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on Post Keynesian Economics |
| By: | Greg Philip Hannsgen (Greg Hannsgen's Economics Blog (US)) |
| Abstract: | This paper proposes a formalization of Hyman P. Minsky’s theory of financial instability. The model includes private-sector borrowing, capacity utilization, and the stock of private-sector debt. The model is based on self-reinforcing borrowing and output dynamics that repeatedly come to a sudden stop, with discontinuous downward jumps in the three variables. The paper treats as endogenous the instantaneous probability of a jump and the size distribution of jump vectors. Formally, the model comprises three ordinary differential equations and a compound Poisson process, with jumps drawn from a heavy-tailed stable distribution. The paper shows it can be stated in three equations in the jump differentials and the usual differentials. A section sketches a nonlinear mechanism that can bound the system. The paper analyzes the dynamics of a simplified version of the main model and a more-SFC model with feedbacks from debt to borrowing and capacity utilization via debt-service effects. The paper reports (1) eigenvalues for the linear parts of both the simplified analytical model and a numerical example of the more-SFC model, (2) a phase diagram for the analytical model, and, (3) analytical stability conditions for the more-SFC model. The model replicates the upward instability and abrupt crises of Minsky’s theory. |
| Keywords: | Minsky model, paradox of debt, Poisson process, financial crisis, dynamical macroeconomic model, Hyman P. Minsky, stable distribution, stock-flow consistency, theory of financial instability, dynamical systems, cádlág process, John Maynard Keynes |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:pke:wpaper:pkwp2102&r=all |
| By: | Joana David Avritzer (Department of Economics, Connecticut College and IRID-UFRJ) |
| Abstract: | This paper discusses the financial sustainability of demand-led growth models. We assume a supermultiplier growth model in which household consumption is the autonomous component of demand that drives growth and discuss the financial sustainability of such dynamics of growth from the perspective of the working households. We show that for positive rates of growth the model converges to an equilibrium where worker households are accumulating debt and not wealth. We also show that when the economy is growing at a rate that is positive, and between 2% and 4.4%, the dynamics of the model also implies that households will not be able to service their debt at the point of full long run equilibrium. We then conclude that this household debt-financed consumption pattern of economic growth generates an internal dynamic that leads to financial instability. |
| Keywords: | Household debt dynamics, debt-financed consumption, growth and financial fragility |
| JEL: | E11 E12 E21 O41 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:new:wpaper:2106&r=all |
| By: | Peter Flaschel; Giorgos Galanis; Daniele Tavani; Roberto Veneziani |
| Abstract: | This paper studies the interaction between epidemiological dynamics and the dynamics of economic activity in a demand-driven model in the structuralist/post-Keynesian tradition. On the one hand, rising aggregate demand increases the contact rate and therefore the probability of exposure to a virus. On the other hand, rising infection lowers aggregate demand because of reduced household spending. The resulting framework is well-suited for policy analysis through numerical exercises. We show that, first, laissez-faire gives rise to sharp fluctuations in demand and infections before herd immunity is achieved. Second, absent any restrictions on economic activity, physical distancing measures have rather limited mitigating effects. Third, lockdowns are effective, especially at reducing death rates while buying time before a vaccine is available, at the cost of a slightly more pronounced downturn in economic activity compared with alternative policies. This casts some doubt on the so-called “lives versus livelihood” policy trade-off. However, we also highlight the importance of policies aimed at mitigating the effects of the epidemic on workers’ income. |
| Keywords: | pandemic, aggregate demand, distribution, public policy |
| JEL: | E12 E25 E60 H00 I10 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:pke:wpaper:pkwp2101&r=all |
| By: | Joshua Weitz (Brown University); William Lazonick (University of Massachusetts Lowell); Philip Moss (University of Massachusetts Lowell) |
