The euro zone crisis: What would John Maynard do?

Dirk Ehnts

No 72/2016, IPE Working Papers from Berlin School of Economics and Law, Institute for International Political Economy (IPE)

Abstract: In his letter to US President Franklin D. Roosevelt Keynes (1933) wrote about "the technique of recovery itself". An increase in output is brought about by an increase in purchasing power, Keynes argues, which can come from three sectors: households, firms and government. Using the IS/MY macroeconomic model developed by Ehnts (2014), which features sectoral balances and endogenous money, the situation of some euro zone members is examined with a focus on the three techniques of recovery: increases in debt of the respective sectors as defined by Keynes. A fourth technique, an increase in spending by the rest of the world, is added. The conclusion is that the policy recommendation given by Keynes in his letter also holds for the euro zone at present: a rise in debt-financed government expenditure. Some reform at the institutional level in Europe would enable "the technique of recovery" to work via the TARGET2 payment system, which is organized along Keynes' International Clearing Union proposal and a solid foundation to build on.

Keywords: deficit spending; fiscal policy; sectoral balances; Keynes; Keynesian economics (search for similar items in EconPapers)
JEL-codes: E12 E32 E62 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-eec, nep-mac and nep-pke
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ipewps:722016

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