The Fisher-Minsky-Koo model repackaged debt-deleveraging crisis into New Keynesian orthodoxy

Evidence

Perhaps Krugman realized something similar, because in the subsequent year he teamed up with Gauti Eggertsson to author what he advertised as a “Fisher-Minsky-Koo” model. The problem Krugman hoped to address was to convince the reader that in the throes of a deleveraging crisis, when financial failures induced everyone to try to shed debt, there was room for the government to improve the situation by taking on substantial volumes of new debt. In his books, this supposed “Keynesian” solution had to map into the old-fashioned IS-LM model of a “liquidity trap,” something he had long trumpeted as the paradigm for “depression economics,” which he interpreted to mean that the supply and demand for loanable funds could be equilibrated only at a negative interest rate. Eggertsson and he sought to render these ideas more acceptable to the orthodoxy through resort to a standard New Keynesian model with the wrinkle that there were posited two different agents, and the “impatient agent borrows from the patient agent, but is subject to a debt limit. If this debt limit is, for some reason, suddenly reduced, the impatient agent is forced to cut spending; if the deleveraging required is large enough, the result can easily be to push the economy up against the zero lower bound … [This is appended to] a sticky-price model in which the deleveraging shock affects output instead of, or as well as, prices.” Recall, “New Keynesians” get unemployment out of their neoclassical models by throwing a little sand in the gears—something Keynes himself rejected. — Philip Mirowski, Never Let a Serious Crisis Go to Waste, 821

Categorization

• XREF: Connects to Mirowski’s broader thesis about how crisis insight gets rewritten into orthodoxy to preclude genuine change. — connects to: Orthodox economics models structurally excluded the possibility of major crises — Philip Mirowski, Never Let a Serious Crisis Go to Waste, 491; Persistent misunderstanding between Keynesian and Walrasian General Equilibrium paradigms in economics results from Kuhnian incommensurability rather than empirical failure or lack of clarity. — Cambridge, That Was: The Crucible of Heterodox Economics
• SEED: Article angle: how the ‘debt limit’ modeling trick smuggled austerity-era constraints into the supposed ‘Keynesian’ policy response.

Broader Connections

• Orthodox economics models structurally excluded the possibility of major crises #expands (0.80) — Philip Mirowski, Never Let a Serious Crisis Go to Waste, 491