Monetary Policy and Financial Structure

This program explores the structure of markets and institutions operating in the financial sector. Research builds on the work of the late Distinguished Scholar Hyman P. Minsky—notably, his financial instability hypothesis—and explores the institutional, regulatory, and market arrangements that contribute to financial instability. Research also examines policies—such as changes to the regulatory structure and the development of new types of institutions—necessary to contain instability.

Recent research has concentrated on the structure of financial markets and institutions, with the aim of determining whether financial systems are still subject to the risk of failing. Issues explored include the extent to which domestic and global economic events (such as the crises in Asia and Latin America) coincide with the types of instabilities Minsky describes, and involve analyses of his policy recommendations for alleviating instability and other economic problems.

Other subjects covered include the distributional effects of monetary policy, central banking and structural issues related to the European Monetary Union, and the role of finance in small business investment.

Research Group: Dimitri B. Papadimitriou, Philip Arestis, James K. Galbraith, Jan Kregel, L. Randall Wray, Jörg Bibow, Steven M. Fazzari, Thomas I. Palley, Robert W. Parenteau, Willem Thorbecke, Éric Tymoigne

Program Publications
Policy Notes | June 2009 Some Simple Observations on the Reform of the International Monetary System The demand for reform of the financial system has focused on the dollar’s loss of international purchasing power (the Triffin dilemma) and its substitution by an international reserve currency that is not a national currency. The problem, however, is not the particular asset that serves as the international currency but rather the operation of the adjustment mechanism for dealing with global imbalances. [more] Policy Note 2009/8
Policy Notes | May 2009 “Enforced Indebtedness” and Capital Adequacy Requirements The capital adequacy requirements for banks, enshrined in international banking regulations, are based on a fallacy of composition—namely, the notion that an individual firm can choose the structure of its financial liabilities without affecting the financial liabilities of other firms. In practice, says author Jan Toporowski, capital adequacy regulations for banks are a way of forcing nonfinancial companies into debt. [more] Policy Note 2009/7
Working Papers | May 2009 New Consensus Macroeconomics: A Critical Appraisal This paper is concerned with the New Consensus Macroeconomics (NCM) in the case of an open economy. It outlines and explains briefly the main elements of and way of thinking about the macroeconomy from the standpoint of both its theoretical and its policy dimensions. [more] Working Paper No. 564
Working Papers | May 2009 Whither New Consensus Macroeconomics? In the face of the dramatic economic events of recent months and the inability of academics and policymakers to prevent them, the New Consensus Macroeconomics (NCM) model has been the subject of several criticisms. This paper considers one of the main criticisms lodged against the NCM model, namely, the absence of any essential role for the government and fiscal policy. [more] Working Paper No. 563
Policy Notes | May 2009 The “Unintended Consequences” Game A simple consideration of history tells us that each new piece of legislation contains loopholes that benefit a new class of entrepreneurs; some of these loopholes are small, but others are such that one could drive a bullion-laden truck through them. In this new Policy Note, Martin Shubik suggests creating a “war gaming group” to stress-test all major new legislation, with a first prize of $1 million to be awarded to the competing lawyer or team of lawyers who finds the most egregious loophole—a small amount relative to the potential savings. [more] Policy Note 2009/6
Public Policy Brief Highlights | April 2009 It’s That “Vision” Thing: Why the Bailouts Aren’t Working, and Why a New Financial System Is Needed The Federal Reserve’s response to the current financial crisis has been praised because it introduced a zero interest rate policy more rapidly than the Bank of Japan (during the Japanese crisis of the 1990s) and embraced massive “quantitative easing.” However, despite vast capital injections, the banking system is not lending in support of the private sector. [more] Public Policy Brief Highlights No. 100A, 2009
Policy Notes | April 2009 A Crisis in Coordination and Competence The ad hoc emergency approach to the current economic crisis has a great chance of wasting billions of dollars by mismatching skills and needs. According to Martin Shubik of Yale University, the current deepening recession needs a “quick fix” solution now, but a longer-fix solution must be put into place along with it. [more] Policy Note 2009/4
Press Releases | April 2009 Central Banks Should Widen Their Scope and Consider Wealth Targets to Stabilize the Economy during a Credit Crisis, New Study from the Levy Economics Institute Says [more] Press Release, April 7, 2009
Public Policy Briefs | April 2009 It’s That “Vision” Thing: Why the Bailouts Aren’t Working, and Why a New Financial System Is Needed The Federal Reserve’s response to the current financial crisis has been praised because it introduced a zero interest rate policy more rapidly than the Bank of Japan (during the Japanese crisis of the 1990s) and embraced massive “quantitative easing.” However, despite vast capital injections, the banking system is not lending in support of the private sector. [more] Public Policy Brief No. 100, 2009
Working Papers | April 2009 The Social and Economic Importance of Full Employment Unemployment was singled out by John Maynard Keynes as one of the principle faults of capitalism; the other is excessive inequality. Obviously, there is some link between these two faults: since most people living in capitalist economies must work for wages as a major source of their incomes, the inability to obtain a job means a lower income. [more] Working Paper No. 560
Public Policy Brief Highlights | April 2009 The Return of Big Government In the current global financial crisis, economists and policymakers have reembraced Big Government as a means of preventing the reoccurrence of a debt-deflation depression. The danger, however, is that policy may not downsize finance and replace money manager capitalism. [more] Public Policy Brief Highlights No. 99A, 2009
Working Papers | April 2009 Managing the Impact of Volatility in International Capital Markets in an Uncertain World International financial flows are the propagation mechanism for transmitting financial instability across borders; they are also the source of unsustainable external debt. Managing volatility thus requires institutions that promote domestic financial stability, ensure that domestic instability is contained, and guarantee that international institutions and rules of the game are not themselves a cause of volatility. [more] Working Paper No. 558
Strategic Analysis | April 2009 A “People First” Strategy: Credit Cannot Flow When There Are No Creditworthy Borrowers or Profitable Projects In 1930, John Maynard Keynes wrote: “The world has been slow to realise that we are living this year in the shadow of one of the greatest economic catastrophes of modern history.” The same holds true today: we are in the shadow of a global catastrophe, and we need to come to grips with the crisis—fast. [more] Strategic Analysis, April 2009
Policy Notes | March 2009 An Assessment of the Credit Crisis Solutions All of the various schemes that have been put forward to resolve the current credit crisis follow either the “business as usual” or the “good bank” model. The “business as usual” model takes different forms—insurance or guarantee of the assets or liabilities of the financial institutions, creation of a “bad bank” to buy toxic assets, temporary nationalization—and is the one favored by banks and pursued by government. [more] Policy Note 2009/3
Policy Notes | March 2009 What Role for Central Banks in View of the Current Crisis? Central banks have an aversion to bailing out speculators when asset bubbles burst, but ultimately, as custodians of the financial system, they have to do exactly that. Their actions are justified by the goal of protecting the economy from the bursting of bubbles; while their intention may be different, the result is the same: speculators, careless investors, and banks are bailed out. [more] Policy Note 2009/2
Press Releases | March 2009 Leading Economists and Policymakers to Discuss Financial Crisis at The Levy Economics Institute’s 18th Annual Hyman P. Minsky Conference, in New York City, April 16–17 [more] Press Release, March 21, 2009
Working Papers | March 2009 Background Considerations to a Regulation of the U.S. Financial System United States financial regulation has traditionally made functional and institutional regulation roughly equivalent. However, the gradual shift away from Glass-Steagall and the introduction of the Financial Modernization Act (FMA) generated a disorderly mix of functions and products across institutions, creating regulatory gaps that contributed to the recent crisis. [more] Working Paper No. 557
Public Policy Briefs | March 2009 The Return of Big Government: Policy Advice for President Obama In the current global financial crisis, economists and policymakers have reembraced Big Government as a means of preventing the reoccurrence of a debt-deflation depression. The danger, however, is that policy may not downsize finance and replace money manager capitalism. [more] Public Policy Brief No. 99, 2009
Press Releases | February 2009 Proposed Federal Accounting Guidelines Pose Unnecessary Threat to Social Security and Medicare, New Levy Study Says [more] Press Release, February 27, 2009
Public Policy Brief Highlights | February 2009 The Case Against Intergenerational Accounting: The Accounting Campaign Against Social Security and Medicare The Federal Accounting Standards Advisory Board (FASAB) has proposed subjecting the entire federal budget to “intergenerational accounting”—which purports to calculate the debt burden our generation will leave for future generations—and is soliciting comments on the recommendations of its two “exposure drafts.” The authors of this brief find that intergenerational accounting is a deeply flawed and unsound concept that should play no role in federal government budgeting, and that arguments based on this concept do not support a case for cutting Social Security or Medicare. [more] Public Policy Brief Highlights No. 98A, 2009
Public Policy Briefs | February 2009 The Case Against Intergenerational Accounting: The Accounting Campaign Against Social Security and Medicare The Federal Accounting Standards Advisory Board (FASAB) has proposed subjecting the entire federal budget to “intergenerational accounting”—which purports to calculate the debt burden our generation will leave for future generations—and is soliciting comments on the recommendations of its two “exposure drafts.” The authors of this brief find that intergenerational accounting is a deeply flawed and unsound concept that should play no role in federal government budgeting, and that arguments based on this concept do not support a case for cutting Social Security or Medicare. [more] Public Policy Brief No. 98, 2009
Public Policy Briefs | January 2009 After the Bust “Change” was the buzzword of the Obama campaign, in response to a political agenda precipitated by financial turmoil and a global economic crisis. According to Research Associate Thomas Palley, the neoliberal economic policy paradigm underlying that agenda must itself change if there is to be a successful policy response to the crisis. [more] Public Policy Brief No. 97, 2009
Working Papers | January 2009 Financial Stability: The Significance and Distinctiveness of Islamic Banking in Malaysia This paper explores the significance of Islamic banking in Malaysia for stability in the country’s economy as a whole. Neither conventional theory nor Islamic economics puts forward a systematic explanation of financial intermediation; consequently, neither is capable of identifying destabilizing elements in the system. [more] Working Paper No. 555
Working Papers | January 2009 Macroeconomic Imbalances in the United States and Their Impact on the International Financial System The argument put forward in this paper is twofold. First, the financial crisis of 2007–08 was made global by the current account deficit in the United States; and second, there is global dependence on the United States trade deficit as a means of maintaining liquidity in financial markets. [more] Working Paper No. 554
Public Policy Brief Highlights | January 2009 After the Bust “Change” was the buzzword of the Obama campaign, in response to a political agenda precipitated by financial turmoil and a global economic crisis. According to Research Associate Thomas Palley, the neoliberal economic policy paradigm underlying that agenda must itself change if there is to be a successful policy response to the crisis. [more] Public Policy Brief Highlights No. 97A, 2009
Working Papers | December 2008 Insuring Against Private Capital Flows Following an analysis of the forces behind the “global capital flows paradox” observed in the era of advancing financial globalization, this paper sets out to investigate the opportunity costs of self-insurance through precautionary reserve holdings. We reject the idea of reserves as low-cost protection against the vagaries of global finance. [more] Working Paper No. 553