| Abstract: | As the Covid-19 pandemic takes its disproportionate toll on African Americans, the historical perspective in this working paper provides insight into the socioeconomic conditions under which President-elect Joe Biden’s campaign promise to “build back better” might actually begin to deliver the equal employment opportunity that was promised by Title VII of the Civil Rights Act of 1964. Far from becoming the Great Society that President Lyndon Johnson promised, the United States has devolved into a greedy society in which economic inequality has run rampant, leaving most African Americans behind. In this installment of our 'Fifty Years After' project, we sketch a long-term historical perspective on the Black employment experience from the last decades of the nineteenth century into the 1970s. We follow the transition from the cotton economy of the post-slavery South to the migration that accelerated during World War I as large numbers of Blacks sought employment in mass-production industries in Northern cities such as Detroit, Pittsburgh, and Chicago. For the interwar decades, we focus in particular on the Black employment experience in the Detroit automobile industry. During World War II, especially under pressure from President Roosevelt’s Fair Employment Practices Committee, Blacks experienced tangible upward employment mobility, only to see much of it disappear with demobilization. In the 1960s and into the 1970s, however, supported by the Civil Rights Act and the Equal Employment Opportunity Commission, Blacks made significant advances in employment opportunity, especially by moving up the blue-collar occupational hierarchy into semiskilled and skilled unionized jobs. These employment gains for Blacks occurred within a specific historical context that included a) strong demand for blue-collar and clerical labor in the U.S. mass-production industries, which still dominated in global competition; b) the unquestioned employment norm within major U.S. business corporations of a career with one company, supported at the blue-collar level by mass-production unions that had become accepted institutions in the U.S. business system; c) the upward intergenerational mobility of white households from blue-collar employment requiring no more than a high-school education to white-collar employment requiring a higher education, creating space for Blacks to fill the blue-collar void; and d) a relative absence of an influx of immigrants as labor-market competition to Black employment. As we will document in the remaining papers in this series, from the 1980s these conditions changed dramatically, resulting in erosion of the blue-collar gains that Blacks had achieved in the 1960s and 1970s as the Great Society promise of equal employment opportunity for all Americans disappeared. |
| Keywords: | African American, employment relations, equal employment opportunity, unions, blue-collar, employment mobility, The Great Migration, New Deal, government employment |
| JEL: | D2 D3 G3 J0 L2 L6 N8 O3 P1 |
| Date: | 2021–01–02 |
| URL: | http://d.repec.org/n?u=RePEc:thk:wpaper:inetwp143&r=all |
| By: | Roman Frydman (Department of Economics, New York University); Morten Nyboe Tabor (Institute for New Economic Thinking (INET)) |
| Abstract: | We propose a novel interpretation and formalization of Kahneman and Tversky's findings in the Linda experiment which implies that subjects are rational in the sense of Muth's hypothesis and provides an approach to specifying rational assessment of uncertainty in macroeconomic models. Behavioral-finance theorists have appealed to Kahneman and Tversky's findings as an empirical foundation for a general approach replacing rational expectations. We show that behavioral models' specifications of participants' irrational forecasts and predictable errors are incompatible with Kahneman and Tversky's findings. Our interpretation of Kahneman and Tversky's findings is supportive of Lucas's compelling critique of inconsistent macroeconomic models. |
| Keywords: | Uncertainty in Economic Models; Kahneman and Tversky's Experimental Findings; Behavioral Finance; Muth's Hypothesis; REH. |
| JEL: | B41 D80 D81 D91 E71 G41 |
| Date: | 2020–12–14 |
| URL: | http://d.repec.org/n?u=RePEc:thk:wpaper:inetwp142&r=all |
| By: | Walter Paternesi Meloni; Antonella Stirati |
| Abstract: | The drop in the labor share experienced in high-income countries in the last three to four decades testifies to a general divergence in the growth rates of labor productivity and average wages. In this respect, we first quantify the magnitude of this decoupling; second, we inquire into the factors that prevented wage growth from keeping pace with productivity. We endorse a ‘political economy’ approach – a line of inquiry which has been recently fueled and followed by the post-Keynesian literature – focusing on the effects on wage dynamics of some macroeconomic and institutional factors in a panel of 22 OECD economies for the post-1970 period. We find that, on average and over the cycle, only 50% of increased productivity went to workers. Our empirics indicate that labor market slack and the weakening of pro-labor institutions have acted as wage-squeezing factors; a negative effect is also found for globalization, specifically for trade openness and international capital mobility. Other aspects of the process of financialization, such as market capitalization and the dynamics of the real interest rate, seem not to have exerted a substantial impact on real wage growth. |
| Keywords: | political economy; income distribution; labor market institutions; labor market slack; globalization; financialization |
| JEL: | E25 J30 P16 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:pke:wpaper:pkwp2104&r=all |
| By: | Andrea Borsato |
