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Reconciling Hayek's and Keynes Views of Recessions

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  • Paul Beaudry
  • Dana Galizia
  • Franck Portier

Abstract

Recessions often happen after periods of rapid accumulation of houses, consumer durables and business capital. This observation has led some economists, most notably Friedrich Hayek, to conclude that recessions mainly reflect periods of needed liquidation resulting from past over-investment. According to the main proponents of this view, government spending should not be used to mitigate such a liquidation process, as doing so would simply result in a needed adjustment being postponed. In contrast, ever since the work of Keynes, many economists have viewed recessions as periods of deficient demand that should be countered by activist fiscal policy. In this paper we reexamine the liquidation perspective of recessions in a setup where prices are flexible but where not all trades are coordinated by centralized markets. We show why and how liquidations can produce periods where the economy functions particularly inefficiently, with many socially desirable trades between individuals remaining unexploited when the economy inherits too many capital goods. In this sense, our model illustrates how liquidations can cause recessions characterized by deficient aggregate demand and accordingly suggests that Keynes' and Hayek's views of recessions may be much more closely linked than previously recognized. In our framework, interventions aimed at stimulating aggregate demand face the trade-off emphasized by Hayek whereby current stimulus mainly postpones the adjustment process and therefore prolongs the recessions. However, when examining this trade-off, we find that some stimulative policies may nevertheless remain desirable even if they postpone a recovery.

Suggested Citation

  • Paul Beaudry & Dana Galizia & Franck Portier, 2014. "Reconciling Hayek's and Keynes Views of Recessions," NBER Working Papers 20101, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:20101
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    References listed on IDEAS

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    1. Réconcilier Keynes et Hayek ?
      by ? in D'un champ l'autre on 2014-06-07 04:59:00

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    Cited by:

    1. Ivan Werning, 2016. "Incomplete Markets and Aggregate Demand," 2016 Meeting Papers 932, Society for Economic Dynamics.
    2. Mayer, Eric & Rüth, Sebastian & Scharler, Johann, 2016. "Total factor productivity and the propagation of shocks: Empirical evidence and implications for the business cycle," Journal of Macroeconomics, Elsevier, vol. 50(C), pages 335-346.
    3. Edouard Challe & Julien Matheron & Xavier Ragot & Juan F. Rubio‐Ramirez, 2017. "Precautionary saving and aggregate demand," Quantitative Economics, Econometric Society, vol. 8(2), pages 435-478, July.
    4. Fabrizio Perri & Jonathan Heathcote, 2011. "Wealth and Volatility," 2011 Meeting Papers 1065, Society for Economic Dynamics.
    5. Olivier Blanchard & Eugenio Cerutti & Lawrence Summers, 2015. "Inflation and Activity – Two Explorations and their Monetary Policy Implications," NBER Working Papers 21726, National Bureau of Economic Research, Inc.
    6. Matthew Rognlie & Andrei Shleifer & Alp Simsek, 2014. "Investment Hangover and the Great Recession," Working Paper 203866, Harvard University OpenScholar.
    7. O'Rourke, Kevin Hjortshøj, 2015. "Economic impossibilities for our grandchildren?," CEPR Discussion Papers 10974, C.E.P.R. Discussion Papers.
    8. Paul Beaudry & Dana Galizia & Franck Portier, 2017. "Is the Macroeconomy Locally Unstable and Why Should We Care?," NBER Macroeconomics Annual, University of Chicago Press, vol. 31(1), pages 479-530.
    9. Beaudry, Paul & Galizia, Dana & Portier, Franck, 2016. "Putting the Cycle Back into Business Cycle Analysis," TSE Working Papers 16-734, Toulouse School of Economics (TSE).
    10. Kevin Hjortshøj O'Rourke, 2015. "Economic Impossibilities For Our Grandchildren?," Oxford University Economic and Social History Series _139, University of Oxford, Department of Economics.
    11. Beaudry, Paul & Galizia, Dana & Portier, Franck, 2015. "Reviving the Limit Cycle View of Macroeconomic Fluctuations," CEPR Discussion Papers 10645, C.E.P.R. Discussion Papers.
    12. Paweł Kopiec, 2018. "Interbank market turmoils and the macroeconomy," NBP Working Papers 280, Narodowy Bank Polski, Economic Research Department.
    13. Emanuele Russo, 2017. "Harrodian instability in decentralized economies: an agent-based approach," LEM Papers Series 2017/17, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    14. Donato Masciandaro, 2014. "Macroeconomic Ideas, Business Cycles and Economic Policies: One Size Doesn’t Fit All - A Primer," BAFFI CAREFIN Working Papers 14161, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    15. Edouard Challe, 2017. "Uninsured Unemployment Risk and Optimal Monetary Policy," Working Papers 2017-54, Center for Research in Economics and Statistics.
    16. Donato Masciandaro, 2018. "Central Banking and Macroeconomic Ideas: Economics, Politics and History," BAFFI CAREFIN Working Papers 1858, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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