Working Papers | November 2008 Excess Capital and Liquidity Management These notes present a new approach to corporate finance, one in which financing is not determined by prospective income streams but by financing opportunities, liquidity considerations, and prospective capital gains. This approach substantially modifies the traditional view of high interest rates as a discouragement to speculation; the Keynesian and Post-Keynesian theory of liquidity preference as the opportunity cost of investment; and the notion of the liquidity premium as a factor in determining the rate of interest on longer-term maturities. [more] Working Paper No. 549
Policy Notes | November 2008 Time to Bail Out: Alternatives to the Bush-Paulson Plan While serving as chairman of the Federal Reserve Board, Alan Greenspan advocated unsupervised securitization, subprime lending, option ARMs, credit-default swaps, and all manner of financial alchemy in the belief that markets “work” to reduce and spread risk, and to allocate it to those best able to assess and bear it—in his view, markets would stabilize in the absence of nasty government intervention. But as Greenspan now admits, he could never have imagined the outcome: a financial and economic crisis of biblical proportions. [more] Policy Note 2008/6
Working Papers | November 2008 On Democratizing Financial Turmoil The paper uses Minsky’s financial instability hypothesis as an analytical framework for understanding the subprime mortgage crisis and for introducing adequate reforms to restore economic stability. We argue that the subprime crisis has structural origins that extend far beyond the housing and financial markets. [more] Working Paper No. 548
Policy Notes | October 2008 Will the Paulson Bailout Produce the Basis for Another Minsky Moment? As the House Committee on Financial Services meets to hear the expert testimony of witnesses concerning the regulation of the financial system, the measures that have been introduced to support the system are laying the groundwork for a new domestic financial architecture. Hyman Minsky suggests that the basic principle behind any reformulation of the regulatory system should limit the size and activities of financial institutions, and should be dictated by the ability of supervisors, examiners, and regulators to understand the institutions’ operations. [more] Policy Note 2008/5
Working Papers | October 2008 Minsky and Economic Policy Recently, national newspapers all over the world have suggested that we should reread John Maynard Keynes, and that Hyman P. Minsky provides a valuable framework for understanding the world in which we live. [more] Working Paper No. 547
Working Papers | October 2008 Do the Innovations in a Monetary VAR Have Finite Variances? Since Christopher Sims’s “Macroeconomics and Reality” (1980), macroeconomists have used structural VARs, or vector autoregressions, for policy analysis. Constructing the impulse-response functions and variance decompositions that are central to this literature requires factoring the variance-covariance matrix of innovations from the VAR. [more] Working Paper No. 546
Public Policy Briefs | October 2008 The Commodities Market Bubble Money manager capitalism—characterized by highly leveraged funds seeking maximum returns in an environment that systematically underprices risk—has resulted in a series of boom-and-bust cycles in equities, real estate, and commodities. Because subsequent cycles have been increasingly damaging to the broader economy, we are now at the point where we are experiencing the most severe financial crisis since the Great Depression. [more] Public Policy Brief No. 96, 2008
Policy Notes | October 2008 A Simple Proposal to Resolve the Disruption of Counterparty Risk in Short-Term Credit Markets The impaired risk assessment caused by the collapse of mortgage-backed securities is the major problem threatening the stability of the American financial system, yet it is not clear that removing these assets from institutional balance sheets, as the government has proposed, will make it easier to assess counterparty risk in short-term credit markets. Resolving the disruption of counterparty risk should be the first objective of policy, argues Senior Scholar Jan Kregel, since these markets provide basic liquidity support for institutions operating in the broader financial markets. [more] Policy Note 2008/4
Working Papers | September 2008 Inflation Targeting in Brazil The monetary policy regime of inflation targeting (IT) has been adopted by a significant number of emerging economies. While the focus of this paper is on Brazil, which began inflation targeting in 1999, the authors also examine the experience of other countries, both for comparative purposes and for evidence of the extent of this “new” economic policy’s success. [more] Working Paper No. 544
Working Papers | September 2008 Macroeconomics Meets Hyman P. Minsky Expanding on an approach developed by financial economist Hyman Minsky, the authors present an alternative to the standard “efficient markets hypothesis”—the relevance of which Minsky vehemently denied. Minsky recognized that, in a modern capitalist economy with complex, expensive, and long-lived assets, the method used to finance asset positions is of critical importance, both for theory and for real-world outcomes—one reason his alternate approach has been embraced by Post Keynesian economists and Wall Street practitioners alike. [more] Working Paper No. 543
Public Policy Briefs | August 2008 Shaky Foundations: Policy Lessons from America's Historic Housing Crash A bursting asset bubble inevitably requires central bank action, usually when it is already too late and with adverse spillover effects. In this sense, the Federal Reserve and other central banks already target asset prices; yet, by taking aim at them only on the way down—as in the current housing and credit crisis—the “Big Banks” create a self-perpetuating cycle of perverse incentives and moral hazard that often gives rise to yet another round of bubbles. [more] Public Policy Brief No. 95, 2008
Policy Notes | August 2008 What's a Central Bank to Do? As homeowner equity continues to disappear, there is a growing consensus that losses on all mortgages will exceed $1 trillion, with financial losses spreading far beyond real estate. Mortgage rates are spiking and, more generally, interest rate spreads remain wide, as financial players shun private debt in the rush to safe Treasury securities. [more] Policy Note 2008/3
Public Policy Brief Highlights | August 2008 Shaky Foundations Treasury Secretary Henry Paulson’s latest plan for tackling the housing-centered credit crisis involves giving the Federal Reserve vast new authority to regulate investment banks, not just depository institutions. However, news analyst Pedro Nicolaci da Costa argues that attitude changes among regulators will be even more important than shifts in mandate in ensuring that regulators like the Fed do their jobs properly. [more] Public Policy Brief Highlights No. 95A, 2008
Policy Notes | June 2008 Securitization “At the annual banking structure and competition conference of the Federal Reserve Bank of Chicago in May 1987, the buzzword heard in the corridors and used by many of the speakers was ‘that which can be securitized, will be securitized.’” So notes Hyman Minsky in a prescient memo on the nature, and the implications, of securitization, written 20 years before an explosion in the securitization of home mortgages helped create the current financial crisis. [more] Policy Note 2008/2
Policy Notes | May 2008 The Collapse of Monetarism and the Irrelevance of the New Monetary Consensus What in monetarism, and what in the "new monetary consensus," led to a correct or even remotely relevant anticipation of the extraordinary financial crisis that broke over the housing sector, the banking system, and the world economy in August 2007 and that has continued to preoccupy central bankers ever since? Absolutely nothing, says Senior Scholar James K. Galbraith. [more] Policy Note 2008/1
Book Series | May 2008 Stabilizing an Unstable Economy The late American economist and Distinguished Scholar Hyman P. Minsky first wrote about the inherent instability of financial markets in the late 1950s, and accurately predicted a transformation of the economy that would not become apparent for nearly a generation. [more] Book Series, May 2008
Book Series | May 2008 John Maynard Keynes This reissue of Hyman P. Minsky's classic book offers a timely reconsideration of the work of economics icon John Maynard Keynes. [more] Book Series, May 2008
Working Papers | April 2008 The Discrete Charm of the Washington Consensus Over the last two centuries in Latin America a Washington Consensus development strategy based on integration in the global trading system has dominated both domestic demand management and industrialization “from within.” This paper assesses the performance of each from the point of view of the impact of external conditions, and the validity of its underlying theory. [more] Working Paper No. 533
Working Papers | April 2008 Old Wine in a New Bottle: Subprime Mortgage Crisis—Causes and Consequences This paper seeks to explain the causes and consequences of the United States subprime mortgage crisis, and how this crisis has led to a generalized credit crunch in other financial sectors that ultimately affects the real economy. It postulates that, despite the recent financial innovations, the financial strategies—leveraging and financial risk mismatching—that led to the present crisis are similar to those found in the United States savings-and-loan debacle of the late 1980s and in the Asian financial crisis of the late 1990s. [more] Working Paper No. 532
Working Papers | April 2008 The International Monetary (Non-)Order and the “Global Capital Flows Paradox” This paper sets out to investigate the forces behind the so-called “global capital flows paradox” and related “dollar glut” observed in the era of advancing financial globalization. The supposed paradox is that the developing world has increasingly come to pursue policies that result in current account surpluses and thus net capital exports—destined primarily for the capital-rich United States. [more] Working Paper No. 531
Working Papers | April 2008 Changes in the U.S. Financial System and the Subprime Crisis This paper traces the evolution of housing finance in the United States from the deregulation of the financial system in the 1970s to the breakdown of the savings and loan industry and the development of GSE (government-sponsored enterprise) securitization and the private financial system. The paper provides a background to the forces that have produced the present system of residential housing finance, the reasons for the current crisis in mortgage financing, and the impact of the crisis on the overall financial system. [more] Working Paper No. 530
Public Policy Brief Highlights | April 2008 Financial Markets Meltdown: What Can We Learn from Minsky? According to Senior Scholar L. Randall Wray, the current crisis in financial markets can be traced back to securitization (the “originate and distribute” model), leverage, the demise of relationship-based banking, and a dizzying array of extremely complex instruments that—quite literally—only a handful understand. [more] Public Policy Brief Highlights No. 94A, 2008
Public Policy Briefs | April 2008 Financial Markets Meltdown In this new Public Policy Brief, Senior Scholar L. Randall Wray explains today’s complex and fragile financial system, and how the seeds of crisis were sown by lax oversight, deregulation, and risky innovations such as securitization. [more] Public Policy Brief No. 94, 2008
Public Policy Brief Highlights | January 2008 Minsky’s Cushions of Safety: Systemic Risk and the Crisis in the U.S. Subprime Mortgage Market In this brief, Senior Scholar Jan Kregel reviews Hyman P. Minsky’s concept of financial fragility—in short, that the structure of a capitalist economy becomes more fragile over a period of prosperity—and concludes that the current crisis is in fact the result of insufficient margins of safety based on how creditworthiness is assessed in the new “originate and distribute” financial system. [more] Public Policy Brief Highlights No. 93A, 2008
Public Policy Briefs | January 2008 Minsky’s Cushions of Safety In this brief, Senior Scholar Jan Kregel reviews Hyman P. Minsky’s concept of financial fragility—in short, that the structure of a capitalist economy becomes more fragile over a period of prosperity—and concludes that the current crisis is in fact the result of insufficient margins of safety based on how creditworthiness is assessed in the new “originate and distribute” financial system. [more] Public Policy Brief No. 93, 2008
Working Papers | December 2007 Financialization Financialization is a process whereby financial markets, financial institutions, and financial elites gain greater influence over economic policy and economic outcomes. Financialization transforms the functioning of economic systems at both the macro and micro levels. [more] Working Paper No. 525
Working Papers | December 2007 The Natural Instability of Financial Markets This paper contrasts the economic incentives implicit in the Keynes-Minsky approach to inherent financial market instability with the incentives behind the traditional equilibrium approach leading to market stability to provide a framework for analyzing the stability induced by the recent changes in bank regulation to modernize financial services and the evolution of financial engineering innovations in the U.S. [more] Working Paper No. 523
Working Papers | December 2007 Lessons from the Subprime Meltdown This paper uses Hyman P. Minsky’s approach to analyze the current international financial crisis, which was initiated by problems in the American real estate market. [more] Working Paper No. 522
