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.


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