ECB admits its models have misplaced theoretical foundations

5 December, 2012 at 08:36 | Posted in Economics | Leave a comment

In a speech at the Hyman P. Minsky Conference on Financial Instability, 26 November 2012, Vítor Constâncio, Vice-President of the ECB, said (h/t money4nothing):

It is a great pleasure to be here today to participate at this event organised by the Levy Institute. It is fair to say that, intellectually, the Levy Institute has had a “good crisis”. Building on the post-Keynesian analysis of Minsky’s Financial Instability Hypothesis and Wynne Godley´s theory of sectoral balances and stock-flow consistent models, the work of the Institute´s resident scholars predicted and explained many of the challenges we are facing today.

This serves as a reminder of the importance for policy-makers to keep an open mind in continuously refining our economic thinking. It is today clear to us that conventional macroeconomic models were ill-equipped to capture the key role of financial markets. Our theoretical foundations proved to be misplaced when tested in reality. The way forward therefore has to involve taking the lessons from this empirical test: using the knowledge we have gained so far to better understand the necessary conditions for economic and monetary union to function. What this implies for the euro area will be the subject of my address today.

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