nep-pke New Economics Papers
on Post Keynesian Economics
Issue of 2020‒03‒02
four papers chosen by
Karl Petrick
Western New England University

  1. The Marginalization of Absolute and Relative Income Hypotheses of Consumption and the Role of Fiscal Policy By Drakopoulos, Stavros A.
  2. Liquidity preference in the Walrasian framework By Icefield, William
  3. Social Market Economy as an Alternative to the Washington Consensus in the Western Balkans By Matoshi, Ruzhdi; Mulaj, Isa
  4. Inequality as a Source of Recessions and Poverty By De Koning, Kees

  1. By: Drakopoulos, Stavros A.
    Abstract: In Keynes’ consumption theory absolute income is the major determinant of consumption, and the marginal propensity to consume determines the magnitudes of fiscal multipliers. Keynes employed a largely psychological analysis of consumption, rejecting the model of utility maximizing consumer. J. Duesenberry extended and improved Keynes’ approach by also emphasizing the role of psychological and social factors on consumption decisions (the relative income hypothesis). Similar conclusions regarding the role of income on consumption, and therefore support for Keynesian policies, are reached by Duesenberry’s analysis. The life-cycle hypothesis by Modigliani and Brumberg (1954), and the permanent income hypothesis by Friedman (1957), emerged as the two main alternatives to Keynes’ and Duesenberry’s approaches. Modern orthodox consumption theories are extensions of these two theories in a rational expectations framework. By employing the concept of forward looking, optimizing agents, current or relative income plays a minimal role in the life-cycle and permanent income hypotheses, and an even lesser role in contemporary orthodox consumption theories. Consequently, fiscal policy has a negligible effect on output and employment. The paper argues that Keynes and Duesenberry’s approaches were marginalized not because of their empirical or theoretical shortcomings, but because of emphasizing the psychological and social influences on consumption patterns, and because of not employing the intertemporal utility maximizing framework. The clear implication of the discussion is that the marginalization of absolute and relative income hypotheses was due to the dominance of a specific methodological framework that did not favour such approaches.
    Keywords: Consumption Function; Keynes; Duesenberry; Economic Methodology
    JEL: B20 B40 E21 E62
    Date: 2020–02
  2. By: Icefield, William
    Abstract: John Hicks argued that liquidity preference theory and loanable funds theory are equivalent, because in general equilibrium, Walras law dictates that one (for example, money) market is redundant when other markets (bond, commodities) are in equilibrium. While there are many other well-known criticisms of this point, I take a route that is rarely invoked - that liquidity preference can encode agent's reactions against risk of disequilibrium in a general equilibrium model. In such a case, money market may be in equilibrium, especially due to endogenous money, while other markets are in disequilibrium. In such a case, liquidity preference theory - or theory of money demand - determines rate of interest, as John Maynard Keynes asserted in General Theory, instead of loanable funds theory.
    Keywords: liquidity preference; loanable funds theory; disequilibrium; general equilibrium; Keynes; Walras law
    JEL: B22 B41 D59 E12 E20 E43
    Date: 2020–01–10
  3. By: Matoshi, Ruzhdi; Mulaj, Isa
    Abstract: Nearly three decades after the beginning of transition from communism to democracy and open market economy in Central and Eastern Europe (CEE), the Washington Consensus in general received the mark as a failure. While the experience from the CEE apart from common results showed considerable variations, the package of reforms is questioned even in the long-term perspective, especially for producing high social costs. Recent mass emigrations from the Western Balkans due to poor economic conditions and from the Middle East, have brought to attention the credibility of exporting or imposing the American type of democracy, and with it, the Washington Consensus as a model of economic transformation and development. But is there an alternative? It already existed even before the systemic changes in CEE began, and can be more preferable even now to the countries that have to undergo a considerable economic transformation. That is the social market economy, which still can be applied in some countries that have lagged behind in transition. This paper explores the perspective of introducing and implementing such a model in the Western Balkan countries, with a reference to the role by the state, taxes, income distribution, and business development.
    Keywords: Washington Consensus, Social Market Economy, Western Balkans, economic reforms
    JEL: B41 F02 P16 P51
    Date: 2019–12
  4. By: De Koning, Kees
    Abstract: This paper will focus on the relationship between mortgages and income developments in the U.S. Individual household’s asset values and liabilities obligations are often combined; for instance in home mortgages. The two main sources of savings, built up over a lifetime, are pension savings and the net worth embedded in one’s own home. Pension savings are normally deducted from annual income levels and transferred to specialist collective pension funds or insurance companies; an instant cash transfer. Mortgage borrowings are different in that future income levels are committed in meeting the payment obligations. The U.S. financial crisis of 2007-2008 was a home mortgage crisis. From 2004, some irresponsible lenders enticed many buyers to acquire homes in the U.S., of which a number of homes were bought for speculative reasons. In the U.K., the main reason of increasing house prices, above average income growth levels, is that house-building levels have lagged behind population growth levels for at least the last ten years. About only 160,000 homes were built per annum, while the population growth required between 230,000 and 300,000 homes annually. In the U.S., during the period 2004-2008, the financial sector made a huge collective mistake in assessing what was the appropriate individual mortgage level. The buyers over this period -many of them lower income households- were confronted with large numbers of repossessions after 2008. Heavy job losses occurred. Where economic theories seem to fail is when liabilities, like a home mortgage, can at the same time represent an asset with an embedded value in a home. Many households in both the U.S. and the U.K. were and are “displaced”, either by repossessions or by the inability to purchase a home. There exists, as yet, no government institution in either country that is able to replace bank funding, when income levels drop in a recession. High unemployment and falling wage levels reflect recessions. The key is to stabilize mortgage expenditure levels as a percentage of incomes over long periods of time. Banks cannot operate such products; only a government institution can do so. Why and how such a system can work in the U.S. is explained in this paper.
    Keywords: U.S. mortgages;home mortgage crisis 2008; tenants or homeowners?; different mortgage repayment method; U.S. median home prices; recession and repossessions; Mortgage Debt Stabilisation Fund(MDSF)
    JEL: D12 D14 E21 E24 E5 E58
    Date: 2020–02–17

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