The State of the US and World EconomiesThis program's central focus is the use of Levy Institute macroeconomic models in generating strategic analyses of the US and world economies. The outcomes of alternative scenarios are projected and analyzed, with the results—published as Strategic Analysis reports—serving to help policymakers understand the implications of various policy options.
The Levy Institute macroeconomic models, created by Distinguished Scholar Wynne Godley, are accounting based. The US model employs a complete and consistent system (in that all sectors “sum up,” with no unaccounted leakages) of stocks and flows (such as income, production, and wealth). The world model is a “closed” system, in which 11 trading blocs—of which the United States, China, Japan, and Western Europe are four—are represented. This model is based on a matrix in which each bloc’s imports are described in terms of exports from the other 10 blocs. From this information, and using alternative assumptions (e.g., growth rates, trade shares, and energy demands and supplies), trends are identified and patterns of trade and production analyzed.
The projections derived from the models are not presented as short-term forecasts. The aim is to display, based on analysis of the recent past, what it seems reasonable to expect if current trends, policies, and relationships continue. To inform policy, it is not necessary to establish that a particular projection will come to pass, but only that it is something that must be given serious consideration as a possibility. The usefulness of such analyses is strategic: they can serve to warn policymakers of potential dangers and serve as a guide to policy instruments that are available, or should be made available, to deal with those dangers, should they arise.
Policy Note 2020/6 | October 2020As COVID-19 infection and test positivity rates rise in the United States and federal stimulus plans expire, Senior Scholar Jan Kregel articulates an alternative approach to analyzing the economic problems raised by the pandemic and organizing an appropriate policy response. In contrast to both the mainstream and some Keynesian-inspired approaches, Kregel advocates a central role for direct social provisioning as a means of equitably sharing the costs of quarantine under conditions of strict lockdown.Download:Associated Program(s):Author(s):Related Topic(s):Region(s):United StatesWorking Paper No. 971 | September 2020In a seminal 1972 paper, Robert M. May asked: “Will a Large Complex System Be Stable?” and argued that stability (of a broad class of random linear systems) decreases with increasing complexity, sparking a revolution in our understanding of ecosystem dynamics. Twenty-five years later, May, Levin, and Sugihara translated our understanding of the dynamics of ecological networks to the financial world in a second seminal paper, “Complex Systems: Ecology for Bankers.” Just a year later, the US subprime crisis led to a near worldwide “great recession,” spread by the world financial network. In the present paper we describe highlights in the development of our present understanding of stability and complexity in network systems, in order to better understand the role of networks in both stabilizing and destabilizing economic systems. A brief version of this working paper, focused on the underlying theory, appeared as an invited feature article in the February 2020 Society for Chaos Theory in Psychology and the Life Sciences newsletter (Hastings et al. 2020).Download:Associated Program(s):Author(s):Harold M. Hastings Tai Young-Taft Chih-Jui TsenRelated Topic(s):Region(s):United StatesPress Releases | March 2020Download:Associated Program:Author(s):Mark PrimoffRelated Topic(s):Region(s):United StatesPolicy Note 2020/1 | March 2020
The Economic Implications of the PandemicThe spread of the new coronavirus (COVID-19) is a major shock for the US and global economies. Research Scholar Michalis Nikiforos explains that we cannot fully understand the economic implications of the pandemic without reference to two Minskyan processes at play in the US economy: the growing divergence of stock market prices from output prices, and the increasing fragility in corporate balance sheets.
