Essays on Microfoundations, Macroeconomic Applications and Economic History in Honor of Axel Leijonhufvud
Edited by Roger E.A. Farmer
Chapter 4: Macroeconomics of Broken Promises
4. Macroeconomics of broken promises Daniel Heymann* INTRODUCTION 4.1 The study of macroeconomic disorders has analytical and practical relevance. The work of Axel Leijonhufvud has been marked by a concern about the scope and limitations of the self-adjustment potential of economic (and social) systems. Hence his maintained interest in the mechanisms and the eﬀects of macroeconomic disruptions, such as the ‘two types of crises’ (Leijonhufvud, 1998b) that put to the test the ability of economies to deal with stresses. High inﬂations shorten decision horizons and restrict ﬁnancial transactions and, in the limit, even the realization of everyday trades (Heymann and Leijonhufvud, 1995). In credit crashes, economies and policies must process the consequences of large-scale ‘broken promises’ (Leijonhufvud, 2003). This chapter focuses mainly on this second kind of disturbance. Episodes of recession linked to currency and credit crises have been recently observed in several ‘emerging economies’ (Kaminsky and Reinhart, 1999). The abruptness of some transitions, and the diﬃculty of ﬁnding statistical associations between the emergence of crises and the past history of ‘fundamental variables’ (Calvo, 1998; Kaminsky, 1999) have oriented the quest for explanations to ‘sudden deaths’ associated with multiplicities of rational expectations equilibriums (for example Sachs et al., 1996), or to phenomena of herd behavior (Chari and Kehoe, 2003). Eﬀects of contagion and imitation seem relevant in critical junctures, when agents perceive that the system may be approaching a sharp turning point, and are prepared to respond with speed and intensity to what others around them...
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