Working Papers | November 2007 Nurkse and the Role of Finance in Development Economics Ragnar Nurkse was one the pioneers in development economics. This paper celebrates the hundredth anniversary of his birth with a critical retrospective of his overall contribution to the field, in particular his views on the importance of employment policy in mobilizing domestic resources and the difficulties surrounding the use of external resources to finance development. [more] Working Paper No. 520
Public Policy Briefs | October 2007 The U.S. Credit Crunch of 2007 It is now clear that most economists underestimated the widening economic impact of the credit crunch that has shaken American financial markets since at least mid-July. A credit crunch is an economic condition in which loans and investment capital are difficult to obtain; in such a period, banks and other lenders become wary of issuing loans, so the price of borrowing rises, often to the point where deals simply do not get done. [more] Public Policy Brief No. 92, 2007
Working Papers | September 2007 Endogenous Money While the mainstream long argued that the central bank could use quantitative constraints as a means to controlling the private creation of money, most economists now recognize that the central bank can only set the overnight interest rate—which has only an indirect impact on the quantity of reserves and the quantity of privately created money. Indeed, in order to hit the overnight rate target, the central bank must accommodate the demand for reserves, draining the excess or supplying reserves when the system is short. [more] Working Paper No. 512
Working Papers | August 2007 The Fed’s Real Reaction Function Using a VAR model of the American economy from 1984 to 2003, we find that, contrary to official claims, the Federal Reserve does not target inflation or react to “inflation signals.” Rather, the Fed reacts to the very “real” signal sent by unemployment, in a way that suggests that a baseless fear of full employment is a principal force behind monetary policy. [more] Working Paper No. 511
Working Papers | August 2007 A Post-Keynesian View of Central Bank Independence, Policy Targets, and the Rules-versus-Discretion Debate This paper addresses three issues surrounding monetary policy formation: policy independence, choice of operating targets, and rules versus discretion. According to the New Monetary Consensus, the central bank needs policy independence to build credibility; the operating target is the overnight interbank lending rate, and the ultimate goal is price stability. [more] Working Paper No. 510
Public Policy Briefs | July 2007 Cracks in the Foundations of Growth With economic growth having cooled to less than 1 percent in the first quarter of 2007, the economy can ill afford a slump in consumption by the American household. But it now appears that the household sector could finally give in to the pressures of rising gasoline prices, a weakening home market, and a large debt burden. [more] Public Policy Brief No. 90, 2007
Public Policy Brief Highlights | July 2007 Cracks in the Foundations of Growth With economic growth having cooled to less than 1 percent in the first quarter of 2007, the economy can ill afford a slump in consumption by the American household. But it now appears that the household sector could finally give in to the pressures of rising gasoline prices, a weakening home market, and a large debt burden. [more] Public Policy Brief Highlights No. 90A, 2007
Public Policy Briefs | January 2007 The Economics of Outsourcing According to Research Associate Thomas I. Palley, global outsourcing represents a new economic challenge that calls for a new set of institutions. [more] Public Policy Brief No. 89, 2007
Working Papers | January 2007 Fixed and Flexible Exchange Rates and Currency Sovereignty This paper provides an analysis of Keynes’s original “Bancor” proposal as well as more recent proposals for fixed exchange rates. We argue that these schemes fail to pay due attention to the importance of capital movements in today’s economy, and that they implicitly adopt an unsatisfactory notion of money as a mere medium of exchange. [more] Working Paper No. 489
Public Policy Brief Highlights | January 2007 The Economics of Outsourcing According to Research Associate Thomas I. Palley, global outsourcing represents a new economic challenge that calls for a new set of institutions. [more] Public Policy Brief Highlights No. 89A, 2007
Working Papers | December 2006 The Balance Sheet Approach to Financial Crises in Emerging Markets This paper contrasts the conventional balance sheet approach to the analysis of economic disturbances in emerging markets with the alternative balance sheet approach that applies and extends Minsky’s Financial Instability Hypothesis to (open) emerging market economies. Earlier balance sheet studies are found to be flawed because of a failure to disaggregate firms’ balance sheets. [more] Working Paper No. 485
Working Papers | December 2006 Expensive Living Apart from its widely accepted direct advantages, the introduction of the euro has been accompanied by a surge of inflation in most of the EU member states. At the same time, wages–in part, wages of the unskilled–are relatively losing ground, while the purchasing power of the average European seems also to have weakened since the introduction of the single currency. [more] Working Paper No. 484
Working Papers | November 2006 Fisher’s Theory of Interest Rates and the Notion of “Real” By providing five different criticisms of the notion of real rate, the paper argues that this concept, as Fisher defined it or as a definition, is not relevant to economic analysis. Following Keynes and other post-Keynesians, the article shows that the notion of real rate is microeconomically and macroeconomically unfounded. [more] Working Paper No. 483
Working Papers | November 2006 An Inquiry into the Nature of Money The paper argues that the functional approach of money does not provide a good method to study monetary history and monetary mechanisms. An alternative approach is developed and illustrated by analyzing the role of tobacco and cowry shells in past monetary systems. [more] Working Paper No. 481
Working Papers | November 2006 On Lower-bound Traps We present a simple theoretical framework that integrates the notion of the natural or neutral interest rate, liquidity preference theory, and the monetary policy practice by modern central banks. We claim that this theory explains the conditions under which an economy will experience an aggregate demand deficiency problem within a modern institutional setting. [more] Working Paper No. 478
Working Papers | October 2006 The “New Consensus” View of Monetary Policy One of the greatest achievements of the modern “new consensus” view in macroeconomics is the assertion of a nonquantity theoretic approach to monetary policy. Leading theorists and practitioners of this view have indeed rejected the quantity theory of money, and defended a return to the old Wicksellian idea of eliminating high levels of inflation by adjusting nominal interest rates to changes in the price level. [more] Working Paper No. 476
Working Papers | July 2006 How the Maastricht Regime Fosters Divergence As Well As Fragility This paper investigates the phenomenon of persistent macroeconomic divergence that has occurred across the eurozone in recent years. Optimal currency area theory would point toward asymmetric shocks and structural factors as the foremost candidate causes. [more] Working Paper No. 460
Working Papers | July 2006 Banking, Finance, and Money This paper briefly summarizes the orthodox approach to banking, finance, and money, and then points the way toward an alternative based on socioeconomics. It argues that the alternative approach is better fitted to not only the historical record, but also sheds more light on the nature of money in modern economies. [more] Working Paper No. 459
Working Papers | June 2006 Why Central Banks (and Money) “Rule the Roost” Some have argued that a significant decrease in the demand for money, due to financial innovations, could imply that central banks are unable to implement effective monetary policies. This paper argues that central banks are always able to influence the economy’s interest rates, because their liability is the economy’s unit of account. [more] Working Paper No. 457
Working Papers | June 2006 Asset Prices, Financial Fragility, and Central Banking The paper reviews the current literature on the subject in both the New Consensus and Post Keynesian frameworks. It shows that both approaches give to central banks a wrong goal (inflation, distribution, curbing speculation, and so on) and a wrong instrument (interest rate rule). [more] Working Paper No. 456
Working Papers | June 2006 The Minskyan System, Part III This is the last part of a three-part analysis of the Minskyan Framework. The paper presents a model that studies some of the features presented in Parts I and II. [more] Working Paper No. 455
Public Policy Briefs | June 2006 The Fallacy of the Revised Bretton Woods Hypothesis The stability of the international financial system is in doubt. Analysis of the system has focused mainly on the sustainability of financing the American trade deficit and has failed to understand the microeconomics of transactions within the system. [more] Public Policy Brief No. 85, 2006
Working Papers | June 2006 The Minskyan System, Part II This is the second part of a three-part analysis of the Minskyan framework. It studies in detail the dynamics at the root of the endogenous financial weakening of capitalist economic systems. [more] Working Paper No. 453
Public Policy Brief Highlights | June 2006 The Fallacy of the Revised Bretton Woods Hypothesis The stability of the international financial system is in doubt. Analysis of the system has focused mainly on the sustainability of financing the American trade deficit and has failed to understand the microeconomics of transactions within the system. [more] Public Policy Brief Highlights No. 85A, 2006
Public Policy Briefs | May 2006 Can Basel II Enhance Financial Stability? Even as the United States enjoys an economic expansion, there is an undercurrent of concern among economic analysts who follow financial markets. Some feel that the expansion of the credit derivatives markets poses the threat of a crisis similar to the Long-Term Capital Management debacle of 1998. [more] Public Policy Brief No. 84, 2006
Public Policy Brief Highlights | May 2006 Can Basel II Enhance Financial Stability? Even as the United States enjoys an economic expansion, there is an undercurrent of concern among economic analysts who follow financial markets. Some feel that the expansion of the credit derivatives markets poses the threat of a crisis similar to the Long-Term Capital Management debacle of 1998. [more] Public Policy Brief Highlights No. 84A, 2006
Policy Notes | January 2006 Credit Derivatives and Financial Fragility On September 15, the Federal Reserve convened 14 large credit derivatives–dealer banks to an unusual meeting. The last such meeting occurred on September 16, 1998, in secret. [more] Policy Note 2006/1
Public Policy Briefs | January 2006 Reforming Deposit Insurance The Federal Deposit Insurance Corporation (FDIC) currently insures bank deposit balances up to $100,000. According to some observers, statutory protection creates moral hazard problems for insurers because it allows banks to engage in risky activities. [more] Public Policy Brief No. 83, 2006
Working Papers | November 2005 Monetary Policy Strategies of the European Central Bank and the Federal Reserve Bank of the U.S. In the debate on monetary policy strategies on both sides of the Atlantic, it is now almost a commonplace to contrast the Fed and the ECB by pointing out the former’s flexibility and capacity to adjust rigidity, and the latter’s extreme caution and its obsession with low inflation. In looking at the foundations of the two banks’ strategies, however, we do not find differences that can provide a simple explanation for their divergent behavior, nor for the very different economic performance in the United States and in Euroland in recent years. [more] Working Paper No. 431
Working Papers | November 2005 Are Long-run Price Stability and Short-run Output Stabilization All That Monetary Policy Can Aim For? A central tenet of the so-called "new consensus" view in macroeconomics is that there is no long-run trade-off between inflation and unemployment. The main policy implication of this principle is that all monetary policy can aim for is (modest) short-run output stabilization and long-run price stability—i. [more] Working Paper No. 430
Working Papers | November 2005 Bad for Euroland, Worse for Germany This paper assesses the contribution of the European Central Bank (ECB) to Germany’s ongoing economic crisis, a vicious circle of decline in which the country has become stuck since the early 1990s. It is argued that the ECB continues the Bundesbank tradition of asymmetric policymaking: the bank is quick to hike, but slow to ease. [more] Working Paper No. 429
Working Papers | August 2005 Europe's Quest for Monetary Stability This paper provides an overview of central banking arrangements in those European countries that have adopted the euro. Issues addressed include the structure of the “Eurosystem” and its central banking functions, the kind of independence granted to the system and the role of monetary policy that central bankers have adopted for themselves, the “two-pillar policy framework,” operating procedures, and actual performance since the euro’s launch in 1999. [more] Working Paper No. 428