The pandemic did not arrive in the context of an otherwise healthy US economy—the demand and supply dimensions of the shock have aggravated an inevitable adjustment process. Using a Minskyan framework, we can understand how the current economic weakness can be perpetuated through feedback effects between flows of demand and supply and their balance sheet impacts.Download:Associated Program(s):Author(s):Related Topic(s):COVID-19 Economic crisis Financial crisis Hyman Minsky Instability Private sector debt Recession Stock markets Stock-flow consistencyRegion(s):United StatesPress Releases | March 2020Download:Associated Program:Author(s):Mark PrimoffRelated Topic(s):Region(s):United StatesOne-Pager No. 62 | March 2020As the coronavirus (COVID-19) spreads across the United States, it has become clear that, in addition to the public health response (which has been far less than adequate), an economic response is needed. Yeva Nersisyan and Senior Scholar L. Randall Wray identify four steps that require immediate attention: (1) full coverage of medical costs associated with testing and treatment of COVID-19; (2) mandated paid sick leave and full coverage of associated costs; (3) debt relief for families; and (4) swift deployment of testing and treatment facilities to underserved communities.Download:Associated Program:Author(s):Yeva Nersisyan L. Randall WrayRelated Topic(s):Region(s):United StatesOne-Pager No. 61 | March 2020The rapidly growing uncertainty about the potential global fallout from an emerging pandemic is occurring against a background in which there is evidence US corporate sector balance sheets are significantly overstretched, exhibiting a degree of fragility that, according to some measures, is unmatched in the postwar historical record. The US economy is vulnerable to a shock that could trigger a cascade of falling asset prices and private sector deleveraging, with severe consequences for both the real and financial sides of the economy.Download:Associated Program:Author(s):Related Topic(s):Region(s):United StatesWorking Paper No. 945 | January 2020The present paper emphasizes the role of demand, income distribution, endogenous productivity reactions, and other structural changes in the slowdown of the growth rate of output and productivity that has been observed in the United States over the last four decades. In particular, it is explained that weak net export demand, fiscal conservatism, and the increase in income inequality have put downward pressure on demand. Up until the crisis, this pressure was partially compensated for through debt-financed expenditure on behalf of the private sector, especially middle- and lower-income households. This debt overhang is now another obstacle in the way of demand recovery. In turn, as emphasized by the Kaldor-Verdoorn law and the induced technical change approach, the decrease in demand and the stagnation of wages can lead to an endogenous slowdown in productivity growth. Moreover, it is argued that the increasingly oligopolistic and financialized structure of the US economy also contributes to the slowdown. Finally, the paper argues that there is nothing secular about the current stagnation; addressing the aforementioned factors can allow for growth to resume, as has happened in the past.Download:Associated Program(s):Author(s):Related Topic(s):Region(s):United StatesPublic Policy Brief No. 148 | January 2020In this policy brief, Yeva Nersisyan and Senior Scholar L. Randall Wray argue that assessing the “affordability” of the Green New Deal is a question of whether there are suitable and sufficient real resources than can be mobilized to implement this ambitious approach to climate policy. Only after a careful resource accounting can we address the question of whether taxes and other means might be needed to reduce private spending to avoid inflation as the Green New Deal is phased in.
Nersisyan and Wray provide a first attempt at resource budgeting for the Green New Deal, weighing available resources—including potential excess capacity and resources that can be shifted away from existing production—against what will be needed to implement the major elements of this plan to fight climate change and ensure a just transition to a more sustainable economic model.Download:Associated Program(s):Author(s):Yeva Nersisyan L. Randall WrayRelated Topic(s):Region(s):United StatesStrategic Analysis | January 2020
2020 and BeyondThis Strategic Analysis examines the US economy’s prospects for 2020–23 and the risks that lie ahead. The baseline projection generated by the Levy Institute’s stock-flow consistent macroeconomic model shows that, given current fiscal arrangements and the slowdown in the global economy, the pace of the US recovery will slacken somewhat, with a growth rate that will average 1.5 percent over the next several years.
The authors then point to three factors that can derail this already weak baseline trajectory: (1) an overvalued stock market; (2) evidence that the corporate sector’s balance sheets are more fragile than they have ever been in the postwar period; and (3) risks in the foreign sector stemming from the slowdown of the global economy, an overvalued dollar, and the current administration’s erratic trade policy.Download:Associated Program:Author(s):Related Topic(s):Region(s):United States
Strategic Analysis | December 2020In this report, projections of a “business as usual” baseline scenario for the Greek economy show that a V-shaped recovery is not in the cards, with the emergence of the COVID-19 virus’s second wave and the economic consequence of businesses shutdowns and further employment loss. A more robust GDP growth rate and the consequent growth in employment can be realized with the combined effects of European recovery funds together with an enhanced public benefit jobs program. It is this mix of policies that can gain traction and bear fruit in putting the Greek economy on a path to sustainable and inclusive growth.
This Strategic Analysis report is the joint product of the Levy Economics Institute of Bard College and INE-GSEE (Athens, Greece). It will be simultaneously issued in both English and Greek.Download:Associated Program:Author(s):Related Topic(s):COVID-19 Employer of Last Resort (ELR) policy Greece Greek economic crisis Job guarantee Levy Institute Model for Greece (LIMG)Region(s):EuropeStrategic Analysis | October 2020Italy was the first European country to be impacted by COVID-19, rapidly overwhelming healthcare facilities in some areas and prompting the government to shut down nonessential economic activities, with an inevitable (asymmetric) impact on production and income. Though the gradual reopening of most business activities began in 2020Q3, the extent of the shutdown’s damage is difficult to assess. The current political debate is now focusing on what can be achieved with European funds (in the form of both grants and loans), which should become available beginning in 2021. In this Strategic Analysis, Institute President Dimitri B. Papadimitriou, Research Associate Francesco Zezza, and Research Scholar Gennaro Zezza detail the shutdown’s impact on business activities in Italy, incorporating the planned government intervention with preliminary evidence available through 2020Q3 to evaluate a baseline projection for the Italian economy up to 2022.Download:Associated Program:Author(s):Related Topic(s):Region(s):EuropeWorking Paper No. 967 | September 2020This paper assesses the quality of the statistical matching used in the LIMTIP estimates for Italy for 2008 and 2014. The match combines the 2008–9 and 2013–14 Italian Time Use Survey (IT-TUS) with the Italian data collected for the European Survey on Income and Living Conditions (IT-SILC) in 2009 and 2015. After the matching, the analysis of the joint distributions of the variables shows that the quality is good.
