nep-pke New Economics Papers
on Post Keynesian Economics
Issue of 2008‒10‒21
eight papers chosen by
Karl Petrick
University of the West Indies

  1. Fiscal policy in the macroeconomic policy mix: A Critique of the New Consensus Model and a comparison of macroeconomic policies in France, Germany, the UK and Sweden from a Post-Keynesian perspective By Eckhard Hein; Achim Truger
  2. Macroeconomics without the LM: A Post-Keynesian Perspective By Thomas I. Palley
  3. Knocked-down Agriculture After De-industrialization; Another Destructive Influence of Neo-liberalism By Shafaeddin, Mehdi
  4. Financialization: What it is and Why it Matters By Thomas I. Palley
  5. Lessons on Reshaping the International Monetary Order - Revisiting J. M. Keynes “Activities 1940-1944” on the Creation of the Bretton Woods Institutions By Piffaretti, Nadia F.
  6. Policies for Industrial Learning in China and Mexico: Neo-developmental vs. Neo-liberal approaches By Shafaeddin, Mehdi; Gallaher, Kevin
  7. "A Simple Proposal to Resolve the Disruption of Counterparty Risk In Short-Term Credit Markets" By Jan Kregel
  8. Asset Price Bubbles and Monetary Policy: Why Central Banks Have Been Wrong and What Should Be Done By Thomas I. Palley

