By Scott Fullwiler
In the comments section of my last post, Neil Wilson linked to this piece by Paul Krugman from last fall. It’s a useful lecture in that it shows mainstream economists are beginning to understand that currency issuers under flexible exchange rates (a term he actually uses) are not generally subject to bond vigilantes, a condition that applies only to nations without their own currencies, debt in other currencies, and/or fixed exchange rates.
In the paper, as he’s done before, he cites DeGrauwe 2011 as the “seminal” paper demonstrating that Eurozone nations are subject to bond vigilantes while others like the US, Japan, and the UK would not be. I’ve got nothing against DeGrauwe 2011 aside from his own failure to cite heterodox literature that preceded him by decades in some cases. Ok, so I do have something against it, but not in terms of content (though I haven’t read closely so perhaps I’d find something). And in fairness Krugman’s suggestion that DeGrauwe 2011 is “seminal” could be due to the fact that the latter provides a model (though the Kelton/Henry paper I cite below does, too; though it’s quite different, it would not be difficult to build on in the direction DeGrauwe 2011 moves)—and we all know that neoclassicals have difficulties discussing anything outside the context of a formal model (not that models aren’t extremely useful for many things, but they should not be the tail that wags the dog, and for neoclassicals they are essentially that).