- Person
- Paul Krugman
- Lived
- b. 1953
- Field
- Economics
- From
- American
The story
In the mid-1970s, the end of the old system of fixed exchange rates had made international finance one of the most exciting fields in economics. At MIT, where Paul Krugman was a graduate student, the arrival of Rudi Dornbusch in 1975 drew many students into trying to understand the new world of floating currencies.
During two months as an intern at the Federal Reserve Board in Washington, Krugman heard the economist Stephen Salant describe how speculators could suddenly attack government stockpiles of commodities. Salant and Dale Henderson were then completing a paper on speculative attacks in the gold market. Krugman realised the same logic could apply to currencies.
The result was "A Model of Balance of Payments Crises", the first paper he considered characteristic of his work. It showed that when a government tries to defend a fixed exchange rate that is out of line with its economic policies, the regime is unlikely to end smoothly. Instead, speculators can exhaust the country's reserves in a sudden attack. Krugman later admitted that the first draft contained unnecessary complications and was somewhat unclear. Neither Dornbusch, by then his thesis adviser, nor the journal referees grasped the point at first, and he set the paper aside until Dornbusch suggested he look at it again a year later.
Published in the Journal of Money, Credit and Banking in 1979, the paper became one of the main contributions to what economists call the first generation of currency crisis models, and by early 2009 it was the second most cited of all his papers.
Krugman went on to write many more papers on international finance, on topics such as developing-country debt and the European Monetary System. He considered his later model of exchange rate target zones, which came to him on a flight from Tokyo to London, arguably his most successful single paper. During the 2008 financial crisis he proposed an international finance multiplier to explain how losses in one market could spread rapidly across borders.
Why it matters
Krugman's crisis model brought new clarity to the study of currency crises, a recurring threat to economies around the world.
About Paul Krugman
Nobel-winning economist who explained why similar countries trade and why industries cluster, then became America’s most widely read, and most argued-with, economic columnist.
More about Paul Krugman
- Paul Krugman co-wrote the bible of new trade theoryWith Elhanan Helpman of Tel Aviv University, Paul Krugman wrote Market Structure and Foreign Trade, the book that brought the new trade theory together.
- Paul Krugman founded the new economic geographyIn a seminal 1991 paper, Increasing Returns and Economic Geography, Paul Krugman began the field that explains why industries and people cluster in cities.
- Paul Krugman explained why similar countries tradeIn 1978 and 1979 Paul Krugman built models showing how economies of scale and consumers' taste for variety drive trade between similar countries.
- Paul Krugman co-wrote economics textbooks for studentsWith his wife, the economist Robin Wells, Paul Krugman wrote college textbooks on microeconomics (2004) and macroeconomics (2005).
Sources
- Incidents from My Career Paul Krugman, MIT
- Paul Krugman Wikipedia
Another act of tikkun olam. This is part of tikkun olam, the Jewish idea of repairing the world, and every one of us can add to it.