nep-pke New Economics Papers
on Post Keynesian Economics
Issue of 2008‒04‒29
eleven papers chosen by
Karl Petrick
University of the West Indies

  1. "Changes in the U.S. Financial System and the Subprime Crisis" By Jan Kregel
  2. "The International Monetary (Non-)Order and the 'Global Capital Flows Paradox'" By Joerg Bibow
  3. The Other J.M.: John Maurice Clark and the Keynesian Revolution By Luca Fiorito; Matías Vernengo
  4. Managing Financial Instability in Emerging Markets: A Keynesian Perspective By Yilmaz Akyuz
  5. New Perspectives On Finance And Growth By Panicos O. Demetriades
  6. Random Matrix Theory and the Evolution of Business Cycle Synchronisation, 1886–2006 By Ormerod, Paul
  7. Economists, Incentives, Judgment, and Empirical Work By Colander, David C.
  8. Causal Depth contra Humean Empiricism: Aspects of a Scientific Realist Approach to Explanation By Khan, Haider
  9. Increasing Public Expenditures: Wagner’s Law in OECD Countries By Serena Lamartina; Andrea Zaghini
  10. A new way to link development to institutions,policies and geography By Sudip Ranjan Basu
  11. Inflation-Targeting in Sub-Saharan Africa: Why Now? Why at All? By Terry McKinley