Working Papers | August 2005 Liquidity Preference Theory Revisited This paper revisits Keynes’s liquidity preference theory as it evolved from the Treatise on Money to The General Theory and after, with a view of assessing the theory’s ongoing relevance and applicability to issues of both monetary theory and policy. Contrary to the neoclassical “special case” interpretation, Keynes considered his liquidity preference theory of interest as a replacement for flawed saving or loanable funds theories of interest emphasizing the real forces of productivity and thrift. [more] Working Paper No. 427
Working Papers | July 2005 Refocusing the ECB on Output Stabilization and Growth through Inflation Targeting? Challenging the conventional wisdom that structural problems are to blame for the euro area’s protracted domestic demand stagnation, this paper sets out to shed some fresh light on the role of the ECB in the ongoing EMU crisis. Contrary to the widely held interpretation of the ECB as an inflation targeter—and a rather soft one, too—it is argued that the key characteristic of the ECB is the pronounced asymmetry in its policy approach and mindset. [more] Working Paper No. 425
Working Papers | June 2005 Macroeconomics of Speculation Despite his emphasis on the speculative character of investment decisions, Minsky paid little attention to asset price speculation per se, ignoring asset price bubbles and their macroeconomic effects. That is perhaps because his views were formed during the era of financial regulation, when speculation “could do no harm as bubbles on a steady stream of enterprise. [more] Working Paper No. 424
Working Papers | May 2005 Is More Mobility Good? Firm Mobility and the Low Wage–Low Productivity Trap This paper explores the possibility that unregulated FDI flows are causally implicated in the decline in labor productivity growth in semi-industrialized economies. These effects are hypothesized to operate through the negative impact of firm mobility on worker bargaining power and thus affecting wages. [more] Working Paper No. 423
Working Papers | March 2005 FDIC-sponsored Self-Insured Depositors Insured depositors have no reason to care how their banks perform or how safe they are.  Only uninsured depositors have that incentive. [more] Working Paper No. 419
Public Policy Briefs | December 2004 The Fed and the New Monetary Consensus The most charitable interpretation of the Federal Reserve’s recent interest rate hikes is that they appear to have been premature. A convincing array of data on payrolls, employment-to-population ratios, and other labor market indicators show that the current recovery has not yet attained the degree of labor market tightness that was common in previous recoveries, and therefore that the threat of inflation is minimal. [more] Public Policy Brief No. 80, 2004
Public Policy Brief Highlights | December 2004 The Fed and the New Monetary Consensus The most charitable interpretation of the Federal Reserve’s recent interest rate hikes is that they appear to have been premature. A convincing array of data on payrolls, employment-to-population ratios, and other labor market indicators show that the current recovery has not yet attained the degree of labor market tightness that was common in previous recoveries, and therefore that the threat of inflation is minimal. [more] Public Policy Brief Highlights No. 80A, 2004
Working Papers | November 2004 Measuring Capacity Utilization in OECD Countries This paper derives measures of potential output and capacity utilization for a number of OECD countries, using a method based on the cointegration relation between output and the capital stock. The intuitive idea is that economic capacity (potential output) is the aspect of output that co-varies with the capital stock over the long run. [more] Working Paper No. 415
Working Papers | October 2004 The Transmission Mechanism of Monetary Policy Recently, many economists have credited the late-1990s economic boom in the United States for the easy money policies of the Federal Reserve. On the other hand, observers have noted that very low interest rates have had very little positive effect on the chronically weak Japanese economy. [more] Working Paper No. 412
Public Policy Brief Highlights | August 2004 The Case for Rate Hikes For a time, the Federal Open Market Committee (FOMC) seemed to have learned from the mistakes of the past. Instead of taking good economic performance as a sign of incipient inflation, Chairman Alan Greenspan kept interest rates relatively low in the late 1990s, even as unemployment plummeted. [more] Public Policy Brief Highlights No. 79A, 2004
Public Policy Briefs | August 2004 The Case for Rate Hikes For a time, the Federal Open Market Committee (FOMC) seemed to have learned from the mistakes of the past. Instead of taking good economic performance as a sign of incipient inflation, Chairman Alan Greenspan kept interest rates relatively low in the late 1990s, even as unemployment plummeted. [more] Public Policy Brief No. 79, 2004
Working Papers | July 2004 Financial Liberalization and Poverty Financial development and its effects on the economic development of a country has recently been one of the most prolific areas of research in the fields of development, finance, and international economics. So far, however, very little work has been done to analyze comprehensively the relationship between financial liberalization and poverty. [more] Working Paper No. 411
Working Papers | July 2004 Gibson's Paradox, Monetary Policy, and the Emergence of Cycles Many empirical studies have found that interest rate increases have a positive effect on the price level. This paper pursues an obvious, but neglected explanation: interest payments are a cost of production that is at least in part passed on to customers. [more] Working Paper No. 410
Working Papers | July 2004 Assessing the ECB's Performance since the Global Slowdown This paper assesses the ECB's performance, which the author finds to be seriously lacking but which is of paramount importance to understanding euroland's ongoing stagnation and fragility. A main finding is that the series of policy blunders which characterized the bank's conduct features a bias. [more] Working Paper No. 409
Working Papers | May 2004 Investigating the Intellectual Origins of Euroland's Macroeconomic Policy Regime This paper investigates the (re-)establishment of central banking in West Germany after 1945 and the history of the Bundesbank Act of 1957. The main focus is on the early emphasis on the "independence" of the central bank, which, together with a "stability-orientation" in monetary policy, proved a lasting German peculiarity. [more] Working Paper No. 406
Policy Notes | May 2004 Those “D” Words Recent economic commentary has been filled with “D” words: deficits, debt, deflation, depreciation. Deficits—budget and trade—are of the greatest concern and may be on an unsustainable course, as federal and national debt grow without limit. [more] Policy Note 2004/2
Policy Notes | April 2004 Inflation Targeting and the Natural Rate of Unemployment Inflation targeting has become an increasingly popular strategy for setting monetary policy during the last decade. While no countries had formal inflation targets before 1990, currently 22 countries use inflation targeting. [more] Policy Note 2004/1
Working Papers | January 2004 Fiscal Consolidation This paper analyzes the issues of public finance sustainability and suitability of strategies aimed at fiscal consolidation. Contrasting growth-based versus thrift-based consolidation strategies, it is argued that in the light of theory only the former promises success in large economies. [more] Working Paper No. 400
Working Papers | January 2004 Does Financial Structure Matter? We address the issue of whether financial structure influences economic growth. Three competing views of financial structure exist in the literature: the bank-based, the market-based and the financial services view. [more] Working Paper No. 399
Public Policy Brief Highlights | December 2003 Is Financial Globalization Truly Global? In 2002 more than $1 trillion worth of new bonds was sold across international boundaries. The total stock of cross-border bond holdings was more than $9 trillion. [more] Public Policy Brief Highlights No. 75A, 2003
Policy Notes | December 2003 The Future of the Dollar The big question is whether the dollar—the world's reserve currency—can survive a steep fall in its value without the active support of the major central banks. Can the United States broker another Plaza Accord, as it did in 1985 when the dollar lost half of its value against the yen and the mark within two years, without jeopardizing its unique international role? [more] Policy Note 2003/7
Public Policy Briefs | December 2003 Is Financial Globalization Truly Global? In 2002 more than $1 trillion worth of new bonds was sold across international boundaries. The total stock of cross-border bond holdings was more than $9 trillion. [more] Public Policy Brief No. 75, 2003
Working Papers | December 2003 Financial Globalization and Regulation This paper attempts to define financial globalization as a process whereby financial markets internationally are integrated so closely that they can be considered as a single market. The process, viewed as a by-product of financial liberalization, is only a necessary condition for financial globalization, however. [more] Working Paper No. 397
Working Papers | October 2003 Understanding Deflation Deflation can be defined as a falling general price level utilizing one of the common price indices.the consumer price index; the GDP deflator or other, narrower indices as the wholesale price index; or an index of manufactured goods prices. [more] Working Paper No. 392
Policy Notes | September 2003 Deflation Worries For the first time since the 1930s, many worry that the world's economy faces the prospect of deflation—accompanied by massive job losses—on a global scale. In a rather hopeful sign, policymakers from Euroland to Japan to America all seem to recognize the threat that falling prices pose to markets. [more] Policy Note 2003/5
Working Papers | September 2003 Aggregate Demand, Conflict, and Capacity in the Inflationary Process The dominant view relating to unemployment and inflation is that inflation will be constant at a level of unemployment (the nonaccelerating inflation rate of unemployment, NAIRU) determined on the supply side of the economy (and in the labor market in particular). Further, the economy will tend to converge to (or oscillate around) that level of unemployment. [more] Working Paper No. 391
Working Papers | September 2003 Inflation Targeting Since the early 1990s, a number of countries have adopted Inflation Targeting (IT) in an effort to reduce inflation. Most literature has praised IT as a superior framework of monetary policy. [more] Working Paper No. 388
Policy Notes | August 2003 Pushing Germany Off the Cliff Edge Germany’s fiscal crisis cannot be attributed to unification per se; it arose as a consequence of ill-guided macroeconomic policies pursued in response to that event. Many structural problems that popped up along the way were mere symptoms of persistent macroeconomic mismanagement and protracted stagnation. [more] Policy Note 2003/4
Public Policy Brief Highlights | August 2003 Asset and Debt Deflation in the United States In an asset and debt deflation, the process of reducing debt by saving and curtailing spending takes a long time, say authors Philip Arestis and Elias Karakitsos. Current imbalances and poor prospects for spending in the private sector affect the balance sheets of the commercial banks. [more] Public Policy Brief Highlights No. 73A, 2003
Public Policy Briefs | August 2003 Asset and Debt Deflation in the United States In an asset and debt deflation, the process of reducing debt by saving and curtailing spending takes a long time, say authors Philip Arestis and Elias Karakitsos. Current imbalances and poor prospects for spending in the private sector affect the balance sheets of the commercial banks. [more] Public Policy Brief No. 73, 2003
Working Papers | July 2003 Minsky's Acceleration Channel and the Role of Money Using Minsky (1986), this paper attempts to answer two questions: (1) How does policy affect real and nominal variables? and (2) How should monetary policy be conducted so as to improve the performance of the economy? Minsky asserted that rising interest rates, brought about by contractionary monetary policy, compromised the balance sheets of firms that had financed long-term positions in illiquid assets with short-term borrowing. As interest rates rose, the debt service costs of a project increased relative to the present discounted value of its future revenue streams. [more] Working Paper No. 384
Working Papers | July 2003 Financial Sector Reforms in Developing Countries with Special Reference to Egypt Financial reforms, and financial liberalization in particular, have been at the root of many recent cases of financial and banking crises. In several countries financial reforms allowed real interest rates to reach levels exceeding 20 percent per annum in some cases; in other cases, banking and financial crises led to currency crises. [more] Working Paper No. 383
Working Papers | May 2003 Is Europe Doomed to Stagnation? This paper challenges the view that external shocks caused Euroland's 2001 slowdown and subsequent stagnation. Instead, the design of Euroland's macro policymaking arrangements is found lacking in looking after sufficient domestic demand growth. [more] Working Paper No. 379
Working Papers | April 2003 Finance and Development There are many recent worldwide examples of severe financial crises that are linked to periods of financial liberalization. Given the ubiquity of these crises, there is the legitimate question of why governments still pursue financial liberalization policies. [more] Working Paper No. 377
