Monday, November 21, 2011

A Business Cycle Theory Suitable for a Parallel Universe


I just glanced at Tyler Cowen’s model of a Eurozone downturn and noticed there are a couple of minor elements missing—the trade imbalances between the surplus and deficit countries in the period leading up to the financial crisis, and the financial crisis itself.

That’s right: Cowen explains the current Euromess without any reference to what transpired in 2008.  Imagine how much worse it would be if the crisis that actually happened actually happened.

2 comments:

Unlearningecon said...

They ignore it because it's outside their equilibrium models. I have seen it referred to as 'noise'; mere interruptions in the Perfect Capitalist Economy. Scott Sumner says that tight monetary policy simply exacerbated some minor debt fiascos.

It's ridiculous. Economics has instilled a level of dissonance in these people that has put them beyond help.

Publius said...

bloody ridiculous stuff goin on... +followed