The preliminary results of the LIMTIP estimates in Italy display widespread time poverty, which translates into significant hidden poverty. The LIMTIP also reveals that the increase in the poverty rate between 2008 and 2014 was even higher that what standard poverty measures report.Download:Associated Program(s):The Distribution of Income and Wealth The Levy Institute Measure of Time and Income Poverty The State of the US and World EconomiesAuthor(s):Erica AloèRelated Topic(s):Household production Italy Levy Institute Measure of Time and Income Poverty (LIMTIP) Poverty Statistical matching Time useRegion(s):EuropePublic Policy Brief No. 151 | June 2020
Recent Experience and Future Prospects in the Post-COVID-19 EraThis policy brief provides a discussion of the relationships between austerity, Greece’s macroeconomic performance, debt sustainability, and the provision of healthcare and other social services over the last decade. It explains that austerity was imposed in the name of debt sustainability. However, there was a vicious cycle of recession and austerity: each round of austerity measures led to a deeper recession, which increased the debt-to-GDP ratio and therefore undermined the goal of debt sustainability, leading to another round of austerity. One of the effects of these austerity policies was the significant reduction in healthcare expenditure, which made Greece more vulnerable to the recent pandemic. Finally, it shows how recent pre-COVID debt sustainability analyses projected that Greek public debt would become unsustainable even under minor deviations from an optimistic baseline. The pandemic shock will thus lead to an explosion of public debt. This brings the need for a restructuring of the Greek public debt to the fore once again, as well as other policies that will address the eurozone’s structural imbalances.Download:Associated Program:Author(s):Related Topic(s):Region(s):EuropeWorking Paper No. 958 | June 2020Macroeconomists and political officers need rigorous, albeit realistic, quantitative models to forecast the future paths and dynamics of some variables of interest while being able to evaluate the effects of alternative scenarios. At the heart of all these models lies a standard macroeconomic module that, depending on the degree of sophistication and the research questions to be answered, represents how the economy works. However, the complete absence of a realistic monetary framework, along with the abstraction of banks and more generally of real–financial interactions—not only in dynamic stochastic general equilibrium (DSGE) models but also in central banks’ structural econometric models—made it impossible to detect the rising financial fragility that led to the Great Recession.
In this paper, we show how to address the missing links between the real and financial sectors within a post-Keynesian framework, presenting a quarterly stock-flow consistent (SFC) structural model of the Italian economy. We set up the accounting structure of the sectoral transactions, describing our “transaction matrix” and “balance sheet matrix,” starting from the appropriate sectoral data sources. We then “close” all sectoral financial accounts, describe portfolio choices, and define the buffer stocks for each class of assets and sector in the model. We describe our estimation strategy, present the main stochastic equations, and, finally, discuss the main channels of transmissions in our model.Download:Associated Program:Author(s):Related Topic(s):Region(s):EuropeStrategic Analysis | May 2020Greece’s fragile economic recovery was halted by the COVID-19 pandemic: GDP, employment, exports, and investment are expected to record significantly negative trends. While some projections for GDP growth show a quick V-shaped recovery beginning in 2021, this is rather improbable given the Greek economy’s structural inefficiencies.
