nep-pke New Economics Papers
on Post Keynesian Economics
Issue of 2015‒11‒01
fifteen papers chosen by
Karl Petrick
Western New England University

  1. Trade Bounded Rationality and Bounded Individuality By Davis, John
  2. "Bank Leverage Ratios and Financial Stability: A Micro- and Macroprudential Perspective" By Emilios Avgouleas
  3. "Money Creation under Full-reserve Banking: A Stock-flow Consistent Model" By Patrizio Laina
  4. Currency School versus Banking School: an ongoing confrontation By Charles Goodhart; Meinhard Jensen
  5. "The Macroeconomics of a Financial Dutch Disease" By Alberto Botta
  6. The Green Entrepreneurial State By Mariana Mazzucato
  7. Modern Monetary Circuit Theory, Stability of Interconnected Banking Network, and Balance Sheet Optimization for Individual Banks By Alexander Lipton
  8. "Is Monetary Financing Inflationary? A Case Study of the Canadian Economy, 1935-75" By Josh Ryan-Collins
  9. "What Should Be Done with Greek Banks to Help the Country Return to a Path of Growth?" By Emilios Avgouleas; Dimitri B. Papadimitriou
  10. Industrialization 'without tariffs' Friedrich List as a forerunner of modern Development Economics By Jose Pedro Pontes; Armando J. Garcia Pires
  11. Next Global Crisis: Greatest Recession in the History of Capitalism is at the Doorstep By Dominik Vuletić
  12. Mapeando o pós-keynesianismo: Uma abordagem cienciométrica By Bruno R. Dammski; Marco A. R. Cavalieri, José S. Paula Pinto
  13. ¿Debería la Historia del Pensamiento Económico ser incluida en los Planes de Estudio de Economía en Pregrado? By Roncaglia, Alesandro
  14. Right to a healthful environment: Flagship of fundamental human rights – An international perspective By Sri Yogamalar; Abdul Haseeb Ansari
  15. Six decades of Pole of Growth Theory: A review necessary. By Josias Alves Jesus; Noelio Dantasle Spinola

  1. By: Davis, John (Department of Economics Marquette University)
    Abstract: This paper argues that since the utility function conception of the individual is derived from standard rationality theory, the view that rationality is bounded suggests that individuality should also be seen as bounded. The meaning of this idea is developed in terms of two ways in which individuality can be said to be bounded, with one bound associated with Kahneman and Tversky's prospect theory and the "new" behavioral economics and a second bound associated with Simon's evolutionary thinking and the "old" behavioral economics. The paper then shows how different bounded individuality conceptions operate in nudge economics, agent-based modeling, and social identity theory, explaining these conceptions in terms of how they relate to these two behavioral economics views of bounded rationality. How both the "new" and "old" individuality bounds might then be combined in a single account is briefly explored in connection with Kirman's Marseille fish market analysis.
    Keywords: bounded rationality, bounded individuality, nudge economics, agent-based modeling, social identity theory, Marseille fish market
    Date: 2014–07
  2. By: Emilios Avgouleas
    Abstract: Bank leverage ratios have made an impressive and largely unopposed return; they are mostly used alongside risk-weighted capital requirements. The reasons for this return are manifold, and they are not limited to the fact that bank equity levels in the wake of the global financial crisis (GFC) were exceptionally thin, necessitating a string of costly bailouts. A number of other factors have been equally important; these include, among others, the world's revulsion with debt following the GFC and the eurozone crisis, and the universal acceptance of Hyman Minsky's insights into the nature of the financial system and its role in the real economy. The best examples of the causal link between excessive debt, asset bubbles, and financial instability are the Spanish and Irish banking crises, which resulted from nothing more sophisticated than straightforward real estate loans. Bank leverage ratios are primarily seen as a microprudential measure that intends to increase bank resilience. Yet in today's environment of excessive liquidity due to very low interest rates and quantitative easing, bank leverage ratios should also be viewed as a key part of the macroprudential framework. In this context, this paper discusses the role of leverage ratios as both microprudential and macroprudential measures. As such, it explains the role of the leverage cycle in causing financial instability and sheds light on the impact of leverage restraints on good bank governance and allocative efficiency.
