Hans-Michael Trautwein

Wicksell after Woodford

The New Neoclassical Synthesis that Michael Woodford puts forward in his Interest and Prices (2003) is primarily a synthesis of New Classical and New Keynesian ideas. Yet Woodford presents it as an encompassing approach that goes much further back in time to integrate the pre-Keynesian macroeconomics of Knut Wickseil and his followers. Starting with the title, the book contains many references to Geldzins und GA¼terpreise (1898), Wicksells landmark contribution to monetary theory which was translated as Interest and Prices in 1936. Woodford relates his concept of a “monetary policy without money†to Wicksells concept of the pure credit system and to Wicksells proposal to eliminate inflation by adjusting nominal interest rates to changes in the price level—an idea that has much in common with modern policy rules A la Taylor. He presents the core model of the new synthesis (in shorthand: IS + AS + Taylor rule) as a “neo-Wicksellian framework†that serves to analyze the dynamics of interest-rate gaps and output gaps (2003, chapter 4). Referring to the Wicksellians of the 1920s and 1930s (primarily Erik Lindahl, Gunnar Myrdal, and Friedrich A. Hayek), Woodford grounds his advocacy of rules to fight inflation on the potential non-neutrality of monetary policy: “[I]t is because instability of the general level of prices causes substantial real distortions—leading to inefficient variation both in aggregate employment and output and in the sectoral composition of economic activity—that price stability is important†(2003, p. 5). He thus sees his analysis of interest-rate and output gaps as “an attempt to resurrect a view†that the old Wicksellians had developed in their analyses of cumulative processes.

An Early Manuscript by Knut Wicksell on the Bank Rate of Interest

In 1898 Knut Wicksell published his Geldzins und Güterpreise, a landmark contribution to monetary theory, translated by Richard F. Kahn in 1936 as Interest and Prices. Yet it was probably already in 1889 that Wicksell had written a draft that carried the message of his classic book in a nutshell. The manuscript, titled “Der Bankzins als Regulator der Warenpreise” and now held in the Wicksell archives (Lund University Library), was never published. In 1897 Wicksell presented an article with the same title inConrads Jahrbücher (as it was popularly known) as conveying the “main ideas” of his forthcoming Geldzins (see Wicksell 1897, 228). Although similar in several ways, the 1889 manuscript, the 1897 article, and the 1898 book differ from each other significantly enough to warrant translation and publication of the early draft (see table 1). As we shall see in the rest of this introduction to the translation presented below, the manuscript sheds new light on the origins and evolution of Wicksell’s monetary thought.

Wicksell's lecture notes on economic crises (1902/05)

Abstract The article brings to light Knut Wicksells Lund lecture notes of 1902 and 1905 on economic crises. In these notes, written a few years after his book on interest and prices but before most of his published work on business cycles, Wicksell made an attempt to bridge the gap between monetary and real theories of crises. The notes are remarkable for a discussion of how partial overproduction is generalized through the credit mechanism and for an assessment and diagrammatic treatment of the controversies between Malthus, Say and Owen on general overproduction.

The Two Triangles: What Did Wicksell and Keynes Know About Macroeconomics that Modern Economists Do Not (Consider)?

The current consensus in macroeconomics, as represented by the New Neoclassical Synthesis, is to work within frameworks that combine intertemporal optimization, imperfect competition and sticky prices. We contrast this “NNS triangle” with a model in the spirit of Wicksell and Keynes that sets the focus on interest-rate misalignments as problems of intertemporal coordination of consumption and production plans in imperfect capital markets. We show that, with minimal deviations from the standard perfect competition model, a model structure can be derived that looks similar to the NNS triangle, but yields substantially different conclusions with regard to the dynamics of inflation and output gaps and to the design of the appropriate rule for monetary policy.

Johan Åkerman vs. Ragnar Frisch on Quantitative Business Cycle Analysis

Abstract The article provides an account of the debate that took place between the late 1920s and the mid 1930s between the Scandinavian economists Johan Åkerman and Ragnar Frisch about the quantitative treatment of aggregate economic fluctuations. Although both interpreted the business cycle as an interference phenomenon between waves of different order, they disagreed on how to model its generation mechanism. Åkermans emphasis on seasonal changes in his path-breaking application of harmonic analysis to economic fluctuations was rejected by Frisch, who instead suggested the explanation of business cycles as free oscillations determined by impulse and propagation mechanisms.

