Publications

Malcolm Sawyer

  • In the Media | September 2003

    Copyright 2003 The Financial Times Limited (London, England)
    Monday, September 8, 2003; Financial Times; USA Edition; Letters to the Editor

    Sir, Ed Crooks and Tony Major (Comment & Analysis, September 1) are right to question the ability of the eurozone economy to catch up with the US economy. Indeed, they are right to argue that the eurozone economy “will struggle to improve potential growth,” and thereby “will leave the world on course for an unbalanced and potentially unstable recovery.”

    It is, however, regrettable that they have not taken the argument further. For it is important to ask why this may be the case.

    We suggest that the answer to this question is not difficult to gauge. It is the implementation of the wrong set of policies introduced since the inauguration of the euro in January 1999, after general deflationary policies in the preceding years.

    The stability and growth pact constrains national governments in the application of their fiscal policies, while monetary policy has not been expansionary, despite recent reductions in the “repo” rate, the official European Central Bank rate of interest. Furthermore, both policies have produced serious “divergence” among the member states of the economic and monetary union in view of the “one-size-fits-all” nature of both policies.

    It is, thus, the case that the institutional arrangements that govern economic policy within the eurozone economy cannot deliver higher growth (it is expected to be negative in the second quarter of 2003) and lower unemployment (at 8.9 per cent currently, as compared to a 6.2 per cent US rate, not to mention the lower 5 per cent in the U.K.).

    What is more disturbing is the highly unequal growth rates in the eurozone: the periphery enjoying rather “healthy” growth rates while the “core” economies, Germany, Italy, and the Netherlands, are now in recession, having experienced two consecutive quarters of negative growth rates, and France’s second quarter of 2003 having contracted.

    An interesting, and related issue, is that productivity in some eurozone countries is about the same level as in the US, once it is measured on a “per hour” basis: the evidence corroborates the view that Americans work longer hours than many Europeans.

    Inflexible labour markets cannot be the reason for the poor eurozone economic performance. Germany in the past, for example during the 1950s and 1960s, despite labour markets even more “inflexible” than currently, managed to deliver healthier growth rates than the US “The US” had “much more flexible markets” then and could “lay off workers” just as easily then as now. Germany did deliver a great deal more than the US, then! More recently, and as the authors also readily acknowledge, eurozone business investment in the second half of the 1990s rose more steeply than in the US Surely the eurozone was not more flexible then.

    The eurozone can catch up with America, but sensible economic policies are desperately needed to enable it to do so. The authors recognise this in the case of the US. Why not for the eurozone economy as well? Such a combination will produce more long-lasting growth and high employment, not merely for the two countries but also for the world as a whole.

    Published by:
    The Financial Times
  • Working Paper No. 391 | September 2003

    The dominant view relating to unemployment and inflation is that inflation will be constant at a level of unemployment (the nonaccelerating inflation rate of unemployment, NAIRU) determined on the supply side of the economy (and in the labor market in particular). Further, the economy will tend to converge to (or oscillate around) that level of unemployment. Moreover, demand variables or economic policy changes are thought to have no influence whatsoever on NAIRU. An alternative perspective on inflation would indicate that there would be no automatic forces leading to a level of aggregate demand consistent with constant inflation. Inflationary pressures would arise from, inter alia, a role of conflict over income shares, and from cost elements, with the price of raw materials, especially oil, being the most important. Insofar as there are supply-side factors impinging on the inflationary process, these would arise from the level of productive capacity (relative to aggregate demand) and from conflict over income shares. This paper focuses on the arguments and the evidence that supply-side constraints should be viewed as arising from capacity constraints, rather than from the operation of the labor market.

  • Working Paper No. 388 | September 2003
    A Critical Appraisal

    Since the early 1990s, a number of countries have adopted Inflation Targeting (IT) in an effort to reduce inflation. Most literature has praised IT as a superior framework of monetary policy. We suggest that IT is a major policy prescription closely associated with the New Consensus Macroeconomics (NCM). Focusing mainly on the IT aspects of the NCM, we address and assess the theoretical foundations of IT, and then assess the empirical work on IT, distinguishing between work that utilizes structural macroeconomic models and work based on single-equation techniques. The IT theoretical framework and the available empirical evidence do not appear to support the views of IT proponents.