    Keywords: Leverage; Banks; Financial Instability; Macroprudential Regulation; Leverage Cycle; Bubbles; Debt Overhang
    JEL: G21 G28 K22
    Date: 2015–10
  3. By: Patrizio Laina
    Abstract: This paper presents a stock-flow consistent model+ of full-reserve banking. It is found that in a steady state, full-reserve banking can accommodate a zero-growth economy and provide both full employment and zero inflation. Furthermore, a money creation experiment is conducted with the model. An increase in central bank reserves translates into a two-thirds increase in demand deposits. Money creation through government spending leads to a temporary increase in real GDP and inflation. Surprisingly, it also leads to a permanent reduction in consolidated government debt. The claims that full-reserve banking would precipitate a credit crunch or excessively volatile interest rates are found to be baseless.
    Keywords: Full-reserve Banking; Stock-flow Consistency; Money Creation; Banking System
    JEL: E27 E42 E51
    Date: 2015–10
  4. By: Charles Goodhart; Meinhard Jensen
    Abstract: The Chicago Plan and Laina’s full-reserve banking proposal are themselves extensions of Ricardo’s earlier proposal for separating money creation from bank intermediation, as incorporated in the 1844 Bank Act. This was the key Currency School position, which was opposed then and subsequently by the Banking School. In this Commentary we outline the criticisms which Banking School supporters have made over the centuries of the Currency School, and indicate what alternative principles the Banking School has proposed.
    Keywords: Currency School and Banking School; rules vs discretion; money vs quasi-money; evolutionary vs static banking structure.
    JEL: N0 F3 G3
    Date: 2015
  5. By: Alberto Botta
    Abstract: We describe the medium-run macroeconomic effects and long-run development consequences of a financial Dutch disease that may take place in a small developing country with abundant natural resources. The first move is in financial markets. An initial surge in foreign direct investment targeting natural resources sets in motion a perverse cycle between exchange rate appreciation and mounting short- and medium-term capital flows. Such a spiral easily leads to exchange rate volatility, capital reversals, and sharp macroeconomic instability. In the long run, macroeconomic instability and overdependence on natural resource exports dampen the development of nontraditional tradable goods sectors and curtail labor productivity dynamics. We advise the introduction of constraints to short- and medium-term capital flows to tame exchange rate/capital flows boom-and-bust cycles. We support the implementation of a developmentalist monetary policy targeting competitive nominal and real exchange rates in order to encourage product and export diversification.
    Keywords: Financial Dutch Disease; Exchange Rate Volatility; Macroeconomic Instability; Developmentalist Monetary Policy
    JEL: F32 O14 O24
    Date: 2015–10
  6. By: Mariana Mazzucato (SPRU (Science Policy Research Unit), School of Business, Management & Economics, University of Sussex, Brighton, BN1 9SL, U.K.)
    Abstract: The paper considers the direct, strategic investments that have been made by international public institutions creating and shaping (not only fixing) green technology. It builds on the key themes found in The Entrepreneurial State: debunking public vs. private sector myths.
    Keywords: Financial institutions; environment; economic development; technological change; industrial policy
    JEL: G20 O13 O16 O38 L52
    Date: 2015–10
  7. By: Alexander Lipton
    Abstract: A modern version of Monetary Circuit Theory with a particular emphasis on stochastic underpinning mechanisms is developed. It is explained how money is created by the banking system as a whole and by individual banks. The role of central banks as system stabilizers and liquidity providers is elucidated. It is shown how in the process of money creation banks become naturally interconnected. A novel Extended Structural Default Model describing the stability of the Interconnected Banking Network is proposed. The purpose of banks' capital and liquidity is explained. Multi-period constrained optimization problem for banks's balance sheet is formulated and solved in a simple case. Both theoretical and practical aspects are covered.
    Date: 2015–10
  8. By: Josh Ryan-Collins
    Abstract: Historically high levels of private and public debt coupled with already very low short-term interest rates appear to limit the options for stimulative monetary policy in many advanced economies today. One option that has not yet been considered is monetary financing by central banks to boost demand and/or relieve debt burdens. We find little empirical evidence to support the standard objection to such policies: that they will lead to uncontrollable inflation. Theoretical models of inflationary monetary financing rest upon inaccurate conceptions of the modern endogenous money creation process. This paper presents a counter-example in the activities of the Bank of Canada during the period 1935-75, when, working with the government, it engaged in significant direct or indirect monetary financing to support fiscal expansion, economic growth, and industrialization. An institutional case study of the period, complemented by a general-to-specific econometric analysis, finds no support for a relationship between monetary financing and inflation. The findings lend support to recent calls for explicit monetary financing to boost highly indebted economies and a more general rethink of the dominant New Macroeconomic Consensus policy framework that prohibits monetary financing.
