adjust it so that N=M. This usually involves adding equations, and it can also involve changing your choice of which variables are endogenous, as here.

    So in the classic case of the GT, the old model was:


    Three equations, three unknowns. (Y is exogenous.)

    Keynes changes that to:


    The addition of the fourth equation -- relating the interest rate to demand for the exogenously fixed stock of liquid assets M -- requires a fourth unknown, so Y become endogenous.

    (This is more or less Hicks' version from "Mr. Keynes and Classics." There's a far more to the GT.)

    There is an endless amount to read on this stuff. In terms of structuralist macro, model closure, and so on, Lance Taylor might be a good place to start. His big two books are Lectures on Structuralist Macroeconomic Theory and Reconstructing Macroeconomics; Maynard's Revenge is the semipopular version -- it's comprehensive and reasonably accessible. In terms of Keynes, the problem is that people have been attacking each others' interpretations right from the start, and JMK himself was not around to clarify. Some good places to start are the Hicks essay (it's been the dominant interpretation ever since); Don Patinkin's collection Anticipations of the General Theory; Axel Leijonhufvud's essay "Mr. Keynes and the Keynesians"; and Minsky's book John Maynard Keynes (which is also probably the best statement of Minsky's own views, much clearer than Stabilizing an Unstable Economy, which is what most people read.) But honestly I wish I could offer better guidance about where to start.

  3. Slightly off the point, but can the Bolivian example be taken as an inference of 'money's role as medium of account is more explanatory of the price level and business cycles than its role as a medium of exchange' ?

  4. Thanks for the reply. I think I get it. I had googled it (I'm not completely lazy) and didn't find much. I'm surprised I hadn't heard of it before. As far as I can tell (further googling) Lance Taylor got it from Sen, and people talked about it in the 1980s, but it seems to have gone away (I started reading Taylor's paper "A foxy hedgehog: Wynne Godley and macroeconomic modelling").

    The alternative model closure approach seems sensible. I'd rather have a dozen models to choose from than one model that's certain to be wrong. Everybody does it anyway -- economic textbooks are full of inconsistent models. You're better off putting the spotlight on instead of pretending it's not there, and if I understand it correctly it gets you closer to an everything-is-endogenous world.

    Except for Patinkin I've come across all those citations you've mentioned but I haven't read any of them yet. I'll start with "Maynard's Revenge." BTW, over on CT you recommended Andrew Glyn to me last year and it was exactly what I was looking for. Thanks for that too.

  5. I was reminded by this post of Mark Thoma arguing for eclecticism.
    To me, the key methodological problem in economics is that economists think analytical models can and are descriptive, when analytical models are always a priori. You can close a model, because the model is a priori; whatever your closure strategy, the model never becomes descriptive or operational; your artfulness in choosing the model cannot make it so. Economics needs to distinguish theoretical analysis from operational modeling, and stop thinking that they can wave at the classroom window and claim even a rough correspondence between equations on the whiteboard and the world outside.

    No one would confuse the Euler equations underlying the theory of aerodynamics with the design of an airfoil, but economists seem determined to do the equivalent, almost without exception. We need aerodynamic theory to construct an operational model of an airfoil, and test and measure the efficiency of the design, but the theoretical model and the operational model are quite different and distinct things.

    To me, your equation, like many models in economics leaves all the economics outside the model. Economics, to my simple mind, is never " 'what' adjusts?" -- it is "who" adjusts, and "why". The economy is not actually a machine -- it is human beings behaving strategically; it may be made to look and function somewhat like a machine by the "mechanics" of institutionalized social cooperation; understanding how economic institutions work would be valuable economic knowledge to have, and it is a problem that economists, as a group, appear to have so little such knowledge (-- and less such knowledge than they usually imagine they have).

    The Quantity Theory of Money made a machine out of the gold standard economy by the expedient of using a spectral Euler of profit-maximizing and market-clearing equilibrium to create a economy-machine, an hydraulic economy, where "price-level" made a certain sort of (metaphoric) fluid sense. But, Fisher is long dead, and I stare at your equation, and I ask myself, what the hell is a "price level"?

    It seems to my admittedly naive and superficial mind that structuralist approaches might be well-suited to operationalization. I am no great admirer of MMT, but they seem to get a lot of power of fairly simple-minded operationalization of credit creation by banks and sectoral analysis. It has got to be better than the fantasy world of a Wicksellian natural rate of intertemporal substitution, or the alleged reasoning powers of Fed President Kocherlakota.

    Operational models would, inevitably mean institutional models, with all the specific detail that that entails. One could not just trot out the EMH and claim that financial markets are qualitatively efficient; one would have to find ways of assessing just how efficient the actual, institutional financial sector is, in particular circumstances, just as the Wright Brothers had to assess how efficient their airfoil design was, and where the "waste" went.

