Research Programs

Monetary Policy and Financial Structure

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

  • Working Paper No. 877 | November 2016

    Against the background of modern-day monetary proposals, ranging from a return to the gold standard to the wholesale abolition of currency, this paper seeks to draw implications from David Ricardo’s Proposals for an Economical and Secure Currency for plans to reform the operation of central banks and extraordinary monetary policy. Although 200 years old, the “Ingot plan,” proposed during a period in which gold convertibility was suspended, appears to be applicable to modern monetary conditions and suggests possible avenues of reform.

  • Working Paper No. 876 | October 2016
    The Fed’s Unjustified Rationale

    In December 2015, the Federal Reserve Board (FRB) initiated the process of “normalization,” with the objective of gradually raising the federal funds rate back to “normal”—i.e., levels that are “neither expansionary nor contrary” and are consistent with the established 2 percent longer-run goal for the annual Personal Consumption Expenditures index and the estimated natural rate of unemployment. This paper argues that the urgency and rationale behind the rate hikes are not theoretically sound or empirically justified. Despite policymakers’ celebration of “substantial” labor market progress, we are still short some 20 million jobs. Further, there is no reason to believe that the current exceptionally low inflation rates are transitory. Quite the contrary: without significant fiscal efforts to restore the bargaining power of labor, inflation rates are expected to remain below the Federal Open Market Committee’s long-term goal for years to come. Also, there is little empirical evidence or theoretical support for the FRB’s suggestion that higher interest rates are necessary to counter “excessive” risk-taking or provide a more stable financial environment.

  • Working Paper No. 875 | September 2016
    A Global Cap to Build an Effective Postcrisis Banking Supervision Framework

    The global financial crisis shattered the conventional wisdom about how financial markets work and how to regulate them. Authorities intervened to stop the panic—short-term pragmatism that spoke volumes about the robustness of mainstream economics. However, their very success in taming the collapse reduced efforts to radically change the “big bank” business model and lessened the possibility of serious banking reform—meaning that a strong and possibly even bigger financial crisis is inevitable in the future. We think an overall alternative is needed and at hand: Minsky’s theories on investment, financial stability, the growing weight of the financial sector, and the role of the state. Building on this legacy, it is possible to analyze which aspects of the post-2008 reforms actually work. In this respect, we argue that the only effective solution is to impose a global cap on the absolute size of banks.

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    Associated Program(s):
    Author(s):
    Giuseppe Mastromatteo Lorenzo Esposito
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  • In the Media | August 2016
    Manhattan Neighborhood Network, August 25, 2016. All Rights Reserved.

    "Radical Imagination" host Jim Vrettos talks to Senior Scholar L. Randall Wray about what the US economy might look like under a Stein, Clinton, Trump, or Johnson administration.

    Full video of the interview is available here.
  • In the Media | August 2016
    By Jeff Spross
    The Week, August 22, 2016. All Rights Reserved.

    The election isn't here yet, but it's looking more and more likely Hillary Clinton will trounce Donald Trump in November. Speculation over who she might appoint as advisors and agency heads has already commenced. And like anyone else, I have got my own opinions about who Clinton should pick, particularly when it comes to the economics positions….

    Read more: http://theweek.com/articles/643874/hillary-clintons-economic-dream-team
     
  • In the Media | July 2016
    The Economist, July 28, 2016. All Rights Reserved.

    From the start of his academic career in the 1950s until 1996, when he died, Hyman Minsky laboured in relative obscurity. His research about financial crises and their causes attracted a few devoted admirers but little mainstream attention: this newspaper cited him only once while he was alive, and it was but a brief mention. So it remained until 2007, when the subprime-mortgage crisis erupted in America. Suddenly, it seemed that everyone was turning to his writings as they tried to make sense of the mayhem....

    Read more: http://www.economist.com/news/economics-brief/21702740-second-article-our-series-seminal-economic-ideas-looks-hyman-minskys />
  • In the Media | July 2016
    Andrea Terzi
    Public Debt Project, July 14, 2016. All Rights Reserved.

    Twice in the second half of the twentieth century, in the midst of a robust economy, economists optimistically talked about the taming and even “the death of the business cycle” based on the belief that advances in macroeconomics had reached a point of perfection. Yet, both times, the economy underwent serious turbulence and the policies that seemed to have “solved the problem” proved inadequate to the challenges presented by unexpected realities. In the 1970s, the “neo-classical synthesis,” with its faith in forecasting and macroeconomic “fine tuning,” succumbed to stagflation and a new theory, the Monetarist paradigm, came to prominence....

    Read more: http://privatedebtproject.org/view-articles.php?Connecting-the-Dots-Debt-Savings-and-the-Need-for-a-Fiscal-Growth-Policy-21
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    Author(s):
  • Working Paper No. 869 | June 2016
    Phases of Financialization within the 20th Century in the United States

    This paper explores from a historical perspective the process of financialization over the course of the 20th century. We identify four phases of financialization: the first, from the 1900s to 1933 (early financialization); the second, from 1933 to 1940 (transitory phase); the third, between 1945 and 1973 (definancialization); and the fourth period begins in the early 1970s and leads to the Great Recession (complex financialization). Our findings indicate that the main features of the current phase of financialization were already in place in the first period. We closely examine institutions within these distinct financial regimes and focus on the relative size of the financial sector, the respective regulation regime of each period, and the intensity of the shareholder value orientation, as well as the level of financial innovations implemented. Although financialization is a recent term, the process is far from novel. We conclude that its effects can be studied better with reference to economic history.

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    Associated Program(s):
    Author(s):
    Apostolos Fasianos Diego Guevara Christos Pierros
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    Region(s):
    United States

  • Working Paper No. 868 | June 2016
    The ECB’s Belated Conversion?

    This paper investigates the European Central Bank’s (ECB) monetary policies. It identifies an antigrowth bias in the bank’s monetary policy approach: the ECB is quick to hike, but slow to ease. Similarly, while other players and institutional deficiencies share responsibility for the euro’s failure, the bank has generally done “too little, too late” with regard to managing the euro crisis, preventing protracted stagnation, and containing deflation threats. The bank remains attached to the euro area’s official competitive wage–repression strategy, which is in conflict with the ECB’s price stability mandate and undermines its more recent, unconventional monetary policy initiatives designed to restore price stability. The ECB needs a “Euro Treasury” partner to overcome the euro regime’s most serious flaw: the divorce between central bank and treasury institutions.