Working Papers | March 2003 The Nature and Role of Monetary Policy When Money Is Endogenous This paper considers the nature and role of monetary policy when money is envisaged as credit money endogenously created within the private sector (by the banking system). Monetary policy is now based in many countries on the setting (or targeting) of a key interest rate, such as the Central Bank discount rate. [more] Working Paper No. 374
Working Papers | February 2003 Credibility of Monetary Policy in Four Accession Countries The aim of this study is to estimate the credibility of monetary policy in four accession countries (the Czech Republic, Hungary, Poland, and the Slovak Republic), based on the Markov regime-switching (MRS) framework. We utilize the theoretical proposition that in the conduct of monetary policy, there is uncertainty in terms of the type of central bank. [more] Working Paper No. 371
Policy Notes | February 2003 Reforming the Euro’s Institutional Framework The SGP has been the focus of growing controversy within the eurozone. The ECB continues to argue that reforming the SGP by relaxing its rules would damage the credibility of the euro. [more] Policy Note 2003/2
Public Policy Brief Highlights | January 2003 Can Monetary Policy Affect the Real Economy? Central bankers and many economists have abandoned “activist” policies and monetarism and adopted in their place a new view of the role of monetary policy. This view draws on many of the tenets of more traditional theories of money—monetarism’s emphasis on inflation control and skepticism about the use of easy-money policies to permanently increase output, and the Keynesian view that the total stock of money is not an important driving force behind either inflation or unemployment—yet it also takes a dim view of democratic input to the policymaking process. [more] Public Policy Brief Highlights No. 71A, 2003
Public Policy Briefs | January 2003 Can Monetary Policy Affect the Real Economy? Central bankers and many economists have abandoned “activist” policies and monetarism and adopted in their place a new view of the role of monetary policy. This view draws on many of the tenets of more traditional theories of money—monetarism’s emphasis on inflation control and skepticism about the use of easy-money policies to permanently increase output, and the Keynesian view that the total stock of money is not an important driving force behind either inflation or unemployment—yet it also takes a dim view of democratic input to the policymaking process. [more] Public Policy Brief No. 71, 2003
Working Papers | January 2003 Testing for Financial Contagion between Developed and Emerging Markets during the 1997 East Asian Crisis This paper examines whether, during the 1997 East Asian crisis, there was any contagion from the four largest economies in the region (Thailand, Indonesia, Korea, and Malaysia) to a number of developed countries (Japan, the United States, the United Kingdom, Germany, and France). Following Forbes and Rigobon (2002) and Rigobon (2003), we test for contagion as a positive significant shift in the degree of comovement between asset returns, taking into account heteroscedasticity and endogeneity bias. [more] Working Paper No. 370
Working Papers | January 2003 On the Effectiveness of Monetary Policy and Fiscal Policy Within the framework of macroeconomic policy and theory over the past 20 years or so, a major shift has occurred regarding the relative importance given of monetary policy versus fiscal policy. The former has gained considerably in stature, while the latter is rarely mentioned. [more] Working Paper No. 369
Working Papers | January 2003 How Far Can U.S. Equity Prices Fall under Asset and Debt Deflation Equity prices have been falling since March 2000. How far can they fall before they reach bottom? The current bear market differs from the mid-1970s plunge in equity prices in terms of the causes and, consequently, the factors that should be monitored to test its progress. [more] Working Paper No. 368
Working Papers | December 2002 Why the Tobin Tax Can Be Stabilizing This paper clarifies why a transaction tax of the type proposed by James Tobin can have a stabilizing influence in financial markets. It argues that such a tax is potentially stabilizing, not because it reduces the "excessive" volume of transactions, but because it can slow the speed with which market traders react to price changes. [more] Working Paper No. 366
Working Papers | December 2002 "New Consensus," New Keynesianism, and the Economics of the "Third Way" In this paper we seek first to set out the economic analysis that underpins the ideas of what has been termed the "third way." The explicit mention of the "third way" is much diminished since the early days of the Blair government in the UK and the Schroeder government in Germany. [more] Working Paper No. 364
Working Papers | December 2002 Does the Stock of Money Have Any Causal Significance? Recent developments in macroeconomics, and in economic policy in general, have produced a "new consensus" economy-wide model. In this model, the stock of money does not play any causal role, but operates as a mere residual in the economic process. [more] Working Paper No. 363
Public Policy Brief Highlights | November 2002 Should Banks Be “Narrowed”? In this brief, Biagio Bossone of the International Monetary Fund evaluates narrow banking from the perspective of modern theories of financial intermediation. These theories portray the status quo banking system as a solution to otherwise intractable problems of imperfect information, risk, and even moral hazard. [more] Public Policy Brief Highlights No. 69A, 2002
Public Policy Briefs | November 2002 Should Banks Be “Narrowed”? In this brief, Biagio Bossone of the International Monetary Fund evaluates narrow banking from the perspective of modern theories of financial intermediation. These theories portray the status quo banking system as a solution to otherwise intractable problems of imperfect information, risk, and even moral hazard. [more] Public Policy Brief No. 69, 2002
Book Series | November 2002 The Mind of Wall Street As stock prices and investor confidence have collapsed in the wake of Enron, WorldCom, and the dot-com crash, people want to know how this happened and how to make sense of the uncertain times to come.Into the breach comes one of Wall Street's legendary investors, Leon Levy, to explain why the market so often confounds us, and why those who ought to understand it tend to get chewed up and spat out. [more] Book Series, November 2002
Working Papers | November 2002 Financial Policies and the Aggregate Productivity of the Capital Stock We collect data on a number of financial restraints, including restrictions on interest rates and capital flows and reserve and liquidity requirements, and capital adequacy requirements from central banks of 14 countries. We estimate the effects of these policies on the aggregate productivity of the capital stock, controlling for the effects of inputs and financial development and using modern econometric techniques. [more] Working Paper No. 362
Working Papers | November 2002 Credibility of EMS Interest Rate Policies The primary objective of this paper is to use the Markov regime-switching modeling framework to study the credibility of monetary policy in five member countries of the European Monetary System (EMS) during the period 1979 to 1998. The five countries examined for this purpose are Austria, Belgium, France, Italy, and the Netherlands. [more] Working Paper No. 361
Working Papers | October 2002 Financial Globalization In recent years free movement of financial capital following financial liberalization has given the impression that financial markets are truly globalized. In this paper we argue that free movement of financial capital alone does not constitute financial globalization. [more] Working Paper No. 360
Working Papers | October 2002 Is There a Trade-Off between Inflation Variability and Output-gap Variability in the EMU Countries? This paper examines two issues. First, we compare, based on the ratio of output-gap variability to inflation variability, the monetary policy performance of eleven EMU countries for the whole period of the EMS. [more] Working Paper No. 359
Working Papers | October 2002 The Euro, Public Expenditure, and Taxation This paper explores the probable consequences for public expenditure in the United Kingdom if Britain were to join the euro. It focuses on the effects of sterling joining the euro (and the associated implications, such as monetary policy being governed by the European Central Bank). [more] Working Paper No. 357
Working Papers | October 2002 Can Monetary Policy Affect the Real Economy? Current monetary policy involves the manipulation of the central bank interest rate (the repo rate), with the specific objective of achieving the goal(s) of monetary policy. The latter is normally the inflation rate, although in a number of instances this may include the level of economic activity (the monetary policy of the United States' Federal Reserve is a good example of this category). [more] Working Paper No. 355
Working Papers | October 2002 Should Banks Be Narrowed? Over the past 70 years, a proposal to narrow the scope of banks has emerged more and more frequently in financial debates and research. Narrow banking would prevent deposit-issuing banks from lending to the private sector and restrict nonbank intermediaries from funding investments with demand deposits. [more] Working Paper No. 354
Public Policy Brief Highlights | August 2002 Optimal CRA Reform At issue in the debate over the renewal of the Community Reinvestment Act (CRA) of 1977 are the various yardsticks regulators use to judge whether individual institutions are meeting the credit and service needs of low- and moderate-income (LMI) communities. Based on careful examination of new CRA data and assessments of comments by selected stakeholders, the author concludes that if the new rules are to succeed, regulators will have to strike a careful balance between various competing interests vying to tip the balance of power in their favor. [more] Public Policy Brief Highlights No. 68A, 2002
Public Policy Briefs | August 2002 Optimal CRA Reform At issue in the debate over the renewal of the Community Reinvestment Act (CRA) of 1977 are the various yardsticks regulators use to judge whether individual institutions are meeting the credit and service needs of low- and moderate-income (LMI) communities. Based on careful examination of new CRA data and assessments of comments by selected stakeholders, the author concludes that if the new rules are to succeed, regulators will have to strike a careful balance between various competing interests vying to tip the balance of power in their favor. [more] Public Policy Brief No. 68, 2002
Working Papers | July 2002 State Policies and the Warranted Growth Rate This paper raises questions about austerity policies by investigating the effects of the state's tax and expenditure policies on the warranted growth rate. It proposes two mechanisms to raise the warranted growth rate in the event that there is long-run unemployment. [more] Working Paper No. 349
Working Papers | May 2002 The "Third Way" and the Challenges to Economic and Monetary Union Macropolicies In the United Kingdom the emergence of a "New Labour" has been closely associated with the development of the notion of the "third way." Tony Blair, for example, stated that "New Labour is neither old left nor new right. [more] Working Paper No. 345
Working Papers | March 2002 Dollarization When economies "dollarize," their exchange rate and monetary policy, both considered to be sources of instability, are simultaneously discarded. Often, dollarization becomes an attractive option for developing countries that have experienced successive failures of exchange rate and monetary management. [more] Working Paper No. 344
Policy Notes | March 2002 European Integration and the “Euro Project” The introduction of the euro has been a significant step in the integration of the economies of the countries that form the European Union (EU) and the 12 countries that comprise the Economic and Monetary Union (EMU). Its adoption not only means that a single currency prevails across the Eurozone, with reduced transactions costs for trade between member countries; the currency also has become embedded in a particular set of institutional and policy arrangements that tell us about the nature of economic integration in the EU. [more] Policy Note 2002/3
Policy Notes | February 2002 The Brazilian Swindle and the Larger International Monetary Problem The International Monetary Fund has offered Brazil a $30 billion loan, most of it reserved for next year, on condition that the country continue to run a large primary surplus in the government budget. In this way the Fund maintains a strong arm over Brazil's next government. [more] Policy Note 2002/2
Public Policy Brief Highlights | November 2001 The Economic Consequences of German Unification Although the costs associated with moving an antiquated socialist economy toward its capitalist counterpart was anticipated to be significant, German industrial efficiency was expected to quickly overcome any challenges. Things turned out rather differently. [more] Public Policy Brief Highlights No. 67A, 2001
Public Policy Briefs | November 2001 The Economic Consequences of German Unification Although the costs associated with moving an antiquated socialist economy toward its capitalist counterpart was anticipated to be significant, German industrial efficiency was expected to quickly overcome any challenges. Things turned out rather differently. [more] Public Policy Brief No. 67, 2002
