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The Wicksellian Flavour in Macroeconomics* Perfil de Coyuntura Económica No. 11, agosto de 2008, pp. 155-170 © Universidad de Antioquia 155 The Wicksellian Flavour in macroeconomics* Nicolas Barbaroux ** –Introduction. –I. Wicksell and Woodford: an economy without money? –II. The monetary policy implications of the Cashless Model. –III. Is Woodford’s model a monetarism without money? -IV. Conclusion. –References. First version november 2007, final accepted version january 2008 Resumen: la macroeconomía encontró renacimiento de la ideas wickselianas en en Johan Gustav Knut Wicksell un nuevo macroeconomía son sinónimo o no del líder. La aparición y el desarrollo reciente de fin del monetarismo? los modelos nuevos keynesianos –también Palabras clave: Woodford, Wicksell, llamados modelos de la nueva síntesis neo- política monetaria, monetarismo clásica, abogan por un renacimiento de las ideas wickselianas en macroeconomía. En Abstract: macroeconomics found its new efecto, la herencia wickseliana se entiende sacrosaint economist in the person of no solamente a partir de la política mon- Johan Gustav Knut Wicksell. The recent etaria bajo la forma de reglas, sino además development of New Keynesian models a partir del papel que juega la cantidad –or models from the New Neo-Classical de dinero en la elaboración de la política Synthesis– plead in favour of a Wick- monetaria. La publicación de Interest and sellian revival. Not only does the actual Prices por Woodford en 2003 legitima ex- monetary policy framework take the form plícitamente este “sabor” wickseliano. Este of a monetary policy rule –in line with artículo presenta un estudio de las conse- Wicksell’s original theory– but the recent cuencias de esta herencia en la elaboración development of the late 1990’s models de la política monetaria, y particularmente, also legitimates such Wicksellian flag due se tratarán las consecuencias sobre la cor- to their de-emphasis of money. The high- riente monetarista. ¿En qué medida el est point of interest was taken with the * The author is indebted to the 2007 ESHET Conference participants, especially Prof. Boianovsky, for their comments on an early draft of this article. A special thanks is addressed to Sharon for her help in the English version of this article. ** University J. Monnet, 6 Rue Basse des Rives, 42 023 ST ETIENNE Cedex, (France). E-mail: Nicolas.Barbaroux@ univ-st-etienne.fr, CREUSET- CNRS FRE 2938. 156 Perfil de Coyuntura Económica No. 11, agosto 2008 publication of Woodford’s “Interest and Mots clef: Woodford, Wicksell, politique Prices” in 2003 that explicitly assumed a monatire, monetarisme. The aim of this paper Wicksellian flavour Clasificación JEL: B22, E13, E31, E43, is to study the policy implications of such E52. a Wicksellian inheritance and to determine the extent to which such a Wicksellian wind in macroeconomics is synonymous of the Introduction end of Monetarism. Monetarism is dead! Central bankers Key words: Woodford, Wicksell, monetary are all Wicksellians now! They target policy, monetarism. low inflation rates, with no regard to monetary aggregates whatsoever, by act- Résumé : la macroéconomie a trouvé son ing upon short-term real rates of interest. nouveau chef de file en la personne de This is the New Consensus in monetary Johan Gustav Knut Wicksell. L’apparition economics or simply the New Keynesian et le développement récents des modèles Synthesis. des Nouveaux Keynésiens, ou des modèles de la Nouvelle Synthèse Néo-Classique, M. Lavoie, M. Seccareccia, 2004 plaident en faveur d’une résurgence des racines wickselliennes en macroéconomie. The emergence of the Austrian theorists- En effet, l’héritage wicksellien s’entend Carl Menger and Eugen von Böhm-Bawerk non seulement du fait de la formulation was of great value for the evolution, if not de la politique monétaire sous la forme to say revolution (Woodford, 1999) in mac- d’un règle; mais aussi et surtout de part la roeconomics. By focusing on the round- restriction du rôle donné à la monnaie pour about process,1 the Austrians emphasised l’élaboration de la politique monétaire. a peculiar relative price: the interest rate. La publication d’Interest and Prices par By allowing the coordination of individual Woodford en 2003 marque un tournant decisions at different points in time, the dans la mesure où ce dernier légitime interest rate became an important element explicitement sa «saveur» wicksellienne. for the stability of the economic system. At L’objectif de cet article consiste à étudier the same time when it fails to fulfil its duty, les conséquences d’un tel héritage pour the interest rate can, conversely, bring about l’élaboration de la politique monétaire. serious consequences for the economy (such Plus particulièrement, c’est la question as an inflationary/deflationary process with de la fin du Monétarisme qui sera posée. the associated growth/recession process). Dans quelle mesure la résurgence de racines It is for these reasons, that the interest wickselliennes en macroéconomie est-elle rate has attracted such attention from the synonyme (ou non) de la fin du courant economists. Monétariste? 