This strategic analysis explores the consequences of various assumptions about the fall in the different sources of aggregate demand in order to produce a baseline projection for the Greek economy. A more optimistic scenario is also analyzed, in which the European Commission’s recently announced Recovery Fund materializes, allowing the government to increase public consumption as well as investment through EU grants and loans. The authors recommend additional measures to alleviate the impact of the shock and help put Greece’s economy back on track when the epidemic has died out.Download:Associated Program:Author(s):Related Topic(s):Region(s):EuropeWorking Paper No. 948 | February 2020This paper analyzes recent macroeconomic developments in the eurozone, particularly in Germany. Several economic indicators are sending signals of a looming German recession. Geopolitical tensions caused by trade disputes between the United States and China, plus the risk of a disorderly Brexit, began disrupting the global supply chain in manufacturing. German output contraction has been centered on manufacturing, particularly the automobile sector. Despite circumstances that call for fiscal intervention to rescue the economy, Chancellor Angela Merkel’s government was overdue with corrective measures. This paper explains Germany’s hesitancy to protect its economy, which has been based on a political and historical ideology that that rejects issuing new public debt to increase public spending, thus leaving the economy exposed to the doldrums. The paper also considers serious shortcomings in the European Union’s (EU) foreign and defense policies that recently surfaced during the Syrian refugee crisis. The eurocrisis revealed near-fatal weaknesses of the European Monetary Union (EMU), which is still incomplete without a common fiscal policy, a common budget, and a banking union. Unless corrected, such deficiencies will cause both the EU and the EMU to dissolve if another asymmetric shock occurs. This paper also analyzes recent geopolitical developments that are crucial to the EU/eurozone’s existential crisis.Download:Associated Program(s):Author(s):George Zestos Rachel N. CookeRelated Topic(s):Region(s):EuropeStrategic Analysis | January 20202019 marked the third year of the continuing economic recovery in Greece, with real GDP and employment rising, albeit at modest rates. In this Strategic Analysis we note that the expansion has mainly been driven by net exports, with tourism playing a dominant role. However, household consumption and investment are still too far below their precrisis levels, and a stronger and sustainable recovery should target these components of domestic demand as well.
Fiscal austerity imposed on the Greek government has achieved its target in terms of public finances, such that some fiscal space is now available to stimulate the economy. Our simulations for the 2019–21 period show that under current conditions the economy is likely to continue on a path of modest growth, and that the amount of private investment needed for a stronger recovery is unlikely to materialize.Download:Associated Program:Author(s):Related Topic(s):Region(s):EuropePolicy Note 2019/1 | April 2019While a consensus has formed that the eurozone’s economic governance mechanisms must be reformed, and some progress has been made on this front, what has been agreed to so far falls short of what is needed to address the central imbalances caused by the eurozone setup, according to Paolo Savona.
The key elements that are missing from the current package of reforms are interrelated: a common insurance scheme for bank deposits, the possible regulation of banks’ sovereign exposure, and the existence of a common safe asset. Savona outlines a proposal to increase the supply of safe assets provided by a common European issuer (the European Stability Mechanism) and explains how the plan could be made economically and politically satisfactory to all member states while facilitating progress on the deposit insurance and sovereign exposure issues.Download:Associated Program(s):Author(s):Paolo SavonaRelated Topic(s):Region(s):EuropePublic Policy Brief No. 147 | March 2019As global market integration collides with growing demands for national political sovereignty, Senior Scholar Jan Kregel contrasts two diametrically opposed approaches to managing the tensions between international financial coordination and national autonomy. The first, a road not taken, is John Maynard Keynes’s proposal to reform the postwar international financial system. The second is the approach taken in the establishment of the eurozone and the development of its settlement and payment system. Analysis of Keynes’s clearing union proposal and its underlying theoretical approach highlights the flaws of the current eurozone setup.Download:Associated Program(s):Author(s):Related Topic(s):Banking principle Clearing union Creditor countries Debtor countries Euro Eurozone Gold standard John Maynard Keynes Monetary theory TARGET2Region(s):Europe
Working Paper No. 938 | October 2019Nominal yields for Japanese government bonds (JGBs) have been remarkably low for several decades. Japanese government debt ratios have continued to increase amid a protracted period of stagnant nominal GDP, low inflation, and deflationary pressures. Many analysts are puzzled by the phenomenon of JGBs’ low nominal yields because Japanese government debt ratios are elevated. However, this paper shows that the Bank of Japan’s (BoJ) highly accommodative monetary policy is primarily responsible for keeping JGB yields low for a protracted period. This is consistent with Keynes’s view that the short-term interest rate is the key driver of the long-term interest rate. This paper also relates the BoJ’s monetary policy and economic developments in Japan to the evolution of JGBs’ long-term interest rates.Download:Associated Program(s):Author(s):Tanweer Akram Huiqing LiRelated Topic(s):Government bond yields Japan Japanese government bonds (JGBs) John Maynard Keynes Long-term interest rates Monetary policy Nominal bond yieldsRegion(s):AsiaBook Series | October 2019The principle of fiscal federalism enshrined in India's Constitution is under severe strain today. This book is a key addition to understanding the challenges involved. The authors capture the implications of the abolition of the Planning Commission, the introduction of the controversial Goods and Services Tax regime, and formulation of Terms of Reference of the 15th Finance Commission. These include the increase in vertical fiscal inequity, distortion of fairness in inter-State distribution, and erosion of policy autonomy at the level of the States.
