nep-pke New Economics Papers
on Post Keynesian Economics
Issue of 2011‒02‒19
nine papers chosen by
Karl Petrick
University of the West Indies

  1. A Voluntary Default Savings Plan: An Effective Supplement to Social Security By Dean Baker
  2. Global Imbalances: Non-conventional View By Vladimir Popov
  4. The Central Banker's Case for Doing More By Adam S. Posen
  5. The Theory of Institutional Change Revisited: The Institutional Dichotomy, Its Dynamic, and Policy Implications in a More Formal Analysis By Elsner, Wolfram
  6. Revisiting the NAFTA Agenda on Climate Change By Jeffrey J. Schott; Meera Fickling
  7. Mathematical Models and Economic Forecasting: Some Uses and Mis-Uses of Mathematicsin Economics By David F. Hendry
  8. The European Rescue of the Washington Consensus? EU and IMF Lending to Central and Eastern European Countries By Susanne Lütz & Matthias Kranke
  9. Big Push versus Absorptive Capacity: How to Reconcile the Two Approaches By Patrick Guillaumont; Sylviane Guillaumont Jeanneney

  1. By: Dean Baker
    Abstract: This paper outlines a proposal for a default savings plan that is intended to provide an important supplement to retirement income for the bottom half of the workforce, most of whom have little other than Social Security to support themselves in retirement at present. Under the proposal, workers would make a default contribution of 3.0 percent on annual wages up to $40,000. They could opt out from this contribution if they choose. The contribution would be automatically turned into an annuity at retirement although workers would have the option to make a lump sum withdrawal after paying a modest penalty. The lowest income workers would get a modest contribution paid into the system by the government based on their earnings. This payment would be modeled along the lines of the Earned Income Tax Credit, with the payment increasing with earnings up to $8,000 and then phasing down to zero with earnings above $20,000. There would also be a match of savings that phases down to zero at $40,000.
    Keywords: social security, retirement
    JEL: H H5 H55
    Date: 2011–02
  2. By: Vladimir Popov (New Economic School, Moscow)
    Abstract: Maintaining today’s global imbalances would help to overcome the major disproportion of our times – income gap between developed and developing countries. This gap was widening for 500 years and only now, in the recent 50 years, there are some signs that this gap is starting to decrease. The chances to close this gap sooner rather than later would be better, if the West would go into debt, allowing developing countries to have trade surpluses that would help them develop faster. Previously, in 16-20th century, it was the West that was developing faster, accumulating surpluses in trade with “the rest” and using these surpluses to buy assets in developing countries, while “the rest” were going into debt. Now it is time for “the rest” to accumulate assets and for the West to go into debt.
    Date: 2010–05
  3. By: Iancu, Aurel (Romanian Academy, National Institute of Economic Research)
    Abstract: This paper analyses two types of models: 1. Those based on assumptions of monetary and financial market equilibrium disturbance in line with mainstream thinking that there is self-regulating market, the units would have rational expectations, and the crisis would be a temporary phenomenon caused by exogenous shocks. Here are the main objectives and features characteristic of the three generations of models; 2. Models based on financial instability hypothesis, taking into account both the dynamics of financial market as well as the role of uncertainty, interdependency and dynamic complexity. We present here Minsky’s concept of financial instability and then analyse the content of some simplified models.
    Keywords: instability, model generations, balance sheet, hedge units, speculative units, Ponzi units, cyclical fluctuations, complexity
    JEL: C61 C62 D84 E12 E13 E32
    Date: 2011–02
  4. By: Adam S. Posen (Peterson Institute for International Economics)
    Abstract: Adam S. Posen presents his view on the role of monetary policy in the global economic recovery, in particular in the large Western countries, and whether the major central banks in the United Kingdom and beyond should be doing more in the coming months. Posen argues that monetary policy should continue to be aggressive about promoting recovery, and further quantitative easing should be undertaken. Policymakers face a clear and sustained uphill battle, in which monetary ease has an ongoing role to play, even if it may not deliver the desired sustained recovery on its own. In every major economy, actual output has fallen so much versus where trend growth would have put them, and trend growth has not been above potential for long enough as yet, that there remains a significant gap between what the economy could be producing at full employment and what it currently produces. Thus, policymakers should not settle for weak growth out of misplaced fear of inflation. If price stability is at risk over the medium term, it is on the downside. There are, however, some very serious risks if policy errors are made by tightening prematurely or even by loosening insufficiently. The risks that Posen believes the United Kingdom and other major Western countries face now are those of sustained low growth and near deflation turning into a self-fulfilling prophecy (as in Japan in the 1990s and in the United States and Europe in the 1930s) and/or of inducing a political reaction that could undermine these countries' long-run stability and prosperity. Inaction by central banks could ratify decisions both by businesses to lastingly shrink the economy's productive capacity and by investors to avoid risk and prefer cash. These tendencies are already present, and insufficient monetary response is likely to worsen them. The combination of these risks with the potential attainable gains motivates Posen's call for additional monetary policy stimulus.
