nep-pke New Economics Papers
on Post Keynesian Economics
Issue of 2015‒04‒19
eleven papers chosen by
Karl Petrick
Western New England University

  1. Playing the game the others want to play : Keynes’ beauty contest revisited By Camille Cornand; Rodolphe Dos Santos Ferreira
  2. Inconspicuous Conspicuous Consumption By Juan Carlos Carbajal; Jonathan Hall; Hongyi Li
  3. Capital Controls and Financial Liberalization: Removing the Ideological Bias in Light of the Contribution of Keynes and Others and the Recent Experience By André de Melo Modenesi; Rui Lyrio Modenesi
  5. General Equilibrium Theory - Walras versus post-Walras Economists: “Finding Equilibrium” - Losing Economics By Ezra Davar
  6. State versus Market in developing countries in the twenty first century By Kalim Siddiqui
  7. Inequality: Are we really 'all in this together'? By Gabriel Zucman; Gabriel Zucman
  8. Follow the money: The monetary roots of bubbles and crashes By Fulvio CORSI; Didier SORNETTE
  9. Sustainable Institutions or Sustainable Poverty Targeting: The Case of Microfinance By Khan, Wajid; Sun, Shaorong; Khan, Ikramullah
  10. How Did Household Indebtedness Hamper Consumption during the Recession? Evidence from Micro Data By Merike Kukk
  11. Cooperation between countries to ensure global economic growth: a role for the G20? By David Vines

  1. By: Camille Cornand (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France); Rodolphe Dos Santos Ferreira (BETA-Strasbourg University, 61 avenue de la Forêt Noire - 67085 Strasbourg Cedex, France; Catolica Lisbon School of Business and Economics)
    Abstract: In Keynes’ beauty contest, agents have to choose actions in accordance with an expected fundamental value and with the conventional value expected to be set by the market. In doing so, agents respond to a fundamental and to a coordination motive respectively, the prevalence of either motive being set exogenously. Our contribution is to consider whether agents favor the fundamental or the coordination motive as the result of a strategic choice that generates a strong strategic complementarity of agents’ actions. We show that the coordination motive tends to prevail over the fundamental one, which yields a disconnection of activity away from the fundamental. A valuation game and a competition game are provided as illustrations of this general framework.
    Keywords: beauty contest, financial markets, indeterminacy, oligopolistic competition,strategic complementarities
    JEL: D43 D84 E12 E44 L13
    Date: 2015
  2. By: Juan Carlos Carbajal (University of New South Wales); Jonathan Hall (Analysis Group); Hongyi Li (University of New South Wales)
    Abstract: A puzzling feature of conspicuous consumption, given its role in signaling wealth, is that it is not more conspicuous. For example, luxury handbags are often available in multiple variants that differ in logo visibility; in fact, subtly branded handbags are often more expensive than their loudly branded equivalents. Why may consumers prefer to deliberately obfuscate their conspicuous consumption? Our explanation is that by being imperfectly visible, subtly conspicuous consumption signals social connectedness in addition to wealth. We analyze a model where individuals care about their reputation for both wealth and social connectedness. Wealthy but poorly-connected individuals consume loudly conspicuous goods because subtle consumption is too costly in foregone wealth signaling. Wealthy, well-connected individuals consume subtly to distinguish themselves from poorly-connected individuals. The model thus explains why "old-money" types prefer to consume subtly, whereas "nouveau riche" types tend to consume loudly. Further, the model predicts that more subtle consumption takes place in societies where social capital is more important. It also explains recent empirical findings from the marketing literature that subtly-branded luxury goods tend to be more expensive than their loudly-branded equivalents.
