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Economics of the crisis and the crisis of economics

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  • Axel Leijonhufvud

Abstract

The macroeconomic instability revealed in the recent deep recession steams from the condition of balance sheets. Generally high leverage and strained maturity mismatches build up slowly but generate a financial structure so brittle that the impulse that eventually sends it crashing is hard to identify. The US financial system had been rendered more vulnerable by the financial reforms that swept away the Glass-Steagall regulations. The crisis made the inadquancies of the ruling macroeconomic paradigm painfully obvious. DSGE models generally did not include a financial sector and did not take the possibility of dramatic instability seriously. Unanticipated violations of budget constraints do not fit easily into general equilibrium models.

Suggested Citation

  • Axel Leijonhufvud, 2014. "Economics of the crisis and the crisis of economics," The European Journal of the History of Economic Thought, Taylor & Francis Journals, vol. 21(5), pages 760-774, October.
    • Handle: RePEc:taf:eujhet:v:21:y:2014:i:5:p:760-774
    DOI: 10.1080/09672567.2014.927519
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    Cited by:

    1. Jonung, Lars, 2022. "The Problems of Inflation Targeting Originate in the Monetary Theory of Knut Wicksell," Working Papers 2022:8, Lund University, Department of Economics.
    2. Gräbner, Claudius, 2016. "From realism to instrumentalism - and back? Methodological implications of changes in the epistemology of economics," MPRA Paper 71933, University Library of Munich, Germany.
    3. Ernest Aigner & Matthias Aistleitner & Florentin Glotzl & Jakob Kapeller, 2018. "The Focus of Academic Economics: Before and After the Crisis," Working Papers Series 75, Institute for New Economic Thinking.

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