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on Post Keynesian Economics |
| By: | Scott Fullwiler; L. Randall Wray |
| Abstract: | Beyond its original mission to "furnish an elastic currency" as lender of last resort and manager of the payments system, the Federal Reserve has always been responsible (along with the Treasury) for regulating and supervising member banks. After World War II, Congress directed the Fed to pursue a dual mandate, long interpreted to mean full employment with reasonable price stability. The Fed has been left to decide how to achieve these objectives, and it has over time come to view price stability as the more important of the two. In our view, the Fed's focus on inflation fighting diverted its attention from its responsibility to regulate and supervise the financial sector, and its mandate to keep unemployment low. Its shift of priorities contributed to creation of the conditions that led to this crisis. Now in its third phase of responding to the crisis and the accompanying deep recession-so-called "quantitative easing 2," or "QE2'-the Fed is currently in the process of purchasing $600 billion in Treasuries. Like its predecessor, QE1, QE2 is unlikely to seriously impact either of the Fed's dual objectives, however, for the following reasons: (1) additional bank reserves do not enable greater bank lending; (2) the interest rate effects are likely to be small at best given the Fed's tactical approach to QE2, while the private sector is attempting to deleverage at any rate, not borrow more; (3) purchases of Treasuries are simply an asset swap that reduce the maturity and liquidity of private sector assets but do not raise incomes of the private sector; and (4) given the reduced maturity of private sector Treasury portfolios, reduced net interest income could actually be mildly deflationary. The most fundamental shortcoming of QE—or, in fact, of using monetary policy in general to combat the recession-is that it only "works" if it somehow induces the private sector to spend more out of current income. A much more direct approach, particularly given much-needed deleveraging by the private sector, is to target growth in after tax incomes and job creation through appropriate and sufficiently large fiscal actions. Unfortunately, stimulus efforts to date have not met these criteria, and so have mostly kept the recession from being far worse rather than enabling a significant economic recovery. Finally, while there is identical risk to the federal government whether a bailout, a loan, or an asset purchase is undertaken by the Fed or the Treasury, there have been enormous, fundamental differences in democratic accountability for the two institutions when such actions have been taken since the crisis began. Public debates surrounding the wisdom of bailouts for the auto industry, or even continuing to provide benefits to the unemployed, never took place when it came to the Fed committing trillions of dollars to the financial system—even though, again, the federal government is "on the hook" in every instance. |
| Keywords: | Quantitative Easing; Monetary Policy; Fiscal Policy; Macroeconomic Stabilization; Interest Rates; Central Bank Operations |
| JEL: | E42 E43 E62 E63 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_645&r=pke |
| By: | Jesus Felipe; Utsav Kumar; Arnelyn Abdon |
| Abstract: | Becoming a rich country requires the ability to produce and export commodities that embody certain characteristics. We classify 779 exported commodities according to two dimensions: (1) sophistication (measured by the income content of the products exported); and (2) connectivity to other products (a well-connected export basket is one that allows an easy jump to other potential exports). We identify 352 "good" products and 427 "bad" products. Based on this, we categorize 154 countries into four groups according to these two characteristics. There are 34 countries whose export basket contains a significant share of good products. We find 28 countries in a "middle product" trap. These are countries whose export baskets contain a significant share of products that are in the middle of the sophistication and connectivity spectra. We also find 17 countries that are in a "middle-low" product trap, and 75 countries that are in a difficult and precarious "low product" trap. These are countries whose export baskets contain a significant share of unsophisticated products that are poorly connected to other products. To escape this situation, these countries need to implement policies that would help them accumulate the capabilities needed to manufacture and export more sophisticated and better connected products. |
| Keywords: | Bad Product; Capabilities; "Low Product" Trap; "Middle Product" Trap; Proximity; Sophistication; Structural Transformation |
| JEL: | O14 O25 O57 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_644&r=pke |
| By: | Augustin Kwasi Fosu |
| Abstract: | Analysing a large sample of 1980-2004 unbalanced panel data, the current study presents comparative global evidence on the role of (income) inequality in poverty reduction. The evidence involves both an indirect channel via the tendency of high inequality to decrease the rate at which income is transformed to poverty reduction, and the tendency of rising inequality to increase poverty. Based on the basic-needs approach, an analysis-of-covariance model is estimated, with the headcount measure of poverty as the dependent variable, and the Gini coefficient and PPP-adjusted mean income as explanatory variables. The study finds that the responsiveness of poverty to income growth is a decreasing function of inequality, and that the income elasticity of poverty is actually smaller than the inequality elasticity. Thus, income distribution can play a more important role than might be traditionally acknowledged. Found also is a large variation across regions (and countries) in the poverty effects of inequality. A version of this paper has been accepted for publication in Social Science Quarterly. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bwp:bwppap:14010&r=pke |
| By: | Alan Kirman (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579) |
| Abstract: | What I argue in this paper is that the direction economics ,and particularly theoretical economics, took in the 20th century was to a great extent due to Walras' influence. This was not so much the result of his own results but rather a reflection of his vision. He was convinced that economics should have “sound mathematical foundations” and his concern for this is reflected in his correspondence with his contemporaries such as Poincaré. However, his specific vision of the nature of equilibrium became the benchmark for modern economic theory and led us to the Arrow-Debreu model which is characterised by its lack of institutional features, and the lack of any proof of stability under adjustment, as later to be shown by Sonnenschein, Mantel and Debreu. Above all there is no place in this framework for out of equilibrium dynamics. Whilst Walras is to be lauded for his insistence on the interdepence of markets, we should also be aware that he set us on a path towards economic models which, while admirably internally consistent, seem to be unable to match the empirical evidence. I fear that Walras would not have been unhappy with this outcome. |
| Keywords: | Walras; mathematical foundations; equilibrium; Arrow-Debreu model; interdependence of markets |
| Date: | 2010–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00545181_v1&r=pke |
| By: | Nancy Birdsall; Ayah Mahgoub; William D. Savedoff |
| Abstract: | Foreign aid often works, but it is often criticized for being ineffective or even for undermining progress in developing countries. This brief describes a new approach, Cash on Delivery Aid, which gives recipients full responsibility and authority over funds paid in proportion to verifed measures of progress. |
| Keywords: | Foreign, aid, developing countries, Cash, Delivery, progress |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ess:wpaper:id:3308&r=pke |