    Do market exchange rates adjust to bring about an equilibrium at purchasing power parity? Let me go out on a limb, and guess not.

  6. Operational models of actual institutions need to draw on a robust, analytic theory, and eclecticism might well fill the operational quiver, so to speak. But, an eclecticism of the sort Thoma advocates just seems to me to be a formula for an endless, degenerative spiral, in which the already poor intuitions of mainstream economics just get more and more detached from critical assessment.

    Thoma claimed back in 2009, "There is no grand, unifying theoretical structure in economics. We do not have one model that rules them all."

    I think Thoma is characteristically wrong about that -- I think there, in fact, is a grand, unifying theoretical structure, but that that grand unifying theoretical structure escapes critical assessment. For the mainstream, it is practically part of the collective unconscious.
    I cannot think of any other explanation than the Freudian one, for how Keynesian macroeconomics could be reduced to AD and AS in a Marshallian cross, intersecting at the "price level". (egad!)

    All the important problems of macroeconomics are about money and uncertainty. No over-arching analytic model, almost by definition, could ever master genuine uncertainty. It would not be uncertainty -- a limitation to human knowledge and powers of reason -- if a human analysis could master and corral it. The imperfect institutions by which humans cooperate in dealing with uncertainty will always be close to as good as it gets, and there will never be any analytic substitute for studying how those institutions work, and how well they work, and how they fail, in operation.

    The "core questions" will always admit a diversity of view as long as the feedback loop of operational models of actual institutional function are left entirely out of account. Left to themselves, theoreticians will follow the path of "tractability" and generalize on the basis of robustness to variations in assumptions; it is what they do.

    Things are pretty far gone when most macroeconomics doesn't even consider an institutional money or a financial sector, let alone notice that most markets do not clear in price, or notice that most "markets" are not even markets. But, in principle, I do not know why economists cannot know more about the actual economy and economic history than they do; biologists with narrow research specialties manage to know lots of informative examples of evolution-in-action in species and ecologies with which they are personally unfamiliar; and there are some very sophisticated theoreticians at work there at well.

  7. Wow, that is a lot to chew on. You've put me, disconcertingly, in the position of having to defend economics. Let me take your points one by one.

    1. The distinction between analytical models and operational or descriptive models. I'm not sure what you mean by this. Say more?

    2. The impossibility of there being "even a rough correspondence" between a system of equations and social reality. I'm afraid I have to disagree with you here. I find, for example, that income and price elasticities very useful tools for thinking about trade flows, and specifically how the smooth price adjustment of mainstream models is not what drives trade in the real world, but rather shifts in effective demand. More generally, the law-like character of the relationships studied by economics is a product of history and is specific to capitalism, but that doesn't mean it's not real. The map is not the territory, agreed. But maps are still worth using.

    3. Mechanistic models exclude choice and uncertainty. True, and I think the two are closely related. It's not an accident that the standard examples of ergodic process -- a die, a roulette wheel -- are specifically engineered by people to have that property. Nature doesn't give us a lot of ergodic processes. But the more important source of fundamental uncertainty is that the world is composed of other reasoning beings. Capitalism, however -- like dice and roulette wheels -- is a system engineered by human beings to have statistical regularities not usually found in nature. I think in many cases the more "mechanistic" view is the more useful and profound one. Always "who" and "why", never "what", sounds suspiciously like the orthodox demand for microfoundations.

    4. There is no such thing as "the" pice level. Well, no, there isn't; I say so in the post. But I don't see why we can't abstract from that particular problem here. I think it is meaningful to ask when inflation responds to exchange rates, and when exchange rates respond to inflation, even if there is a limit to the precision with which inflation can be measured or even defined.

    5. "Do market exchange rates adjust to bring about an equilibrium at purchasing power parity? Let me go out on a limb, and guess not." OK. But does arbitrage impose no limits on the deviation of tradables prices between countries? I would also guess not, at least in the absence of comprehensive restrictions on trade. So then the question becomes, how much does goods arbitrage limit the independent movements of real exchange rates, and how much can nominal exchange rates in fact move relative prices. I think this is a well-formed question, and an important one. You seem to object to even posing it, but I don't understand why.

    6. Eclecticism is an excuse to withhold judgement and not reject bad models for good ones. OK. One could just as well say, don't stand in the middle of the road. But you can't cross from one side to the other without spending some time in the middle.

    7. AD-AS sucks colossally. No argument here. On the test I just gave, I asked student to explain the logic of the downward sloping AD curve, and then explain why it had nothing to do with what happens in real economies. They did pretty well. But the existence of crappy models is not an argument against models tout court.

    8. Human reason cannot master uncertainty. Ok. But Bruce, human reason is all we've got.

    most macroeconomics doesn't even consider an institutional money or a financial sector, let alone notice that most markets do not clear in price, or notice that most "markets" are not even markets.