Published by: Leftword PressPolicy Note 2019/2 | May 2019Against the background of an ongoing trade dispute between the United States and China, Senior Scholar Jan Kregel analyzes the potential for achieving international adjustment without producing a negative impact on national and global growth. Once the structure of trade in the current international system is understood (with its global production chains and large imbalances financed by international borrowing and lending), it is clear that national strategies focused on tariff adjustment to reduce bilateral imbalances will not succeed. This understanding of the evolution of the structure of trade and international finance should also inform our view of how to design a new international financial system capable of dealing with increasingly large international trade imbalances.Download:Associated Program(s):Author(s):Related Topic(s):Capital flows Current account imbalances International finance International trade Tariffs Trade imbalancesRegion(s):United States, AsiaWorking Paper No. 906 | May 2018This paper employs a Keynesian perspective to explain why Japanese government bonds’ (JGBs) nominal yields have been low for more than two decades. It deploys several vector error correction (VEC) models to estimate long-term government bond yields. It shows that the low short-term interest rate, induced by the Bank of Japan’s (BoJ) accommodative monetary policy, is mainly responsible for keeping long-term JGBs’ nominal yields exceptionally low for a protracted period. The results also demonstrate that higher government debt and deficit ratios do not exert upward pressure on JGBs’ nominal yields. These findings are relevant to ongoing policy debates in Japan and other advanced countries about government bond yields, fiscal sustainability, fiscal policy, functional finance, monetary policy, and financial stability.Download:Associated Program(s):Author(s):Tanweer Akram Huiqing LiRelated Topic(s):Banking Japanese government bonds (JGBs) John Maynard Keynes Long-term interest rates Monetary policy Nominal bond yieldsRegion(s):AsiaWorking Paper No. 881 | January 2017
This paper investigates the long-term determinants of Indian government bonds’ (IGB) nominal yields. It examines whether John Maynard Keynes’s supposition that short-term interest rates are the key driver of long-term government bond yields holds over the long-run horizon, after controlling for various key economic factors such as inflationary pressure and measures of economic activity. It also appraises whether the government finance variable—the ratio of government debt to nominal income—has an adverse effect on government bond yields over a long-run horizon. The models estimated here show that in India, short-term interest rates are the key driver of long-term government bond yields over the long run. However, the ratio of government debt and nominal income does not have any discernible adverse effect on yields over a long-run horizon. These findings will help policymakers in India (and elsewhere) to use information on the current trend in short-term interest rates, the federal fiscal balance, and other key macro variables to form their long-term outlook on IGB yields, and to understand the implications of the government’s fiscal stance on the government bond market.Download:Associated Program(s):Author(s):Tanweer Akram Anupam DasRelated Topic(s):Region(s):AsiaWorking Paper No. 872 | August 2016
Do Fiscal Rules Impose Hard Budget Constraints?
The primary objective of rule-based fiscal legislation at the subnational level in India is to achieve debt sustainability by placing a ceiling on borrowing and the use of borrowed resources for public capital investment by phasing out deficits in the budget revenue account. This paper examines whether the application of fiscal rules has contributed to an increase in fiscal space for public capital investment spending in major Indian states. Our analysis shows that, controlling for other factors, there is a negative relationship between fiscal rules and public capital investment spending at the state level under the rule-based fiscal regime.Download:Associated Program(s):Author(s):Related Topic(s):Region(s):AsiaWorking Paper No. 862 | March 2016
Japan has experienced stagnation, deflation, and low interest rates for decades. It is caught in a liquidity trap. This paper examines Japan’s liquidity trap in light of the structure and performance of the country’s economy since the onset of stagnation. It also analyzes the country’s liquidity trap in terms of the different strands in the theoretical literature. It is argued that insights from a Keynesian perspective are still quite relevant. The Keynesian perspective is useful not just for understanding Japan’s liquidity trap but also for formulating and implementing policies that can overcome the liquidity trap and foster renewed economic growth and prosperity. Paul Krugman (1998a, b) and Ben Bernanke (2000; 2002) identify low inflation and deflation risks as the cause of a liquidity trap. Hence, they advocate a credible commitment by the central bank to sustained monetary easing as the key to reigniting inflation, creating an exit from a liquidity trap through low interest rates and quantitative easing. In contrast, for John Maynard Keynes (2007 ) the possibility of a liquidity trap arises from a sharp rise in investors’ liquidity preference and the fear of capital losses due to uncertainty about the direction of interest rates. His analysis calls for an integrated strategy for overcoming a liquidity trap. This strategy consists of vigorous fiscal policy and employment creation to induce a higher expected marginal efficiency of capital, while the central bank stabilizes the yield curve and reduces interest rate volatility to mitigate investors’ expectations of capital loss. In light of Japan’s experience, Keynes’s analysis and proposal for generating effective demand might well be a more appropriate remedy for the country’s liquidity trap.Download:Associated Program(s):Author(s):Tanweer AkramRelated Topic(s):Region(s):AsiaIn the Media | June 2015Economia, June 23, 2015. All Rights Reserved.