    Keywords: conspicuous consumption, signaling, Veblen goods
    JEL: D11 D43
    Date: 2015–04
  3. By: André de Melo Modenesi; Rui Lyrio Modenesi
    Abstract: o label the defense of capital controls (CC) as a left-wing proposal is a misconstruction. Such labeling uses the Borsa economicist criterion, which reduces the dichotomy between right and left to a distinction between liberalism and interventionism. Yet, under this criterion, the use of CC cannot be labeled as a leftist proposal. The interventionism underlying the defense of CC, as pioneered by Keynes and developed by Tobin, Davidson, Stiglitz and Rodrik, is not the fruit of an ideological conviction favoring widespread and indiscriminate State intervention. For them, CC are instruments to be used under specific economic circumstances. To call CC a practice typical of left-wing governments is also a misinterpretation. Among the countries using strict forms of CC since the 1990’s–Chile, China, India, Malaysia and Thailand–only China’s government may be called leftist. The other countries’ political panorama is more complex than may suppose those who believe in a simple and direct relationship between CC and political ideology. The discussion should be stripped of the prevalent ideological bias: CC are not inherent to the political leanings of the governments that adopt them but are an expedient used under a pragmatic justification. Recognizing this is an important step toward a more objective analysis of the incidental opportunity of using CC, without prejudice. CC should be used whenever the benefits surpass the costs of their implementation. Rotular o controle de capitais como uma proposta da esquerda é um duplo equívoco. Tal rotulação tem como base critério economicista à Borsa, que reduz a dicotomia entre direita e esquerda à distinção liberalismo econômico versus intervencionismo. Além disso, o intervencionismo econômico subjacente à defesa do controle de capitais por parte dos autores analisados (Keynes, Tobin, Davidson, Stiglitz e Rodrik) não é fruto de convicção ideológica em prol de ampla e indiscriminada interferência do Estado na economia. Para eles, controles são instrumentos de utilização tópica, justificada pragmaticamente, ou seja, de acordo com circunstâncias econômicas específicas. Taxar o controle de capitais como prática de governos de esquerda também é incorreto. Dos cinco principais países que usaram controle de capitais a partir da década de 1990 – Chile, China, Índia, Malásia e Tailândia –, só o governo chinês pode ser considerado de esquerda. O panorama político dos demais países é muito mais complexo do que supõem os que acreditam haver uma relação simples e direta entre o controle de capitais e o posicionamento ideológico dos governos que o praticam. Reconhecer isso é um importante passo na direção de uma avaliação mais objetiva da eventual oportunidade de se adotar controle de capitais, sem preconceito. Controles devem ser usados sempre que os benefícios de sua adoção suplantem os custos.
    Date: 2015–01
  4. By: Paulina Szyja (Uniwersytet Pedagogiczny im. Komisji Edukacji Narodowej)
    Abstract: Starting from the crisis on the real economy in 2008 it has been developed an intense discussion, supported by a number of declarations on the global scale, about the need for changes in the economy. A huge impact on this state of affairs was the analysis of the causes and effects of the economic downturn and the challenges of the future. As a result, some states have taken action to remedy the situation. Many of them were aimed at structural changes in production, consumption and environmental friendly investment. At the same time gained in importance the concept of "low carbon economy" and "green economy". The aim of this paper is to present the role of the state in the economy in terms of creating conditions for a green economy. The thesis of publication is: implementation of structural changes connected with creating a green economy requires the involvement of the state.