    Keywords: Monetary Policy; Monetary Financing; Inflation; Central Bank Independence; Fiscal Policy; Debt; Credit Creation
    JEL: B22 B25 E02 E12 E31 E42 E51 E52 E58 E63 N12 N22 O43
    Date: 2015–10
  9. By: Emilios Avgouleas; Dimitri B. Papadimitriou
    Abstract: The recapitalization of Greek banks is perhaps the most critical problem for the Greek state today. Despite direct cash infusions to Greek banks that have so far exceeded 45 billion euros, with corresponding guarantees of around 130 billion euros, credit expansion has failed to pick up. There are two obvious reasons for this failure: first, the massive exodus of deposits since 2010; and second, the continuous recession--mainly the product of strongly deflationary policies dictated by international lenders. Following the 2012-13 recapitalization, creditors allowed the old, now minority, shareholders and incumbent management (regardless of culpability) to retain effective control of the banks--a decision that did not conform to accepted international practices. Sitting on a ticking time bomb of nonperforming loans (NPLs), Greek banks, rather than adopting the measures necessary to restructure their portfolios, cut back sharply on lending, while the country's economy continued to shrink. The obvious way to rehabilitate Greek banking following the new round of recapitalization scheduled for later this year is the establishment of a "bad bank" that can assume responsibility for the NPL workouts, manage the loans, and in some cases hold them to maturity and turn them around. This would allow Greek banks to make new and carefully underwritten loans, resulting in a much-needed expansion of the credit supply. Sound bank recapitalization with concurrent avoidance of any creditor bail-in could help the Greek banking sector return to financial health—and would be an effective first step in returning the country to the path of growth.
    Date: 2015–10
  10. By: Jose Pedro Pontes; Armando J. Garcia Pires
    Abstract: In this paper, we analyse Friedrich List's contribution to the modern theory of economic development. We argue that Friedrich List saw economic development as a combination of a sectorial division of labour (following Adam Smith, 1776) and a geographical division of labour across regions and countries. In this sense, the passage from a traditional economy to an industrial one consists of balanced growth at both the sectorial and geographical level, as we see in modern development economics (see Rosentein-Rodan, 1943; and Murphy et al., 1989). In addition, List highlights the role of transport costs in the industrialization process not only in terms of the costs incurred by firms, but also how industrialization affects these costs, since modern technology produces goods that are ?lighter? to transport than goods produced with traditional technology. In this sense, contrary to what is usually attributed to List, tariffs are not the central part of his argument for industrialization. He puts more emphasis on the creation of a larger internal market via for instance a customs union and the complementarities between resources and sectors in a country. We illustrate these arguments with a model.
    Keywords: Friedrich List; Economic Development; Industrial Agglomeration; Labor Division
    JEL: O14 R11 R30
    Date: 2015–10
  11. By: Dominik Vuletić (Faculty of Economics and Business, University of Zagreb)
    Abstract: The main purpose of this paper is to warn academia and general public about the inevitability of the impending global economic recession. Heuristically paper introduces concept of macroeconomic gambling trap within the wider context of global economic history. Macroeconomic gambling trap is then applied to the current situation. The underlying cause for the impending crisis is the growth of debt in the West. Primary progenitor of debt problem is the world’s largest debtor nation, United States. Since the 1970s and the unilateral destruction of the golden standard US political and military power guarantee status of the dollar as world reserve currency despite absence of its backing in gold. Debt explosion caused alienation of financial sector from the real economy in most western countries. The impending crisis is foreshadowed by a Great Recession (Financial crisis of 2007/2008). The Great Recession was only temporally stopped by means of unorthodox monetary policy – with quantitative easing programs and by keeping interest rates at record low, even negative, levels. However, this will make forthcoming collapse only more severe. After analysis of the influence of gold standard collapse on the outcome of the Cold War the paper utilizes specific economic indicators, such as velocity of money M2 for USD, growth in total debt, CAPE ratio for aggregate US stock market, US labour force participation and index of the Shanghai Stock Exchange to indicate the immediacy and the inevitability of the next global recession.