All'interno del quadro economico internazionale, Jan Kregel, direttore del programma “Politica Monetaria” presso il Levy Economic Institute negli USA, analizza qual è stato il ruolo degli Stati Uniti all'interno della crisi economica. Uno degli elementi che viene messo maggiormente in evidenza, è l' importanza data al settore finanziario, rispetto all'economia reale: ciò ha portando ad una minore attenzione a problemi come la disoccupazione, che rappresenta ancora una delle questioni irrisolte dell'Europa, ma soprattutto dell'Italia.
Una volta che la crisi economica è scoppiata negli Usa, si è diffusa a macchia d'olio specie nel continente europeo, dove la forbice presente tra europa meridionale e settentrionale, si è notevolmente ampliata. A tale ritratto, Kregel, aggiunge anche un'attenta le politiche economiche messe in atto da Cina e Giappone e dalle loro ripercussioni sul sistema economico mondiale.
intervista videoregistrata: http://www.economia.rai.it/articoli/la-crisi-negli-usa-il-punto-di-vista-di-jan-kregel/30575/default.aspxWorking Paper No. 834 | March 2015
John Maynard Keynes held that the central bank’s actions determine long-term interest rates through short-term interest rates and various monetary policy measures. His conjectures about the determinants of long-term interest rates were made in the context of advanced capitalist economies, and were based on his views on ontological uncertainty and the formation of investors’ expectations. Are these conjectures valid in emerging markets, such as India? This paper empirically investigates the determinants of changes in Indian government bonds’ nominal yields. Changes in short-term interest rates, after controlling for other crucial variables such as changes in the rates of inflation and economic activity, take a lead role in driving changes in the nominal yields of Indian government bonds. This vindicates Keynes’s theories, and suggests that his views on long-term interest rates are also applicable to emerging markets. Higher fiscal deficits do not appear to raise government bond yields in India. It is further argued that Keynes’s conjectures about investors’ outlooks, views, and expectations are fairly robust in a world of ontological uncertainty.Download:Associated Program(s):Author(s):Tanweer Akram Anupam DasRelated Topic(s):Region(s):AsiaWorking Paper No. 813 | August 2014
For Economic Stimulus, or for Austerity and Volatility?
The implementation of economic reforms under new economic policies in India was associated with a paradigmatic shift in monetary and fiscal policy. While monetary policies were solely aimed at “price stability” in the neoliberal regime, fiscal policies were characterized by the objective of maintaining “sound finance” and “austerity.” Such monetarist principles and measures have also loomed over the global recession. This paper highlights the theoretical fallacies of monetarism and analyzes the consequences of such policy measures in India, particularly during the period of the global recession. Not only did such policies pose constraints on the recovery of output and employment, with adverse impacts on income distribution; but they also failed to achieve their stated goal in terms of price stability. By citing examples from southern Europe and India, this paper concludes that such monetarist policy measures have been responsible for stagnation, with a rise in price volatility and macroeconomic instability in the midst of the global recession.Download:Associated Program:Author(s):Sunanda Sen Zico DasGuptaRelated Topic(s):Austerity Development expenditures Exchange rate volatility Fiscal deficit Fiscal policy Fiscal Responsibility and Budget Management Act (FRBMA), India Inflation Interest payments Interest rates Monetarism Monetary policy Sound financeRegion(s):Asia
Working Paper No. 980 | December 2020
A Stock-Flow Consistent Framework for MexicoThis working paper empirically and theoretically analyzes the exchange rate’s role in Mexico’s development for the period 2004–19. We test the hypothesis of the re(emergence) of the balance sheet effect due to an increase in external debt in the nonfinancial corporate sector; higher foreign debt would affect private investment after episodes of real currency depreciation, in the spirit of the literature put forward by Gertler, Gilchrist, and Natalucci (2007) and Céspedes, Chang, and Velasco (2004). We build a stock-flow consistent (SFC) model, following the OPENFLEX model proposed in Godley and Lavoie (2006), to explore the balance sheet implications from a theoretical perspective. We simulate the 2014 fall in the Mexican peso generated by the drop in oil prices to replicate stylized facts for Mexico for the period under investigation. The scenario analysis points to a hysteresis effect of the real exchange rate (RER) depreciation on investment flows. That is, firms’ investment ratio does not completely recover from negative shocks in the currency.Download:Associated Program:Author(s):Lorenzo Nalin Giuliano Toshiro YajimaRelated Topic(s):Foreign exchange International finance forecasting Macro-based behavioral economics Modeling methodologyRegion(s):Latin AmericaWorking Paper No. 975 | November 2020