    True. But nihilism is not a viable response. Faced with a profession full of people using bad but tractable models, we have to come up with better, tractable models. We can't just throw up our hands and say, "It's all too complicated!"

    What economists do you like?

    1. I feel quite honored by your detailed reply to my comment. Thank you. (And, I'm being neurotic and compulsive, to post a comment weeks later, on a dead thread. Apologies.)

      Point 1 is pretty much the ballgame, here. Clearly, you do not understand what point I was making in distinguishing analytic models from operational models, and there's really no reason you should, given the shortcomings of my exposition. 2,3,4,5,6,7,8 -- which build toward an accusation of nihilism (!not guilty, your honor!) seem to depend on my failure to have made a clear case out of 1.

      My point is not, "the map is not the territory" -- useful though that cautionary may be. My point is, a geometry is not a map. A geometry is an example of an analytic theory, created for the purpose of identifying functional relationships among concepts; a map is an example of, or a product of, if you prefer, an operational model, created for the purpose of observation, description and measurement.

      Geometry can help make a map, and to understand what a map is, and what relation a map purports to have to a territory. Geometry is necessary and useful for the surveyor and the cartographer. By all means, let's recognize that the surveyor is using geometric logic and models to make inferences, in, say, "measuring" the height of a distant, but observable mountain. A mathematician, or even a high school sophomore studying Euclid's geometry, does not imagine, I think, that she's constructing a map. In ancient times, the a priori idealism of geometry was a source of wonderment -- Pythagoras reportedly made a religion out of it.

      Samuelson's Foundations, a codification of economic theory -- or the general equilibrium competitive market economy beloved of Chicago -- is a geometry, not an exercise in cartography, not a survey of any territory. Like any analytic theory, the proper purpose is to identify the necessary and sufficient elements of a system and the functional relationships. Going out into the world, observing and interpreting facts in the light of theories rendered as operational models, is a wholly different activity, which mainstream Economics tends, unfortunately, to deprecate, or to stylize in odd, self-defeating ways.

      The confusion of a geometry for a map is the premise of what Dani Rodrik calls "1st-best economics" and it is pernicious and pervasive, and I reject it out of hand as ignorance. I don't think that's nihilism, even if I am not willing to accord it respect as an "orthodox" religious faith; there would be a lot to economics, without it -- more to economics of substance, without it. "First-best economics" starts in Econ 101, when the teacher presents the model of perfect competition, and then points out the window, so to speak (but possibly literally), and argues that the model of perfect competition is a good enough model of some actual markets, where there are large numbers of buyers and sellers. (Roger Farmer does it! -- your 4/24 post) It's not true, and it is terribly misleading, and generations of econ teachers have done it with no critical self-awareness. As a theoretical model, perfect competition is useful, maybe essential, to defining some very basic concepts and relationships. That's what analytic theory does. It doesn't work, though, as an operational model, for interpreting and measuring the mechanisms of an actual market.

    2. In an earlier comment, I gave the example of aerodynamic theory, and the corresponding application of aerodynamic theory to designing, engineering and testing an airfoil. Aerodynamic theory is based on a theoretical analysis the dynamics of a gas or moving fluid, pioneered by Bernoulli and by Euler in the 18th century. (That Euler certainly did get around.) It is a marvelous accomplishment; a full derivation, with all three applicable conservation laws (mass, momentum, energy) is a complex thing of beauty. But, as a practical matter, engineers still have to design an airfoil, and test it in a wind tunnel, interpreting and measuring with an operational model.

      The point of my aerodynamic example was that human intuition is not surprised by the difference between theoretical physics (even of the relatively non-esoteric Newtonian variety) and practical engineering. Even where there's a great, valid theory, fully buttoned up, there's still a job to do, in order to measure and know practical facts. Something is wrong in economics, that so many economists do not share an analogous intuition or expectation, about the relation of economic theory to generalizing from the interpretation and description of institutional reality and variety. As to uncertainty and the complexity and other challenges it implies -- well, to extend the earlier analogy, that's one of the reasons a designer of an airfoil goes to the wind tunnel. We can usefully study the institutions -- the mechanisms -- which are used in the actual economy to deal with uncertainty and other problems, which are unlikely to ever yield to models of abstract omniscience, such as "rational expectations".

      In theoretical analysis, we are rightly trying to isolate factors, because the holy grail is the "necessary and sufficient"; in operational modeling, we may be justified to making something of coincidence, or a very particular range of measured values (ala Trygve Haavelmo), because we are inferentially interpreting a concrete situation. Pretty much anything in economics, which we would be interested in modeling operationally, is the outcome of some kind of selection process, a sampling, if you will, and the first thing to notice is what isn't there, and the second thing to notice, is coincidence of factors (not, as in a priori analysis, their isolation), and the task posed to inferential reasoning is, why are these together so often, and these other logical possibilities, absent? What are the stochastic processes generating, and filtering, what we see?

