EconPapers    
Economics at your fingertips  
 

Reconciling Hayek's and Keynes Views of Recessions

Paul Beaudry (), Dana Galizia () and Franck Portier ()

No 20101, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Recessions often happen after periods of rapid accumulation of houses, consumer durables and business capital. This observation has led some economists, most notably Friedrich Hayek, to conclude that recessions mainly reflect periods of needed liquidation resulting from past over-investment. According to the main proponents of this view, government spending should not be used to mitigate such a liquidation process, as doing so would simply result in a needed adjustment being postponed. In contrast, ever since the work of Keynes, many economists have viewed recessions as periods of deficient demand that should be countered by activist fiscal policy. In this paper we reexamine the liquidation perspective of recessions in a setup where prices are flexible but where not all trades are coordinated by centralized markets. We show why and how liquidations can produce periods where the economy functions particularly inefficiently, with many socially desirable trades between individuals remaining unexploited when the economy inherits too many capital goods. In this sense, our model illustrates how liquidations can cause recessions characterized by deficient aggregate demand and accordingly suggests that Keynes' and Hayek's views of recessions may be much more closely linked than previously recognized. In our framework, interventions aimed at stimulating aggregate demand face the trade-off emphasized by Hayek whereby current stimulus mainly postpones the adjustment process and therefore prolongs the recessions. However, when examining this trade-off, we find that some stimulative policies may nevertheless remain desirable even if they postpone a recovery.

JEL-codes: E32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2014-05
Note: EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (35) Track citations by RSS feed

Published as Paul Beaudry & Dana Galizia & Franck Portier, 2018. "Reconciling Hayek’s and Keynes’ Views of Recessions," Review of Economic Studies, Oxford University Press, vol. 85(1), pages 119-156.

Downloads: (external link)
http://www.nber.org/papers/w20101.pdf (application/pdf)

Related works:
Journal Article: Reconciling Hayek’s and Keynes’ Views of Recessions (2018) Downloads
Working Paper: Reconciling Hayek's and Keynes' Views of Recessions (2016) Downloads
Working Paper: Reconciling Hayek's and Keynes' views of recessions (2015) Downloads
Working Paper: Reconciling Hayek's and Keynes' views of recessions (2014) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:20101

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w20101

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2019-09-11
Handle: RePEc:nbr:nberwo:20101