nep-pke New Economics Papers
on Post Keynesian Economics
Issue of 2017‒02‒19
sixteen papers chosen by
Karl Petrick
Western New England University

  1. The theoretical inconsistency of the expansionary austerity doctrine (reprise): an extension to the long run By Botta, Alberto
  2. Long-run variation in capacity utilization in the presence of a fixed normal rate By Mark Setterfield
  3. The macroeconomics of shadow banking By Botta, Alberto; Caverzasi, Eugenio; Tori, Daniele
  4. Banking theories and Macroeconomics. By Claudio Sardoni; Antonio Bianco
  5. The global role of the US economy: Linkages, policies and spillovers By M. Ayhan Kose; Csilla Lakatos; Franziska Ohnsorge; Marc Stocker
  6. Secular stagnation and progressive economic policy alternatives By Onaran, Özlem
  7. A stock-flow-fund ecological macroeconomic model By Dafermos, Yannis; Nikolaidi, Maria; Galanis, Giorgos
  8. An empirical analysis of Minsky regimes in the US economy By Leila E. Davis; Joao Paulo A. de Souza; Gonzalo Hernandez
  9. Post Keynesian Dynamic Stochastic General Equilibrium Theory By Roger E.A. Farmer
  10. Migration in Kenya: beyond Harris-Todaro By Oyvat, Cem; wa Gĩthĩnji, Mwangi
  11. An investment and equality-led sustainable development strategy for Europe By Onaran, Özlem; Andersen, Lars; Cozzi, Giovanni; Dahl, Signe; Nissen, Thea; Obst, Thomas; Tori, Daniele
  12. Financial Structure and Instability in an Open Economy By Kenshiro Ninomiya
  13. Socialist alternatives to capitalism I: Marx to Hayek By Duncan Foley
  14. Socialist alternatives to capitalism II: Vienna to Santa Fe By Duncan Foley
  15. Whither central banking? By Charles A. E. Goodhart
  16. Combining Behavioral Economics and Field Experiments to Reimagine Early Childhood Education By John List; Anya Samek; Dana Suskind

  1. By: Botta, Alberto
    Abstract: In this paper, we provide a critical analysis of the theory of the expansionary austerity (EAT). Our attention is on the theoretical weaknesses of the EAT, say the extreme circumstances and fragile assumptions under which expansionary consolidations might actually take place. We present a simple theoretical model that takes inspiration from both the post-Keynesian and evolutionary/institutionalist traditions. We first show that well-designed austerity measures hardly trigger off short-run economic expansions in the context of expected long-lasting consolidation plans (i.e. when adjustment plans deal with remarkably high debt-to-GDP ratios); when the so-called ‘financial channel’ is not operative (i.e. in the context of monetarily sovereign economies); when the degree of export responsiveness to internal devaluation is low. Even in the context of non-monetarily sovereign countries (see Eurozone countries), austerity’s effectiveness crucially depends on its highly disputable capacity to immediately stabilize fiscal variables. We then analyse some possible long-run economic dynamics. We emphasize the high degree of instability that characterizes austerity-based adjustments plans. Path-dependency and cumulativeness make the short-run impulse effects of fiscal consolidation of paramount importance to (hopefully) obtain any appreciable medium-to-long-run benefit. Should these effects be contractionary on the onset, the short-run costs of austerity measures can breed an endless spiral of recession and ballooning debt in the long run. If so, in the case of non-monetarily sovereign countries debt forgiveness may emerge as the ultimate solution to restore economic soundness. Alternatively, institutional innovations like those adopted since mid-2012 by the ECB are required to stabilize the economy, although not to prompt sustained recovery.