Policy Notes | September 2001 Hard Times, Easy Money? The tools of countercyclical monetary policy have been brought fully to bear on a potentially severe recession. This note argues, however, that such a policy is less effective in times such as these—that is, when uncertainty is especially high—and so is likely to be particularly ineffective in combating the current economic slowdown. [more] Policy Note 2001/9
Working Papers | September 2001 The Monetary Policies of the European Central Bank and the Euro's (Mal)performance The stability-oriented macroeconomic framework established in the Maastricht and Amsterdam Treaties on European Union (TEU), especially the unparalleled status of independence and peculiar mandate of the European Central Bank (ECB), were promised to virtually guarantee price stability and a "strong" euro. Actual developments have shattered these hopes in a rather drastic way. [more] Working Paper No. 338
Public Policy Brief Highlights | August 2001 Easy Money through the Back Door This brief assesses the experiences of Europe’s policy regime in the two years since the introduction of the euro in 1999, particularly the performance of the European Central Bank (ECB), the institution in charge of conducting monetary policy for the euro area. Conventional accounts of European growth, price, and labor market performance over recent years focus on labor market institutions and wage trends. [more] Public Policy Brief Highlights No. 65A, 2001
Public Policy Briefs | August 2001 Easy Money through the Back Door This brief assesses the experiences of Europe’s policy regime in the two years since the introduction of the euro in 1999, particularly the performance of the European Central Bank (ECB), the institution in charge of conducting monetary policy for the euro area. Conventional accounts of European growth, price, and labor market performance over recent years focus on labor market institutions and wage trends. [more] Public Policy Brief No. 65, 2001
Working Papers | August 2001 Can Countries under a Common Currency Conduct Their Own Fiscal Policies? The debate about balance of payment problems is generally linked with adjustments in the fiscal sector, especially since the views of Bretton Woods institutions became predominant. For the majority of theoretical models that currently inform policy, it is becoming common thought that in a world of free trade and free movement of capital, a floating rate of exchange may clear the market for financial assets. [more] Working Paper No. 337
Working Papers | July 2001 Reflections on the Current Fashion for Central Bank Independence This paper challenges the time-inconsistency case for central bank independence. It argues that the time-inconsistency literature not only seriously confuses the substance of the rules versus discretion debate, but also posits an implausible view of monetary policy. [more] Working Paper No. 334
Working Papers | May 2001 On the "Burden" of German Unification This paper investigates the causes of western Germany's remarkably poor performance since 1992. The paper challenges the view that the poor record of the nineties, particularly the marked deterioration in public finances since unification, might be largely attributable to unification. [more] Working Paper No. 328
Policy Notes | April 2001 Put Your Chips on 35 According to Federal Reserve Chairman Alan Greenspan, we live in a time “profoundly different from the typical postwar business cycle.” Our experiences have “defied conventional wisdom” and mark ”veritable shifts in the tectonic plates of technology. [more] Policy Note 2001/4
Public Policy Brief Highlights | March 2001 The Future of the Euro This brief provides a detailed description of the Stability and Growth Pact, an agreement entered into by the member states of the European Union that has far-reaching implications for the long-run value of the euro, and therefore, on the real economy in terms of output growth and employment. Yet despite the fact that the pact underpins the adoption of the single currency and has fundamentally redefined the scope and nature of economic policymaking in the member states, public discussion about it is relatively scant, especially on our side of the Atlantic, even though the economic health of the European Union does matter to the economic and strategic position of the United States. [more] Public Policy Brief Highlights No. 63A, 2001
Public Policy Briefs | March 2001 The Future of the Euro This brief provides a detailed description of the Stability and Growth Pact, an agreement entered into by the member states of the European Union that has far-reaching implications for the long-run value of the euro, and therefore, on the real economy in terms of output growth and employment. Yet despite the fact that the pact underpins the adoption of the single currency and has fundamentally redefined the scope and nature of economic policymaking in the member states, public discussion about it is relatively scant, especially on our side of the Atlantic, even though the economic health of the European Union does matter to the economic and strategic position of the United States. [more] Public Policy Brief No. 63, 2001
Working Papers | March 2001 Making EMU Work This paper investigates the lessons learned from Europe's convergence process of the 1990s. The paper challenges the conventional focus on labour market institutions and "structural rigidities" as the root cause of Europe's poor employment record. [more] Working Paper No. 326
Working Papers | March 2001 Endogenous Money in a Coherent Stock-flow Framework A method advocated by Wynne Godley to model monetary macroeconomics, is presented. The method, based on a transactions matrix, essentially makes sure that every flow goes somewhere and comes from somewhere, so that there are no black holes. [more] Working Paper No. 325
Working Papers | March 2001 The Causes of Euro Instability This paper examines the causes of the general decline in the value of the euro. First, it assesses the various explanations proffered in existing literature, and then it offers a more satisfactory one. [more] Working Paper No. 324
Working Papers | March 2001 Easy Money through the Back Door This paper assesses the performance of the European Central Bank (ECB) over the first two years of Europe's new policy regime. The verdict is that the ECB was not actually in charge, as the markets took over and imposed easy money on the euro zone. [more] Working Paper No. 323
Working Papers | March 2001 Will the Euro Bring Economic Crisis to Europe? It has been argued that the eurozone will face considerable economic difficulties. These will take a number of forms, two of which could qualify as "crises. [more] Working Paper No. 322
Working Papers | September 2000 CRA Grade Inflation Community Reinvestment Act of 1977 (CRA) ratings and performance evaluations are the only bank and thrift exam findings disclosed by financial institution regulators. Inflation of CRA ratings has been alleged by community activists for two decades, but there has been no quantification or empirical investigation of grade inflation. [more] Working Paper No. 313
Working Papers | July 2000 Can European Banks Survive a Unified Currency in a Nationally Segmented Capital Market? The euro was expected to become a substitute for the American dollar as an international currency. However, compromises made during its creation make it a less than perfect substitute in the medium term. [more] Working Paper No. 305
Public Policy Briefs | June 2000 A Dual Mandate for the Federal Reserve The Federal Reserve currently has two legislated goals—price stability and full employment—but a debate continues about making price stability the Fed’s primary and overriding goal. Evidence from the recent history of monetary policy contradicts arguments in favor of assigning primacy to inflation fighting and supports giving full employment equal importance. [more] Public Policy Brief No. 60, 2000
Public Policy Brief Highlights | June 2000 A Dual Mandate for the Federal Reserve The Federal Reserve currently has two legislated goals—price stability and full employment—but a debate continues about making price stability the Fed’s primary and overriding goal. Evidence from the recent history of monetary policy contradicts arguments in favor of assigning primacy to inflation fighting and supports giving full employment equal importance. [more] Public Policy Brief Highlights No. 60A, 2000
Policy Notes | May 2000 Can the Expansion Be Sustained? Hyman P. Minsky’s insights into the relationship between profits, economic growth, and the public and private financial balances are particularly relevant to today’s conditions. [more] Policy Note 2000/5
Working Papers | March 2000 Krugman on the Liquidity Trap Paul Krugman has argued that Japan is in a liquidity trap and that it can recover only if the central bank there follows a policy of "credible inflation." This paper argues that Krugman's proposal, which is similar to what Fisher proposed during the Depression, is based on a different interpretation of the liquidity trap from that proposed by Keynes. [more] Working Paper No. 298
Working Papers | March 2000 An Alternative Stability Pact for the European Union This paper proposes an alternative stability and growth pact among European Union (EU) governments that would underpin the introduction of a single currency and a "single market" within the EU. The alternative pact embraces a number of new aspects of integration within the EU that are based on a different monetary analysis (different from that of "new monetarism"), new objectives for economic policy (such as employment and growth), and new institutions to reduce various kinds of disparities across the EU. [more] Working Paper No. 296
Working Papers | February 2000 The Brazilian Crisis This paper argues that the Brazilian crisis differs from the standard Minsky crisis in that it is Brazil's government that is engaging in Ponzi financing while private sector balance sheets are relatively robust. However, attempts to stabilize the economy through high interest rates and expenditure cuts may quickly produce private sector fragility. [more] Working Paper No. 294
Book Series | December 1999 Modernizing Financial Systems Since the 1980s many changes have taken place in the financial system in the United States and to some extent in other countries—uniform capital requirements have been instituted, regulations have been eased, and market share consolidation of firms in the financial services business has been allowed. But more substantive reforms are necessary to avert crises such as those that occurred in Japan, Korea, and other Asian countries. [more] Book Series, December 1999
Public Policy Brief Highlights | November 1999 Risk Reduction in the New Financial Architecture The causes for the instability that has marked the financial system over the past decade lie deep in the economic theory that urges easy and efficient substitution of one piece of paper for another, in the technology-driven tight articulation of receipts and payments, and in the growth of leverage that diminishes the creditworthiness of major institutions when an interruption in their receipts requires them to seek funds. Many of the proposals aimed at reducing risk in the financial system, however, do not recognize these changes or their importance. [more] Public Policy Brief Highlights No. 56A, 1999
Public Policy Briefs | November 1999 Risk Reduction in the New Financial Architecture The causes for the instability that has marked the financial system over the past decade lie deep in the economic theory that urges easy and efficient substitution of one piece of paper for another, in the technology-driven tight articulation of receipts and payments, and in the growth of leverage that diminishes the creditworthiness of major institutions when an interruption in their receipts requires them to seek funds. Many of the proposals aimed at reducing risk in the financial system, however, do not recognize these changes or their importance. [more] Public Policy Brief No. 56, 1999
Working Papers | November 1999 Functional Finance The purpose of this paper is threefold. First, the theory of functional finance, as explicated by its originator, Abba Ptachya Lerner, is put forward; second, the reader is introduced to the use, standard in money and banking texts, of T-account balance sheet entries. [more] Working Paper No. 287
Working Papers | October 1999 The Economic and Monetary Union The euro was adopted as legal tender, albeit in a virtual form, by 11 countries of the European Union on January 1, 1999. The intention was that notes and coins denominated in euros would be introduced and the national currencies phased out during the first six months of that year, and that the euro would be fully operational by 2002. [more] Working Paper No. 282
Working Papers | September 1999 Open Economy Macroeconomics Using Models of Closed Systems The following paper presents a series of two-country models, each of which makes up a whole world. The models are all based on a rigorous and watertight system of stock and flow accounts and can be used to generate numerical simulations of the way in which of the whole system evolves through time on various assumptions regarding institutions, policies, and behavioral responses. [more] Working Paper No. 281
Working Papers | September 1999 Monetary Policy in an Era of Capital Market Inflation The theory of capital market inflation argues that the values of long-term securities markets are determined by a disequilibrium inflow of funds into those markets. The resulting overcapitalization of companies leads to increased fragility of banking and undermines monetary policy and stable relationships between short- and long-term interests rates, such as that postulated by Keynes in his theory of the speculative demand for money. [more] Working Paper No. 279