    Date: 2010–10
  5. By: Elsner, Wolfram
    Abstract: The original institutionalist theory of institutional change as elaborated by Paul D. Bush (1987) in the traditions of Veblen, Ayres and J.F. Foster (called here the VAFB-paradigm), provides a most important theoretical and empirical device for critical institutional analysis, with its clarification of the value base and of different forms and dynamics of value-behavior patterns. Bush’s paper was certainly one of the most important ones in Institutionalism. The Theory of Institutional Change pushed Institutionalism to a certain limit by elaborating its logical relations and systems that have been underexplored for so long. Coming from different ‘galaxies’, established formal approaches and methods, such as system dynamics, econometrics, network analysis, graph theory, or game theory—in fact, often applied only bluntly in the mainstream—have been interpreted, developed and applied by institutional and evolutionary economists in an evolutionary-institutionalist perspective in recent decades. However, a theoretical and methodological gap somehow still existed until recently that those practicing institutionalists had to deal with. This gap seems to become closed in different areas (such as the Theory of Institutional Change or the Social Fabric Matrix Approach) currently. This paper tries to demonstrate that careful proper interpretations allow, in a ‘dialectical’ process, to bridge the remaining gap and reveal surprising equivalences and complementarities with resulting synergies for the future. The example here is the mutual approximation of the VAFB-paradigm and evolutionary-institutionally interpreted game theory, called the EIGT-paradigm here. Should such bridge-building be corroborated in the near future, Institutionalism would be enabled to cut across traditional and long lasting boundaries with respect to deeper both empirical and logical analysis. This might turn out to be a historical project of the extension of Institutionalism’s reach. The particular asymmetry of the logics of instrumental vs. ceremonial warrants explains a general dominance of the ceremonial. The forms of change of institutional value-behavior structures derived are (1) (reinforced) ‘ceremonial encapsulation’, (2) regressive institutional change and (3) progressive institutional change. In the cases (2) and (3), the degree of ceremonial dominance will have to increase (decrease) and the system’s ‘permissiveness’ to decrease (increase). The conceptualization of institutions, the asymmetric schematization of value-behavior-structures, the reason for ceremonial dominance, and the possibility of progressive institutional change will be reconsidered and compared in this paper using a game-theoretic perspective, with its basically instrumental comprehension of institutions and with the ceremonial warrant comprehensible only as a degeneration of the instrumental. We refer to a most simple social dilemma interaction structure and a supergame solution. Surprising equivalences and complementarities emerge, with potentials of cross-fertilization. An initially instrumental institution is considered to develop (in fact degenerate), together with (1) the emergence, or reproduction, of status and power differentials in hierarchical systems, and (2) the striving for easy, smooth, and cheap decision-making, or ‘economies of scale’ of decision-making, first into a still instrumental norm and eventually into a ceremonial or abstract norm. The latter takes place, when original conditions have changed but the institutional structure will not properly adapt because of the two motives of status gain and economies of scale of institutionalized decision-making. In a game-theoretical perspective, ceremonial dominance and ceremonial encapsulation preventing a new progressive institutional change would translate into an insufficient new collective action capacity, due to (1) habituation, (2) an insufficient incentive structure and (3) a neglect of the common future. The conclusion of the critical role of policy to initiate, accelerate, and stabilize progressive institutional change is shared in the original institutionalist and the game-theoretic perspectives as well. A well-defined institutional policy approach, inferable in some detail from the game-theoretic logic, may initiate a lock-out of ceremonial encapsulation, through a change of the incentive structure and an increase of the importance and awareness of interdependence and a common future. The public agent must be capable of ‘meritorizing’ the private-interaction outcomes through a negotiated, participatory social process. Thus, the public agent would interact with the interaction system of the private agents in a well-defined way, i.e., ‘institutional policy’ as a double interactive policy. In all, large potentials for cross-fertilization of institutionalism and game theory.
