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Economy and economics: the twin crises

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  • Alessandro Vercelli

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Abstract

This paper explores the interaction between the Great recession triggered by the US subprime mortgages crisis and the twin crisis of macroeconomics. We argue that a major determinant of the subprime crisis and its dire consequences has been an approach to economics that is unable to deal with irregular phenomena. On the other hand, the unexpectedly deep financial crisis that has heavily affected the real economy makes clear that we need a major redirection of macroeconomic theory to make it able to explain, forecast and control irregular phenomena. The recent interaction between the crisis of the economy and the crisis of macroeconomics is analyzed in the light of similar preceding episodes in the 20th century: the Great contraction of the 1930s and the Great stagflation of the 1970s.

Suggested Citation

  • Alessandro Vercelli, 2010. "Economy and economics: the twin crises," Department of Economic Policy, Finance and Development (DEPFID) University of Siena 0410, Department of Economic Policy, Finance and Development (DEPFID), University of Siena.
  • Handle: RePEc:usi:depfid:0410
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    File URL: http://repec.deps.unisi.it/depfid/text0410.pdf
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    References listed on IDEAS

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    1. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 56(3), pages 291-299, September.
    3. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-1370, November.
    4. Thomas I. Palley, 2007. "Financialization: What It Is and Why It Matters," Working Papers wp153, Political Economy Research Institute, University of Massachusetts at Amherst.
    5. Vercelli,Allessandro, 1991. "Methodological Foundations of Macroeconomics," Cambridge Books, Cambridge University Press, number 9780521392945, May.
    6. Laidler,David, 1999. "Fabricating the Keynesian Revolution," Cambridge Books, Cambridge University Press, number 9780521641739, May.
    7. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Irregular phenomena and the macroeconomics research agenda
      by Economic Logician in Economic Logic on 2010-11-15 21:56:00

    More about this item

    Keywords

    subprime crisis; Great recession; Great stagflation; Great contraction; Great depression; liberalism; laissez-faire; Keynesism; neoliberalism; new classical economics; theory and facts; scientific revolutions.;

    JEL classification:

    • A11 - General Economics and Teaching - - General Economics - - - Role of Economics; Role of Economists
    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • N1 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations

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