| Abstract: | The paper extends the research started with Borsato (2020). I develop an agent-based, stock-flow consistent growth model to analyze the interplay between income distribution, innovation and productivity growth. Results still show that the mounting shrinkage of the labour share impacts negatively upon firm's innovative effort. Additionally, I question the neoclassical belief on the negative interest-elasticity of investments, since decreases in the rate of interest are not associated with increases in capital accumulation. Finally, the panel cointegration analysis based on US manufacturing industries corroborates the theoretical predictions for the period 1958 - 2011. |
| Keywords: | Secular Stagnation; Innovation dynamics; Income distribution; Agent-based SFC models; US manufacturing industries; Panel cointegration analysis. |
| Date: | 2021–03–31 |
| URL: | http://d.repec.org/n?u=RePEc:ssa:lemwps:2021/09&r=all |
| By: | José Luis Oreiro (None); Carmem Aparecida Feijó; Lionelo Franco Punzo; João Pedro Heringer Machado |
| Abstract: | The main objective of this paper is to discuss the concept of financialization in developing economies, arguing that the broad definition of financialization - understood as a growing role of motivations, markets and financial institutions in the operation of domestic and international economies – does not take into consideration important features of those economies, such as the hierarchy of currencies and the subordination to the principles of the so-called Washington Consensus. The latter imposed the adoption of a foreign savings-driven growth model, which mostly applied to Latin American countries. Hence, the financialization process in LDCs will be denominated peripherical financialization, since it is associated with dependence upon capital inflows from developed countries and with the reduction in the autonomy of their macroeconomic policies, even within flexible exchange rate regimes. Attraction of capital inflows to countries with a subordinate position in international financial markets, requires high interest rate differentials which have as side effect a trend to the overvaluation of real exchange rates. This creates a trap, high interest rates with an associated overvalued exchange rate. This trap reduces policy space, turning procyclical even fiscal policy. Moreover, the overvaluation of real exchange rate reduces price competitiveness of the manufacturing industry, becoming the main drive toward these countries’ premature deindustrialization. It will be shown that the macroeconomic performance of the Brazilian economy in the period 2003-2015 fits almost perfectly this model of peripherical financialization. |
| Keywords: | Financialization, Premature Deindustrialization, high interest rate-overvalued exchange rate trap |
| JEL: | O11 O14 O16 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:pke:wpaper:pkwp2103&r=all |
| By: | Muhammad Asali (International School of Economics at Tbilisi State University, Georgia; IZA, Bonn, Germany; SIPA, Columbia University, NY) |
| Abstract: | Racial, ethnic, and gender wage differentials, in particular those that are not explained by human capital differences between the respective groups, are fixtures of labor markets in almost all countries, developed and developing alike. Discriminatory wage differentials have detrimental social and economic effects. Gender differentials have larger distortional effects than other ethnic and racial differentials, and might call for different policies to address them. Measuring and documenting wage and employment differentials is an essential first step towards eliminating these differentials, which in turn is a very important economic as well as social policy goal akin to the Sustainable Development Goals set by the international community. |
| Keywords: | Gender wage gap, ethnic wage gap, discrimination in the labor market, economic growth, wage differentials, economics of transition, labor market tightness |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:tbs:wpaper:21-002&r=all |
| By: | Hanappi, Hardy |
| Abstract: | Money is real. Few other objects are perceived with comparable attention. At the same time its content, its mystery, evaporates behind its physical form. For every commodity producing human society money has been a steady companion since it emerged . Money forms, the way in which money took on its material cloth, have changed a lot. Money forms, the blood running through almost all social interaction, have been a mirror, a reflection of the essence of a society’s working. This paper is an attempt to look behind the veil that money forms as sign systems for social value produce. Thus two concepts are the starting point for the investigation: Sign systems and social value. Sign systems are directly coupled to the perceptions of human individuals. More precisely, they are connected to a society’s communication processes, including self-communication, i.e. personal thought. The mystic force of money forms, its resemblance to sexual attraction, derives from its root in direct and blunt relevance for each human individual in a fully developed commodity producing society. It can be redemption, it can be disgust. ‘Money speaks, wealth whispers’ expresses this interface between individual and society, distinguishes how the force of the money form is transmitted . The first part of the paper will develop a sketch