nep-pke New Economics Papers
on Post Keynesian Economics
Issue of 2012‒05‒15
nine papers chosen by
Karl Petrick
University of the West Indies

  1. The European Financial and Economic Crisis: Alternative Solutions from a (Post-) Keynesian Perspective By Eckhard Hein; Achim Truger; Till van Treeck
  2. Monetary Policy and Central Banking after the Crisis: The Implications of Rethinking Macroeconomic Theory By Thomas I. Palley
  3. Financial Reform in the U.S.: A Critical Survey of Dodd-Frank and What is Needed for Europe By Raphaële Chappe; Willi Semmler
  4. Explaining Global Financial Imbalances: A Critique of the Saving Glut and Reserve Currency Hypotheses By Thomas I. Palley
  5. Did inequality cause the U.S. financial crisis? By Till van Treeck
  6. Equity Begins with Children By Jan Vandemoortele
  7. "Aggregate Production Functions and the Accounting Identity Critique: Further Reflections on Temple's Criticisms and Misunderstandings" By Jesus Felipe; John McCombie
  8. Encyclical Letter "Caritas in Veritate": An Economist's Reading By Dembinski, Paul H.
  9. The Implicit Theory of Historical Change in the work of Alan S. Milward By Frances M. B. Lynch; Fernando Guirao

