nep-pke New Economics Papers
on Post Keynesian Economics
Issue of 2006‒03‒11
fourteen papers chosen by
Karl Petrick
Leeds Metropolitan University

  1. "Is the Dollar at Risk?" By Korkut A. Erturk
  2. "Credit Derivatives and Financial Fragility" By Edward Chilcote
  3. "THE FISCAL FACTS: Public and Private Debts and the Future of the American Economy" By James K. Galbraith
  4. "Are Housing Prices, Household Debt, and Growth Sustainable?" By Dimitri B. Papadimitriou; Edward Chilcote -Name:Gennaro Zezza
  5. "Bad for Euroland, Worse for Germany: The ECB's Record" By Joerg Bibow
  6. "Are Long-run Price Stability and Short-run Output Stabilization All that Monetary Policy Can Aim For?" By Giuseppe Fontana; Alfonso Palacio-Vera
  7. "Monetary Policy Strategies of the European Central Bank and the Federal Reserve Bank of the U.S." By L. Randall Wray
  8. "Speculation, Liquidity Preference, and Monetary Circulation" By Korkut A. Erturk
  9. "Keynes's Approach To Money: An Assessment After 70 Years" By L. Randall Wray
  10. "Prolegomena to Realistic Monetary Macroeconomics: A Theory of Intelligible Sequences" By Wynne Godley; Marc Lavoie
  11. "Government Effects on the Distribution of Income: An Overview" By Dimitri B. Papadimitriou
  12. Methodological Triangulation at the Bank of England:An Investigation By Paul Downward; Andrew Mearman
  13. Monetary Policy Regimes: a fragile consensus By Peter Howells; Iris Biefang-Frisancho Mariscal
  14. The Endogeneity of Money: Empirical Evidence By Peter Howells

  1. By: Korkut A. Erturk
    Abstract: A massive fiscal stimulus and, until recently, aggressive monetary easing have been successful in raising bond and real estate prices to unprecedented levels, inducing a credit boom that has prevented private consumption from falling. While it might still be too early to say that it worked, the strategy has indeed, for the time being, prevented the U.S. economy from slipping into a severe depression after the collapse of the stock market at the turn of the millennium.
    Date: 2005–04
  2. By: Edward Chilcote
    Abstract: On September 15, the Federal Reserve convened 14 large credit derivatives-dealer banks to an unusual meeting (Beales 2005b). The last such meeting occurred on September 16, 1998, in secret. At that time, a major financial institution was melting down and threatening to take some large banks with it. This time they met to discuss the same topic: the clearing of transactions in the credit derivatives market.
    Date: 2006–01
  3. By: James K. Galbraith
    Abstract: TodayÕs federal budget deficits are a preoccupation of many American citizens and more than a few political leaders. Is the American government going bankrupt? Does our fiscal condition warrant radical surgery, as some now prescribe? Or, are we in such deep trouble that there is no plausible route of escape?
    Date: 2006–02
  4. By: Dimitri B. Papadimitriou; Edward Chilcote -Name:Gennaro Zezza
    Abstract: Rising home prices and low interest rates have fueled the recent surge in mortgage borrowing and enabled consumers to spend at high rates relative to their income. Low interest rates have counterbalanced the growth in debt and acted to dampen the growth in household debt-service burdens. As past Levy Institute strategic analyses have pointed out, these trends are not sustainable: Household spending relative to income cannot grow indefinitely.
    Date: 2006–01
  5. By: Joerg Bibow
    Abstract: This paper assesses the contribution of the European Central Bank (ECB) to GermanyÕs ongoing economic crisis, a vicious circle of decline in which the country has become stuck since the early 1990s. It is argued that the ECB continues the Bundesbank tradition of asymmetric policymaking: the bank is quick to hike, but slow to ease. It thereby acts as a brake on growth. This approach has worked for the Bundesbank in the past because other banks behaved differently. Exporting the Bundesbank Òsuccess storyÓ to Euroland has undermined its working, however; given its sheer size, Euroland simply cannot freeload on external stimuli forever. While Euroland cannot do without proper demand management, the Maastricht regime and especially the ECB are firmly geared against it. The ECBÕs monetary policies have been biased against growth and have thus proved bad for Euroland as a whole. Meanwhile, the German disease of protracted domestic demand weakness has spread across much of Euroland. Yet, by pursuing its peculiar traditions of wage restraint and procyclical public thrift, the ECBÕs policies have had even worse results for Germany. Fragility and divergence undermine the euroÕs long-term survival.
