Research Topics

This paper argues that the 40-year-old Feldstein-Horioka “puzzle” (i.e., that in a regression of the domestic investment rate on the domestic saving rate, the estimated coefficient is significantly larger than what would be expected in a world characterized by high capital mobility) should have never been labeled as such. First, we show that the investment and saving series typically used in empirical exercises to test the Feldstein-Horioka thesis are not appropriate for testing capital mobility. Second, and complementary to the first point, we show that the Feldstein-Horioka regression is not a model in the econometric sense, i.e., an equation with a proper error term (a random variable). The reason is that by adding the capital account to their regression, one gets the accounting identity that relates the capital account, domestic investment, and domestic saving. This implies that the estimate of the coefficient of the saving rate in the Feldstein-Horioka regression can be thought of as a biased estimate of the same coefficient in the accounting identity, where it has a value of one. Since the omitted variable is known, we call it “pseudo bias.” Given that this (pseudo) bias is known to be negative and less than one in absolute terms, it should come as no surprise that the Feldstein-Horioka regression yields a coefficient between zero and one.

Divergent trends, as observed, between growth in the financial and real sectors of the global economy entail the need for further research, especially on the motivations behind investment decisions. Investments in market economies are generally guided by call-put option pricing models—which rely on an ergodic notion of probability that conforms to a normal distribution function. This paper considers critiques of the above models, which include Keynes’s Treatise on Probability (1921) and the General Theory (1936), as well as follow-ups in the post-Keynesian approaches and others dealing with “fundamental uncertainty.” The methodological issues, as can be pointed out, are relevant in the context of policy issues and social institutions, including those subscribed to by the ruling state. As it has been held in variants of institutional economics subscribed to by John Commons, Thorstein Veblen, Geoffrey Hodgeson, and John Kenneth Galbraith, social institutions remain important in their capacity as agencies that influence individual behavior with their “informational-cognitive” functions in society. By shaping business concerns and strategies, social institutions have a major impact on investment decisions in a capitalist system. The role of such institutions in investment decisions via policy making is generally neglected in strategies based on mainstream economics, which continue to rely on optimization of stock market returns based on imprecise estimations of probability.

Case Studies from Latin America

This paper analyzes the economic impact of unions on productivity in the manufacturing sector across six Latin American countries: Argentina, Bolivia, Chile, Mexico, Panama, and Uruguay. Using an augmented Cobb-Douglas production function, the paper finds that unions have positive, but mostly small, effects on productivity, with the exception of Argentina, with a large negative effect, and Bolivia, with no effect. An analysis on profitability shows that, in most cases, the positive productivity effects barely offset higher union compensation, and that unions are negatively related to investment in capital and R & D. Different explanations for these effects are discussed.

The Limits to Neo-Kaleckian Models and a Kaldorian Proposal

We argue that a fundamental difference between Post-Keynesian approaches to economic growth lies in their treatment of investment. Kaleckian-Robinsonian models postulate an investment function dependent on the accelerator and profitability. Some of these models rely on the importance of profitability, captured by the profit share, to make the case for profit-led growth. For their part, Kaldorian models place the emphasis on the accelerator. More important, investment is a derived demand; that is, it is ruled by the adjustment of capacity to exogenous demand, which, in turn, determines the normal level of capacity utilization.

In our view, the Kaldorian approach is better equipped to deal with some of the issues relating income distribution to accumulation with effective demand in the long run. We develop a Kaldorian open-economy model to examine the conditions under which an increase in real wages can produce profit or wage-led growth, showing that the limit to a wage-led expansion is a binding external constraint. The role and limitations of wages as a determinant of growth are further examined through spectral techniques and cycle analysis for a subset of developed economies. The evidence indicates that real wages are positively related to growth, investment, and capacity utilization. It also highlights the role of finance in sustaining expansions, suggesting that debt-led growth should not be identified with profit-led growth.

A Distinctive Feature of the Business Cycle in Latin America and the Caribbean

Using two standard cycle methodologies (classical and deviation cycle) and a comprehensive sample of 83 countries worldwide, including all developing regions, we show that the Latin American and Caribbean cycle exhibits two distinctive features. First, and most important, its expansion performance is shorter and, for the most part, less intense than that of the rest of the regions considered; in particular, that of East Asia and the Pacific. East Asia’s and the Pacific’s expansions last five years longer than those of Latin American and the Caribbean, and its output gain is 50 percent greater. Second, the Latin American and Caribbean region tends to exhibit contractions that are not significantly different from those other regions in terms of duration and amplitude. Both these features imply that the complete Latin American and Caribbean cycle has, overall, the shortest duration and smallest amplitude in relation to other regions. The specificities of the Latin American and Caribbean cycle are not confined to the short run. These are also reflected in variables such as productivity and investment, which are linked to long-run growth. East Asia’s and the Pacific’s cumulative gain in labor productivity during the expansionary phase is twice that of Latin American and the Caribbean. Moreover, the evidence also shows that the effects of the contraction in public investment surpass those of the expansion, leading to a declining trend over the entire cycle. In this sense, we suggest that policy analysis needs to increase its focus on the expansionary phase of the cycle. Improving our knowledge of the differences in the expansionary dynamics of countries and regions can further our understanding of the differences in their rates of growth and levels of development. We also suggest that, while the management of the cycle affects the short-run fluctuations of economic activity and therefore volatility, it is not trend neutral. Hence, the effects of aggregate demand management policies may be more persistent over time, and less transitory, than currently thought.

A Dynamic Kaleckian Approach

This paper studies the effects of an (exogenous) increase of nominal wages on profits, output, and growth. Inspired by an article by Michał Kalecki (1991), who concentrated on the effects on total profits, the paper develops a model that explicitly considers the dynamics of demand, prices, profits, and investment. The outcomes of the initial wage rise are found to be path dependent and crucially affected by the firms’ initial response to an increase in demand and a decrease in profit margins. The present model, which relates to other Post Keynesian/Kaleckian contributions, can offer an alternative to the mainstream approach to analyzing the effects of wage increases.

Some Caveats

Since the early 1990s, the number of papers estimating econometric models and using other quantitative techniques to try to understand different aspects of the Chinese economy has mushroomed. A common feature of some of these studies is the use of neoclassical theory as the underpinning for the empirical implementations. It is often assumed that factor markets are competitive, that firms are profit maximizers, and that these firms respond to the same incentives that firms in market economies do. Many researchers find that the Chinese economy can be well explained using the tools of neoclassical theory. In this paper, we (1) review two examples of estimation of the rate of technical progress, and (2) discuss one attempt at modeling investment. We identify their shortcomings and the problems with the alleged policy implications derived. We show that econometric estimation of neoclassical models may result in apparently sensible results for misinformed reasons. We conclude that modeling the Chinese economy requires a deeper understanding of its inner workings as both a transitional and a developing economy.