Policy Notes | September 1999 1999 Levy Institute Survey of Small Business Modest sales expectations and limited access to bank credit may be curtailing small businesses’ plans for hiring and capital investment. [more] Policy Note 1999/9
Working Papers | August 1999 Minsky and the Mainstream Hyman Minsky's research emphasized the central role of finance in modern economics at a time when finance was not important in most mainstream macroeconomic research. But in the 1980s, mainstream research began to explore the role of finance in firm and consumer behavior. [more] Working Paper No. 278
Working Papers | August 1999 Hyman Minsky's Theory of Capitalist Development During the last decade of his life, Hyman P. Minsky drew on insights acquired from Joseph Schumpeter in an effort to explore the long-term development of capitalism. [more] Working Paper No. 277
Working Papers | August 1999 Lessons from the Asian Crisis This paper presents a central banker's perspective on the Asian crisis. Central banks have two core missions: the pursuit of monetary policy to achieve broad macroeconomic objectives and the maintenance of financial stability, including the management of financial crises. [more] Working Paper No. 276
Public Policy Brief Highlights | July 1999 Government Spending in a Growing Economy Based on neoclassical theory, cutting budget deficits has come to be seen as a principal way to increase long-run growth, but the empirical evidence is ambiguous on the outcome of this macropolicy. A new model, the classical growth cycles (CGC) model, offers an alternative theoretical framework for analyzing the complex effects of fiscal policy. [more] Public Policy Brief Highlights No. 52A, 1999
Public Policy Briefs | July 1999 Government Spending in a Growing Economy Based on neoclassical theory, cutting budget deficits has come to be seen as a principal way to increase long-run growth, but the empirical evidence is ambiguous on the outcome of this macropolicy. A new model, the classical growth cycles (CGC) model, offers an alternative theoretical framework for analyzing the complex effects of fiscal policy. [more] Public Policy Brief No. 52, 1999
Working Papers | July 1999 The Independent European Central Bank In this paper, Visiting Senior Scholar Philip Arestis questions the assumptions underlying the economic case for the independent European Central Bank (ECB). Arestis argues that although a European Clearing Agency (ECA) of the type Keynes envisaged for the international economy is not a panacea for the economic problems of the European Union (EU), it is nonetheless a better way forward and far superior to the ECB. [more] Working Paper No. 274
Working Papers | July 1999 Savings-Recycling Public Employment William Vickrey's single-minded commitment to full employment is evident in a series of papers written in the last years of his life. In these works Vickrey formulated an assets-based approach to macroeconomic analysis that has definite implications for budgetary and employment policy. [more] Working Paper No. 273
Working Papers | July 1999 Functional Finance and Full Employment Recent global economic developments invite a reconsideration of orthodox macroeconomic theory and policy and encourage a revisiting of the ideas of unorthodox thinkers of the past. This paper reviews fifteen lessons to be learned from the work of Abba Lerner. [more] Working Paper No. 272
Working Papers | May 1999 Demand Constraints and Economic Growth In recent years the United States has seemed to achieve the best of all possible worlds: robust economic growth, very low unemployment, and low inflation. Many attribute this performance to fewer supply-side constraints, as the country has moved away from stifling regulations and other impediments to trade. [more] Working Paper No. 269
Working Papers | April 1999 Risk Reduction in the New Financial Architecture Five times in a decade not yet completed, financial markets have floated to the edge of a whirlpool. In October 1998, they were about to drown when Alan Greenspan threw them a piece of string that, surprisingly, turned out to be a lifeline. [more] Working Paper No. 268
Policy Notes | April 1999 Can Goldilocks Survive? Growing government budget surpluses combined with growing trade deficits have generated record private sector deficits. Unless households continue to reduce their saving—creating an increasingly unsustainable debt burden—the impetus that has driven the expansion will evaporate. [more] Policy Note 1999/4
Working Papers | March 1999 Minsky's Analysis, the European Single Currency, and the Global Financial System The paper begins with a brief review of the main ideas associated with Hyman Minsky and their implications for economic policy and the achievement of full employment. There is a focus on the financial instability hypothesis, the role of the central bank as lender of last resort, and the requirements for regulation of the financial system. [more] Working Paper No. 266
Working Papers | February 1999 Further Evidence on the Distributional Effects of Disinflationary Monetary Policy The performance of the United States' economy between 1994 and 1998 was so good that some pundits began to call for the Federal Reserve to increase interest rates to depress economic activity and reduce asset prices. However, slowing the economy to stabilize asset prices would have adverse distributional effects. [more] Working Paper No. 264
Working Papers | February 1999 From Common Market to EMU This paper traces the history and the institutional background of European integration to the establishment of the economic and monetary union in the European Union (EU). After the establishment of the European Economic Community (EEC) in the late 1950s, attempts at monetary integration, and ultimately monetary union, tended to assume importance only as a result of financial crisis and then returned to being a vague objective as soon as the crisis recedes. [more] Working Paper No. 263
Working Papers | January 1999 The 1966 Financial Crisis The so-called credit crunch of 1966 has long been recognized as the first significant postwar financial crisis and one that required the first important intervention by the Federal Reserve Bank. In the midst of the robust postwar expansion, the Fed began to fear inflation and tightened monetary policy to the point at which profitability of financial institutions was threatened. [more] Working Paper No. 262
Working Papers | December 1998 Government Spending and Growth Cycles In this paper the impact of fiscal policy is analyzed within the context of an endogenous growth and cycles model. The investigation shows the different situations in which government expenditure can lead to both crowding-in and crowding-out of output and employment. [more] Working Paper No. 260
Working Papers | November 1998 Is Keynesianism Institutionalist? This paper poses that the one commonality between institutionalist thought and Keynesianism (as presented in his General Theory) was money. Tracing the origins and uses of money, the myth of the development of money as a medium of exchange is dispelled and replaced with money used as evidence of debt, specifically, government debt. [more] Working Paper No. 257
Working Papers | October 1998 Finance and the Macroeconomic Process in a Classical Growth and Cycle Model The aim of this paper is to derive an endogenous growth and cycles model that integrates sectoral incomes, expenditures, and finance requirements into an ex ante social accounting matrix (SAM) in the spirit of the Cambridge Economic Policy Group. The SAM includes households, businesses, a banking sector with non-zero net worth, and the government. [more] Working Paper No. 253
Public Policy Briefs | September 1998 The Asian Disease: Plausible Diagnoses, Possible Remedies Asia presents a cumulation of apparently rational decisions that produced disastrous results—a textbook illustration of “financial instability” developing from the economics of euphoria. A combination of factors produced the crisis as enormous capital inflows were drawn to the “Asian miracle“-pegged exchange rates with fluctuating interest rates, integrated economies, moral hazard created by central banks, and short-term lending and derivatives trade without sufficient evaluation of risk and credit analysis of borrowers. [more] Public Policy Brief No. 44, 1998
Public Policy Briefs | September 1998 How Big Should the Public Capital Stock Be? Investment in infrastructure is necessary for a strong, flexible, and growing economy. However, the relationship between public capital and economic growth is not linear. [more] Public Policy Brief No. 43, 1998
Public Policy Brief Highlights | September 1998 The Asian Disease: Plausible Diagnoses, Possible Remedies Asia presents a cumulation of apparently rational decisions that produced disastrous results—a textbook illustration of “financial instability” developing from the economics of euphoria. A combination of factors produced the crisis as enormous capital inflows were drawn to the “Asian miracle“-pegged exchange rates with fluctuating interest rates, integrated economies, moral hazard created by central banks, and short-term lending and derivatives trade without sufficient evaluation of risk and credit analysis of borrowers. [more] Public Policy Brief Highlights No. 44A, 1998
Public Policy Brief Highlights | September 1998 How Big Should the Public Capital Stock Be? Investment in infrastructure is necessary for a strong, flexible, and growing economy. However, the relationship between public capital and economic growth is not linear. [more] Public Policy Brief Highlights No. 43A, 1998
Working Papers | August 1998 Derivatives and Global Capital Flows Four factors in the current financial crisis in Asia have surprised observers. First, although capital flows in Asia appeared stable, the crisis was precipitated by the reversal of the very large proportion of short-term lending. [more] Working Paper No. 246
Working Papers | July 1998 Can Taxes and Bonds Finance Government Spending? This paper investigates the commonly held belief that government spending is normally financed through a combination of taxes and bond sales. The argument is a technical one and requires a detailed analysis of reserve accounting at the central bank. [more] Working Paper No. 244
Working Papers | July 1998 Money and Credit in a Keynesian Model of Income Determination This paper formally integrates the theory of money and credit derived ultimately from Wicksell into the Keynesian theory of income determination, with assets allocated according to Tobinesque principles. The model deployed has much in common with the modern "endogenous money" school initiated by Kaldor which emphasizes the essential role played by credit in any real life economy, since production takes time and the future is always uncertain. [more] Working Paper No. 242
Working Papers | May 1998 East Asia Is Not Mexico What was different about the collapse of the Asian emerging markets in 1997? The free fall of the Mexican peso and the collapse of the Mexican Bolsa produced a “Tequila effect” that spread through most of South America. But it did not create a sell-off in the global financial markets similar to that which occurred on 27 October 1997. [more] Working Paper No. 235
Working Papers | April 1998 Yes, "It" Did Happen Again The title of Visiting Senior Scholar Jan Kregel's working paper is a reference to Hyman P. Minsky's book Can "It" Happen Again? The Minskian "it" is the debt deflation scenario that led to the Great Depression, and Kregel makes the case that the recent Asian crisis is just such a scenario. [more] Working Paper No. 234
Working Papers | April 1998 Public Capital and Economic Growth Empirical research largely suggests that there is a positive role for public capital and a negative role for taxation and debt, and the effectiveness of public capital depends critically on its efficiency. Research Associate David Alan Aschauer develops a common framework to investigate the importance of three aspects of public capital: how much you have, how you pay for it, and how you use it. [more] Working Paper No. 233
Working Papers | April 1998 The Asian Disease The Asian crisis is a textbook case of the "financial instability hypothesis" first expressed in 1966 by the late Hyman P. Minsky. [more] Working Paper No. 232
Working Papers | April 1998 The Hierarchy of Money This paper attempts to bring together several of Hyman P. Minsky's insights in order to suggest a relationship between the state's ability to tax and the money of the economy. [more] Working Paper No. 231
Working Papers | January 1998 The Development and Reform of the Modern International Financial System The international financial system might be said to be in crisis. It requires frequent intervention by central banks and other national and international bodies to reduce fluctuations of currencies. [more] Working Paper No. 225
Public Policy Briefs | December 1997 Who Pays for Disinflation? Using theoretical predictions, econometric results, and the example of the Volcker disinflation, Willem Thorbecke establishes that through disinflation’s burden on the durable goods and construction industries, small firms, and low-wage workers and its benefits to bond market investors, it effects a redistribution of wealth from the poor to the rich. Because of this distributional consequence, he argues, engineering a disinflationary recession now to wring more inflation out of the economy would be inappropriate. [more] Public Policy Brief No. 38, 1997
