nep-pke New Economics Papers
on Post Keynesian Economics
Issue of 2012‒02‒27
seven papers chosen by
Karl Petrick
University of the West Indies

  1. Minsky’s Financial Instability Hypothesis and the Leverage Cycle By Sudipto Bhattacharya; Charles Goodhart; Dimitrios Tsomocos; Alexandros Vardoulakis
  2. "Fiddling in Euroland as the Global Meltdown Nears" By Dimitri B. Papadimitriou; L. Randall Wray
  3. Pension Liabilities: Fear Tactics and Serious Policy By David Rosnick; Dean Baker
  4. The European Collapse of 2012/13 By Charles Goodhart
  5. When Economics Faces the Economy: John Bates Clark and the 1914 Antitrust Legislation By Luca Fiorito
  6. Low-wage Lessons By John Schmitt
  7. The Necessity of a Lower Dollar and the Route There By Dean Baker

  1. By: Sudipto Bhattacharya; Charles Goodhart; Dimitrios Tsomocos; Alexandros Vardoulakis
    Abstract: Busts after periods of prolonged prosperity have been found to be catastrophic. Financial institutions increase their leverage and shift their portfolios towards projects that were previously considered too risky. This results from institutions rationally updating their expectations and becoming more optimistic about the future prospects of the economy. Default is inevitably harsher when a bad shock occurs after periods of good news. Commonly used measures to forecast risk in the system, such as VIX, fail to capture this phenomenon, as they are also biased by optimistic expectations. Competition among financial institutions for better relative performance exacerbates the boom-bust cycle. We explore the relative advantages of alternative regulations in reducing financial fragility, and suggest a novel criterion for improvement of aggregate welfare.
    Date: 2011–09
  2. By: Dimitri B. Papadimitriou; L. Randall Wray
    Abstract: President Dimitri B. Papadimitriou and Senior Scholar L. Randall Wray argue that the common diagnosis of a "sovereign debt crisis" ignores the crucial role of rising private debt loads and the significance of current account imbalances within the eurozone. Profligate spending in the periphery is not at the root of the problem. Moreover, pushing austerity in the periphery while ignoring the imbalances within the eurozone is a recipe for deflationary disaster. The various rescue packages on offer for Greece will not ultimately solve the problem, say the authors, and a default is a very real possibility. If a new approach is not embraced, we are likely seeing the end of the European Monetary Union (EMU) as it currently stands. The consequences of a breakup would ripple throughout the EMU as well as the shaky US financial system, and could ultimately trigger the next global financial crisis.
    Date: 2012–02
  3. By: David Rosnick; Dean Baker
    Abstract: This working paper argues that pension funds should adopt a funding principle that is consistent with a return on holdings conditional on the state of the stock market. As will be shown, the expected “conditional rate of return” used in making this assessment will vary depending on the current ratio of stock prices to trend corporate earnings. This funding rule will lead to a more even flow of contributions into the fund than a rule that is based on a fixed return for assets over time.
    Keywords: pensions, retirement
    JEL: G G2 G23 J J3 J32
    Date: 2012–01
  4. By: Charles Goodhart
    Abstract: No Abstract is available.
    Date: 2011–10
  5. By: Luca Fiorito
    Keywords: B15, B31 JEL Classification: The aim of this paper is to analyze John Bates Clark’s influence in the passing of the Clayton and Federal Trade Commission Acts (1914). Specifically, it is argued and documented that Clark was important in this process in two ways. First, he exercised an “indirect” influence by discussing in academic journals and books problems concerning trusts, combinations, and the necessary measures to preserve the working of competitive markets. At least as importantly, if not more so, Clark took an active role in the reform movement both contributing to draft proposals for the amendment of existing antitrust legislation and providing help and advice during the Congressional debates which led to the passing of the FTC and Clayton Acts.
    Date: 2012
  6. By: John Schmitt
    Abstract: Over the last two decades, high – and, in some countries, rising – rates of low-wage work have emerged as a major political concern. If low-wage jobs act as a stepping stone to higher-paying work, then even a relatively high share of low-wage work may not be a serious social problem. If, however, as appears to be the case in much of the wealthy world, low-wage work is a persistent and recurring state for many workers, then low-wages may contribute to broader income and wealth inequality and constitute a threat to social cohesion. This report draws five lessons on low-wage work from the recent experiences of the United States and other rich economies in the OECD.
    Keywords: low-wage, minimum wage, EITC, unions
    JEL: J J3 J31 J8 J88 J5 J51
    Date: 2012–01
  7. By: Dean Baker
    Abstract: Debates over economic policy tend to be enormously confused. It is often the case that even high-level officials and well-known economists seem ignorant of basic accounting identities. This leads them to make claims that literally do not add up. This seems to be especially common in the case of debates on trade policy. This paper is intended to clarify some of the key issues. The first part is a simple accounting exercise showing that a large trade deficit implies that a country must either have a large budget deficit, negative private savings, or some combination of the two. Since both large budget deficits and negative private savings are generally viewed as undesirable, this means that a lower trade deficit should be a top policy priority. Furthermore, as a practical matter, a lower-valued dollar is the only plausible mechanism for getting the trade deficit closer to balanced. The second section shows the implications of a lower trade deficit for the economy in terms of the sectors that will expand. While some analysts have implied that in the future the United States will no longer be engaged in manufacturing, this is not a plausible economic scenario. If the United States will continue to consume manufactured goods then it will have to produce the bulk of these goods itself. There is no sector of the economy where exports can reasonably be expected to expand enough to pay for the country’s consumption of manufactured goods. The final section discusses mechanisms for lowering the value of the dollar. In public debates, the value of the dollar is often treated as being beyond the control of the U.S. government. This is not true. The government certainly has the ability to influence the value of the dollar; however it may be necessary to sacrifice other policy goals to achieve a desired exchange rate for the dollar.
    Keywords: trade, trade deficit, budget, budget deficit, national accounting, dollar, currency
    JEL: F F1 F10 F13 H H6 H62 E E5
    Date: 2012–02

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