    Keywords: Fiscal policy; Expansionary austerity theory; Post-Keynesian macro models; Evolutionary theory
    Date: 2016–11–04
  2. By: Mark Setterfield (Department of Economics, New School for Social Research)
    Abstract: We develop a generic Kalecki-Robinson model of growth that, subject to different closures, illustrates the different channels through which the economy can adjust to a change in demand conditions in the long run. The closures are shown to have different implications for the behaviour of the rate of capacity utilization and hence whether and how the economy achieves a “fully-adjusted position” (equalization of the actual and normal rates of capacity utilization). Assuming that the normal rate of capacity utilization is exogenously fixed, it is then shown that variation in the actual capacity utilization rate can nevertheless occur – at least within limits – without triggering “Harrodian instability”. This result emanates from a discontinuity in the investment function that is grounded in Harrod’s own macrodynamics, so that it is ultimately the combination of Harrodian and Kaleckian dynamics that gives rise to long-run variations in the actual rate of capacity utilization in the presence of a fixed normal rate. Aggregate and industry-level US capacity utilization data are then used to calculate possible bands within which the rate of capacity utilization may vary without triggering Harrodian instability. A key finding is that the conditions necessary for the latter appear to be relatively rare.
    Keywords: Normal rate of capacity utilization, Harrodian instability, Kaleckian growth theory
    JEL: E11 E12 O41
    Date: 2017–02
  3. By: Botta, Alberto; Caverzasi, Eugenio; Tori, Daniele
    Abstract: In this paper, we propose a simple short-run post-Keynesian model in which the key aspects of shadow banking, namely securitization and the production of structured finance instruments, are explicitly formalized. At the best of our knowledge, this is the first attempt to broaden purely real-side post-Keynesian models and their traditional focus on shareholder-value orientation, the financialization of non-financial firms, and the profit-led vs wage-led dichotomy. We rather put emphasis on the role of financial institutions and rentier-friendly environment in determining the predominance of specific growth and distribution regimes. First, we illustrate the macroeconomic rationale of shadow banking practices. We show how, before the 2007-8 crisis, securitization and shadow banking allowed for an increase in profitability for the whole financial sector, while apparently keeping leverage under control. Second, we define a variety of shadow-banking-led regimes in terms of economic activity, productive capital accumulation, and income distribution. We show that both an ‘exhilarationist’ and a ‘stagnationist’ regime may prevail, nevertheless characterized by a probable increase in income inequality between rentiers and wage earners
    Keywords: securitization; shadow banking; leverage; rentiers-led regimes; income distribution;
    Date: 2016–06–22
  4. By: Claudio Sardoni (Department of Social Sciences and Economics, Sapienza University of Rome); Antonio Bianco (Dipartimento di Scienze Sociali ed Economiche, Sapienza University of Rome (Italy).)
    Abstract: The recently expanding macro-financial literature is facing the analytical challenge to analyse the working of modern market economies without losing touch with the factual role played by financial institutions. Mainstream macroeconomic models that embody a financial sector are characterized by the understanding of banks as intermediaries of loanable funds (deposit-taking paving the way for loan extension). This approach to banking is increasingly considered as a major flaw in macroeconomic thinking. The Post-Keynesian theory of inside money creation is gaining momentum even in mainstream circles. The present article highlights the key differences of these alternative doctrines from a money supply perspective, so to stress the key aspects of the monetary dimension of the so-called financial cycle and the fact that monetary policy alone has no impact on aggregate expenditure.
    Keywords: Financial Cycle, Money Supply, Banking, Inside Money, Liquidity Risk.
    JEL: E44 E51
    Date: 2017–02
  5. By: M. Ayhan Kose; Csilla Lakatos; Franziska Ohnsorge; Marc Stocker
    Abstract: This paper analyzes the role of the United States in the global economy and examines the extent of global spillovers from changes in U.S. growth, monetary and fiscal policies, and uncertainty in its financial markets and economic policies. Developments in the U.S. economy, the world’s largest, have effects far beyond its shores. A surge in U.S. growth could provide a significant boost to the global economy. Tightening U.S. financial conditions-whether due to contractionary U.S. monetary policy or other reasons-could reverberate across global financial markets, with adverse effects on some emerging market and developing economies that rely heavily on external financing. In addition, lingering uncertainty about the course of U.S. economic policy could have an appreciably negative effect on global growth prospects. While the United States plays a critical role in the world economy, activity in the rest of the world is also important for the United States.