    Keywords: sustainable development; environment; state; a green economy; energy
    JEL: E12 O20 O38 O44 P48 Q01 Q28 Q30 Q32 Q43
    Date: 2015–04
  5. By: Ezra Davar (r)
    Abstract: This paper shows that the post-Walras general equilibrium theory is irrelevant to real contemporary economic life. The main achievement of modern General Equilibrium Theory is the proof of equilibrium’s existence. It might be that the proof of the equilibrium existence is a mathematical achievement, but the question is whether these proofs are harmonious with the economic situation in reality. This paper traces concisely how Walras’s theory has been became causing economic science to deviate in an erroneous direction and reaching a deep crisis; because post-Walras’s economists, since Pareto, have misunderstood and misinterpreted Walras’s economic theory. This group of Post-Walras authors (Pareto, Cassel, Schlesinger, Wald, and von-Neumann, Hicks, Keynes, Lange, and Patinkin) then recast Walras’s theory into incorrect and wrong form; their error further compounded when a later group of economist-mathematicians (Arrow, Debreu, Friedman, Samuelson, Solow and others) accepted their interpretation without reservation. Post-Walras’s economists ignore Walras’s less known assumptions and blame him for disregarding the problem of equilibrium existence, uniqueness and stability and comparative-static. Therefore, their main objective since the beginning of the 20th century was the rigorous proof of equilibrium existence. However, this proof was based on unrealistic assumptions and along the road the goal of economics was lost. The nine crucial, unrealistic assumptions will be considered and will illustrate that modern general equilibrium theory is irrelevant to real economics and is also far removed from Walras’s general equilibrium theory.
    Keywords: Walras; post-Walras; General Equilibrium Theory; Modern Theory; Unrealistic Assumptions
    JEL: A1 B2 D5 E4
    Date: 2015–04
  6. By: Kalim Siddiqui (University of Huddersfield)
    Abstract: This paper analyses the issue of the state versus the market in developing countries. There was wide ranging debate in the 1950s and 1960s about the role of the state in their economy when these countries attained independence, with developing their economies and eradicating poverty and backwardness being seen as their key priority. In the post-World War II period, the all-pervasive ‘laissez-faire’ model of development was rejected, because during the pre-war period such policies had failed to resolve the economic crisis. Therefore, Keynesian interventionist economic policies were adopted in most of these countries. The economic crisis in developing countries during the 1980s and 1990s provided an opportunity for international financial institutions to impose ‘Structural Adjustment Programmes’ in the name of aid, which has proved to be disastrous. More than two decades of pursuing neoliberal policies has reduced the progressive aspects of the state sector. The on-going crisis in terms of high unemployment, poverty and inequality provides an opportunity to critically reflect on past performance and on the desirability of reviving the role of the state sector in a way that will contribute to human development.
    Keywords: ‘Market-centric’ model, role of the state, economic policy and developing countries
    Date: 2015–04
  7. By: Gabriel Zucman; Gabriel Zucman
    Abstract: The UK's top 1% have between 12.5% and 15.5% of all income. This is mid-way between the United States (20%) and Continental Europe (8%). This share has been rising steadily since the late 1970s, mainly due to labour income (wages), but also with a role for capital income (dividends, capital gains, etc.). In the global financial crisis of 2008-09 inequality fell, but has been stable since then. It is too soon to tell whether inequality will resume its rising trend as the economy fully recovers. Overall, coalition policies have been mainly regressive. Tax credit and benefit cuts took more away in the bottom half of the income distribution than they gained from higher income tax allowances. Looking forward, wealth will be increasingly important for inequality as it is rising faster than aggregate income, and the concentration of capital income is much greater than the concentration of labour income. To combat inequality, policy should be focused on wealth (in particular inheritance) taxation, closing loopholes for capital income (e.g., non-domiciled residents), and increasing skills, especially for the disadvantaged.
    Keywords: inequality, wages, wealth, taxes, #electioneconomics
    Date: 2015–04
  8. By: Fulvio CORSI (University of St. Gallen and Swiss Finance Institute); Didier SORNETTE (ETH Zurich and Swiss Finance Institute)
    Abstract: We propose a reduced form model for the Minskian dynamics of liquidity and of asset prices in terms of the so-called financial accelerator mechanism. In a nutshell, credit creation is driven by the market value of the financial assets employed as collateral in the bank loans. This leads to a self-reinforcing feedback between financial prices and liquidity that we model by coupled non–linear stochastic processes. We show that the resulting dynamics are characterized by a transient super- exponential growth qualifying a bubble regime. Unchecked, this would lead to a finite time singularity (FTS). The underlying singularity expresses the unsustainable dynamics of the corresponding econ- omy and announces a regime change, such as a crash. We propose to describe the dynamics of the crisis by the same coupled non–linear stochastic process with inverted signs, i.e., nonlinear negative feedbacks of value and money on their growth rates. Casting the financial accelerator dynamics into a simple macroeconomic model, we show that the cycle of booms and bursts of financial assets and liquidity determines economic recessions in the form of increasing aggregate default rates and decreas- ing GDP. Finally, by exploiting the implications of the proposed model on the dynamics of financial asset returns, we introduce a generalized GARCH process, called FTS-GARCH, that can provide an early warning identification of bubbles. Estimating the FTS-GARCH on well-known historical bubble episodes suggest the possibility to diagnose in real-time the presence of bubbles in financial time series.
