nep-pke New Economics Papers
on Post Keynesian Economics
Issue of 2016‒09‒25
five papers chosen by
Karl Petrick
Western New England University

  1. Macroeconomic and Financial Management in an Uncertain World: What Can We Learn from Complexity Science? By Sitthiyot, Thitithep
  2. Econometrics as a Pluralistic Scientific Tool for Economic Planning: On Lawrence R. Klein's Econometrics By Erich Pinzón-Fuchs
  3. The Case for a Weak Labor Market By Nick Buffie
  4. Unjust Enrichment from Official Corruption in Africa: Theory and Model on how Lenders have benefited By Simplice Asongu; Jacinta C. Nwachukwu
  5. Criticizing the Lucas Critique: Macroeconometricians’ Response to Robert Lucas By Aurélien Goutsmedt; Erich Pinzon-Fuchs; Matthieu Renault; Francesco Sergi

  1. By: Sitthiyot, Thitithep
    Abstract: This paper discusses serious drawbacks of existing knowledge in macroeconomics and finance in explaining and predicting economic and financial phenomena. Complexity science is proposed as an alternative approach to be used in order to better understand how economy and financial market work. This paper argues that understanding characteristics of complex system could greatly benefit financial analysts, financial regulators, as well as macroeconomic policy makers.
    Keywords: Macroeconomics; Finance; Complexity Science
    JEL: A10 E00 G00
    Date: 2015–07–20
  2. By: Erich Pinzón-Fuchs (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Lawrence R. Klein (1920-2013) played a major role in the construction and in the further dissemination of econometrics from the 1940s. Considered as one of the main developers and practitioners of macroeconometrics, Klein's influence is reflected in his application of econometric modelling " to the analysis of economic fluctuations and economic policies " for which he was awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel in 1980. The purpose of this paper is to give an account of Klein's image of econometrics focusing on his early period as an econometrician (1944-1950), and more specifically on his period as a Cowlesman (1944-1947). Independently of how short this period might appear, it contains a set of fundamental publications and events, which were decisive for Klein's conception of econometrics, and which formed Klein's unique way of doing econometrics. At least four features are worth mentioning, which characterise this uniqueness. First, Klein was the only Cowlesman who carried on the macroeconometric programme beyond the 1940s, even if the Cowles had already abandoned it. Second, his pluralistic approach in terms of economic theory allowed him not only to use the Walrasian framework appraised by the Cowles Commission and especially by T.C. Koopmans, but also the Marxian and Keynesian frameworks, enriching the process of model specification and motivating economists of different stripes to make use of the nascent econometrics. Third, Klein differentiated himself from the rigid methodology praised at Cowles; while the latter promoted the use of highly sophisticated methods of estimation, Klein was convinced that institutional reality and economic intuition would contribute more to econometrics than the sophistication of these statistical techniques. Last but not least, Klein never gave up what he thought was the political objective of econometrics: economic planning and social reform.
    Keywords: Economic Epistemology,History of Econometrics,History of Macroeconometric Modelling,Pluralism in Econometrics,Lawrence R Klein,Cowles Commission
    Date: 2016–09–12
  3. By: Nick Buffie
    Abstract: In October 2009, the unemployment rate broke double digits for the first time in over two decades. That month, nearly 15.4 million Americans found themselves out of a job. This represented a stark shift from just two years earlier, when the unemployment rate was 4.6 percent and seven million Americans were looking for work. While unemployment remained elevated for a time, it has been falling quickly in recent years. This past January, the unemployment rate dropped below five percent for the first time in eight years. While there have been some monthly fluctuations since then, the unemployment rate has averaged 4.9 percent through the first six months of 2016. Along with the relatively strong rate of job growth — the economy has added 2.4 million private- sector jobs over the past 12 months — the low unemployment rate has engendered discussions of whether the labor market is fully recovered. This debate is extremely relevant to both monetary and fiscal policy: if the job market is still weak, the Federal Reserve (“Fed”) should keep interest rates low and the government should run larger budget deficits; if the job market is nearly recovered, the Fed should begin increasing rates and the government should avoid fiscal stimulus. This paper argues that the labor market is still weak despite the low unemployment rate. Many media outlets and policymaking institutions have argued the opposite — as one Fortune headline recently put it, “The U.S. Economy Is Finally at Full Employment.” [1] Similarly, the Congressional Budget Office (CBO), which is tasked with advising members of Congress on economic policy, estimates that unemployment fell to its natural long-term rate in the first quarter of 2016. [2] Perhaps most importantly, the Fed seems to accept this view as well. Earlier this month, Kansas City Federal Reserve President Esther George said that “the economy is at or near full employment”; in May, San Francisco President John Williams said it was “basically at full employment.” [3] Fed Chair Janet Yellen has expressed a similar position, stating that the labor market is close to full employment. [4] Finally, in their June “Summary of Economic Projections,” voting members of the Federal Open Market Committee (FOMC) — the group tasked with setting interest rate policy — estimated that the long-run unemployment rate lies between 4.6 and 5.0 percent, with the median forecaster projecting a rate of 4.8 percent. [5] In line with this view, Fed officials predicted five rate hikes through the end of 2017. If the labor market is weaker than the Fed believes, raising rates in the near future will needlessly throw many Americans out of work. This paper presents evidence that the job market remains weak; in general, the estimates indicate that the economy is about two-thirds recovered from the Great Recession.
