This chapter briefly describes the key characteristics of the contemporary crisis. The first characteristic is related to the place where it originated. The second concerns the phenomenon that triggered the crisis, that is, the substantial increase in delinquencies in a specific category of residential mortgages, namely, the so-called subprime mortgages. The third characteristic had to do with the evolution of the crisis since 2007.
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Louis-Philippe Rochon and Sergio Rossi
A new virus, known as ‘Reality’, has started to afflict Mainstream Economists, causing them to reject the ‘as if’ arguments they used to use to justify their models. There is no known cure for the virus, and complete avoidance of ‘Reality’ is the only effective strategy to prevent infection.
The Bhaduri–Marglin model has become a widely used workhorse model in heterodox macroeconomics and has given rise to two dozen or so empirical studies, which at times have given conflicting results. Neo-Kaleckians and neo-Goodwinians have applied different estimation strategies, with the former typically estimating behavioural equations, while the latter have often used reduced-form demand equations. Further differences include the lag structure, the output measure, the control variables and the sample. This paper, first, tries to clarify the terms of the debate. While neo-Kaleckians interpret the model as a medium-term, partial-equilibrium goods market model, neo-Goodwinians are interested in the interaction of demand and distribution and regard the model as a long-run model with short-run cycles. Second, we elaborate a Kaleckian–Minskyan view of the economy as characterised by a wage-led demand regime and cycles driven by financial fragility. Many of the reported results may suffer from omitted variable bias as they do not include financial control variables. At least in the recent past, financial effects on demand have been much larger in size than distribution effects. A wage-led Minsky model with a reserve-army distribution function gives rise to pseudo-Goodwin cycles.
Robert A. Blecker
Several recent critiques have questioned the theoretical logic of standard models of balance-of-payments-constrained growth (BPCG) and the empirical support for ‘Thirlwall's law’. On the empirical side, critics charge that most econometric estimates of this model have effectively only tested whether exports and imports grow at similar rates in the long run. On the theoretical side, the criticisms have focused on the role of foreign income growth, capital accumulation, relative prices and country size in BPCG models. This article reviews the current state of the debate over these critiques and also offers a brief discussion and evaluation of three alternative models. The alternative models all highlight a significant role for the level of relative prices (or the real exchange rate) in determining long-run growth, which is consistent with recent empirical studies.