    Keywords: economic crisis, Financial crisis of 2007/2008, gold standard, global reserve currency, currency war, velocity of money
    JEL: G01 G17 F34 F36 F37 F55 K20 N10
    Date: 2015–10–29
  12. By: Bruno R. Dammski; Marco A. R. Cavalieri, José S. Paula Pinto
    Abstract: O presente artigo tem por objetivo estudar a corrente pós-keynesiana na economia para delinear suas características. A metodologia usada para atingir este objetivo combina concepções filosóficas e linguísticas, com técnicas computacionais e cienciométricas. Primeiro, tal metodologia parte do conceito de finitismo de significados (meaning finitism) para compreender o que significa uma expressão do ponto de vista da sua construção social. A ideia de finitismo consiste em expandir o significado de um termo para permitir que ele seja formado por uma infinidade de conceitos, e não por uma a definição unívoca. Tal ideia é baseada na filosofia da linguagem de Ludwig Wittgenstein. Segundo, o contexto social em que o significado da expressão “Post Keynesian” surge tem que ser escolhido. Neste artigo, o contexto relevante é a comunidade acadêmica dos economistas, representada pelas revistas em que esses pesquisadores publicam seus artigos. Assim, o significado da expressão “Post Keynesian” é estudado a partir de uma base de dados formada por milhares de artigos acadêmicos. Terceiro, o modo especifico de estudar a expressão “Post Keynesian” neste contexto é através um programa computacional para construir um mapa de Co-word. Este mapa representa a co-ocorrência de palavras relevantes que co-ocorrem com a expressão em foco como distâncias em um espaço bidimensional. Quarto, a literatura pós-keynesiana é utilizada para estabelecer conexões entre as palavras que aparecem no mapa, dando origem a um quadro de significados e características da corrente pós-keynesiana. Em paralelo com esta metodologia, o presente artigo apresenta, ainda, um gráfico que mostra as ocorrências da expressão “Post Keynesian” nas revistas de economia, cotejando tal gráfico com a literatura histórica da corrente.
    Keywords: Post Keynesian; Mining finitism; Co-word analysis; History of economic thought
    JEL: B29 B49 B59
    Date: 2015–10–27
  13. By: Roncaglia, Alesandro
    Abstract: Mainstream views concerning the uselessness or usefulness of HET are illustrated. These rely on a hidden assumption: a ‘cumulative view’ according to which the provisional point of arrival of contemporary economics incorporates all previous contributions in an improved way. Critiques of positivism led philosophy of science to recognise the existence of different approaches – in economics, as in other sciences. Conceptualisation, recognised by Schumpeter as the first stage in economic theorising, is the stage in which the different visions of the world underlying the different approaches, take shape – and are better recognised. In this, HET plays an essential role. As an illustration, the differences between the classical and marginalist conceptualisations of the economy are illustrated. Thus HET is essential in both undergraduate and graduate economic curricula, as a decisive help towards a better understanding and evaluation of formalised theories/models in the first case, and as an education to the philological method of research, essential in the first stage of theorising, in the case of graduate curricula Resumen: Este artículo discute los puntos de vista de la corriente de pensamiento dominante respecto a la utilidad o inutilidad de la Historia del Pensamiento Económico (en adelante HPE). Estos puntos de vista se basan en un supuesto oculto: una “visión acumulativa” según la cual el punto de llegada provisional de la economía contemporánea debe incorporar todas las contribuciones teóricas anteriores de una forma mejorada. Los críticos del positivismo le permitieron a la filosofía de la ciencia reconocer la existencia de diferentes enfoques, tanto en la economía como en otras ciencias. La conceptualización, reconocida por Schumpeter como la primera etapa en la teorización económica, permite que las diferentes visiones del mundo en las cuales se basan los diversos enfoques, tomen forma y alcancen un mayor reconocimiento. Es aquí donde la HPE juega un papel esencial. En este artículo se toma como ejemplo las diferencias entre los enfoques clásicos y marginalistas de la Economía. De esta forma, la HPE resulta esencial en los Planes de Estudio de Economía tanto a nivel de pregrado como de posgrado. En el primer caso como una ayuda decisiva para una mejor comprensión y evaluación de los teorías/modelos ya formalizados y, en el segundo caso, como una formación en el método filológico de investigación, esencial en la primera etapa de la teorización.