of a theory of this interface, of sign systems as social systems. The second part will then focus on the concept ‘social value’. The perspective will be changed: What is beneficial from the point of view of the species will be the starting point for a discussion on how it materializes in certain money forms. It turns out that money forms follow an evolutionary trajectory , leading through alternating stages of contributing to the stabilization of a mode of production and then actively destroying it in revolutionary turning points – just to give birth to a new form of representation of social value . Finally, a third part shall provide ideas on the connection between the first two parts. How is desire and pain injected in personal perceptions by the interference of social value loaded money forms; and how are vice versa these passions and grievances shaping the potential constellation of social value regulating institutionalized forms in revolutionary times? In conclusion this part will also present some immediate consequences of the theoretical results on contemporary global economic policy. |
| Keywords: | Money, Sign Systems, Political Economy, Individual Perception |
| JEL: | B40 B51 E4 Z1 |
| Date: | 2021–01–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:105966&r=all |
| By: | Lance Taylor (New School for Social Research); Nelson H. Barbosa-Filho (Getulio Vargas Foundation, Brazil) |
| Abstract: | Recognizing that inflation of the value of output and its costs of production must be equal, we focus on a cost-based macroeconomic structuralist approach in contrast to micro-oriented monetarist analysis. For decades the import and profit shares of cost have risen, while the wage share has declined to around 50% with money wage increases lagging the sum of growth rates of prices and productivity. Conflicting claims to income are the underlying source of inflationary pressure. Inflation affects income (labor's spending power) and wealth. Monetarist theory around 1900 concentrated on the latter (Bryan and the ''Cross of Gold)'' leading to the standard Laffer curve. It was replaced by the Friedman-Phelps model which has incorrect dynamics (labor payments do not fall during an expansion, they go up). Samuelson and Solow introduced a version of the Phillips curve that violates macroeconomic accounting. Rational expectations replaced Friedman but was immediately falsified by output drops after the Volcker shock treatment around 1980. There followed a complicated transition from rational expectations to inflation targeting, anchored by economists' misunderstanding of the physical meaning of ergodicity and ontological blindness. It did not help that the real balance effect is irrelevant because money makes up a small part of wealth. Rather than issuing veiled threats of disaster if its policy advice is not followed, the Fed now announces inflation targets which it cannot meet. Contemporary structuralist theory suggests that conflicting income claims set the inflation rate. Firms can mark up costs but workers have latent bargaining power over the labor share that they can exercise. Import costs and policy repercussions complicate the picture, but a simple vector error correction model and visual analysis suggest that money wages would have to grow one percentage point faster than prices plus productivity for several years if the Fed is to meet a three percent inflation target. The results pose a Biden policy trilemma: (i) the only path toward a more egalitarian size distribution of income is through a rising labor share (money wage growth exceeds price plus productivity growth), (ii) which would provoke faster inflation with feedback to rising interest rates, and (iii) the resulting asset price deflation likely facing political resistance from Wall Street and affluent households. |
| Keywords: | Cost-based inflation, structuralist inflation, conflicting claims |
| JEL: | E31 E32 |
| Date: | 2021–01–20 |
| URL: | http://d.repec.org/n?u=RePEc:thk:wpaper:inetwp145&r=all |
| By: | ; Gauti B. Eggertsson; Giorgio E. Primiceri; Andrea Tambalotti |
| Abstract: | How will the U.S. economy emerge from the ongoing COVID-19 pandemic? Will it struggle to return to prior levels of employment and activity, or will it come roaring back as soon as vaccinations are widespread and Americans feel comfortable travelling and eating out? Part of the answer to these questions hinges on what will happen to the large amount of “excess savings” that U.S. households have accumulated since last March. According to most estimates, these savings are around $1.6 trillion and counting. Some economists have expressed the concern that, if a considerable fraction of these accumulated funds is spent as soon as the economy re-opens, the ensuing rush of demand might be destabilizing. This post argues that these savings are not that excessive, when considered against the backdrop of the unprecedented government interventions adopted over the past year in support of households and that they are unlikely to generate a surge in demand post-pandemic. |
| Keywords: | personal saving; government saving; marginal propensity to consume; COVID-19 |
| JEL: | D14 E2 |
| Date: | 2021–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:90631&r=all |