THE CONVENTIONAL MODELING HAS FAILED

1. THE DIVERSITY OF NATIONAL REACTIONS TO THE PRESENT CRISIS:What consequences for macro-economic theory and economic policy?Robert BOYER (CEPREMAP)“The future of the global economy”, Lund, September 2nd , 2011

2. THE CONVENTIONAL MODELING HAS FAILED • 1. At the macroeconomic level, Dynamic Stochastic General Equilibrium models have delivered unreliable predictions. • Not any negative exogenous shock • A structurally stable equilibrium • No financial sector, hence no Lehman Brothers bankruptcy .

3. The macroeconomic profession was unable to anticipate the brutal downturn associated with Lehman Brothers’ bankruptcy. Output forecast made on third quarter 2008 Output forecast made on third quarter 2008 Source: Volker Wieland (2010), Model comparison and Robustness: A proposal for policy analysis after the financial crisis, WP Goethe University Frankfurt, November 28th.

4. “It will be a mild and short recession…” Output forecast made in the fourth quarter 2008 Source: Volker Wieland (2010), ibidem

5. “….The recession is deeper, but the recovery stronger” Output forecast made in the first quarter 2009 Source: Volker Wieland (2010), ibidem

6. “At least the recovery is correctly forecast, but not the subsequent slowdown” Output forecast made in the second quarter 2009 Source: Volker Wieland (2010), ibidem

7. AN INSTITUTIONAL APPROACH TO THE FINANCE-LED GROWTH REGIME IN THE US 1. A genuine set of macroeconomic mechanisms

8. Figure – The main macroeconomic relations of a finance-led accumulation regime

9. Result 1: When equity effects are well developed and if the financial markets lead to a generalisation of investment behaviour determined largely by profitability, then a virtuous system of financial growth can be said to exist. • Result 2: The development of the financial markets mechanically extends the finance-led zone but at the same time takes the economy closer to the zone of structural instability. There is thus a threshold above which financialisation destabilises macroeconomic equilibrium. • Result 3: To stabilise a financial system, it is important for the Central Bank to react sufficiently quickly to prevent financial bubbles from bursting.

10. III. AGAINST “ONE SIZE FOR ALL”: THE LARGE AND RENEWED DIVERSITY OF NATIONAL “RÉGULATION” MODES. • Result 4: If financialization occurs in an economy which is still dominated by wage-earning social relations, where the wage is the essential determinant of the mode of consumption, raising the profitability norm has a contrary negative effect.

11. Table – The finance-led SSA is typical of US: few chances of diffusion of the rest of the world with the exception of UK

12. IV. THE COEXISTENCE AND COMPLEMENTARITY OF VARIOUS BRANDS OF CAPITALISM AND INSTITUTIONAL CONFIGURATIONS

13. Three transmission mechanisms from the US economy to the rest of the world The diffusion of the finance led growth model to other OECD countries : mimicking the American crisis Financial globalization implies a brusque assessment of risk and this severely hits all the countries that relied upon the permanent inflow of foreign capital The collapse of the world trade, consequence of the freeze of inter-bank credit, is spreading the crisis even to the high performing and virtuous economies

14. C1 : The good pupils of financiarization : A systemic crisis with a freeze of credit : UK Table – The difference between producers and buyers of toxic derivatives Depreciations of financial assets by banks (Mds de $)

15. C2 : The Asian crisis is repeating itself in Europe : the danger of a large debt in foreign currency. Hungary, Estonia, Latvia, Lithuania et Ukraine. Table – Europe 2008 : the excess of borrowing in foreign currency

16. C3 : The victims of the very success of an export and innovation led growth regime Sweden, Netherland, Germany and Japan Table – Countries at the technological frontier Source : Artus Patrick (2009) : « Se limiter à règlementer la finance ne résoudra rien », Flash Economie, n° 156, 3 avril, Natixis, Paris, p. 10.

17. Germany and Japan benefit from the growth of NPI markets Table – Exports towards emerging economies (*) Source : Artus Patrick (2008) : « Quels vont être les pays qui seront le plus en difficulté après la crise », Flash Economie, n° 477, 22 octobres, Natixis, Paris, p. 8.

18. C4 : Rentier economies do continue to exhibit quite specific macroeconomic regimes Saudi Arabia, Russia et Venezuela C5 : Continental economies : the potentiality of a very large domestic market India, Brasil, China C6 : Hybrid economies discomposed by their international insertion Latin America (Argentina, Mexico) C7 : The victims from the disconnection with respect to the word markets Most African countries

19. Figure – How the seven regulation modes interact and coexist C3 Innovation / export led Germany , Japan C2 Financial external dependency Hungary, Iceland, Ireland Trading sophisticated goods Trade C5 Continental powers China, India, Brazil Capital flows Capital, Mass produced goods Primary resources Saving Primary resources C1 Financial hegemony US, UK C4 Rentier Russia, Venezuela, Saudi Arabia C6 Hybrid and disarticulated by international insertion Argentina, Mexico Capital flows and trade Competition more than complementarity C7 Disconnection from the world market Africa

20. V. WHY HAVE ECONOMIC POLICIES BECOME SO DIFFERENT FROM ONE COUNTRY TO ANOTHER? 1. The policy response to the present crisis is path dependent with respect to the national style for economic policy.

21. United States UK Germany France Sweden Figure – Diversity of strategies: a matter of national interests and style for economic policy Laisser faire fondamentalism Republican experts and politicians Mervyn King initial statement Keynesian spending + Bad debts resolution funds Paulson and Geithner Plans Bank bailing out but no Keynesian plan Help to the banks and supply side plan 2008 strategy Partial nationalization and active Keynesian policy Obama 2009 plan Gordon Brown 2009 plan Nationalization of core banks Bailing out after 1990s crisis

22. The style for economic policy is related to the whole national institutional architecture…. • ….And the related diversity makes quite problematic the negotiation of common international rules and coordination of strategies out of the present crisis.

23. Table – Diversity of national goals

24. VI. DEFINITE CONSEQUENCES FOR A RENEWED AND RELEVANT MACROECONOMICS 1. The complete irrelevance of past DSGE models opens new macroeconomic researches

26. A series of new research strategies

27. An institutionally grounded macro modeling

28. The end of close economy macroeconomic theory: the need for multinational modeling. • Taking into account the consequences of financialization on macroeconomic dynamics and crises.

29. Recurring major financial crises but not the repetition of a single pattern: a major challenge for macroeconomic theory. • Policy makers are exploring unchartered territories: it is not sufficient to repeat the strategies of the past.

30. Table – Each financial crisis has induced significant anti-crisis institutional reforms

31. Thanks for your attention and patience Robert BOYER CEPREMAP 140, rue du Chevaleret, 75013 PARIS (France) e-mail : robert.boyer@ens.fr web sites : http://www.jourdan.ens.fr/~boyer/