  1. By: Jan Kregel
    Abstract: This paper traces the evolution of housing finance in the United States from the deregulation of the financial system in the 1970s to the breakdown of the savings and loan industry and the development of GSE (government-sponsored enterprise) securitization and the private financial system. The paper provides a background to the forces that have produced the present system of residential housing finance, the reasons for the current crisis in mortgage financing, and the impact of the crisis on the overall financial system.
    Date: 2008–04
  2. By: Joerg Bibow
    Abstract: This paper sets out to investigate the forces behind the so-called "global capital flows paradox" and related "dollar glut" observed in the era of advancing financial globalization. The supposed paradox is that the developing world has increasingly come to pursue policies that resulted in current account surpluses and thus net capital exports—destined primarily for the capital-rich United States. The hypothesis put forward here is that systemic deficiencies in the international monetary and financial order have been the root cause behind today’s situation. Furthermore, it is argued that the United States’ position as issuer of the world's premiere reserve currency and supremacy in global finance explain the related conundrum of a positive investment income balance despite a negative international investment position. The assessment is carried out in light of John Maynard Keynes’s views on a sound international monetary and financial order.
    Date: 2008–04
  3. By: Luca Fiorito; Matías Vernengo
    Abstract: This paper suggests that Clark’s views regarding the Keynesian Revolution illuminate some of the limitations of the Keynesian orthodoxy that developed after the war, bringing more institutional detail and a greater preocupation with dynamic analysis. Clark developed the multiplier in dynamic terms and coupled it with the accelerator to provide the framework for business cycle theory. His analysis was not formalized and emphasized time lags and non-linearities, similarly to Harrod. Also Clark was concerned with the inflationary consequences of Keynesian policies and he was dissatisfied with those mechanical interpretations of the income flow analysis, which came to be known as hydraulic Keynesianism. Clark’s policy conclusions emphasized the need of balance between employment creation and price stability, and the need of cooperation between social groups.
    Keywords: John Maurice Clark, Keynesians, Institutionalists
    JEL: B20 B22 B31
    Date: 2008–07
  4. By: Yilmaz Akyuz (UNCTAD)
    Abstract: The Keynesian analysis of financial stability as developed by Hyman Minsky, provides considerable insights into understanding the nature and dynamics of boom-bust cycles driven by international capital flows in emerging markets. Its main policy conclusion that financial control rather than macroeconomic policy holds the key to financial stability is equally valid. There is however, need to develop a new approach to financial control and place greater emphasis on managing capital inflows than has hitherto been the case
    Keywords: Financial instability, countercyclical policy, financial regulation
    JEL: E32 F32 G18
    Date: 2008
  5. By: Panicos O. Demetriades
    Abstract: This paper offers a number of new perspectives on the finance and growth literature. It starts by reviewing the empirical evidence on finance and growth, highlighting studies which suggest that financial development may be ineffective in delivering growth in the poorest of countries. The paper proceeds to examine the likely sources of financial (under-)development and argues that: (a) the legal origins view has been largely discredited by lawyers; (b) government ownership of banks is much more of a symptom of weak institutions than a cause of financial under-development. It then argues that political economy explanations of financial development, focussing on the role of incumbents, income and wealth inequality and the evolution of economic institutions, are much more promising hypotheses but remain largely untested. It calls for more work to test and develop further these ideas but warns against over-simplified notions of politics. It ends by reviewing recent work on the political economy origins of financial development and the politics of financial reforms, which suggests that politics plays a greater and more complex role than has so far been recognised by the economics literature on finance and growth.
    Date: 2008–04
  6. By: Ormerod, Paul
    Abstract: Bordo and Helbing (2003) examine the business cycle in Western economies over the 1881-2001 period. They examine four distinct periods in economic history and conclude that there is a secular trend towards greater synchronisation for much of the 20th century, and that it takes place across these different regimes. Most of the analytical techniques used in the business cycle convergence literature rely upon the estimation of an empirical correlation matrix of time series data of macroeconomic aggregates in the various countries. However due to the finite size of both the number of economies and the number of observations, a reliable determination of the correlation matrix may prove to be problematic. The structure of the correlation matrix may be dominated by noise rather than by true information. Random matrix theory was developed in physics to overcome this problem, and to enable true information in a matrix to be distinguished from noise. It has been successfully applied in the analysis of financial data. Using a very similar data set to Bordo and Helbing, I use random matrix theory, and the associated technique of agglomerative hierarchical clustering, to examine the evolution of convergence of the business cycle between the capitalist economies. The results confirm that there is a very clear degree of synchronisation of the business cycle across countries during the 1973-2006 period. In contrast, during the pre-First World War period it is not possible to speak of an international business cycle in any meaningful sense. The crosscountry correlations of annual real GDP growth are indistinguishable from those which could be generated by a purely random matrix. Contrary to the findings of Bordo and Helbing, it does not seem possible to speak of a ‘secular trend’ towards greater synchronisation over the 1886-2006 period as a whole. The periods 1920-1938 and 1948-1972 do show a certain degree of synchronisation – very similar in both periods in fact – but it is weak. In particular, the cycles of the major economies cannot be said to be synchronised during these periods. Such synchronisation as exists in the overall data set is due to meaningful comovements in sub-groups. So the degree of synchronisation has evolved fitfully, and it is only in the most recent period, 1973-2006, that we can speak of a strong level of synchronisation of business cycles between countries. More detailed analysis of the evolution of synchronisation of the 6 major economies since 1948 suggests it can vary considerably over relatively short periods of time. During the 1990s, for example, the degree of synchronisation of the cycle was similar to that of the 1950s, and lower than it was in the 1970s and 1980s following the oil shocks.
    Keywords: International business cycle, synchronisation, random matrix theory
    JEL: C69 E32 N10
    Date: 2008
  7. By: Colander, David C.
    Abstract: This paper asks the question: Why has the “general-to-specific” cointegrated VAR approach as developed in Europe had only limited success in the US as a tool for doing empirical macroeconomics, where what might be called a “theory comes first” approach dominates? The reason this paper highlights is the incompatibility of the European approach with the US focus on the journal publication metric for advancement. Specifically, the European “general-to specific” cointegrated VAR approach requires researcher judgment to be part of the analysis, and the US focus on a journal publication metric discourages such research methods. The US “theory comes first” approach fits much better with the journal publication metric.
    Keywords: Incentives, empirical work, econometrics, methodology, cointegration, VAR
    JEL: B4
    Date: 2008
  8. By: Khan, Haider
    Abstract: The purpose of this note is to clarify how the idea of "causal depth" can play a role in finding the more "approximately true" explanation through causal comparisons. It is not an exhaustive treatment but rather focuses on a few aspects that may be the most critical in evaluating the explanatory strengths of a theory in the social sciences. It presents a general argument which is anti-Humean on the critical side and scientific realist on the positive side. It also elucidates how explanations in political economy and other social sciences can be judged by the scientific realist criterion of causal depth by an extensive example from research in the political economy of development. In this case, an "intentional" and methodologically individualist neoclassical explanation is contrasted with a "structural" dual-dual approach as rival theories purporting to explain the same set of phenomena. The formal model representing the dual-dual approach can easily be contrasted with its neoclassical counterpart. The comparison shows that the dual-dual model is indeed deeper in terms of causal structure than the neoclassical model
    Keywords: Economic Models; Social Explanation;Causal Depth; Scientific Realism; Political Economy; Neoclassical Economics; Structuralism; Social Science Theories.
    JEL: O11 C68 O17 A10 B41
    Date: 2008
  9. By: Serena Lamartina (European Central Bank); Andrea Zaghini (Banca d’Italia & Center for Financial Studies, Frankfurt)
    Abstract: The paper proposes a panel cointegration analysis of the joint development of government expenditures and economic growth in 23 OECD countries. The empirical evidence provides indication of a structural positive correlation between public spending and per-capita GDP which is consistent with the so-called Wagner’s law. A long-run elasticity larger than one suggests a more than proportional increase of government expenditures with respect to economic activity. In addition, according to the spirit of the law, we found that the correlation is usually higher in countries with lower per-capita GDP, suggesting that the catching-up period is characterized by a stronger development of government activities with respect to economies in a more advanced state of development.
    Keywords: Fiscal Policy, Wagner’s Law, Panel Cointegration
    JEL: E62 H50 C23
    Date: 2008–04
  10. By: Sudip Ranjan Basu (IUHEI, The Graduate Institute of International Studies, Geneva)
    Abstract: The paper aims to examine the role of institutions relative to economic policy and geography in explaining the differential level of development across countries over time. To that end, it attempts to construct a Development Quality Index (DQI) and an Institutional Quality Index (IQI) by using multivariate statistical method of principal components. It shows that (i) higher level of IQI along with economic policy and geography factors lead to a positive improvement in the level of DQI; and (ii) results remain robust for IQI and relatively robust for economic policy and geography even when it is compared across cross-section and panel data estimation for a set of 102 countries over 1980 to 2004. The results strongly indicate that institutions matter in the context of specific economic policy mixes and geography related factors illustrated by disease burden, etc. It demonstrates that relative influence of institutions varies across stages of development.
    Keywords: Development, Institutions, Economic policy, Geography, Principal component, Instrumental variables, Panel data
    JEL: C3 O10 O57 P51 R11
    Date: 2008–03–01
  11. By: Terry McKinley (International Poverty Centre)
    Keywords: Sub-Saharan Africa, Inflation
    Date: 2008–04

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