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Are earthquakes needed to shake economics?

Author

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  • Ronald Schettkat

    (Schumpeter School University of Wuppertal)

Abstract

The current crisis is like an earthquake for the theoretical foundations of economic policies, which have guided governments and central banks for the last few decades. The efficient market hypothesis and its application to labor markets –“natural rate theory”- dominated interpretations of economic trends and policy prescriptions since the 1970s. Public policy, public institutions, and regulations were generally regarded as distortions of the otherwise well functioning markets. Economic trends were filtered through the lens of the “natural rate theory,” focusing on labor market institutions only and putting blinds on macroeconomic influences. Therefore, the recipe was a reshaping of institutional arrangements intended to allow markets to operate more freely, i.e. to bring the real world closer to the idealized theoretical model. This paper confronts the economic trends with the interpretations of the “natural rate theory” and argues that they hardly fitting the facts. The paper argues that monetary policy gained importance in the 1970s and enforced deflationary policies – which, in turn reduced growth, especially in upswings – and allowed employment to recover to its initial pre-recession levels. Deflationary bias was also guiding the design of major EU institutions, reducing potential and actual growth.

Suggested Citation

  • Ronald Schettkat, 2010. "Are earthquakes needed to shake economics?," Schumpeter Discussion Papers sdp10003, Universitätsbibliothek Wuppertal, University Library.
  • Handle: RePEc:bwu:schdps:sdp10003
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    File URL: http://elpub.bib.uni-wuppertal.de/servlets/DerivateServlet/Derivate-1537/sdp10003.pdf
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    References listed on IDEAS

    as
    1. Homburg, Stefan, 2007. "Die Abgeltungsteuer als Instrument der Unternehmensfinanzierung," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 686-690.
    2. Homburg, Stefan & Houben, Henriette & Maiterth, Ralf, 2008. "Optimale Eigenfinanzierung der Personenunternehmen nach der Unternehmensteuerreform 2008/2009," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 29-47.
    3. Homburg, Stefan, 2010. "Allgemeine Steuerlehre," EconStor Books, ZBW - German National Library of Economics, number 92547.
    4. Michael Broer & Nadja Dwenger, 2008. "Die kurzfristigen Steuereffekte der "Thesaurierungsbegünstigung" für Personenunternehmen: eine mikrofundierte Analyse," Discussion Papers of DIW Berlin 765, DIW Berlin, German Institute for Economic Research.
    5. Houben, Henriette & Maiterth, Ralf, 2008. "Zur Diskussion der Thesaurierungsbegünstigung nach § 34a EStG," arqus Discussion Papers in Quantitative Tax Research 42, arqus - Arbeitskreis Quantitative Steuerlehre.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Economic crisis; efficient market hypothesis; natural rate theory; deflationary bias;

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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