    Keywords: Minskian dynamics, financial bubbles, positive feedback, financial accelerator, general- ized FTS-GARCH
    JEL: G01 G17 C53
  9. By: Khan, Wajid; Sun, Shaorong; Khan, Ikramullah
    Abstract: Microcredit, being the most unique form of antipoverty intervention in terms of its methodology and outreach, has generated considerable amount of disagreements in recent times. While there may be more serious disagreements surrounding microcredit, this article addresses whether or not microcredit has the potential to alleviate poverty, and whether or not the conclusion derived to the first issue is sensitive to interest rate variations. Connecting the already established principles of economics, we show that there is every reason to believe that microcredit has the potential to change the fortunes of the poor communities. However, we also show that this change in fortune can be in any direction, depending on how costly the financial services of the microfinance institutions are felt by the poor.
    Keywords: Poverty, Microfinance Institutions, Optimization, Income/Price Policy
    JEL: C61 E64 G21 I30
    Date: 2015–04–11
  10. By: Merike Kukk (Tallinn University of Technology)
    Abstract: The paper investigates the extent to which household indebtedness suppressed consumption during the economic downturn in 2008-2009. The paper uses a unique quarterly panel dataset containing financial information on over 100,000 individuals. The dataset covers the period 2005-2011, when there were large changes in credit volumes, income and consumption in Estonia, a new EU member country. The estimations show that indebtedness measured by the debt-to-income ratio and the debt service ratio hampers consumption over the whole business cycle. The negative impact of the debt service ratio is, however, substantially stronger during the recession than in the pre-crisis and post-crisis periods, while the negative effect of the debt-to-income ratio is relatively stable over the sample period. The findings suggest that household indebtedness is amplifying the recession and the debt repayment burden indicates the mechanism which is at work.
    Keywords: household indebtedness, debt repayment burden, debt-to-income ratio, amplification effect, recession.
    JEL: E21 D14 E32
    Date: 2015–04
  11. By: David Vines
    Abstract: The global economic recovery is on course but remains weak. Many analysts and policymakers — including those from emerging markets — have recently called for international cooperation in the setting of macroeconomic policies. A global growth target has been adopted by the G20 to aid such cooperation. But advanced counties are unwilling to abandon fiscal policies which are driven by austerity, monetary policy is incapacitated, and demand in emerging markets economies is not growing rapidly enough. As a result, cooperation in the promotion of growth appears elusive. However microeconomic reforms have been added to the G20 policy mix: reforms which, for example, promote competition, liberalise trade, and support increased investment in infrastructure. A new form of cooperative process is thereby emerging. Countries have been asked to pursue such reforms, in ways which both promote the growth of productive potential and encourage the growth of aggregate demand. The aim is to create a global environment of ‘concerted unilateral reform’. Beneath the umbrella of a global growth target, counties are being encouraged to embrace reform, and to expand demand, in the light of the opportunities which are created by the pursuit of similar reforms elsewhere. This is a valuable experiment in international economic cooperation, and a successful outcome will be of particular value to emerging-market economies.
    Keywords: G20, Global financial crisis, Macroeconomic policy, European Union
    JEL: E60 F30 F41 F42
    Date: 2014

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