  1. By: Eckhard Hein; Achim Truger; Till van Treeck (Macroeconomic Policy Institute (IMK) at the Hans Boeckler Foundation)
    Abstract: The financial and economic crisis in the Euro area has revealed a number of important flaws in the economic policy framework in Europe. On the one hand, the imbalances, which have dominated European development since the introduction of the euro, are not sustainable; and this is more serious in a period of crisis in particular. On the other hand, it has become clear that the Euro area suffers from a serious lack of institutions and policy concepts, which will not allow coping with deep financial and economic crises unless a deep restructuring takes place. The policy reactions of European governments, the European Commission and the European Central Bank in cooperation with the IMF will, therefore, hardly be able to initiate recovery. On the one hand, some important steps towards financial stabilisation have been made. On the other hand, however, these are combined with restrictive fiscal and wage policies, which will impose deflationary pressure on major parts of the Euro area and thus prevent stabilisation (or reduction) of public debt-GDP ratios. In the paper we will first analyse the imbalances, which have been built up in the Euro area, before we briefly review the policy responses towards the crisis. Since the prescribed fiscal and wage policies are still dominated by the New Consensus Macroeconomics theoretical framework, we will then develop an alternative macroeconomic policy model based on Keynesian and Post-Keynesian principles. It will be shown that stabilising wage and active fiscal policies will have major roles to play in order to cope with the imbalances and to initiate recovery for the EU as a whole. Furthermore, current account targets will have to be included into intra-Euro area policy coordination.
    Date: 2011
  2. By: Thomas I. Palley
    Abstract: The financial crisis and Great Recession have prompted a rethink of monetary policy and central banking. The status quo insider rethink focuses on the role of monetary policy in dealing with asset bubbles; making the central bank the banking system supervisor; and how to deal with the problem of the zero lower bound to nominal interest rates. This paper presents an outsider reform program that focuses on central bank governance and independence; reshaping the economic philosophy of central banks to be more intellectually open-minded; major monetary policy reform that includes adoption of an inflation target equal to the minimum unemployment rate of inflation (MURI) and implementation of asset based reserve requirements; and regulatory reform that addresses problems of flawed incentives, excessive leverage, and maturity mismatch.The proposed outsider reform program is rooted in a rethink of macroeconomic theory compelled by the crisis. There are some overlaps between the insider and outsider reform programs but they are more form than substance. That is dangerous because it can confuse debate if similarity of form is mistaken for similarity of substance.The insider program makes no changes to macroeconomic theory and is uncritical of the Federal Reserve's past actions. From its perspective, any failings of the Federal Reserve have been unwitting sins of omission. The outsider program fundamentally challenges existing macroeconomic theory and is also highly critical of the Federal Reserve. From its perspective the failings of the Federal Reserve have included significant sins of commission rooted in political capture, cognitive capture and intellectual hubris.The outsider critique can be taken even further. The Federal Reserve is already legally mandated to pursue maximum employment with price stability. However, it needs institutional transformation that makes it think of itself as an agent for helping realize the "American Dream". That means it should have a duty to shape the allocation of credit and the financial system in ways that ensure growth, full employment and a fair shake for all.
    Date: 2011
  3. By: Raphaële Chappe; Willi Semmler
    Abstract: We review the major provisions of Dodd-Frank, focusing on the monitoring of systemic risk, the limitation on proprietary trading, the regulation of the hedge fund industry, credit rating agencies, and the rules applicable to derivative trading. We compare these provisions with the recent regulatory changes in the EU, and critically assess the potential impact of Dodd-Frank.
    Date: 2012
  4. By: Thomas I. Palley
    Abstract: This paper examines three different explanations of the global financial imbalances. It begins with the neoliberal globalization hypothesis that explains the imbalances as the product of the model of globalization implemented over the past thirty years. It then examines the saving glut and reserve currency hypotheses. The paper concludes by arguing that both the saving glut and reserve currency hypotheses are inconsistent with the empirical record and both provide a misleading guide for policy.
    Date: 2011
  5. By: Till van Treeck (IMK at the Hans Boeckler Foundation)
    Abstract: In his widely discussed book "Fault Lines" (2010), Raghuram Rajan argues that many U.S. consumers have reacted to the decline in their relative permanent incomes since the early 1980s by reducing saving and increasing debt. This has temporarily kept private consumption and thus aggregate demand and employment high, despite stagnating incomes for many households. But it also contributed to the creation of a credit bubble, which eventually burst, and a large current account deficit in the United States. We place the Rajan hypothesis in the context of competing theories of consumption, and survey the empirical literature on the effects of inequality on household behaviour beyond the largely anecdotal evidence provided in Rajan (2010). We argue that the Rajan hypothesis, supported by the empirical evidence, calls for a renaissance of the relative income hypothesis of consumption.
    Date: 2012
  6. By: Jan Vandemoortele (Division of Policy and Practice,UNICEF)
    Abstract: While considerable progress is being made across the world in terms of human well-being, global statistics hide the fact that scores of people do not benefit from it much, if at all. Global progress has, by and large, by-passed those who are excluded, ignored, vulnerable, marginalised or dispossessed. As a result, the majority of countries are witnessing widening disparities; so much so that inequality has become the ugly underbelly of global prosperity. The evidence is quite compelling that more equal societies do better in terms of progress in health, education and nutrition than less equal ones. This paper stresses the need for an ‘equity-mediated’ approach to human development. Equity is not only important for its intrinsic value but also for its instrumental worth. As long as the global discourse overlooks growing inequalities, human poverty is set to pervade and deepen. The equity-inducing effects of putting children first will be more effective and efficient in improving human well-being than to continue with the simple ‘growth-mediated’ strategy.
    Keywords: malnutrition, poverty, inequality, equity, crisis recovery, fiscal consolidation, children
    Date: 2012
  7. By: Jesus Felipe; John McCombie
    Abstract: In a reply to Felipe and McCombie (2010a), Temple (2010) has largely ignored the main arguments that underlie the accounting identity critique of the estimation of production functions using value data. This criticism suggests that estimates of the parameters of aggregate production functions cannot be regarded as reflecting the underlying technology of the industry. While Temple concedes some points, he erroneously believes that the critique holds only under some ad hoc assumptions. As a consequence, he argues that the critique works only "part-time." This rejoinder discusses Temple's arguments and demonstrates that the critique works full-time.
    Keywords: Accounting Identity; Aggregate Production Function; Aggregation Problems; Value-added Identity; Value Data
    JEL: C43 O11 O16 O47 O53
    Date: 2012–05
  8. By: Dembinski, Paul H.
    Abstract: On the 29 of June 2009, the Pope Benedict XVIth published Caritas in Veritate, his third encyclical letter. It was addressed to the clergy but also to “lay faithful and all people of good will”. In the two papers assembled here under one single title, the author enters in dialogue with the Papal encyclical from the perspective of an economist interested in ethical issues related specially to finance. > First paper “Incompleteness of Economy and Business: A Forceful Reminder” is to be published in the Journal of Business Ethics. It underlines the logical incompleteness of both economic theory and business practice. Although Caritas in Veritate does not address this question explicitly, the reminder of incompleteness seems to be the main lessons the “dismal” discipline should draw form the encyclical. > Second paper “Fecundity vs. Efficiency: Rediscovering Relations” will appear in the forthcoming book “Human Development in Business” (D. Mele & C. Dierksmeier, ed). The paper analyses the ethical underpinnings of the present systemic crisis. It builds on the “category of relation” - as suggested by Caritas in Veritate - in the context of financial activities and contrasts it with the “category of transaction”. In conclusion, the paper suggests that transactions may breed efficiency but only relations will breed fecundity - economic, social and spiritual. Caritas in Veritate, as every encyclical is a letter, an invitation to exchange. The comments and thoughts expressed here are not only respectful answer to the Pope's message but also a set of questions and possible suggestions on how to make the main message of the Church easier to understand be by “lay faithful and all people of good will” who are either practitioners of business and finance, or teachers of management, finance or economics in universities or business schools.
    Keywords: Caritas in Veritate ; ethics ; exchange ; financial crisis ; Gödel's Theorems ; incompleteness in economics ; purpose of business ; relation ; System of National Accounts (SNA) ; transaction
    JEL: A11 A12 A13 A2 G01
    Date: 2011–10–13
  9. By: Frances M. B. Lynch; Fernando Guirao
    Abstract: Alan S. Milward was an economic historian who developed an implicit theory of historical change. His interpretation which was neither liberal nor Marxist posited that social, political, and economic change, for it to be sustainable, had to be a gradual process rather than one resulting from a sudden, cataclysmic revolutionary event occurring in one sector of the economy or society. Benign change depended much less on natural resource endowment or technological developments than on the ability of state institutions to respond to changing political demands from within each society. State bureaucracies were fundamental to formulating those political demands and advising politicians of ways to meet them. Since each society was different there was no single model of development to be adopted or which could be imposed successfully by one nation-state on others, either through force or through foreign aid programs. Nor could development be promoted simply by copying the model of a more successful economy. Each nation-state had to find its own response to the political demands arising from within its society. Integration occurred when a number of nation states shared similar political objectives which they could not meet individually but could meet collectively. It was not simply the result of their increasing interdependence. It was how and whether nation-states responded to these domestic demands which determined the nature of historical change.
    Keywords: historical change, development, World Wars, Third Reich, Blitzkrieg, New Order, Vichy, Fascism, Grossraumwirtschaft, German question, reconstruction, golden age, integration, supranationality, Bretton Woods, Marshall Plan
    JEL: B23 B31 F02 F13 F30 F42 F59 N01 N14 N44 N54 O10 O24 O38 O43 P16 P45 Q18
    Date: 2011–10

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