Some Insights from an Empirical Stock-Flow Consistent ModelThe Argentinean economy has just ended another lost decade. After the peak registered in 2011, the per capita GDP has oscillated with a decreasing trend, leaving the economy poorer than it was ten years before. During these ten years, different governments with conflicting macroeconomic programs were in power, none of them able to save the economy from stagflation. The goal of this paper is to address to what extent the economic performance would have been better had other policy combinations been implemented. The analysis is made through an empirical quarterly stock-flow consistent (SFC) model for the period 2007–19 in order to ensure the coherence of the results and to give the outcomes of the simulations a holistic and dynamically consistent interpretation. From the results of the simulations it seems that the problem that is keeping Argentina in stagflation goes beyond the domain of macroeconomics. The fact that in practice two divergent macroeconomic programs were implemented—neither of them being able to produce good and sustainable macroeconomic performance—is a first symptom that favors the case for that hypothesis. When the model is used to counterfactually test the policy recommendations of these approaches with the external conditions that prevailed while the opposite program was implemented, none of them yield results that can be deemed sustainable. Yet, the model developed in this paper can be useful for studying the different policy combinations that, given a specific context, can bring about more stable and sustainable dynamics for the Argentinean economy.Download:Associated Program:Author(s):Sebastian ValdecantosRelated Topic(s):Region(s):Latin AmericaPublic Policy Brief No. 153 | September 2020After spending over 6 percent of GDP responding to the COVID-19 crisis, Brazil has suffered among the worst per capita numbers in the world in terms of cases and deaths. In this policy brief, Luiza Nassif-Pires, Laura Carvalho, and Eduardo Rawet explore how stark inequalities along racial, regional, and class lines can help account for why the pandemic has had such a damaging impact on Brazil. Although they find that fiscal policy measures have so far neutralized the impact of the crisis with respect to income inequality, the existence of structural inequalities along racial lines in particular have resulted in an unequally shared public health burden. Broader policy changes are necessary for addressing dimensions of inequality that are rooted in structural racism.Download:Associated Program(s):Author(s):Luiza Nassif Pires Laura Carvalho Eduardo RawetRelated Topic(s):Region(s):Latin AmericaWorking Paper No. 960 | July 2020Fiscal policy is useful as a government instrument for supporting the economy, contributing to an increase in employment, and reducing inequality through more egalitarian income distribution. Over the past 30 years, developing countries have failed to increase their real wages due to the lack of domestic value-added in the era of globalization, where global supply chains are the driving factor for attracting foreign direct investment. Under such circumstances, the role of fiscal policy has become an important factor in creating the necessary conditions for boosting the economy. With the end of commodity-export-led growth, Mexico experienced a moderate reduction of 5 percent in poverty between 2014 and 2018 due to the structural adjustment of social policies and its economic and trade relationship with the United States; during the same period there has been no change in poverty in Argentina, and Brazil has suffered a rise in poverty. Following the global financial crisis, greater attention has been paid to fiscal policy in developed and developing countries—specifically Argentina, Brazil, and Mexico (ABM)—in order to attain macroeconomic stability. One of the consequences of the financial crisis is rising income inequality and its negative effects on economic growth. Over the past decade, fiscal policy has been adopted for the economic recovery. However, the recovery has been accompanied by a decrease in real wages of the middle class. The purpose of the present research is to critically examine the results of fiscal policy in ABM and the United Nations’ 2030 Agenda for Sustainable Development.Download:Associated Program(s):Author(s):Bendreff DesilusRelated Topic(s):Fiscal policy Full employment Government policy and regulation Inequality Productivity Sustainability WagesRegion(s):Latin AmericaPress Releases | March 2019Download:Associated Program:Author(s):Mark PrimoffRegion(s):United States, Latin America, EuropeWorking Paper No. 919 | January 2019While the literature on theoretical macroeconomic models adopting the stock-flow-consistent (SFC) approach is flourishing, few contributions cover the methodology for building a SFC empirical model for a whole country. Most contributions simply try to feed national accounting data into a theoretical model inspired by Wynne Godley and Marc Lavoie (2007), albeit with different degrees of complexity.