    Keywords: history of economic analysis, undergraduate curricula, graduate curricula, heterodox approaches, stages of economic theorising. Historia del análisis económico, Planes de estudios de Economía de pregrado, Planes de estudios de Economía de posgrado, Enfoques heterodoxos, Etapas de la teorización económica.
    JEL: A20 B30
    Date: 2015–05–01
  14. By: Sri Yogamalar (Monash University Malaysia); Abdul Haseeb Ansari (International Islamic University Malaysia)
    Abstract: The right to a healthful environment gained global recognition with the growing trend in environmental consciousness and development of human awareness over the past decades. This human right is interlinked to our environment because an ecosystem which is otherwise will affect all living organisms to the very root of their existence. It is said that the right to a healthful environment is the flagship of all fundamental human rights. This stems from the indubitable fact that the survival of mankind is totally dependent on a clean, healthy and pollution-free environment. This paper delves into the constitutions of 23 nations in 6 different continents, with the right to a healthful environment as the central theme. It also explores the status, adequacy and enforcement of this basic human right as a constitutional right. To what extent Mother Nature is protected and how effective our environmental safeguards are, directly and indirectly, have reciprocal effects on the sustainable development of a country. In the midst of facing today’s global environmental challenges, it is the fervent hope of every citizen to live a decent life with reasonable living conditions for survival, and preservation of human dignity and sanity. This can only be achieved if the greed of the developed countries gradually erodes in the face of abating the sufferings of mankind by having a heart for humanity. Going back to basics, the right to a healthful environment actually relates to the sustainable survival of the humankind because it encompasses fresh air to breathe, safe and clean drinking water, sufficient nutritious food, proper homes for shelter and adequate sanitation facilities for the sustenance of all biota. Without securing and maintaining a healthful environment for present and future generations to come, mankind will drastically be deprived from enjoying the fundamental human rights that make life worth living.
    Keywords: Constitution, human rights, environment, fundamental liberties, anthropogenic, right to health, judicial activism, enforcement
    JEL: Q51
  15. By: Josias Alves Jesus; Noelio Dantasle Spinola
    Abstract: The theory of poles of growth appeared in a seminal work of François Perroux in 1955 and had a great influence on the Latin American thought in the decades of 1960 and 1970 as an important tool for reducing regional inequalities. In Brazil was no different. By possessing an extensive territory, with depressed regions and with an economy that is highly concentrated in the Southeast region of the country, especially in São Paulo, the theory of the Poles was used as a way to mitigate latent regional problems. Proof of the importance of the theory of the poles can be proven through the urban and Regional Planning seminar on Latin America organized by the Latin American Institute of Economic and Social Planning (ILPES) in 1972 in Chile in which is discussed widely its validity for Latin American economies. However, as noted by Boisier (1980) are there really growth Poles? Will attend the funeral of the theory? Does the theory of the poles is dead? At the conclusion of this same work Boisier (1980) responds to this question stating that NO, the theory of the poles is not dead, but no doubt has experienced a profound metamorphosis. Given these changes, metamorphoses, refinements and due to the importance of the theory of the Poles in economic science this investigation aims to take stock about the Theory of the growth Poles in the last 60 years (1955-2015), seeking to identify the context of its emergence, its theoretical influences, as well as their main criticisms or shortcomings, ending with the possibility of application of the theory in the present day in a globalized economy and environment oligopolizada. The problem of research that guides all of the work is: As poles of growth theory can be applied in regional analysis in the context of recent economic science? The overall objective is to identify which tools of the theory can still be applied in regional analysis and which need better refinement. The methodology used bibliographical research concerning the major publications on the theory in the last 40 years. About the work of Perroux, the research focused on their jobs 'Economic Space', 'the poles of growth', the concept of 'growth Poles' and 'Driving firm in a region and the Driving Region'. The main conclusion of this study is that the theory of the Poles still represents an important tool of regional analysis.
    Keywords: polos de crescimento; desenvolvimento regional; industria
    JEL: O18
    Date: 2015–10

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