LCrises upset existing economic theories and stimulate their regeneration. Nothing new to that. One can cite as an example the General theory of employment, interest and money, key work by John Maynard Keynes, published in 1936, a few years after the 1929 collapse. monetary disorders of the 1970s, the crisis occurred when the markets anticipated that the central bank no longer had the means to defend the currency; the second-generation model, inspired by the crises of the European monetary system in the early 1990s, anticipates a crisis when the defense of parity becomes not impossible, but too costly; finally, the third generation model, born after the Asian crisis of 1997, considers the currency crisis as both the cause and the consequence of a banking crisis.
The 2020 health crisis has also shaken up macroeconomists. While they were busy analyzing the interaction between inequalities and economic fluctuations, the crisis forced them to shift their gaze to sectoral issues and value chains. Out of this emerged, for example, the seemingly paradoxical concept of the “Keynesian supply shock”. For example, the closure of restaurants for health reasons (supply shock) results in a drop in demand for taxis (demand shock).
It is still a little early to anticipate what the current energy and geopolitical crisis will bring in terms of novelties in the toolbox of macroeconomists. The theory of international trade already offers relevant resources, whether for understanding the impact of sanctions against Russia or for anticipating the repercussions of higher prices for imported energy on European companies.
Research is struggling to keep up
Another major area of importance is that of the price-wage loop, which describes to what extent, and at what speed, the rise in prices is transmitted to wages, and wages to prices, to form a spiral which could end up escape us. And there, it must be admitted that academic research is struggling to keep up. Researchers active today have, for the most part, studied when inflation had almost disappeared. In the 2000s and 2010s, it was readily explained that fluctuations in unemployment no longer had an impact on wage and price inflation: the so-called “Phillips” curve, which links unemployment to inflation, was now flat as the horizon line. Sudden awakening today, and macroeconomics research struggles to concretely help policy makers who are wondering, for example, whether it is better to spread inflation over time (to reduce uncertainty and give households and businesses time to adjust) or else to let prices rise sharply and hope that this does not last. If we know that a general re-indexation of wages on prices must be vigorously fought, what is then the best strategy to preserve the purchasing power of low-income households?
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