In this paper we argue instead that the structure of an empirical SFC model should start from a careful analysis of the specificities of a country’s sectoral balance sheets and flow of funds data, given the relevant research question to be addressed. We illustrate our arguments with examples for Greece, Italy, and Ecuador.
We also provide some suggestions on how to consistently use the financial and nonfinancial accounts of institutional sectors, showing the link between SFC accounting structures and national accounting rules.Download:Associated Program:Author(s):Related Topic(s):Region(s):Latin America, EuropeWorking Paper No. 904 | May 2018This paper provides an empirical analysis of nonfinancial corporate debt in six large Latin American countries (Argentina, Brazil, Chile, Colombia, Mexico, and Peru), distinguishing between bond-issuing and non-bond-issuing firms, and assessing the debt’s macroeconomic implications. The paper uses a sample of 2,241 firms listed on the stock markets of their respective countries, comprising 34 sectors of economic activity for the period 2009–16. On the basis of liquidity, leverage, and profitability indicators, it shows that bond-issuing firms are in a worse financial position relative to non-bond-issuing firms. Using Minsky’s hedge/speculative/Ponzi taxonomy for financial fragility, we argue that there is a larger share of firms that are in a speculative or Ponzi position relative to the hedge category. Also, the share of hedge bond-issuing firms declines over time. Finally, the paper presents the results of estimating a nonlinear threshold econometric model, which demonstrates that beyond a leverage threshold, firms’ investment contracts while they increase their liquidity positions. This has important macroeconomic implications, since the listed and, in particular, bond-issuing firms (which tend to operate under high leverage levels) represent a significant share of assets and investment. This finding could account, in part, for the retrenchment in investment that the sample of countries included in the paper have experienced in the period under study and highlights the need to incorporate the international bond market in analyses of monetary transmission mechanisms.Download:Associated Program(s):Author(s):Esteban Pérez Caldentey Nicole Favreau-Negront Luis Méndez LobosRelated Topic(s):Region(s):Latin AmericaConference Proceedings | April 2018A conference organized by the Levy Economics Institute of Bard College
The proceedings include the 2017 conference program, transcripts of keynote speakers’ remarks, synopses of the panel sessions, and biographies of the participants.Download:Associated Program(s):Author(s):Michael StephensRelated Topic(s):Region(s):United States, Latin America, EuropePress Releases | March 2018Download:Associated Program:Author(s):Mark PrimoffRegion(s):United States, Latin America, EuropePublic Policy Brief No. 143 | February 2017
Since inheriting the Brazilian presidency five months ago, the new Temer administration has successfully ratified a constitutional amendment imposing a radical, two-decades-long public spending freeze, purportedly aimed at sparking an increase in business confidence and investment. In this policy brief, Fernando Cardim de Carvalho explains why this fiscal strategy is based not only on a flawed conception of the drivers of private-sector confidence and investment but also on a mistaken view of the roots of the current Brazilian economic crisis. The hoped-for “expansionary fiscal consolidation” is not likely to be achieved.Download:Associated Program:Author(s):Related Topic(s):Region(s):Latin America
Russia and Eastern Europe
Working Paper No. 909 | July 2018
Applying Minsky’s Theory of Financial Fragility to International MarketsThis inquiry argues that the successful completion of the transition process in the post-Soviet economies is constrained by the prevailing social structure and low levels of technological progress, both of which require institutional reforms aimed at increasing growth in national income, productivity, and the degree of export competitiveness. Domestic policy implementation has not shown significant improvements on these fronts, given its short-term orientation, but instead resulted in stagnating growth rates, continuously accumulating levels of external debt, and decreasing living standards. The key to a successful completion of the transition process is therefore a combination of policies targeted at the dynamic transformation of production structures within an environment of financial stability and favorable macroeconomic conditions.Download:Associated Program(s):Author(s):Liudmila MalyshavaRelated Topic(s):Region(s):Russia and Eastern Europe
Working Paper No. 910 | August 2018
An Empirical AnalysisThe short-term interest rate is the main driver of the Commonwealth of Australia government bonds’ nominal yields. This paper empirically models the dynamics of government bonds’ nominal yields using the autoregressive distributed lag (ARDL) approach. Keynes held that the central bank exerts decisive influence on government bond yields because the central bank’s policy rate and other monetary policy actions determine the short-term interest rate, which in turn affects long-term government bonds’ nominal yields. The models estimated here show that Keynes’s conjecture applies in the case of Australian government bonds’ nominal yields. Furthermore, the effect of the budget balance ratio on government bond yields is small but statistically significant. However, there is no statistically discernable effect of the debt ratio on government bond yields.Download:Associated Program(s):Author(s):Tanweer Akram Anupam DasRelated Topic(s):Region(s):Pacific Rim