  • In the Media | August 2003

    The slowdown in economic growth and rising unemployment in the euro area, with major economies slipping into recession, have revealed serious faultlines in the stability and growth pact governing the euro area's macroeconomic policies. The pact dictates that budget deficits must not exceed 3% of GDP, with a requirement budgets are in balance or surplus on average. Countries that do not adhere to these limits are threatened with fines. It should come as no surprise that slowdown pushes up deficits and has taken some countries over the 3% limit, notably in Germany and France.

    For now, penalties for countries exceeding the limit have not been imposed and countries are given up to four years to meet the budget deficit requirements. Although there has been some bending of them, the rules remain in place. Indeed, the European Central Bank and members of the commission are demanding strict adherence to the rules of the pact in future. They are supported by the small countries of the eurozone, which complain that it is unfair for them to have to adhere to the pact while its main architects, Germany and France, do not.

    The ECB and some governments view the zone's slowdown as the result of structural factors—labour market rigidities above all—and the failure to tackle burgeoning budget deficits. The rigidities, though, have been around for a long time: during the 50s and 60s, when many European economies were booming, especially Germany's "economic miracle" of the 70s. It is adherence to the pact's rules to limit budget deficits, which thereby can require tax rises and expenditure cuts in the face of recession, that has promoted the present slowdown.

    This has not been helped by the ECB's inability to take action to stimulate the zone's economies. The recession has raised severe questions about the appropriateness of the institutional and policy arrangements governing the single currency and their ability to deal with unemployment, recession and inflation.

    The limit on budget deficits and the overall balanced budget requirement are severe, running counter to the experience of the past six decades, not allowing public capital investment to be funded by borrowing and more severe than necessary to maintain the 60% public debt to GDP ratio.

    Seeking to enforce the requirements of the pact imposes a substantial deflationary thrust and calls for flexibility in the pact's terms do not deal with the underlying problem. It is often argued the budget position of each country has to be restrained because of externalities, or spillover effects. These sometimes take the form of a government's spending putting upward pressure on interest rates and raising the cost of borrowing for others. This may then spill over into other countries and may cause the ECB to raise rates to dampen inflation.

    Without accepting that expenditure would necessarily have these effects, we would say the expansion of private sector spending could be expected to have similar effects to those resulting from public spending. Fluctuations in the overall level of expenditure come into play mostly because of fluctuations in private expenditure. The logic of imposing limits on public expenditure would also apply to the private sector. Perhaps there should be limits on private sector deficit or on the trade account.

    The pact threatens to become an "instability and no growth pact", with the thrust of fiscal and monetary policies pushing the eurozone economies in a deflationary direction, with Germany, Italy, and the Netherlands now in recession.

    No wonder the EC president, Romano Prodi, complains that current pact arrangements are "rigid" and "stupid", and it would not be an exaggeration to suggest they have also become a standing joke.

    France and Germany's justification for violating the fiscal rules is that the pact has delivered too much stability and not enough growth. Changes at this juncture in global economic development are very pressing. The falling dollar provides an opportunity for expansion. For, without strong growth outside the US, the economic imbalances may undermine the rest of the world's prospects.

    The euro countries should take a lead. What is needed is a fundamental change so a truly effective pact emerges. Coordination of monetary and fiscal policies is paramount but requires monetary authorities to enter into agreements with fiscal authorities and a removal of limits on national deficits. And those deficits should be used to ensure high levels of activity within the euro area.

  • Working Paper No. 385 | July 2003
    Theoretical Underpinnings and Challenges

    This paper presents two issues: first, an effort to decipher the theoretical and policy framework of the Economic and Monetary Union (EMU); and second, an argument that the challenges to the EMU's macroeconomic policies lie in their potential to achieve full employment and low inflation in the euro area. We conclude that the institutional and policy arrangements surrounding the EMU and the euro are neither adequate for dealing with today's problems of unemployment and inflation nor promising for the future. We propose alternative policies, and institutional arrangements.

  • Working Paper No. 382 | May 2003

    This paper reconsiders the case for the use of fiscal policy based on a "functional finance" approach that advocates the use of fiscal policy to secure high levels of demand in the context of private aggregate demand, which would otherwise be too low. This "functional finance" view means that any budget deficit should be seen as a response to the perceived excess of private savings over investment at the desired level of economic activity. The paper outlines the "functional finance" approach and its relationship with fiscal policy. It then considers the three lines of argument that have been advanced against fiscal policy on the grounds of "crowding out." These lines are based on the response of interest rates, the supply-side equilibrium, and Ricardian equivalence. The paper advances the view that the arguments, which have been deployed against fiscal policy to the effect that it does not raise the level of economic activity, do not apply when a "functional finance" view of fiscal policy is adopted. A section on the intertermporal budget constraint considers whether this constraint rules out budget deficits, and concludes that in general it does not.

  • Working Paper No. 381 | May 2003

    Recent developments in macroeconomic policy, in terms of both theory and practice, have elevated monetary policy while downgrading fiscal policy. Monetary policy has focused on the setting of interest rates as the key policy instrument, along with the adoption of inflation targets and the use of monetary policy to target inflation. Elsewhere, we have critically examined the significance of this shift, which led us to question the effectiveness of monetary policy. We have also explored the role of fiscal policy and argued that it should be reinstated. This contribution aims to consider further that conclusion. We consider at length fiscal policy within the current "new consensus" theoretical framework. We find the proposition of this thinking, that fiscal policy provides at best a limited role, unconvincing. We examine the possibility of crowding out and the Ricardian Equivalence Theorem. A short review of quantitative estimates of fiscal policy multipliers gives credence to our theoretical conclusions. Our overall conclusion is that, under specified conditions, fiscal policy is a powerful tool for macroeconomic policy.

  • Working Paper No. 374 | March 2003

    This paper considers the nature and role of monetary policy when money is envisaged as credit money endogenously created within the private sector (by the banking system). Monetary policy is now based in many countries on the setting (or targeting) of a key interest rate, such as the Central Bank discount rate. The amount of money in existence then arises from the interaction of the private sector and the banks, based on the demand to hold money and the willingness of banks to provide loans. Monetary policy has become closely linked with the targeting of the rate of inflation. In this paper we consider whether monetary policy is well-equipped to act as a counter-inflation policy and discuss the more general role of monetary policy in the context of the treatment of money as endogenous. Currently, two schools of thought view money as endogenous. One school has been labeled the "new consensus" and the other the Keynesian endogenous (bank) money approach. Significant differences exist between the two approaches; the most important of these, for the purposes of this paper, is in the way in which the endogeneity of money is viewed. Although monetary policy—essentially interest rate policy—appears to be the same in both schools of thought, it is not. In this paper we investigate the differing roles of monetary policy in these two schools.

  • Policy Note 2003/2 | February 2003

    The SGP has been the focus of growing controversy within the eurozone. The ECB continues to argue that reforming the SGP by relaxing its rules would damage the credibility of the euro. The opposite, however, may be closer to reality. Relaxing the rules according to the measures already taken by the European Commission has been inconsequential regarding the euro's credibility. In our view, many more fiscal policy reforms are needed so that the Eurozone can realize a true economic recovery and enhance the credibility of the euro.

  • Public Policy Brief No. 71 | January 2003
    The Dubious Effectiveness of Interest Rate Policy

    Central bankers and many economists have abandoned “activist” policies and monetarism and adopted in their place a new view of the role of monetary policy. This view draws on many of the tenets of more traditional theories of money—monetarism’s emphasis on inflation control and skepticism about the use of easy-money policies to permanently increase output, and the Keynesian view that the total stock of money is not an important driving force behind either inflation or unemployment—yet it also takes a dim view of democratic input to the policymaking process. This brief evaluates a premise subscribed to by most central bankers: that monetary policy can be effectively used to control inflation without any permanent sacrifice in the form of reduced income or job opportunities.

  • Public Policy Brief Highlights No. 71A | January 2003
    The Dubious Effectiveness of Interest Rate Policy
    Central bankers and many economists have abandoned "activist" policies and monetarism and adopted in their place a new view of the role of monetary policy. This view draws on many of the tenets of more traditional theories of money—monetarism's emphasis on inflation control and skepticism about the use of easy-money policies to permanently increase output, and the Keynesian view that the total stock of money is not an important driving force behind either inflation or unemployment—yet it also takes a dim view of democratic input to the policymaking process. This brief evaluates a premise subscribed to by most central bankers: that monetary policy can be effectively used to control inflation without any permanent sacrifice in the form of reduced income or job opportunities.

  • Working Paper No. 369 | January 2003

    Within the framework of macroeconomic policy and theory over the past 20 years or so, a major shift has occurred regarding the relative importance given of monetary policy versus fiscal policy. The former has gained considerably in stature, while the latter is rarely mentioned. Further, monetary policy no longer focuses on attempts to control some monetary aggregate, as it did in the first half of the 1980s, but instead focuses on the setting of interest rates as the key policy instrument. There has also been a general shift toward the adoption of inflation targets and the use of monetary policy to target inflation. This paper considers the significance of this shift in the emphasis of monetary policy, questions its effectiveness, and explores the role of fiscal policy. We examine these subjects from the point of view of the "new consensus" in monetary economics and suggest that its analysis is rather limited. When the analysis is broadened to embrace empirical issues and evidence, the conclusion clearly emerges that monetary policy is relatively impotent. We argue that fiscal policy (under specified conditions) remains a powerful tool for macroeconomic policy, particularly under current economic conditions.

  • Working Paper No. 364 | December 2002

    In this paper we seek first to set out the economic analysis that underpins the ideas of what has been termed the “third way.” The explicit mention of the “third way” is much diminished since the early days of the Blair government in the UK and the Schroeder government in Germany. We argue that the ideas associated with the “third way” continue to influence these governments and, more broadly, other governments and the European Union, and that these ideas are firmly embedded in New Keynesian economics. Our paper then focuses on some particular aspects of New Keynesian economics and its emphasis on the role of monetary policy and the downgrading of fiscal policy. There has emerged a so-called “new consensus” on macroeconomic policy (specifically, monetary policy), which we regard as an outgrowth of New Keynesian economics. We review this “new consensus” and argue that the empirical evidence on the operation of monetary policy reveals that such a policy is rather impotent. Insofar as it does have an effect, it operates to influence the level of investment, which in turn affects the future level and distribution of productive capacity. Thus, contrary to the prevailing view, monetary policy is not an effective way to control inflation, but it can have effects on the real side of the economy. The lack of attention to fiscal policy and the overemphasis on monetary policy leaves the European Union and its member countries without the means to tackle any serious recession or upsurge of inflation.

     

  • Working Paper No. 363 | December 2002

    Recent developments in macroeconomics, and in economic policy in general, have produced a "new consensus" economy-wide model. In this model, the stock of money does not play any causal role, but operates as a mere residual in the economic process. The absence of the stock of money in many current debates over monetary policy has prompted the deputy governor of the Bank of England to note the irony of the situation: as central banks became more and more concerned with price stability, less and less attention is paid to money. Indeed in several countries, the decline of interest in money appears to have coincided with low inflation. In turn, a number of contributions have attempted, wittingly or unwittingly, to "reinstate" a more substantial role for money in this "new" macroeconomics. In this paper we argue that these attempts to "reinstate" money in current macroeconomic thinking entail two important problems. First, they contradict an important theoretical property of the new "consensus" macroeconomic model, namely, that of dichotomy between the monetary and the real sector. Second, some of these attempts either fail in terms of their objective or merely reintroduce the problem rather than solve it. We conclude that if money is to be given a causal role in the "new" consensus model, more substantial research is needed.

  • Working Paper No. 357 | October 2002

    This paper explores the probable consequences for public expenditure in the United Kingdom if Britain were to join the euro. It focuses on the effects of sterling joining the euro (and the associated implications, such as monetary policy being governed by the European Central Bank). It does not consider any broader questions of the effects of membership in the European Union and the policies pursued by the EU and the European Commission. Since the fiscal stance of government influences the level of demand in the economy, there are also important implications for the level of employment more generally. While the general deflationary nature of the economic policy of the eurozone (an issue we have explored elsewhere on many occasions) should not be overlooked, the focus of this paper is on the implications for public expenditure of the eurozone and the UK's possible entry into the euro.

  • Working Paper No. 355 | October 2002

    Current monetary policy involves the manipulation of the central bank interest rate (the repo rate), with the specific objective of achieving the goal(s) of monetary policy. The latter is normally the inflation rate, although in a number of instances this may include the level of economic activity (the monetary policy of the United States' Federal Reserve is a good example of this category). This raises two issues. The first is the theoretical underpinnings of this mode of monetary policy. The second is the channels of monetary policy or, more concretely, the channels through which changes in the rate of interest may affect the ultimate goal(s) of policy. Both aspects are investigated in this paper. Furthermore, we suggest that it is imperative to consider the empirical estimates of the effects of monetary policy. We summarise results drawn from the eurozone, the US and the UK and suggest that these empirical results point to a relatively weak effect of interest rate changes on inflation. We also suggest, on the basis of the evidence adduced in the paper, that monetary policy can have long-run effects on real magnitudes. This particular result does not fit comfortably with the theoretical basis of current thinking on monetary policy.

  • Working Paper No. 352 | September 2002

    This paper is concerned with two issues. First, it discusses some of the main problems and inferences the methodological approach of critical realism raises for empirical work in economics, while considering an approach adopted to try to overcome these problems. Second, it provides a concrete illustration of these arguments, with reference to our recent research project analyzing the single European currency. It is argued that critical realism provides a method that is partially appropriate to concrete levels of analysis, as illustrated by the attempt to explain the falling value of the euro. It is concluded that the critical realist method is inappropriate to the most abstract and fundamental levels of theory.

  • Working Paper No. 345 | May 2002

    In the United Kingdom the emergence of a “New Labour” has been closely associated with the development of the notion of the “third way.” Tony Blair, for example, stated that “New Labour is neither old left nor new right. . . . Instead we offer a new way ahead, that leads from the centre but is profoundly radical in the change it promises.” In a similar vein Giddens locates the "third way" by reference to two other “ways” of classical social democracy and neoliberalism. Although some notable contributions have been made on the subject of the “third way,” rather little has been written specifically on the economic analysis underpinning it. This paper infers such an analysis by working back from the policies and policy pronouncements of governments. To do so, the paper examines the types of economic analyses being used to underpin the ideas of the “third way”; the suggestion that the ideas surrounding the economic analysis of the economic and monetary union's (EMU's) theoretical and policy framework are firmly embedded in that of “third way”; and the argument that the challenge for EMU macropolicies lies in their potential to achieve full employment and low inflation in the euro system. On the last point, the author concludes that these policies, as they currently operate, are not very promising. Alternatives are therefore suggested.

  • Policy Note 2002/3 | March 2002

    The introduction of the euro has been a significant step in the integration of the economies of the countries that form the European Union (EU) and the 12 countries that comprise the Economic and Monetary Union (EMU). Its adoption not only means that a single currency prevails across the Eurozone, with reduced transactions costs for trade between member countries; the currency also has become embedded in a particular set of institutional and policy arrangements that tell us about the nature of economic integration in the EU. In fact, the euro is a relatively small step along the path to further economic integration at the global level, and the neoliberal agenda of globalization can be clearly seen from the ways in which the euro has been introduced.

  • Public Policy Brief Highlights No. 63A | March 2001
    Is There an Alternative to the Stability and Growth Pact?
    This brief provides a detailed description of the Stability and Growth Pact, an agreement entered into by the member states of the European Union that has far-reaching implications for the long-run value of the euro, and therefore, on the real economy in terms of output growth and employment. Yet despite the fact that the pact underpins the adoption of the single currency and has fundamentally redefined the scope and nature of economic policymaking in the member states, public discussion about it is relatively scant, especially on our side of the Atlantic, even though the economic health of the European Union does matter to the economic and strategic position of the United States. The authors provide propose a critique of the pact that focuses on the shortcomings induced by the its regime of mandatory fiscal austerity, the separation between fiscal and monetary policy, the undemocratic structure and lack of accountability of the European Central Bank, and the paramount importance attached to price stability at the expense of other policy objectives. According to the authors, these shortcomings will have serious negative effects on the current and future economic performance of the member states and the material well-being of its citizens.

  • Working Paper No. 324 | March 2001

    This paper examines the causes of the general decline in the value of the euro. First, it assesses the various explanations proffered in existing literature, and then it offers a more satisfactory one. The argument prevalent in the literature that the decline in value of the euro is due to "US strength" rather than to any inherent difficulties with its imposition is viewed as somewhat undeveloped. We suggest that US strength is an important but only partial factor in the euro's decline; the other side of US strength is Eurozone weakness. We review the (poor) performance of the ECB and assess the level of macroeconomic convergence of Eurozone countries. We conclude that a combination of Eurozone weakness, endogenous to the inception of the euro, and US strength is the most plausible explanation for the euro's decline in value. We find that although the future value of the euro is uncertain, the prospects for the eurozone will remain bleak as long as the current institutions underpinning the euro, with their inherent tendencies to promote deflation, are in place.

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    Author(s):
    Philip Arestis Malcolm Sawyer Iris Biefang-Frisanch Mariscal Andrew Brown

  • Working Paper No. 322 | March 2001

    It has been argued that the eurozone will face considerable economic difficulties. These will take a number of forms, two of which could qualify as "crises." First, the euro was launched at a time when unemployment levels were high (10 percent of the workforce) and disparities in the experience of unemployment and standards of living were particularly severe. These high levels of unemployment are likely to continue in the foreseeable future, and the policy arrangements that surround the operation of the euro, notably the objectives of the European Central Bank and the workings of the Stability and Growth Pact, will have a deflationary bias. These levels of and disparities in unemployment could be termed a crisis. Second, the introduction of the euro and the associated institutional setting could well serve to exacerbate tendencies toward financial crisis, including the volatility and subsequent collapse of asset prices and runs on the banking system. Some additional forces of instability may arise from the current trade imbalances and the relationship between the dollar and the euro as two major global currencies. Further, the operating arrangements of the European System of Central Banks can be seen as inadequate to cope with such financial crises.

  • Public Policy Brief No. 63 | March 2001
    Is There an Alternative to the Stability and Growth Pact?

    This brief provides a detailed description of the Stability and Growth Pact, an agreement entered into by the member states of the European Union that has far-reaching implications for the long-run value of the euro, and therefore, on the real economy in terms of output growth and employment. Yet despite the fact that the pact underpins the adoption of the single currency and has fundamentally redefined the scope and nature of economic policymaking in the member states, public discussion about it is relatively scant, especially on our side of the Atlantic, even though the economic health of the European Union does matter to the economic and strategic position of the United States. The authors provide propose a critique of the pact that focuses on the shortcomings induced by the its regime of mandatory fiscal austerity, the separation between fiscal and monetary policy, the undemocratic structure and lack of accountability of the European Central Bank, and the paramount importance attached to price stability at the expense of other policy objectives. According to the authors, these shortcomings will have serious negative effects on the current and future economic performance of the member states and the material well-being of its citizens.