Public Policy Brief Highlights | December 1997 Who Pays for Disinflation? Using theoretical predictions, econometric results, and the example of the Volcker disinflation, Willem Thorbecke establishes that through disinflation’s burden on the durable goods and construction industries, small firms, and low-wage workers and its benefits to bond market investors, it effects a redistribution of wealth from the poor to the rich. Because of this distributional consequence, he argues, engineering a disinflationary recession now to wring more inflation out of the economy would be inappropriate. [more] Public Policy Brief Highlights No. 38A, 1997
Working Papers | December 1997 The Economic Contributions of Hyman Minsky Financial economist Hyman P. Minsky believed that because there are many types of capitalism determined by circumstances and an evolving set of institutional structures, an abstract economic theory could not be applicable in all times and places but must be institution-specific. [more] Working Paper No. 217
Working Papers | October 1997 Cumulative Regional Decline, Institutional Inadequacy, and the "Democratic Deficit" European monetary union (EMU) now seems increasingly likely to progress as planned, with a membership of eight to 10 countries in 1999. There has not been great enthusiasm among European citizens for integration, but there has not been great hostility, either. [more] Working Paper No. 209
Working Papers | July 1997 Skiki vono ko shtuvalo? After the collapse of the Soviet bloc many of the transition economies experienced significant inflation, largely because their new monetary authorities and undeveloped tax infrastructure induced them to resort to generating revenue through seignorage. In Ukraine inflation rates reached as high as 133 percent per month. [more] Working Paper No. 196
Working Papers | March 1997 Disinflationary Monetary Policy and the Distribution of Income Some economists and others argue that, despite years of low inflation, a further decrease in the rate of price growth would be beneficial by reducing the dead-weight losses created by inflation-induced distortions. According to Research Associate Willem Thorbecke, of George Mason University, such arguments fail to consider the costs and benefits of changes in the distribution of income arising from deflationary policies. [more] Working Paper No. 185
Public Policy Briefs | September 1996 Targeting Inflation The targets for monetary policy adopted by the Fed in recent years have not proven to be closely correlated with inflation, leading some theorists and policymakers to advocate the use of a price index, such as the consumer price index (CPI), as both the target and the goal of monetary policy. The authors of this brief show that such a choice is not wise because the CPI does not accurately reflect market-caused price increases and is not under the control of monetary policy. [more] Public Policy Brief No. 27, 1996
Book Series | September 1996 Stability in the Financial System The S&L crisis of the 1990s led many analysts to review the events that culminated in the banking crisis of the 1930s and the subsequent passage of the Emergency Banking Act, the Banking Act of 1933, the Banking Act of 1935, and other related legislation. The restructuring of the financial system accomplished by this legislation brought about the longest period of financial stability in American history, lasting half a century. [more] Book Series, September 1996
Working Papers | June 1996 Money, Finance, and National Income Determination Traditional economic models have largely failed to account adequately for the roles of money and finance in economic operations. For example, traditional models assume an exogenously determined, fixed money stock and ignore the outcomes of spending changes that result from changes in bank loans. [more] Working Paper No. 167
Working Papers | May 1996 Economic Insecurity and the Institutional Prerequisites for Successful Capitalism In this working paper, Distinguished Scholar Hyman P. Minsky and Visiting Scholar Charles Whalen search for reasons to account for the split in post-World War II economic performance—that is, the difference in performance between the 1946–66 period and the 1966–96 period. [more] Working Paper No. 165
Working Papers | May 1996 The Consumer Price Index As a Measure of Inflation A consensus is emerging among economists and policymakers that the consumer price index (CPI) as a measure of cost of living has an upward bias. As a result, downward revisions of cost-of- living adjustments are frequently recommended, especially in discussions about deficit reduction. [more] Working Paper No. 164
Working Papers | May 1996 Managing Foreign Capital Flows Between 1990 and 1994, developing countries in Asia posted $261 billion in net capital inflows, an amount equivalent to about half the total inflows to all developing countries. Although foreign direct investment accounts for the largest portion of net inflows to Asia, the share of portfolio investment has been steadily rising, from an average of 8 percent of net inflows between 1983 and 1989 to 24 percent between 1990 and 1994. [more] Working Paper No. 163
Working Papers | May 1996 Capital Account Regulations and Macroeconomic Policy A resurgence of perceived opportunities by international investors has resulted in a new policy debate regarding the regulation of capital flows into certain South American countries. The integrationist camp defends totally open markets on the grounds that they result in a more efficient financial sector, greater asset diversification, and other benefits; those in the isolationist camp support regulating capital inflows on the grounds that they generate macroeconomic instability and reduce the effectiveness of monetary policy. [more] Working Paper No. 162
Working Papers | May 1996 Globalization, Capital Flows, and International Regulation In the postwar period prior to 1990 policy proposals aimed at reducing the instabilities associated with increased capital flows focused on increasing market efficiencies so that nominal variables would reflect real conditions in the economy. However, those in charge of financial resource flows applied theories largely unconcerned with fundamentals, resulting in such financial market instabilities as volatility in the foreign exchange market. [more] Working Paper No. 161
Working Papers | May 1996 Intervention versus Regulation This new working paper investigates the roles the International Monetary Fund (IMF) might play given its mandate to provide institutional support for a global capital market that can promote trade and investment, and given current worldwide economic instabilities such as highly volatile exchange rates. The experience of steady growth and price stability under the Bretton Woods system is often cited in support of a return to a managed fixed-rate system. [more] Working Paper No. 160
Working Papers | May 1996 The Anatomy of the Bond Market Turbulence of 1994 The bond market sell-off of 1994 has begun to show up on lists of market events against which risk management systems are judged, but there has been little analysis of the cause of the 1994 decline. This new working paper fills the void by examining a number of factors that might explain the rise in volatility during that year. [more] Working Paper No. 159
Working Papers | May 1996 Capital Inflows and Macroeconomic Policy in Sub-Saharan Africa Little has been written about capital flows to sub-Saharan Africa (SSA), largely because of the flows' small size and data limitations. In this working paper, Louis Kasekende, executive director for policy and research at the Bank of Uganda; Damoni Kitabire, commissioner for the Macroeconomic Policy Department for the Ministry of Finance and Economic Planning in Kampala; and Matthew Martin, Ministry of Finance, United Kingdom, explore these inflows, noting that although they are small compared to those into other countries, they are in proportion to the size of the recipient economies. [more] Working Paper No. 158
Book Series | May 1996 Money in Motion In its analysis of money, contemporary economics has focused on money’s function as a store of value, neglecting its role as a medium of circulation. When circulation is put center stage, it becomes apparent that the supply of money does indeed adapt to the needs of trade, and it does so in myriad ways that are often difficult for a central bank to control because they reflect the responses of banks and other financial institutions to market incentives. [more] Book Series, May 1996
Working Papers | April 1996 Uncertainty and the Institutional Structure of Capitalist Economies In this new working paper, Distinguished Scholar Hyman P. Minsky points out that capitalism in the United States is an evolving construct that recently entered a new stage: "money manager" capitalism. [more] Working Paper No. 155
Public Policy Briefs | February 1996 Revisiting Bretton Woods Raymond F. Mikesell outlines the activities of the International Monetary Fund (IMF) and the World Bank over the course of their history and evaluates the organizations' success in meeting their original and subsequent goals. [more] Public Policy Brief No. 24, 1996
Working Papers | December 1995 Proposals for Changing the Functions of the International Monetary Fund (IMF) The 50th anniversary of the signing of the Articles of Agreement of the International Monetary Fund (IMF) and the World Bank was celebrated at meetings in Washington, DC: at Bretton Woods, New Hampshire; and at the Annual Meeting of the Boards of Governors of the two institutions held in Madrid. The many addresses at the 1994 meetings praising the contributions of the Fund and Bank were overshadowed by the widely held conviction that both institutions are seriously in need of overhauling. [more] Working Paper No. 150
Working Papers | November 1995 Does an Independent Central Bank Violate Democracy? The question of central bank independence is one of degree. A completely independent central bank is impossible as long as a country has provisions for altering central bank powers, even if that requires constitutional amendments. [more] Working Paper No. 148
Public Policy Briefs | January 1995 Narrow Banking Reconsidered The functional approach to reforming the financial system advocates the structural separation of the depository and lending functions of banks. As a result of such a separation, monetary and credit policy undergo a parallel separation, and government supervision and regulation of the banking industry are modified. [more] Public Policy Brief No. 17, 1995
Public Policy Briefs | September 1994 Monetary Policy Uncovered Experience with a variety of targets has cast doubt on the likelihood that a single variable can be found to be closely and reliably linked to future inflation; it is even less likely that such a variable, should it be found, would somehow be under the control and manipulation of the Federal Reserve. This brief provides a review of the experiments with various targets undertaken by former Fed Chairman Paul Volcker and current Chairman Alan Greenspan. [more] Public Policy Brief No. 15, 1994
Public Policy Briefs | October 1993 The Investment-Finance Link The author of this brief offers evidence that policies aimed at stimulating private sector investment through interest rate reductions are, at best, misguided. He concludes that, while there may be benefits from policies aimed at increasing saving or lowering the budget deficit, a higher level of business investment is not one of them. [more] Public Policy Brief No. 9, 1993
Public Policy Briefs | September 1993 Financing Prosperity in the Next Century The authors of this brief propose a series of reforms aimed at making bank regulations compatible with the changing financial system. They present evidence to support their contention that change in the market for financial services has reduced the importance of depositories as they have traditionally operated. [more] Public Policy Brief No. 8, 1993
Public Policy Briefs | May 1993 The Limits of Prudential Supervision According to Bernard Shull, although the recent round of banking legislation—most notably the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) and the Federal Deposit Insurance Corporation Improvement Act (FDICIA)—did take steps toward preventing financial crises, it did not go far enough in the area of unifying the regulatory structure. Shull proposes unifying federal bank regulatory agencies that presently have flexible authority over competing institutions. [more] Public Policy Brief No. 5, 1993
Public Policy Briefs | January 1993 Community Development Banking This brief proposes that the establishment of a nationwide system of community development banks (CDBs) would advance the capital development of the economy. The proposal is based on the notion that a critical function of the financial system is not being adequately performed by existing institutions for low-income citizens, inner-city minorities, and entrepreneurs who seek modest financing for small businesses. [more] Public Policy Brief No. 3, 1993
Book Series | November 1992 Financial Conditions and Macroeconomic Performance This collection of papers on financial instability and its impact on macroeconomic performance honors Hyman P. Minsky and his lifelong work. [more] Book Series, November 1992
Public Policy Briefs | July 1992 Restructuring the Financial Structure To avoid excessive concentration of economic and financial power, Athony M. Solomon recommends institutional and regulatory reform of the financial system by such means as nationwide banking, restrictions on federal deposit insurance, consolidation of financial regulation, balancing numerical standards with supervisory discretion, increased accountability of banks’ management boards, and leveling the playing field across institutions, markets, and countries. [more] Public Policy Brief No. 1, 1992