    Keywords: United States, uncertainty, trade, business cycles, global economy
    JEL: C15 E32 E52 F13 H30
    Date: 2017–02
  6. By: Onaran, Özlem
    Abstract: This paper summarizes two main findings in the Post-Keynesian literature regarding the linkages between financialization, income distribution, accumulation and productivity. Firstly, at the core of secular stagnation lies the missing link between profits and investment. Secondly, rising inequality and financialization have been the main reasons for this missing link and hence the major brakes against capital accumulation and growth. The paper concludes with alternative progressive policies based on a coordinated policy mix of equality-led development and public investment.
    Keywords: wage share; inequality; wage-led growth; financialization; secular stagnation; public investment
    Date: 2016–05
  7. By: Dafermos, Yannis; Nikolaidi, Maria; Galanis, Giorgos
    Abstract: This paper develops a stock-flow-fund ecological macroeconomic model that combines the stock-flow consistent approach of Godley and Lavoie with the flow-fund model of Georgescu-Roegen. The model has the following key features. First, monetary and physical stocks and flows are explicitly formalised taking into account the accounting principles and the laws of thermodynamics. Second, Georgescu-Roegen’s distinction between stock-flow and fund-service resources is adopted. Third, output is demand-determined but supply constraints might arise either due to environmental damages or due to the exhaustion of natural resources. Fourth, climate change influences directly the components of aggregate demand. Fifth, finance affects macroeconomic activity and the materialisation of investment plans that determine ecological efficiency. The model is calibrated using global data. Simulations are conducted to investigate the trajectories of key environmental, macroeconomic and financial variables under (i) different assumptions about the sensitivity of economic activity to the leverage ratio of firms and (ii) different types of green finance policies.
    Keywords: Ecological macroeconomics; stock-flow consistent modelling; laws of thermodynamics; climate change; finance
    Date: 2016–09–14
  8. By: Leila E. Davis (Department of Economics, Middlebury College); Joao Paulo A. de Souza (Department of Economics, Middlebury College); Gonzalo Hernandez (Department of Economics, Pontificia Universidad Javeriana)
    Abstract: In this paper we analyze Minskian dynamics in the US economy via an empirical application of Minsky financing regime classifications to a panel of nonfinancial corporations. First, we map Minsky definitions of hedge, speculative and Ponzi finance onto firm-level data to describe the evolution of Minskian regimes. We highlight striking growth in the share of Ponzi firms in the post-1970 US, concentrated among small corporations. This secular growth in the incidence of Ponzi firms is consistent with the possibility of a long wave of increasingly fragile finance in the US economy. Second, we explore the possibility of short-run Minskian dynamics at a business-cycle frequency. Using linear probability models relating firms probability of being Ponzi to the aggregate output gap, which captures short-term macroeconomic fluctuations exogenous to individual firms, we find that aggregate downturns are correlated with an almost zero increased probability that firms are Ponzi. This result is corroborated by quantile regressions using a continuous measure of financial fragility, the interest coverage ratio, which identify almost zero effects of short-term fluctuations on financial fragility across the interest coverage distribution. Together, these results speak to an important question in the theoretical literature on financial fragility regarding the duration of Minskian cycles, and lend support, in particular, to the contention that Minskian dynamics may take the form of long waves, but do not operate at business cycle frequencies.
    Date: 2017
  9. By: Roger E.A. Farmer
    Abstract: This paper explains the connection between ideas developed in my recent books and papers and those of economists who self-identify as Post Keynesians. My own work is both neoclassical and ‘old Keynesian’. Much of my published work assumes that people have rational expectations and that ‘animal spirits’ should be modeled as a new fundamental. I adopt a general equilibrium framework to model the macroeconomy. But although I write from a neo-classical tradition the themes I explore in my published writing have much in common with heterodox economics. This paper explains the common elements between these seemingly disparate traditions. I make the case for unity between Post-Keynesian and General Equilibrium Theory under the banner of Post-Keynesian Dynamic Stochastic General Equilibrium Theory.