      In theoretical analysis, "equilibrium" is really just a way of deriving an account of the necessary and sufficient from a an adding-up constraint, such as a conservation law, a way of demonstrating an exhaustive logical consistency. In operational models, though, it becomes something else: an argument explaining stability, an attractor that shapes behavior, or a constraining limit that channels it. I don't know why economists seem so determined to be confused by this, but many are.

  8. Looking at the Thoma post, which I hadn't read before, I agree and disagree. I agree with you that Thoma is wrong in a lot of his claims, but I don't agree it's on the high-level methodological claims. He says:

    "the classical model is a good way to think about inflation in the long run."

    I object to this, just as you do. But not because I think there's anything wrong with having a model that's reserved for the long run, in principle. But because I don't think the "classical" model of inflation is a good one. It asserts both (1) money is super-neutral in the long run, i.e. all real variables will reach the same values at any stable inflation rate; and (2) it is worth paying a cost in lower real output to reduce inflation. Honestly, I don't know why more mainstream people aren't embarassed by this. And the solution of putting inflation directly into the utility function is such an obvious kludge. But that's a lower level problem than the ones you're raising.

    1. Here's the thing about an eclecticism, which admits the classic model as a "good way to think about inflation in the long run": it makes a lie out of the premise of that eclecticism: "no grand, unifying theoretical structure". If money is not-neutral in the short-run, and the long-run is composed of short-runs, then saying money is neutral in the long-run, requires some kind of overarching ("grand, unifying") structure to reconcile one model to the other: the long-run model implies something about the nature of the short-run and its non-neutral money; if you accept that long-run model, it shapes what kind of short-run model is acceptable. All that Thoma's claim of eclecticism does is isolate that overarching structure from critical assessment.

      I don't know that that's a high-level methodological claim; my favored hypothesis for why Thoma makes a claim for eclecticism, which excludes criticism of the over-arching structure, is that that's the price the "left" mainstream pays for the peace of the New Neoclassical Synthesis, and, frankly, that possibility disgusts me.

      When Hume was doing his thought experiment in the 18th century, it was a pot-shot, I suppose, at those, who valued specie above all else, and he offered it to people, who were well-acquainted with how an inadequate system of credit could hobble an economy. His audience was acutely aware of how the events of 1720-25 in Britain and France -- his generation's Bretton Woods -- had impacted the economy, and, how, for another example, the British North American colonies struggled against insufficient specie. His point was not about the "long-run" -- it was about specie (vertical money? I'm never sure what these terms mean), and he just assumed that everyone understood that money in its extended sense of credit and finance, mattered a lot, and was an important problem to solve.

      It wasn't an argument isolated from either historical experience or other arguments systemically related to it. It was part of the project of the Scottish Enlightenment, to create an Economics to explain the success of the emerging system of the British Empire, which could guide that Empire's governance. It was a kind of null result, intended to shape an emerging "grand, unifying theoretical structure", and distinguish that system from that of the physiocrats as well as those who had no structure or system. To consign it to isolation by eclecticism kind of misses the point.

  9. Great post, Josh. I was teaching the real exchange rate yesterday and thinking about the same kind of stuff. Actually if you take a look at the literature on exchange rates, balances of payments and national macro conditions in the late years of Bretton Woods and early post-BW years, you find lots of debate about 'exported' and 'imported' inflation and the channels by which it might happen.

    In fact it's already there in the earlier (1950s) balance-of-payments literature about the relationship between 'internal' and 'external' balance and how differences in inflation rates tend to affect currency reserves and domestic monetary conditions under fixed exchange rates.

    I think it's productive to think about the rationales for different model closures not only for purely scientific reasons, but also for what it says about policy strategy - and of course they are related. This is the basic guiding thread for my research into macropolicy history. How are policy dilemmas reflected in theory? What are taken to be exogenous parameters, what are exogenous but seen to be under policy control, and what is treated as endogenous? How do political projects attempt to shift variables between the categories? How do different social groups attempt to defend their positions in the exogenous parameters and shift the burden of adjustment onto others?

    I call it a radical Tinbergian approach, because the basic ideas come from Jan Tinbergen's theory of economic policy - which have been vulgarised into the 'one instrument per target' message.

  10. This is off-topic but I wanted to alert your readers to this excellent video , which has just been posted at TripleCrisis :

    It's from a March 13 panel on inequality at MIT , and your colleague , Arjun Jayadev , discusses your recent paper on debt dynamics.

    Good stuff.

  11. Replies
    1. I copied it from Google Reader to here if you need to recover it:

    2. Thanks Chris. No idea what happened there, but it's back.