Research Programs

Economic Policy for the 21st Century

Economic Policy for the 21st Century

Nearly all Levy Institute research focuses not only on economic analysis, but also on the creation of possible strategies through which policymakers may solve the issue at hand. This program includes research on those macroeconomic policy areas most closely associated with public sector activities: monetary policy and financial institutions, federal budget policy, and the labor market. Examples of studies on monetary policy and financial institutions include explorations of the repercussions the euro’s introduction has had on monetary and fiscal policies and monetary institutions within the European Community; the effectiveness of monetary policy; and Minskyan analyses of the current economic problems in the United States, Japan, and Brazil. Examinations of federal budget policies cover such topics as the effects of budget surpluses on the economy, the need for fiscal expansion to combat economic torpor, and analyses of the Social Security and health care systems.

Associated Programs

Federal Budget Policy
Explorations in Theory and Empirical Analysis
INET–Levy Institute Project

Program Publications

  • Working Paper No. 859 | February 2016
    A Technical Articulation for Asia-Pacific

    Against the backdrop of the 2030 UN Agenda for Sustainable Development, this paper analyzes the measurement issues in gender-based indices constructed by the United Nations Development Programme (UNDP) and suggests alternatives for choice of variables, functional form, and weights. While the UNDP Gender Inequality Index (GII) conceptually reflects the loss in achievement due to inequality between men and women in three dimensions—health, empowerment, and labor force participation—we argue that the assumptions and the choice of variables to capture these dimensions remain inadequate and erroneous, resulting in only the partial capture of gender inequalities. Since the dimensions used for the GII are different from those in the UNDP’s Human Development Index (HDI), we cannot say that a higher value in the GII represents a loss in the HDI due to gender inequalities. The technical obscurity remains how to interpret GII by combining women-specific indicators with indicators that are disaggregated for both men and women. The GII is a partial construct, as it does not capture many significant dimensions of gender inequality. Though this requires a data revolution, we tried to reconstruct the GII in the context of Asia-Pacific using three scenarios: (1) improving the set of variables incorporating unpaid care work, pay gaps, intrahousehold decision making, exposure to knowledge networks, and feminization of governance at local levels; (2) constructing a decomposed index to specify the direction of gender gaps; and (3) compiling an alternative index using Principal Components Index for assigning weights. The choice of countries under the three scenarios is constrained by data paucity. The results reveal that the UNDP GII overestimates the gap between the two genders, and that using women-specific indicators leads to a fallacious estimation of gender inequality. The estimates are illustrative. The implication of the results broadly suggests a return to the UNDP Gender Development Index for capturing gender development, with an improvised set of choices and variables.

  • Working Paper No. 857 | December 2015

    This paper describes the transformations in federal classification of ethno-racial information since the civil rights era of the 1960s. These changes were introduced in the censuses of 1980 and 2000, and we anticipate another major change in the 2020 Census. The most important changes in 1980 introduced the Hispanic Origin and Ancestry questions and the elimination of two questions on parental birthplace. The latter decision has made it impossible to adequately track the progress of the new second generation. The change in 2000 allowed respondents to declare origins in more than one race; the anticipated change for 2020 will create a single question covering race and Hispanic Origin—or, stated more broadly, race and ethnic origin. We show that the 1980 changes created problems in race and ethnic classification that required a “fix,” and the transformation anticipated for 2020 will be that fix. Creating the unified question in the manner the Census Bureau is testing will accomplish by far the hardest part of what we believe should be done. However, we suggest two additional changes of a much simpler nature: restoring the parental birthplace questions (to the annual American Community Survey) and possibly eliminating the Ancestry question (the information it gathered will apparently now be obtained in the single race-and-ethnicity question). The paper is historical in focus. It surveys how the classification system prior to 1980 dealt with the tension between ethno-racial continuity and assimilation (differently for each major type of group); how the political pressures producing the changes of 1980 and 2000 changed the treatment of that tension; and, finally, the building pressure for a further change.

  • Working Paper No. 856 | December 2015
    Evidence from Europe, 2006–13

    We examine the relationship between changes in a country’s public sector fiscal position and inequality at the top and bottom of the income distribution during the age of austerity (2006–13). We use a parametric Lorenz curve model and Gini-like indices of inequality as our measures to assess distributional changes. Based on the EU’s Statistics on Income and Living Conditions SLIC and International Monetary Fund data for 12 European countries, we find that more severe adjustments to the cyclically adjusted primary balance (i.e., more austerity) are associated with a more unequal distribution of income driven by rising inequality at the top. The data also weakly suggest a decrease in inequality at the bottom. The distributional impact of austerity measures reflects the reliance on regressive policies, and likely produces increased incentives for rent seeking while reducing incentives for workers to increase productivity.

