Morning Must-Read: Paul Krugman: The New Classical Clique and the Insulation of International Macro

Paul Krugman: The New Classical Clique: “As I said, international macro went in a different direction…

…The overwhelming international evidence against a new classical view, although that view persisted on the domestic side despite compelling evidence after 1980…. For domestic macro types, the big event of the 70s was stagflation; in international macro it was the collapse of Bretton Woods and the shocking volatility… that followed. The very tight correlation between nominal and real rates meant that international macroeconomists kept sticky prices in their models. The famous Dornbusch ‘overshooting’ analysis paired sticky goods prices with volatile, forward-looking asset prices, and seemed to have very interesting things to say–so international macro had a program other than the demolition of all things Keynes…. International macro has all along had stronger ties to real-world policymakers, especially at central banks, maybe because there are a lot of currencies and US-based economists therefore have a lot more opportunities to weigh in on actual policy decisions.