Research Programs
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.
Program Publications
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Working Paper No. 1048 | April 2024This paper econometrically models the dynamics of Swedish government bond (SGB) yields. It examines whether the short-term interest rate has a decisive influence on long-term SGB yields, after controlling for other macroeconomic and financial variables, such as consumer price inflation, the growth of industrial production, the stock price index, the exchange rate of the Swedish krona, and the balance sheet of Sweden’s central bank, Sveriges Riksbank. It applies an autoregressive distributive lag (ARDL) approach using monthly data to model SGB yields across the Treasury yield curve. The results of the estimated models show that the short-term interest rate has a marked influence on the long-term SGB yield. Such findings reaffirm John Maynard Keynes’s view that the central bank’s monetary policy affects long-term government bond yields through the current short-term interest rate. It also shows that the interest rate behavior observed in Sweden is in concordance with empirical patterns discerned in previous studies related to government bond yields in both advanced countries and emerging markets.Download:Associated Program:Author(s):Tanweer Akram Mahima YadavRelated Topic(s):
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Working Paper No. 1046 | March 2024This paper offers a retrospective view of the key pillar of Solow’s neoclassical growth model, namely the aggregate production function. We review how this tool came to life and how it has survived until today, despite three criticisms that undermined its raison d’être. They are the Cambridge Capital Theory Controversies, the Aggregation Problem, and the Accounting Identity. These criticisms were forgotten by the profession, not because they were wrong but because of the key role played by Robert Solow in the field. Today, these criticisms are not even mentioned when students are introduced to (neoclassical) growth theory, which is presented in most economics departments and macroeconomics textbooks as the only theory worth studying.
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Working Paper No. 1044 | February 2024This paper econometrically models the dynamics of long-term Chinese government bond (CGB) yields based on key macroeconomic and financial variables. It deploys autoregressive distributive lag (ARDL) models to examine whether the short-term interest rate has a decisive influence on the long-term CGB yield, after controlling for various macroeconomic and financial variables, such as inflation or core inflation, the growth of industrial production, the percentage change in the stock price index, the exchange rate of the Chinese yuan, and the balance sheet of the People’s Bank of China (PBOC). The findings show that the short-term interest rate has an economically and statistically significant effect on the long-term CGB yield of various maturity tenors. John Maynard Keynes claimed that the central bank’s policy rate exerts an important influence over long-term government bond yields through the short-term interest rate. The paper’s findings evince that Keynes’s claim holds for China, implying that the PBOC’s actions are a driver of the long-term CGB yield. This means that policymakers in China have considerable leeway in fiscal and monetary operations, government deficit finance, and central government debt management.Download:Associated Program:Author(s):Tanweer Akram Shahida PervinRelated Topic(s):Bond markets Central bank policy Central banking China Interest rates John Maynard Keynes Long-term interest rates Short-term interest ratesRegion(s):Asia
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Working Paper No. 1043 | February 2024This paper critically reviews both mainstream and Keynesian empirical studies of interest rate dynamics. It assesses the key findings of a selected number of these studies, surveying the debates between the mainstream and the Keynesian schools. It also explores the debates on interest rate dynamics within the Post Keynesian school of thought. Lastly, the paper identifies the critical questions relevant for future empirical research.Download:Associated Program:Author(s):Tanweer Akram Khawaja MamunRelated Topic(s):
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Working Paper No. 1035 | January 2024In this paper, we discuss the balance sheet mechanics of the Swedish government. We examine spending, government bond purchases, and tax payments. As long as the Swedish central bank, which is created through Swedish laws, supports the Swedish central government, it cannot run out of money. The Swedish government therefore plays a large role in the Swedish economy. It can and should target full employment and price stability, bringing to bear its fiscal power.Download:Associated Program:Author(s):Dirk Ehnts Jussi OraRelated Topic(s):Region(s):Europe
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Working Paper No. 1034 | December 2023This paper models the month-over-month change in euro-denominated (EUR) long-term interest rate swap yields. It shows that the change in the short-term interest rate has an economically and statistically significant effect on the change in EUR swap yields of different maturity tenors, after controlling for various macroeconomic and financial variables, such as the month-over-month change in inflation or core inflation and the growth of industrial production, and the percentage change in the equity price index, the exchange rate, and the size of the European Central Bank’s (ECB) balance sheet. It uses a generalized autoregressive conditional heteroskedasticity (GARCH) approach to model the dynamics of the monthly change in EUR swap yields and their volatility. The results of the estimated models of EUR swap yields of different maturity tenors extend the Keynesian view that the central bank’s monetary policy actions have a decisive influence on long-term government bond yields and long-term market interest rates, primarily through their effects on the current short-term interest rate.Download:Associated Program:Author(s):Tanweer Akram Khawaja MamunRelated Topic(s):
