Money, Banks and Finance in Economic Thought

The history of Macroeconomics under the lens of Leijonhufvud's “Swedish Flag” taxonomy

Clerc Pierrick, Swiss National Bank

Throughout his work, Axel Leijonhufvud has devoted a prominent place to the history of our field. Among his various contributions in this area, his “Swedish Flag” taxonomy is perhaps one of the least known. Leijonhufvud introduced it in the 1980s in order to survey the postwar macroeconomic debates (from Keynes to the Real Business Cycle theory). This taxonomy classifies aggregate fluctuations in a 2*2 matrix, distinguishing between impulses and propagation mechanisms that can be either nominal or real. This paper extends the analysis (from Marshall to the last vintage of Dynamic Stochastic General Equilibrium models) and proposes a reading of the history of Macroeconomics through this taxonomy. It is first shown that, until RBC theory included, such an history can be represented by two successive and identical “loops” within the matrix (following the path (real, nominal) → (nominal, nominal) → (nominal, real) → (real, real), where for each cell the first term embodies the type of shocks, the second term the nature of the propagation mechanism). It is also argued that DSGE modelling, while encompassing a large range of shocks and propagation mechanisms, can nonetheless be usefully characterized according to this taxonomy.

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Keywords: Axel Leijonhufvud, history of Macroeconomics