1 The concept of roundaboutness is of great value since it focuses attention on the idea that current saving involves deferring consumption into the future, and current investment provides the economy with the capacity to supply that future consumption. Thus, the main determinant of the economic stability is the interest rate. The Wicksellian Flavour in macroeconomics 157 The same thing is said concerning Knut the Neo-monetarist economists such as Wicksell and his influence in macroeco- Nelson, Mc Callum or Meltzer. The last nomics. Even if the extent to which the section will conclude. actual macroeconomics is Wicksellian is not crystal clear, we can not deny that I. Wicksell and Woodford: Wicksell’s monetary works are nowadays an economy without money? widely recognized as being a pillar in recent macroeconomic theories (Woodford, 2003; It would seem that policymakers found Mc Callum, 2005, Tamborini 2006). The their own bible since the publication of opening quotation from the New Keynsi- Woodford’s monetary treatise in 2003. ans is quite clear in this sense. If Wicksell Such a New Wicksellian theory holds a has been raised from the dead it is due to leading place in macroeconomics by simply his emphasis on an ideal type of economy taking into account the increasing number –called the pure credit system– in which of reactions that Woodford’s “Interest and “all domestic payments are effected by means Prices” provoked (Green, 2005; Nakajima, of Giro system and bookkeeping transfers’’ 2005; Zouache (with Trautwein), 2005; (Wicksell, 1936 (1898), p. 70). In short, Zouache, 2004, Mc Callum, 2005; Laid- what macroeconomics remembers today ler, 2007; Goodhart, 2005). Woodford’s from Wicksell is the cashless framework. landmark and distinctive feature, notably This is precisely what allows Woodford towards the traditionnal New Neoclassical to define his own work under the label of Synthesis lies in his explicit reference to Neo-Wicksellian (2003).2 Knut Wicksell.3 Within this Woodfordian The aim of this paper is to recall the version of the New Neoclassical Synthesis, general features of Wicksell’s monetary the concept of pure credit economy (Wick- work, particularly the pure credit system, sell, 1936 (1898) & 1935 (1906) –or cash- in order to analyze to what extent the new less economy in Woodfordian terms– holds consensus in macroeconomics –represented a leading place. by Woodford’s approach– is synonymous Wicksell’s original theory: a pure credit of a demise of Monetarism. This article system will begin by outlining the essential fea- tures of Wicksell’s original theory and In the early 20th century, Wicksell was seen subsequently presenting the monetary as a pioneer in monetary policymaking be- policy implications of Woodford’s model. cause he pleaded in favour of a monetary The “anti-monetarist approach” (Mc Cal- policy under the form of a monetary interest lum, 2005) of Woodford’s model will be rate rule. At that time such policymaking explored by studying the reaction from was seen as heterodox since the context 2 Woodford took voluntary the same title as Wicksell’s first monetary book (1898) saying more than anythingelse about Wicksell’s inheritance in Woodford’s work. 3 The label New Wicksellian has to be understood as a distinction from New Neoclassical Synthesis theory. Woodford distinguishes his own theory by neglecting real balance effects and by assuming that inflation is determined by an interest rate gap which can be eliminated by the use of an interest rate feedback rule. 158 Perfil de Coyuntura Económica No. 11, agosto 2008 was one of the devotion to the rule of (decrease) of the velocity of circulation the gold standard system.4 Wicksell was of money.8 Consequently, the causality entirely opposed to any monetary use of link between money and prices changes gold because of its two opposite functions as soon as banks enter into the economic (gold as money and gold as raw material framework. Wicksell highlighted V in the for the industry). Instead, he proposed to explanation of the transmission-mecha- substitute a free floating currency system nism between M (the stock of money) in which the purchasing power of money and P (the level of commodity prices). was guaranteed by the fluctuation of the Thus Wicksell’s monetary thesis should (banking) interest rate. In his first monetary be understood as an attempt “to restate the opus–entitled “Interest and Prices”, Wick- Quantity theory in credit-theoretical-terms.” sell aimed to give a clear statement of the (Trautwein/Boianovsky, 2001, p. 500). origin of the fluctuation of prices during the second half of the 19th century.5 Wicksell‘s “pure credit economy” was a model in which cash money did not exist. By removing the fixed velocity assumption More precisely, it was a banking economy in the Quantity relationship, Wicksell with the centralisation of lending by banks endogenized this hypothesis by introduc- and monetary institutions where “all do- ing several frameworks for the economy.
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