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2020-01-23

How and why economics forgot Keynes’ warnings on panics

In a new paper (hat-tip to the University of Washington’s Fabio Ghironi for drawing our attention to it), Nobel Prize winning economist George Akerlof does a brilliant job of explaining how and why, in the decades before the financial crash, macroeconomists failed to include any meaningful role of the financial system in their economic models.

John Maynard Keynes’ “beauty contest” theory of market behaviour, which helps explain why asset prices become unmoored from economic fundamentals due to people allocating their wealth partly based on what they think others will value, rather than what they themselves do. 

FT Alphaville 5 November 2019

What They Were Thinking Then:
The Consequences for Macroeconomics during the Past 60 Years


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