Out of the Corridor: Keynes and the Crisis

Posted: 15 Jul 2009

See all articles by Axel Leijonhufvud

Axel Leijonhufvud

University of Trento - Department of Economics and Management; University of California, Los Angeles

Date Written: July 2009


We should learn from Keynes to focus on the macroproblems of our day. Today's problem is the financial crisis and the resulting great recession. Neither the standard Keynesian policies of decades past nor the monetary policy doctrine of recent years provides useful solutions. Dynamic stochastic general equilibrium theory is part of the crisis wreckage, but turning to old or to New Keynesian theory will be of little use. A balance sheet recession requires that policy address the problems in the private sector's capital as well as its income accounts. We need serious theoretical work on problems of system stability using, for example, agent-based methods. Monetary theory needs to develop analysis of processes in which intertemporal budget constraints are violated. Network theory will be useful in that quest.

Keywords: Keynes, Keynesian policy, Minsky, Interest targeting, Corridor stability, Balance sheet recession, Financial crisis, Financial networks, Leverage dynamics, Deleveraging, Positive (adverse) feedback loops, High inflation

JEL Classification: B22, E12, E44, E61, G20

Suggested Citation

Leijonhufvud, Axel, Out of the Corridor: Keynes and the Crisis (July 2009). Cambridge Journal of Economics, Vol. 33, Issue 4, pp. 741-757, 2009, Available at SSRN: https://ssrn.com/abstract=1433941 or http://dx.doi.org/10.1093/cje/bep022

Axel Leijonhufvud (Contact Author)

University of Trento - Department of Economics and Management ( email )

Via Inama 5
Trento, I-38100

University of California, Los Angeles

405 Hilgard Avenue
Box 951361
Los Angeles, CA 90095-1361
United States

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