    Date: 2005–11
  6. By: Giuseppe Fontana; Alfonso Palacio-Vera
    Abstract: A central tenet of the so-called new consensus view in macroeconomics is that there is no long-run trade-off between inflation and unemployment. The main policy implication of this principle is that all monetary policy can aim for is (modest) short-run output stabilization and long-run price stabilityÑi.e., monetary policy is neutral with respect to output and employment in the long run. However, research on the different sources of path dependency in the economy suggests that persistent but nevertheless transitory changes in aggregate demand may have a permanent effect on output and employment. If this is the case, then, the way monetary policy is run does have long-run effects on real variables. This paper provides an overview of this research and explores how monetary policy should be implemented once these long-run effects are acknowledged.
    Date: 2005–11
  7. By: L. Randall Wray
    Abstract: In the debate on monetary policy strategies on both sides of the Atlantic, it is now almost a commonplace to contrast the Fed and the ECB by pointing out the formerÕs flexibility and capacity to adjust rigidity, and the latterÕs extreme caution, and obsession with low inflation. In looking at the foundations of the two banksÕ strategies, however, we do not find differences that can provide a simple explanation for their divergent behavior, nor for the very different economic performance in the U.S. and Euroland in recent years. Not surprisingly, both central banks share the same conviction that money is neutral in the long period, and even their short-term policies are based on similar fundamental principles. The two policy approaches really differ only in terms of implementation, timing, competence, etc., but not in terms of the underlying theoretical orientation. We then draw the conclusion that monetary policy cannot represent a significant variable in the explanation of the different economic performances of Euroland and U.S. The two economic areasÕ differences must be explained by considering other factors among which the most important is fiscal policy.
    Date: 2005–11
  8. By: Korkut A. Erturk
    Abstract: The sharp exchanges that Keynes had with some of his critics on the loanable funds theory made it harder to appreciate the degree to which his thought was continuous with the tradition of monetary analysis that emanates from Wicksell, of which KeynesÕs A Treatise on Money was a part. In the aftermath of the General Theory (GT), many of KeynesÕs insights in the Treatise were lost or abandoned because they no longer fit easily in the truncated theoretical structure he adopted in his latter work. A part of KeynesÕs analysis in the Treatise which emphasized the importance of financial conditions and asset prices in determining firmsÕ investment decisions was later revived by Minsky, but another part, about the way self-sustained biases in asset price expectations in financial markets exerted their influence over the business cycle, was mainly forgotten. This paper highlights KeynesÕs early insights on asset price speculation and its link to monetary circulation, at the risk perhaps, of downplaying the importance of the GT.
    Date: 2006–01
  9. By: L. Randall Wray
    Abstract: This paper first examines two approaches to money adopted by Keynes in the General Theory (GT). The first is the more familiar Òsupply and demandÓ equilibrium approach of Chapter 13 incorporated within conventional macroeconomics textbooks. Indeed, even Post Keynesians utilizing KeynesÕs Òfinance motiveÓ or the ÒhorizontalÓ money supply curve adopt similar methodology. The second approach of the GT is presented in Chapter 17, where Keynes drops Òmoney supply and demandÓ in favor of a liquidity preference approach to asset prices that offers a more satisfactory treatment of moneyÕs role in constraining effective demand. In the penultimate section, I return to KeynesÕs earlier work in the Treatise on Money (TOM), as well as the early drafts of the GT, to obtain a better understanding of the nature of money. I conclude with policy implications.
