Re: Fw: Obituary: Franco Modigliani

[Bill Mitchell <ecwfm@xxxxxxxxxxxxxxxxxxxxxxx>]

Dear PKT

While FM is well-known for his life-cycle hypothesis and the work with
Miller his 
contributions to macro have been in other areas as well. And I would
conjecture
it is these latter contributions that have been more damaging to theory
development
and policy of the type this list might be interested in.

Modigliani introduced the term NAIRU to the economics profession
(Modigliani and Papademos, 1975),.
This concept has been one of the most abused in all time and has seen
governments systematically
implement policies that have denied people the opportunity to work and
prevented full employment
from being achieved. The concept underpins current macro policy all
around the globe and is also
the motivation for the pernicious anti-worker regimes that parade under
the title "Active Labour Market
Programs".

It is interesting though that in his latter years, even Franco himself
began to see the problems he
created. In his 2000 Freiburg Lecture (essential reading) (Modigliani,
2000: 3) that:

"Unemployment is primarily due to lack of aggregate demand. This is
mainly the outcome of erroneous 
macroeconomic policies? [the decisions of Central Banks] ? inspired by an
obsessive fear of inflation, ? 
coupled with a benign neglect for unemployment ? have resulted in
systematically over tight monetary 
policy decisions, apparently based on an objectionable use of the
so-called NAIRU approach. The contractive 
effects of these policies have been reinforced by common, very tight
fiscal policies (emphasis in original)"

References:

Modigliani, Franco (2000). ?Europe?s Economic Problems?, Carpe Oeconomiam
Papers in Economics, 
3rd Monetary and Finance Lecture, Freiburg, April 6.

Modigliani, Franco and Lucas Papademos (1975). ?Targets for Monetary
Policy in the Coming Year?, Brookings 
Papers on Economic Activity, Number 1, pp. 141-163.

I have written articles that trace this metamorphous and the empirical
analysis that accompanies it if anyone is 
interested in them. The empirical evidence that is now emerging (with
longer time series now being available 
and sufficient to test some of the basic NAIRU propositions) very much
supports FM's change of heart.

I am surprised that we are concentrating on the early work including the
LCH rather than this recent
and more influential phase of his work.

best wishes
bill