    JEL: J E E2 E24
    Date: 2016–09
  4. By: Simplice Asongu (Yaoundé/Cameroun); Jacinta C. Nwachukwu (Coventry University, UK)
    Abstract: A 2015 World Bank report on the achievement of Millennium Development Goals (MDGs) revealed that since the 1990s, extreme poverty has been decreasing in all regions of the world with the exception of Africa where about 50 percent of countries in Sub-Saharan Africa did not achieve the MDG extreme poverty target despite the sub-region enjoying more than two decades of GDP growth resurgence. The purpose of this chapter is twofold. First to understand the interconnections between the large pool of capital transferred to the OECD countries and the corrupt deposits of stolen public funds. Second, to illustrate how such diversion of funds overseas are related to the spread of poverty in the African economies. We enunciate a ‘poverty multiplier theory’ and propose a model for its application within an African context. The ‘poverty multiplier theory’ postulates that: (i) one unit of currency deposited abroad represents a loss in financial development at home (ii) a fraction of the unit currency placed in foreign bank accounts is redirected to the domestic economy in the form of external debt. This external debt is further siphoned overseas through interest and loan principal repayment. Policy implications of these processes are discussed.
    Keywords: Poverty, External Debts, Corruption, Capital flight, Development
    JEL: B20 F35 F50 O19 O55
    Date: 2016–09
  5. By: Aurélien Goutsmedt (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Erich Pinzon-Fuchs (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Matthieu Renault (IRIF - Institut de Recherche en Informatique Fondamentale - UP7 - Université Paris Diderot - Paris 7 - CNRS - Centre National de la Recherche Scientifique); Francesco Sergi (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The standard history of macroeconomics considers Lucas (1976)– “the Lucas Critique”–as a path-breaking innovation for the discipline. According to this view Lucas’s article dismissed the traditional macroeconometric practice calling for new ways of conceiving the quantitative evaluation of economic policies. The Lucas Critique is considered, nowadays, as a fundamental principle of macroeconomic modeling (Woodford, 2003). The interpretation and the application of the Critique, however, represent still unsolved issues in economics (Chari et al., 2008). Even if the influence of Lucas’s contribution cannot be neglected, something seems to be missing in the narrative: the reactions of the economists that were directly targeted by the Critique. Modeling practices of economic policy evaluation were not overthrown immediately after Lucas (1976), creating a divide between theoretical and applied macroeconomics (Brayton et al., 1997). In the first section we propose a careful account of Lucas’s argument and of some of the previous works anticipating the substantial outline of the Critique (like Frisch’s notion of autonomy). Second, we bring our own interpretation of Lucas (1976). We find two points of view in Lucas's paper: a prescriptive one that tell how to build a good macroeconometric model (it is the standard interpretation of the article); a positive one that relies on the fact that the Lucas critique could be seen as an attempt to explain a real-world phenomenon: stagflation. Third, we classify the reactions of the Keynesian macroeconometricians following this line of interpretation. On the prescriptive side, the Keynesians protested against the New Classical solution to the Lucas critique (the use of the rational expectation hypothesis among other things). Klein, for instance, proposed an alternative microfoundational program to empirically study the formation of expectations. On the positive side, the Keynesians put into question the relevance of the Lucas Critique to explain the rise of both unemployment and inflation in the 1970s. They tried to test the impact of policy regime changes and of shifts in agents' behavior. We argue that the explanation of the stagflation was elsewhere. The purpose of this paper is to study the reactions of the macroeconometricians criticized by Lucas. We focus especially on those macroeconometricians who worked on policy evaluation and who held an expertise position in governmental institutions. We categorize the different reactions to the Critique, in order to enrich the understanding of the evolution of modeling and expertise practices through the analysis of the debates–which have not yet been completely solved.
    Keywords: History of macroeconomics, Keynesian economics, Lu- cas Critique, Macroeconometrics, Rational Expectations.
    Date: 2016–09–12

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