Haberler, the League of Nations, and the Quest for Consensus in Business Cycle Theory in the 1930s

The paper discusses the League of Nationss project to produce consensus in the interpretation of aggregate economic fluctuations in the 1930s. G. Haberler started working in 1934 at the League of Nations headquarters in Geneva on a broad enquiry that should lead to a synthesis of the several conflicting explanations of the causes of the business cycles, which culminated with the publication of his classic book in 1937. The paper makes use of archival material hitherto unexplored - such as correspondence and verbatim records of conferences - to show how the discussions with economists at the time were incorporated into Haberlers final report, and to interpret in what extent the attempt to reach a consensus was successful.

Financial innovation and the long-run demand for money in the United Kingdom and in West-Germany

Financial Innovation and the Long-Run Demand for Money in the United Kingdom and in West Germany. — This paper uses a cointegration model to compare the long-run demand for broad money in the UK and (West) Germany during the period 1963Q1–1990Q2. In the long-run demand function for Germany, real M3 is determined in classical manner by real income and a single opportunity cost variable. By contrast, the UK demand function requires in addition an explicit own rate on money as well as a risk variable. The income elasticity is also very high. These differences reflect the more rapid pace of financial innovation in the UK in the 1970s and 1980s.ZusammenfassungFinanzinnovationen und die langfristige Geldnachfrage in Großbritannien und Deutschland. — In diesem Aufsatz wird ein Kointegrationsmodell benutzt, um die Geldnachfrage in Großbritannien und der Bundesrepublik Deutschland im Zeitraum 1963/1–1990/2 zu vergleichen. In der langfristigen Nachfragefunktion für Deutschland ist die reale Geldmenge M3 geradezu klassisch durch das Realeinkommen und eine einzige Opportunitätskostenvariable bestimmt. Dagegen sind in der britischen Nachfragefunktion außerdem eine explizite Ertragsrate der Geldhaltung wie auch eine Risikovariable zu berücksichtigen. Die Einkommenselastizität ist zudem sehr hoch. Diese Unterschiede reflektieren den vergleichsweise starken Einfluß von Finanzinnovationen in Großbritannien in den 70er und 80er Jahren.

Industry relocation, linkages and spillovers across the Baltic Sea: extending the footloose capital model

Abstract Studying the recent relocation of manufacturing industries from the Nordic countries to the Baltic countries, this paper provides an empirical application of the footloose capital model, a framework for spatial analysis. The model is extended to include input-output linkages and FDI spillovers. It is calibrated and applied, industry by industry, to a 3x3 matrix of Baltic countries and Nordic countries and to the pairing of these blocs. Simulation results are compared with ‘real world’ data and discussed in regard to testability restrictions of the footloose capital model. Incorporation of vertical linkages and spillovers can improve the goodness of fit, but while the predicted direction of industry relocation is often correct, predicted levels are not.

Rating sovereign debt in a monetary union – original sin by transnational governance

It is frequently argued that credit rating agencies (CRAs) have acted procyclically in their rating of sovereign debt in the European Monetary Union (EMU). They are believed to have under-rated sovereign risk in the early years of EMU, when integrated financial markets provided easier access to liquidity, and to have contributed to the recent Eurozone debt crisis by over-rating the lack of (individual) monetary sovereignty that EMU entails for its member states. Yet, there is little direct evidence for this so far. While CRAs are quite explicit about their risk assessments concerning public debt that is denominated in foreign currency, the same cannot be said about their treatment of sovereign debt issued in the currency of a monetary union. We examine the major CRAs’ methodologies for rating sovereign debt and test their ratings for a monetary union bonus in good times and a malus, akin to the ‘original sin’ problem of emerging market countries, in bad times. Using a newly compiled dataset of quarterly sovereign bond ratings from 1990 until 2012, we find some evidence that EMU countries received a rating bonus on euro-denominated debt before the global financial crisis and a large penalty after 2007.

The last generalists

Abstract The general trend of research specialisation in economics has contributed to the marginalisation of the history of economic thought. However, it has also led to a state of fragmentation in the profession and thereby increased the costs of neglecting the history of economic thought. This paper argues that historians of thought can help to counteract fragmentation because they are special generalists that fulfil multiple functions, for example, in the education of economists, the detection of blind spots in modern theories and the identification of routes for innovation by backtracking.