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Working Paper No. 1025 | August 2023
A Financial Post-Keynesian Comparison
The purpose of public policy, expansionary or contractionary, is to encourage the expansion of income, output, and employment. Theory decides the nature and kind of policy, and the underlying mechanics that result in expansion. Keynes (1964) brings money and a monetary production economy to the forefront of economic analysis, yet in the General Theory, he is skeptical of the efficacy of monetary policy. This paper analyzes how prices of assets, liabilities, and commodities interact in response to unconventional monetary policy and fiscal policy (namely automatic stabilizers) to create conditions that stimulate private investment and economic activity. Modern economics, after accepting the need for intervention, tends to attempt to use monetary policy to steer aggregate demand. “Unconventional” monetary policy such as zero and negative interest rates, and quantitative easing have been instituted in an attempt to fight slumps and stimulate economic activity without increasing government deficits. In this paper, we point out—using Davidson’s (1972) financial post-Keynesian framework—how unconventional monetary policy is not sufficient to create the conditions of backwardation that stimulate production. Finally, we explain how automatic stabilizers, using the Kalecki profits (price) equation, are the best avenue to create the conditions for backwardation that stimulate economic activity. We conclude, like Keynes, that fiscal policy is the reliable path to economic expansion.
Download:Associated Program:Author(s):Nitin NairRelated Topic(s): -
Working Paper No. 1024 | July 2023
A Stock-Flow Consistent Approach to the Currency Hierarchy
Underdevelopment is often conceived as being reproduced domestically. This paper emphasizes the international forces that enable the persistence of underdevelopment. We first explore how the currency hierarchy imposes a dependency relation between developed and underdeveloped economies. We improvise and quantify the currency hierarchy using ratios from the consolidated sovereign balance sheet. Using the improvisation of the currency hierarchy, we identify that a weak currency must compensate its position by resorting to three mechanisms: changes in interest rates, changes in exchange rates, and accumulation of international reserves to improve balance sheet structure. We employ these relationships to formulate two novel, financial post-Keynesian behavioral equations: an international reserves function and a domestic interest rate function. These equations are simulated in a stock-flow consistent model. We simulate the transmission of international shocks and domestic fiscal expansion. The key findings are (1) that the intensity of economic activity in the emerging economy is reliant on the level of economic activity (and policy) i n the developed economy and (2) that any attempts to stimulate—through government spending—the emerging economy benefit primarily the developed economy while harming the emerging economy’s private sector, assuming free capital and goods mobility. This indicates the existence of a balance-of-payment constrained expansion originating from the demand for international reserves as a margin of safety. Simulations show import controls to be a solution. We find government spending complemented by import substitution to be the most appropriate response to a crisis of international origin and suggest the need for international cohesion between emerging economies to create a more conducive international financial and trade system, halting the reproduction of underdevelopment.Download:Associated Program:Author(s):Nitin NairRelated Topic(s): -
Policy Note 2023/3 | July 2023In recalling John Maynard Keynes’s revolutionary theory of interest, reviewing the doctrines Keynes sought to overthrow, and analyzing the structural transformations of the US economy, James K. Galbraith maintains there is no alternative to a policy of low interest rates. However, such a policy cannot be effective, he argues, without a radical restructuring of the US economy as a whole.Download:Associated Program:Author(s):Related Topic(s):
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Working Paper No. 1021 | June 2023
The Role of Profits in Banking Regulation
Since the nineties, crises have punctuated financial markets, shattering the conventional wisdom about how these markets work and how to regulate them, and forcing a deep rethinking of the supervisory framework that, however, did not change much of the banks’ behavior and incentives. In particular, banking regulation did not face the nexus profitability-riskiness. Based on Minsky’s financial instability hypothesis, we discuss the literature on banks’ profitability and its relation to the originate-to-distribute model. We also propose a different strategy for banking regulation, based on a profitability cap that prevents financial innovation from overwhelming supervision. Finally, we discuss the data for the US case, confirming the importance of profitability as a signal of incoming troubles and the possibility of using the profitability cap to greatly simplify banking regulation.Download:Associated Program:Author(s):Lorenzo Esposito Giuseppe MastromatteoRelated Topic(s):
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