Frontiers of heterodox macroeconomics

Author: Philip Arestis

Professional affiliation: University of Cambridge, UK, and University of the Basque Country UPV/EHU, Spain

The focus of this contribution is on the New Consensus Macroeconomics theoretical framework in the case of an open economy. It is also focused on a more Keynesian macroeconomic model that accounts for a number of aspects, which are either omitted or not dealt with properly in the New Consensus Macroeconomics theoretical framework. This contribution outlines and explains briefly the main elements and way of thinking about the macroeconomy from the point of view of the New Consensus Macroeconomics theoretical and policy dimensions. There are many problems with this particular theoretical framework, which are highlighted and discussed. We then proceed to propose our macroeconomic model, which overcomes a great deal of the omissions and problems of the New Consensus Macroeconomics theoretical and policy framework. Our proposed model deals with an open economy that includes money, financial and government sectors, and accounts for distributional effects, financial stability and other economic policies.

Authors: Malcolm Sawyer

Professional affiliation: University of Leeds, UK

Seven propositions on budget deficits, public debt and money are set out, which should inform debates on fiscal policy. They are: (1) The central bank is able to provide finance for government expenditure. However, the focus should be on the issues of desirability of expenditure and its eventual funding. (2) Phrases such as ‘magic money tree’ are designed to confuse and mislead. (3) People’s QE would not provide any stimulus which is not obtainable from conventional fiscal policy and is anti-democratic. (4) The ‘golden rule’ of public finance suffers from the fallacy of treating government like a firm, comparable to the ‘government as household’ fallacy. (5) The target for budget position should be to secure full employment. (6) Public debt should be judged sustainable by reference to the level of debt which results from a budget position as in previous proposition. (7) The so-called structural budget does not provide guide for fiscal policy.

Author: Marc Lavoie

Professional affiliation: Université Paris 13 (CEPN), France

This paper focuses on the various themes that have been emphasized by post-Keynesian economists and that turned out to have been validated by the events that occurred during and after the subprime financial crisis. These include the financial instability hypothesis, banks as creators of money and not just financial intermediaries, the importance of credit aggregates versus monetary aggregates, the theory of endogenous money and the determination of interest rates by central banks, the defensive role of central banks, and the arguments brought forth by advocates of modern monetary theory (MMT). These themes will be related to current issues, such as the various unconventional policies that have proposed by central banks, such as credit easing, quantitative easing, yield curve control, negative interest rates, fixed exchange rates, capital adequacy ratios, high quality liquid asset ratios; they will also be related to proposals coming from various quarters, such as Positive money or quantitative easing for the people. Finally, it will be shown how post-Keynesian monetary theory is being incorporated into agent-based models that pertain to replace DSGE models.

Author: John McCombie and Marta Spreafico

Professional affiliation: Cambridge Centre for Economic and Public Policy, University of Cambridge, UK

The subprime crisis was not anticipated by the Federal Reserve (Bernanke and Greenspan) and by many other economic commentators and academics. Ultimately, the cause was the result of a long period of increasing financial deregulation. However, in the twenty-five years or so before the crash, there were marked warnings of the increasing fragility of the US financial system. These still have important implications for the present regulatory framework. These warnings include the US savings and loan crisis that showed that banking fraud was endemic at a time when regulatory control was weakened. The failure of Long-Term Capital Management, which, as Greenspan admitted, nearly brought down the US and world banking systems, pointed to the dangers of the reliance on complex computer algorithms, VaR assessment, and excessive leverage. This paper presents an overview of these, and other financial failures, and considers the implications for current and future macroeconomic and regulatory policy.

Author: Elisabeth Springler

Professional affiliation: University of Applied Sciences, BFI Vienna, Austria

Monetary policy became the major tool of economic policy to counteract the financial crisis of 2008/2009. The underlying macroeconomic consensus is that inflation rates of account 2% spur the economy to a stable rise of economic growth. While most central banks follow this guideline, which is well pronounced by New Keynesians and New Classical Macroeconomists, the impact for asset price bubbles, uneven wealth distribution and economic development are neglected. Macroeconomic stability is not an outcome of inflation targeting. The paper firstly revises the theoretical background of inflation targeting and explains its theoretical shortcomings from a Post Keynesian perspective. Secondly, the effects on wealth distribution and asset prices are discussed from a developed as well as emerging market point of view for the period of 2008/2009 to 2018. In the following an alternative view on monetary policy is presented, which critically discusses the necessary framework under which tools of inflation targeting might work to stabilize the economy and develops a respective policy mix.

Author: Emilio Carnevali, Matteo Deleidi, Riccardo Pariboni and Marco Veronese Passarella

Professional affiliation: University of Leeds, UK, Università Roma Tre, Italy, Università Roma Tre, Italy, University of Leeds, UK

The stock-flow consistent (SFC) approach to macroeconomic dynamic modelling was developed in the 2000s by Godley and Lavoie, who paved the way for the flourishing of SFC models. These models are based on four accounting principles (flow consistency, stock consistency, stock-flow consistency, and quadruple book-keeping), which allow inferring a set of accounting identities. The latter are then coupled with a set of equations defining the equilibrium conditions. Finally, difference (or differential) stochastic equations are added to define the behaviour of each macro-sector (or agent) of the economy. SFC models’ coefficients can be calibrated to obtain a theoretical baseline scenario and/or estimated through standard econometric techniques. Baseline results are then compared with a variety of ‘possible worlds’ or shocks. This theoretical and analytical flexibility is the reason SFC models are used by economists with different theoretical backgrounds. While SFC models are affected by some limitations, we believe that advantages outdo weaknesses.

Authors: Yannis Dafermos and Maria Nicolaides

Professional affiliation: University of Greenwich, UK, and University of the West of England, UK

Ecological sustainability has recently received a growing interest in post-Keynesian economics. This contribution analyses how environmental issues can be incorporated in post-Keynesian macroeconomic frameworks, paying attention to the role of climate change, the use of natural resources and the waste generation process. It then develops an ecological macroeconomic model, which is calibrated, estimated and validated using global data, in order to investigate the effects of different types of green fiscal policies on ecological sustainability, macroeconomic performance and financial stability. We focus on three fiscal policies: (i) carbon taxes, (ii) green public investment and (iii) their combination. Our simulation results show that green fiscal policies could significantly reduce the pace of climate change, restrict waste flows and limit climate-induced financial instability. Furthermore, our analysis provides a comparative evaluation of the short-run and long-run impact of carbon taxes and green public investment and illuminates the key factors that might influence their effectiveness.

Author: Salvador Perez-Moreno and Elena Bárcena-Martín

Professional affiliation: University of Malaga, Spain

In recent years, there is rising debate about the causes and consequences of secular stagnation in economically advanced countries. Some authors point out possible links between secular stagnation and income inequality, in both directions of causality. Taking as a reference point the theoretical literature on the relationship between economic growth and income distribution, this study examines potential effects of secular stagnation on income inequality in European countries, focusing particularly on the impacts of slow growth on income class structure (lower, middle and upper classes). We use data from ECHP and EU-SILC databases from 1994 to 2016 to compute the class structure with the aim of exploring the nexus between growth patterns and the trends in class structure in Europe, both before and after the global financial crisis. Some institutional and policy implications are discussed and recommendations are offered in order to reduce income inequality in the European countries in a context of lack of growth.