    JEL: E0 E12
    Date: 2017–01
  10. By: Oyvat, Cem; wa Gĩthĩnji, Mwangi
    Abstract: This paper examines the impact of agrarian structures on the migration behavior and destination of rural household heads and individuals in Kenya. To explore the complexity of migration we extend the standard Harris-Todaro framework to account for land inequality and size as well as type of destination. Using logistic regressions, we show that Kenyan household heads born in districts with higher land inequality, smaller per capita land and lower per capita rural income are more likely to migrate. We show that for individuals whose incomes are squeezed by larger land inequality, migration from villages to suburban Nairobi, smaller cities, and villages in different districts could be a preferable strategy to migrating to Metro Nairobi. The impact of land inequality is more significant for male than female migration. Moreover, the level of education, age, marital status, gender, religion and distance to Nairobi play a role in migration behavior.
    Keywords: Migration; Distribution; Agrarian structures
    Date: 2017–01–25
  11. By: Onaran, Özlem; Andersen, Lars; Cozzi, Giovanni; Dahl, Signe; Nissen, Thea; Obst, Thomas; Tori, Daniele
    Abstract: Austerity policies coupled with rising inequality in Europe have resulted in a prolonged stagnation and a vicious circle of chronically low demand, slow down in investment and productivity, and economic, social and political instability. In order to end this vicious cycle, Europe needs directed public investment policies accompanied by industrial policy, higher equality, stimulated demand, and regulation of finance and corporate governance. Our research presents strong empirical evidence that expansionary fiscal policy is sustainable when wage and public investment policies are combined with progressive tax policy; the impact is stronger when these policies are implemented in a coordinated fashion across Europe due to strong positive spill over effects on demand. A strong investment performance also requires a process of de-financialization of the economy and a new approach to corporate governance.
    Keywords: Public spending; Tax policy; Wage share; Growth; Financialization; Investment; Non-financial sector; Financial development; Social infrastructure; Physical infrastructure; Sustainable development; Europe
    JEL: C23 D22 E12 E22 E25 E62 G31
    Date: 2017–01–24
  12. By: Kenshiro Ninomiya (Faculty of Economics, Shiga University)
    Abstract: The subprime loan mortgage crisis has revived scholarly interest in Minsky fs financial instability hypothesis. The related mathematical models present two types of Minskian financial structures, which we identify as the lenders f risk type (LR) and the hedge, speculative and Ponzi type (HSP) We construct macrodynamic models in a fixed and floating exchange rate sys- tem which considers both the LR and HSP financial structures. We examine the effects of international capital mobility and international lenders f risks and demonstrate the significance of the LR and HSP financial structures in the fixed and floating exchange rate system. We emphasize the significance of stable financial structures in order to stabilize dynamic systems in an open economy.
    Keywords: Minskian financial structure, financial fragility, financial instability,international capital mobility
    JEL: E12 E32 E43
    Date: 2017–02
  13. By: Duncan Foley (Department of Economics, New School for Social Research)
    Date: 2017–02
  14. By: Duncan Foley (Department of Economics, New School for Social Research)
    Date: 2017–02
  15. By: Charles A. E. Goodhart
    Abstract: The history of central banking can be divided into periods of consensus about the roles and function of central banks, interspersed with periods of uncertainty, often following a crisis, in which central banks are searching for a new consensus.
    JEL: F3 G3
    Date: 2016
  16. By: John List; Anya Samek; Dana Suskind
    Abstract: Behavioral economics and field experiments within the social sciences have advanced well beyond academic curiosum. Governments around the globe as well as the most powerful firms in modern economies employ staffs of behavioralists and experimentalists to advance and test best practices. In this study, we combine behavioral economics with field experiments to reimagine a new model of early childhood education. Our approach has three distinct features. First, by focusing public policy dollars on prevention rather than remediation, we call for much earlier educational programs than currently conceived. Second, our approach has parents at the center of the education production function rather than at its periphery. Third, we advocate attacking the macro education problem using a public health methodology, rather than focusing on piecemeal advances.
    Date: 2017

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