Reconciling Krugman and Keen using nef’s model

Photo credit:   00Joshi

September 7, 2012 // By: Emanuele Campiglio

A few months ago a heated row took place between the economists Paul Krugman, American Nobel prize winner, and Steve Keen, the Australian author of a book entitled “Debunking Economics”. The argument, which triggered wide debate across the blogosphere, was sparked by a difference in the way the two looked at things such as the process of credit creation and the role of debt in the wider macroeconomic framework.

The dispute was ignited by a paper prepared by Steve Keen for the INET conference in Berlin, in which he asserted that changes in the levels of debt add to the economy’s aggregate demand. In other words, aggregate demand in an economy can be different from income, and the difference is equal to the net change in the level of debt. The concept can appear a bit odd, and certainly sounds very different from what Krugman so often repeats: “Your spending is my income, and my spending is your income”! 

The point that Steve Keen makes is very subtle and it’s no wonder that even an economist as experienced as Krugman struggled to get it. We at nef, being involved in macroeconomic modeling ourselves, have tried to unravel the issue using our own tools. We therefore built a simplified version of our model to run numerical simulations of different scenarios (have a look at this if you want to have a taste of the complete model).

Below you can find a presentation that explains our analysis. You can flip through the pages or download it from this link. In this work:

This presentation will be followed very soon by another one dealing with the way we model banks and credit creation, and by a full working paper. We hope this could contribute to bring the debate a step further. And of course, any comment is more than welcome.

Reconciling Krugman and Keen using nef model from nefcomms


Reconciling Krugman and Keen using nef’s model

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