  1. By: Eckhard Hein (IMK at the Hans Boeckler Foundation); Achim Truger (IMK at the Hans Boeckler Foundation)
    Abstract: The New Consensus approach in macroeconomics is criticised for its exclusive but unwarranted reliance on stabilising monetary policies, for its ill-designed approach to the role of wages and wage policies, and for its complete neglect of fiscal policies. From a Post-Keynesian perspective, it is argued that fiscal policies play an important role for macroeconomic development, albeit the whole macroeconomic policy-mix of monetary, fiscal and wage policies as well as open economy conditions should be considered. Based on this view macroeconomic performance and macroeconomic policies in France, Germany, Sweden and the UK between 1996 and 2005 are analysed, with a special focus on the role of fiscal policies. It is shown that the fiscal policy stance is important for the explanation of different developments in these economies. However, fiscal policies are not the whole story, monetary policies, wage policies and open economy conditions matter as well.
    Keywords: Fiscal policy, macroeconomic policies, New Consensus, Post-Keynesian macroeconomics, France, Germany, UK, Sweden
    JEL: E61 E62 E63 E64 E65
    Date: 2008
  2. By: Thomas I. Palley (Economics for Democratic & Open Societies, Washington DC, and Visiting Scholar at the Macroeconomic Policy Institute (IMK), Germany)
    Abstract: Romer (2000) provides an alternative model to the AS/AD and IS/LM models that abandons the LM schedule by having the short-term interest rate set by the central bank. His framework acknowledges the critical role of the central bank in determining short-term interest rates, which moves mainstream macroeconomics closer to Post Keynesian monetary theory. The current paper presents a Post Keynesian construction of macroeconomics without an LM schedule. Rather than describing the financial sector in terms of an exogenously determined interest rate set by the central bank, the model unpacks financial markets by fully specifying a banking sector. The key analytic feature of the Post Keynesian approach is to replace the money market with the loan market. That makes transparent the macroeconomic significance of the loan market and bank behavior, and generates an endogenous money supply driven by bank lending. If banks become more optimistic over the
    Keywords: bank lending, credit, endogenous money, loan market.
    JEL: E12 E40
    Date: 2008
  3. By: Shafaeddin, Mehdi
    Abstract: Knocked-down Agriculture After De-industrialization; Another Destructive Influence of Neo-liberalism M. Shafaeddin* Abstract The author shows that although some short term factors have contributed to the recent food crisis in developing countries, the crisis is rooted mainly in agricultural support policies of developed countries, liberalization of the agricultural sector by developing countries and contradictions in the design and implementation of GATT/WTO rules. Agricultural liberalization has been imposed on lower-income countries by International Financial Institutions (IFIs) and through bilateral trade agreements between developed and developing countries. The Neo-liberal economic philosophies, as well as unequal power relations between developing and developed countries, have been main contributory factors. There is a danger that further pressure on developing countries during the Doha Round may result in an outcome undermining development of the agricultural sector of developing countries further. The result would be intensification of dependence of lower-income countries on food imports, knocked-down agriculture and economic and political dependence on developed countries. A radical change in the trading system, practices of IFIs and policies of developed countries is required. Developing countries have little power to bring about such changes, but they can try to change their own policies. To do so it is not easy to resist pressure from developed countries and IFIs, but it is absolutely necessary if they do not wish to sacrifice their long-term development and well being of their population. -----------------------------------------------------------------------------------------------------------*. The author is a development economist affiliated to the Economic Research Institute, University of Neuchatel, Switzerland and international consultant in trade and industrial policies and management of competitiveness. He is the author of Trade Policy at the Crossroads; Recent Experience of Developing Countries, Palgrave, Macmillan and numerous articles on development policy issues in international journals Comments are welcome and can be sent to him through:
    Keywords: Food, WTO, trade liberalization, food supply, international financial institutions
    JEL: F13 O10 Q18 F00 N50 F10 Q17 B13 Q10
    Date: 2008–07–22
  4. By: Thomas I. Palley (Economics for Democratic & Open Societies, Washington DC, and Visiting Scholar at the Macroeconomic Policy Institute (IMK), Germany)
    Abstract: Financialization is a process whereby financial markets, financial institutions and financial elites gain greater influence over economic policy and economic outcomes. Financialization transforms the functioning of economic system at both the macro and micro levels. Its principal impacts are to (1) elevate the significance of the financial sector relative to the real sector; (2) transfer income from the real sector to he financial sector; and (3) increase income inequality and contribute to wage stagnation. Additionally, there are reasons to believe that financialization may render the economy prone to risk of debt-deflation and prolonged recession. Financialization operates through three different conduits: changes in the structure and operation of financial markets; changes in the behavior of non-financial corporations, and changes in economic policy. Countering financialization calls for a multi-faceted agenda that (1) restores policy control over financial markets, (2) challenges the neo-liberal economic policy paradigm encouraged by financialization, (3) makes corporations responsive to interests of stakeholders other than just financial markets, and (4) reforms the political process so as to diminish the influence of corporations and wealthy elites.
    Keywords: Financialization, neo-liberal policy, deregulation, debt, financial fragility.
    JEL: E61 E62 E63 E64 E65
    Date: 2008
  5. By: Piffaretti, Nadia F.
    Abstract: As we witness profound changes in the global economy, and the raise of a multipolar intergrated global economy, as it appears clear that so-called “Revived Bretton Woods System” as described by in their influential paper by Dooley, Folkerts-Landau and Garber (2003) (in which many countries, particularly in Asia, limit exchange rate fluctuation against the dollar, accumulating as a consequence enormous reserves in dollars) maybe be nothing more than a temporary non sustainable financing of the US structural internal imbalance, it’s worth revisiting the origins of the Bretton Woods Institutions, and pointing out to the relevance for today’s framework of Keynes’ original 1942 plan. In this note we explore the main characteristics of Keynes’ original plans for an international Clearing Union, by revisiting his original writings between 1940-1944, and we briefly outline the relevance of his plan to today’s framework.
    Keywords: International Financial Architecture; Bretton Woods Institutions; Plan Keynes; Money
    JEL: E12 E58 E42 F02 N20 E00 E50 F33
    Date: 2008–10–11
  6. By: Shafaeddin, Mehdi; Gallaher, Kevin
    Abstract: Abstract Previous work has shown that the results of both China and Mexico’s export-led market reforms over the past quarter century have been strikingly different. In contrast to China, Mexico has not managed to increase the value added of its exports of manufactured goods and has subsequently had a difficult time competing with China in world markets. Building on this previous work, in this paper we conduct a comparative analysis of the role of government policies in industrial learning and the development of capabilities of indigenous firms in Mexico and China in order to shed light on why China is so outperforming Mexico. We find that Mexico and China have had starkly different approaches to economic reform in this area. Mexico’s approach to reform has been a “neo-liberal” one, whereas China’s could be described as “neo-developmental.” Mexico’s hands-off approach to learning has resulted in a lack of development of endogenous capacity of domestic firms, little transfer of technology, negligible progress in the upgrading of industrial production, and little increase in value added of exports. By contrast, China has deployed a hands-on approach of targeting and nurturing domestic firms through a gradual and trial and error led set of government policies.
    Keywords: International trade; development; competitiveness; value added; government policy; assembly operations
    JEL: O38 O25 O34 I0 O32 L60 O14 L63 N65 O30 F10 L52 I00 O20 O31 P52
    Date: 2008–09
  7. By: Jan Kregel
    Abstract: The impaired risk assessment caused by the collapse of mortgage-backed securities is the major problem threatening the stability of the American financial system, yet it is not clear that removing these assets from institutional balance sheets, as the government has proposed, will make it easier to assess counterparty risk in short-term credit markets. Resolving the disruption of counterparty risk should be the first objective of policy, argues Senior Scholar Jan Kregel, since these markets provide basic liquidity support for institutions operating in the broader financial markets.
    Date: 2008–10
  8. By: Thomas I. Palley (Economics for Democratic & Open Societies, Washington DC, and Visiting Scholar at the Macroeconomic Policy Institute (IMK), Germany)
    Abstract: Over the last several years debate over monetary policy has focused on two issues, inflation targeting and asset price bubbles. This paper explores the case for explicitly targeting asset price bubbles, a policy that the Federal Reserve Bank has opposed on the grounds that it is both infeasible and undesirable. The paper argues that the Fed is wrong on both counts. Asset price bubbles are identifiable. Bubbles also do significant economic harm through the debt footprint effects they leave behind and through interest rate blunderbuss effects resulting from attempts to mitigate the aggregate demand impact of bubbles. Managing bubbles calls for additional policy instruments. These can be provided a system of asset based reserve requirements (ABRR).
    Date: 2008

This nep-pke issue is ©2008 by Karl Petrick. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.