    Keywords: Emergence of Institutions; Institutional Change; ‘institutional-game-theoretic’formalism ;Interactive Policy
    JEL: B52 D02 C72
    Date: 2011–02–09
  6. By: Jeffrey J. Schott (Peterson Institute for International Economics); Meera Fickling (Peterson Institute for International Economics)
    Abstract: The three NAFTA signatories have a shared interest in harmonizing climate change policy, and while they have made steps in that direction, there is still much that can be done to promote renewable energy development and other measures to reduce greenhouse gas emissions. Authors Jeffrey J. Schott and Meera Fickling examine channels for energy and environmental cooperation among the three North American countries in light of limited progress in international climate talks and scaled back energy legislation being vetted in the US Senate. Suggestions include: harmonizing renewable energy standards and trading of renewable electricity credits, improving cross-border transmission capacity between the United States and Mexico, and using NAFTA institutions for data collection and monitoring of regional climate policies and for capacity building in Mexico.
    Date: 2010–07
  7. By: David F. Hendry
    Abstract: We consider three ‘cases studies’ of the uses and mis-uses of mathematics in economics and econometrics. The first concerns economic forecasting, where a mathematical analysis is essential, and is independent of the specific forecasting model and how the process being forecast behaves. The second concerns model selection with more candidate variables than the number of observations. Again, an understanding of the properties of extended general-to-specific procedures is impossible without advanced mathematical analysis. The third concerns inter-temporal optimization and the formation of ‘rational expectations’, where misleading results follow from present mathematical approaches for realistic economies. The appropriate mathematics remains to be developed, and may end ‘problem specific’ rather than generic.
    Keywords: Economic forecasting, structural breaks, model selections, expectations, impulse-indicator saturation, mathematical analyses
    JEL: C02 C22
    Date: 2011
  8. By: Susanne Lütz & Matthias Kranke
    Abstract: The latest global financial crisis has allowed the International Monetary Fund (IMF) a spectacular comeback. But despite its notorious reputation as a staunch advocate of restrictive economic policies, the Fund has displayed less preference for austerity in recent crisis lending. Though widely welcomed as overdue, the IMF’s shift away from what John Williamson coined the ‘Washington Consensus’ was met with resistance from the European Union (EU) where it concerned Central and Eastern European (CEE) countries. The situation of hard-hit Hungary, Latvia, and Romania propelled unprecedented cooperation between the IMF and the EU, in which the EU has very actively promoted orthodox measures in return for loans. We argue that this represents a European rescue of the Washington Consensus. The case of Latvia is paradigmatic for the profound disagreements between an austerity-demanding EU and a less austere IMF. The IMF’s stance contradicts conventional wisdom about the organization as the guardian of economic orthodoxy. To solve this puzzle, we shed light on three complementary factors of (non)learning that have shaped the EU’s relations vis-à-vis CEE borrowing countries in comparison to the IMF’s: (1) a disadvantageous institutional setting; (2) vociferous creditor coalitions; (3) the precarious eurozone project.
    Keywords: Latvia
    Date: 2010–05–01
  9. By: Patrick Guillaumont (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I); Sylviane Guillaumont Jeanneney (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I)
    Abstract: We examine whether absorptive capacity represents a compulsory reason to reject the proposal of a large aid increase to support a big push. We argue that poverty trap is a probability for many countries, in particular the Least Developed Countries and that an aid increase is relevant for them. Moreover we show that the decrease in marginal aid returns is slower in vulnerable countries, what enhances the rationale to take vulnerability as one of the aid allocation criteria. We then examine the main limits to absorptive capacity, such as disbursement constraints and short term bottlenecks, macro economic troubles, including loss of competitiveness and macroeconomic volatility, as well as institution weakening. The general conclusion we draw to reconcile the two approaches is that absorptive capacity strongly depends on aid itself or on its very modalities. Big push and absorptive capacity approaches cannot be reconciled without an aid reform coming with an aid increase. First, needed is to balance the utilisation of aid between directly productive and social activities, in order to avoid transitory loss of competitiveness. Second, schemes helping to use aid as insurance against exogeneous shocks are to be enhanced because they lower the risk of Dutch disease and contribute to a faster and more equitable long term growth. Finally a performance-based conditionality should be substituted to the traditional policy-based one in order to cope with several absorptive capacity limitations, most importantly the socio-political one. An aid supported big push will not be effective without a new ownership of policy by the recipient countries.
    Keywords: cerdi
    Date: 2011–02–09

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