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Financial Sector

In the long run, we all want to be alive, and thrive

Hans Timmer's picture

Ninety years ago, in his A Tract on Monetary Reform Keynes famously wrote “In the long run we are all dead”. That observation recently stirred a lot of debate for all the wrong reasons, after Niall Ferguson obnoxiously claimed that Keynes did not care about the future because he was childless. Whether Keynes cared about the long-term future or not (and whether he had children or not) is completely irrelevant in this context, as many (e.g. Brad DeLong and Paul Krugman) have pointed out.

The actual context in which Keynes wrote this observation was a discussion about the quantity theory of money, which states that doubling the supply of money will only double the prices, but will have no consequences for other parts of the economy. This is the classical dichotomy between real and nominal variables. Keynes argued: “Now in the long run this is probably true”. But “In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.”  So, Keynes’ point was obviously not that the future doesn’t matter. His point was that simple theories that might describe long-term relationships are just not good enough to deal with current issues. In the short run, changes in money supply can have all kinds of important consequences beyond the price levels. Economists will have to make their hands dirty and delve into the complicated dynamics of the here and now.

From Net to Gross Capital Flows

Sergio Schmukler's picture

The financial crises of the last three decades have spurred a very large interest on international capital flows. Although most of the work in the topic has concentrated on the behavior of net capital flows, much less is known about the behavior of gross capital flows (the difference between capital inflows by foreigners and capital outflows by domestic agents).

The overwhelming focus on net flows represents a serious shortcoming because gross flow are much larger and much more volatile than net flows, and their size and volatility have been growing substantially faster, as we discuss in a recently published paper and Vox column (Broner et al., 2013a and b).

It is time to shift the attention from net capital flows to gross capital flows.

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