    Date: 2006–01
  10. By: Wynne Godley; Marc Lavoie
    Abstract: This paper sets out a rigorous basis for the integration of Keynes-Kaleckian macroeconomics (with constant or increasing returns to labor, multipliers, mark-up pricing, etc.) with a model of the financial system (comprising banks, loans, credit money, equities, etc.), together with a model of inflation. Central contentions of the paper are that, with trivial exceptions, there are no equilibria outside financial markets, and the role of prices is to distribute the national income, with inflation sometimes playing a key role in determining the outcome. The model deployed here describes a growing economy that does not spontaneously find a steady state even in the long run, but which requires active management of fiscal and monetary policy if full employment without inflation is to be achieved. The paper outlines a radical alternative to the standard narrative method used by post-Keynesians as well as by Keynes himself.
    Date: 2006–02
  11. By: Dimitri B. Papadimitriou
    Abstract: This paper is the overview chapter of an edited volume on ÒThe Distributional Effects of Government Spending and Taxation.Ó The paper offers the authorÕs perspective on the governmentÕs role as a redistributive agent. Taxation and public spending programs are analyzed using the experiences of the United States and other OECD countries. The stark differences among the respective welfare systems are examined from an economic policy lens assessing the success and failure of the tested social policy programs. The measurement and distribution of well-being for special segments of the population, i.e., the elderly and women, are considered.
    Date: 2006–02
  12. By: Paul Downward (Augusta State University); Andrew Mearman (School of Economics, University of the West of England)
    Abstract: This paper investigates the extent to which triangulation takes place within the Monetary Policy Committee (MPC) process at the Bank of England. Triangulation is at its most basic, the mixing of two or more methods, investigators, theories, methodologies or data in a single investigation. More specifically, we argue for triangulation as a commitment in research design to the mixing of methods in the act of inference. The paper argues that there are many motivations for triangulation as well as types of triangulation. It is argued that there is evidence of extensive triangulation of different types within the MPC process. However, there is very little theoretical triangulation present; raising concerns about pluralism. Also, it is argued that the triangulation which occurs is mainly undertaken for pragmatic reasons and does not reflect other, coherent ontological and epistemological positions.
    Date: 2005–08
  13. By: Peter Howells (School of Economics, University of the West of England); Iris Biefang-Frisancho Mariscal (School of Economics, University of the West of England)
    Abstract: The last fifteen years have seen the emergence of widespread consensus that optimum monetary policy is designed on the basis of three pillars: a short-term official rate of interest as the sole policy instrument and the placing of that instrument in the hands of a central bank which is (a) independent of government and (b) transparent in its decision-making. We take a critical look at each of these. In the first case, we focus attention on the failure of mainstream economics to recognise the choice of instrument and the implications of its adoption. In the case of independence we argue that he theoretical case for independence has been misunderstood and that it is not an essential requirement for successful policy. We also show that ‘independence’ is not best measured against a checklist of statutory characteristics. As regards ‘transparency’ our argument is slightly different, though we come to a similar conclusion. Unlike independence, ‘transparency’ does address a real problem for central banks. However, the evidence suggests that transparency is not the only, or even the best, solution. A variety of evidence tells us that agents can understand and anticipate the actions of the most secretive institutions.
    Keywords: Monetary policy; central banks; independence; transparency
    JEL: E31 E42
    Date: 2005–12
  14. By: Peter Howells (School of Economics, University of the West of England)
    Abstract: For many years, the endogenous nature of the money supply has been a cornerstone of post-Keynesian economics. In this paper we survey the empirical work which has been done on both the ‘core’ thesis – that loans create deposits – and on peripheral questions such as the origin of the demand for loans, the reconciliation of the demand for money with the loan-created supply and the accommodationist/structuralist debate. The originality of the paper lies in its demonstration that while post-Keynesians may have thought they were fighting in heroic isolation, most economists involved with the real world of monetary policy-making in practice took much the same view. The consequence is that we can find empirical investigations of issues relating to the endogeneity in a wide range of locations.
    Keywords: Money; endogeneity;
    JEL: E50
    Date: 2005

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