    Associated Program(s):
    Markus P.A. Schneider Stephen Kinsella Antoine Godin
    Related Topic(s):

  • Working Paper No. 854 | November 2015
    Graph Theory and Macroeconomic Regimes in Stock-flow Consistent Modeling

    Standard presentations of stock-flow consistent modeling use specific Post Keynesian closures, even though a given stock-flow accounting structure supports various different economic dynamics. In this paper we separate the dynamic closure from the accounting constraints and cast the latter in the language of graph theory. The graph formulation provides (1) a representation of an economy as a collection of cash flows on a network and (2) a collection of algebraic techniques to identify independent versus dependent cash-flow variables and solve the accounting constraints. The separation into independent and dependent variables is not unique, and we argue that each such separation can be interpreted as an institutional structure or policy regime. Questions about macroeconomic regime change can thus be addressed within this framework.

    We illustrate the graph tools through application of the simple stock-flow consistent model, or “SIM model,” found in Godley and Lavoie (2007). In this model there are eight different possible dynamic closures of the same underlying accounting structure. We classify the possible closures and discuss three of them in detail: the “standard” Godley–Lavoie closure, where government spending is the key policy lever; an “austerity” regime, where government spending adjusts to taxes that depend on private sector decisions; and a “colonial” regime, which is driven by taxation.

  • Working Paper No. 850 | October 2015

    We describe the medium-run macroeconomic effects and long-run development consequences of a financial Dutch disease that may take place in a small developing country with abundant natural resources. The first move is in financial markets. An initial surge in foreign direct investment targeting natural resources sets in motion a perverse cycle between exchange rate appreciation and mounting short- and medium-term capital flows. Such a spiral easily leads to exchange rate volatility, capital reversals, and sharp macroeconomic instability. In the long run, macroeconomic instability and overdependence on natural resource exports dampen the development of nontraditional tradable goods sectors and curtail labor productivity dynamics. We advise the introduction of constraints to short- and medium-term capital flows to tame exchange rate/capital flows boom-and-bust cycles. We support the implementation of a developmentalist monetary policy targeting competitive nominal and real exchange rates in order to encourage product and export diversification.

  • Working Paper No. 843 | July 2015

    This paper has two main objectives. The first is to propose a policy architecture that can prevent a very high public debt from resulting in a high tax burden, a government default, or inflation. The second objective is to show that government deficits do not face a financing problem. After these deficits are initially financed through the net creation of base money, the private sector necessarily realizes savings, in the form of either government bond purchases or, if a default is feared, “acquisitions” of new money.

  • In the Media | March 2015
    El Salmon Contracorriente, 5 Marzo 2015. Reservados todos los derechos. 

    Randall Wray abrió el acto explicando al público una de las bases de su enfoque teórico: la apertura del discurso económico hacia una perspectiva distinta a la que se imparte en la universidad. El profesor estadounidense planteó que para criticar el actual modelo económico es necesario conocer la teoría y se desmarcó de la idea predominante al afirmar que “existen cosas primordiales que son más importantes que el déficit público”, antes de profundizar en la propuesta de Trabajo Garantizado, que calificó de “sentido común”....

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  • In the Media | March 2015
    El Correro, 4 Marzo 2015. Reservados todos los derechos.

    Izquierda Unida quiere que el trabajo esté "garantizado" en Espaã como elemento de inserción social imprescindible y, para ello, propone implantarlo de forma gradual y por etapas con la creación de un millón de empleos el primer aõ con menos del 1% del PIB....

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  • In the Media | March 2015
    Público, 04 de marzo 2015. Reservados todos los derechos.

    MADRID — El portavoz económico de la Izquierda Plural (IU-ICV-CHA) y próximo candidato de Izquierda Unida a la Presidencia del Gobierno, Alberto Garzón, ha presentado este miércoles una propuesta para crear un millón de empleos por una inversión neta de 9.600 millones de euros en su primer año de aplicación.   Este programa de trabajo garantizado, que será una de las piezas angulares de su programa electoral en el ámbito laboral, se inspira en la teoría monetaria moderna y en el libro del profesor L. Randall Wray sobre este asunto, que aporta un discurso alternativo a las teorías convencionales sobre cómo debe gastar e invertir el Estado para mejorar el bienestar social y garantizar el derecho al trabajo que tienen los ciudadanos.

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  • In the Media | March 2015
    By Campbell R. Harvey and Éric Tymoigne
    The Wall Street Journal, March 1, 2015. All Rights Reserved.

    Despite the mystery, the whiff of scandal, and general public unfamiliarity with the concept, somebody out there is buying, and selling, not just bitcoin but dozens of other cryptocurrencies as well. The total market capitalization for these unregulated electronic forms of payment was roughly $4.04 billion as of mid-February, according to, a website that tracks trading in alternative currencies. More than 500 altcoins, as they are also known, were represented on the site recently.

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    Associated Program: