Thread by @DanielaGabor

now that the S/B duo and other New Keynesians worry about pent-up demand, excess savings & inflation

I am reminded of similar debate, won by 'excess savings' crowd, with disastrous consequences in formerly planned economies.

it's 1989, the Berlin Wall is shaking, and IMF economists + theoreticians of centrally planned economies need to come up with a plan of what exactly transition macroeconomics should look like.

IMF and Disequilibrium School agreed: planned economies were 'chronic excess demand economies'

why? monetary overhang = the socialist worker couldnt spend her income because of chronic shortages and rationing.

pent up demand would explode into hyperinflation if left unchecked

not just the socialist worker, but the socialist company was viewed as an inflationary threat:

through lens of Janos Kornai's soft-budget constraint, state companies were viewed as wild socialist beasts that no capitalist price mechanism could discipline.

the pre-1989 disequilibrium vs shortage school debate is probably the most impolite macro debate I have ever studied, Friedman vs Kaldor aside.

they agreed on one thing 'no chronic excess demand'

by 1990, both schools had moved to 'of course, chronic excess demand'

'speaking truth to power' is how cynics describe the conceptual journey of the wise economists from Western Europe & US.

you dont get lucrative consultancy contracts, op-eds & to feed your saviour complex by sticking to nuanced views of socialist macro

https://twitter.com/DanielaGabor/status/1334991154111270920?s=20

but the excess savings/monetary overhang narrative justified the IMF's view that citizens and state companies in Eastern Europe needed repeated doses of monetary and fiscal austerity - the so called Shock Therapy

monetary+fiscal austerity combo offered some quick lessons, that I worry we will re-learn this/next year in UK and US:

- withdrawing fiscal support under profound uncertainty kills pent-up demand/excessive savings
- withdrawing monetary support (unwinding QE) - even worse

on the other hand, I offer my services in my double capacity as a survivor on how to inflict maximum pain on your citizens by claiming they have too much money to spend and macroeconomist.
perfect combo, and as Sachs has demonstrated, no reputational damage.

a lot more on why a PostKeynesian/structuralist 'it's industrial + exchange rate policy' would have worked much better - as it would now to accelerate the low-carbon transition

you know what to do if you hit the paywall.

tandfonline.com/doi/pdf/10.108…