From the Global Financial Crisis to Global Monetary Rules: a Wicksellian View

In this paper we provide a unifying view of the main factors that interacted and caused the global financial crisis, inspired by the work of Knut Wicksell. We revive Wicksell’s theory in a different way from the Neo-Wicksellian approach that led to the definition of the Taylor’s rule. We start from the observation of two stylized facts of the world economy preceding the outburst of the crisis: growing profit rates and declining real long-term interest rates. In terms of the standard neo-classical model this can be hardly explained by real factors as an excess of savings or shortage of investments. It rather evokes the problem, especially dealt with by Wicksell, of monetary and banking policies not tracking the movements of the return on capital and therefore fixing the rate on loans to such a level that the real long-term rate is below (as it was before the crisis) or above its “natural” level (as in the decades preceding Interest and Prices). The widening gap between the market real interest rate and “natural” one indicates a disequilibrium much more fundamental than that signalled by the short-run downward deviations of central banks’ policy rates detected by Taylor’s rules. Such a disequilibrium did not, however, put in motion the well- known neo-classical mechanism of adjustment- the “cumulative process” in Wicksell’s words- driven by inflation. It rather generated much more dangerous outcomes. It fed asset bubbles and pushed banks and other financial institutions to a “search for yield” to align their rate of return, that was depressed by low interest rates, to that of the real sectors of the economy. Thus, the “cumulative process” turned out to be highly destabilizing, spurring risk taking and leverage and at the same time global imbalances by bubble driven growth till the sudden adjustment brought about by the financial crisis. By stressing the importance of reference to the long-run of the neo-classical tradition, our reading of the crisis indicates the limits of the short-termism of a monetary policy guided by Neo-Wicksellian or Taylor rules that provide real time references to central banks.