  • Working Paper No. 296 | March 2000

    This paper proposes an alternative stability and growth pact among European Union (EU) governments that would underpin the introduction of a single currency and a "single market" within the EU. The alternative pact embraces a number of new aspects of integration within the EU that are based on a different monetary analysis (different from that of "new monetarism"), new objectives for economic policy (such as employment and growth), and new institutions to reduce various kinds of disparities across the EU. The paper begins by critically examining the Stability and Growth Pact, which accompanied the introduction of the euro in January 1999, but which has not received as much attention in the policy debates on the euro as some other aspects of it. This is followed by a discussion of the institutional underpinnings of the euro, with the argument made that the institutional arrangements have a number of weaknesses. An alternative pact governing monetary and fiscal policy, which contains the promotion of the objective of full employment and that requires the creation of new institutions, is proposed.

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  • Working Paper No. 282 | October 1999
    Current and Future Prospects

    The euro was adopted as legal tender, albeit in a virtual form, by 11 countries of the European Union on January 1, 1999. The intention was that notes and coins denominated in euros would be introduced and the national currencies phased out during the first six months of that year, and that the euro would be fully operational by 2002. This paper first reviews the current position of the EMU member states in relation to the convergence criteria under the Maastricht Treaty and finds that there must have been a considerable degree of "fudge" for the criteria to have been met. The paper next looks at the central role of aggregate demand in the EMU and at concerns about unemployment. It then examines the prospects of the current EMU arrangements, concluding that they are highly deflationary. To overcome the deflationary bias of current proposals and as a means to alleviate the serious unemployment problem, the authors recommend that the European Central Bank be enhanced by (1) the development of a new institution, the European Union Development Bank, and (2) a modification of the Stability and Growth Pact.

  • Working Paper No. 266 | March 1999

    The paper begins with a brief review of the main ideas associated with Hyman Minsky and their implications for economic policy and the achievement of full employment. There is a focus on the financial instability hypothesis, the role of the central bank as lender of last resort, and the requirements for regulation of the financial system. The implications of these ideas for economic policy are then explored at the level of the European Union and the global economy. It is argued that the Minsky analysis would suggest that at the level of the nation state, the general drift of economic policy and changes in institutional arrangements have made the prospects for full employment bleak. For the European Union, the institutions that are emerging in the context of EMU and the euro are considered in terms of their impacts on the level of economic activity. At the global economy level, the need for international institutions to regulate the global financial system is considered.

  • Working Paper No. 263 | February 1999
    A Historical Perspective of European Economic and Monetary Integration

    This paper traces the history and the institutional background of European integration to the establishment of the economic and monetary union in the European Union (EU). After the establishment of the European Economic Community (EEC) in the late 1950s, attempts at monetary integration, and ultimately monetary union, tended to assume importance only as a result of financial crisis and then returned to being a vague objective as soon as the crisis recedes. In recent years, however, monetary integration has assumed greater urgency. Economic union, on the other hand, has followed a smoother transition.

    Economic integration was used after the Second World War to realize political goals, chiefly to anchor West Germany within the western European alliance. Since that time the economies of member states have slowly integrated. The economic environment of the 1950s is a far cry from the integrated community of today. In the 1950s European currencies were not convertible and domestic trade was highly protected. Intra-European trade was based on bilateral clearing arrangements institutionalized by the European Payments Union. Today EU currencies are fully convertible; capital controls, intra-EU tariffs, and quotas have been eliminated; and the single market has been completed.

    Monetary union has gone through a number of stages. The Werner Plan of the early 1970s, which set the goal of economic and monetary union by the end of the decade, was only partially implemented. Its failure can be put down to unfavorable international economic conditions and poor institutional structures. In the early 1980s a new monetary initiative, the European Monetary System (EMS), was launched. It struggled through its initial phase until it was replaced by the current euro arrangements. These successive stages ultimately culminated in the Maastricht Treaty, which laid out a precise path and timetable for economic and monetary union.

  • Working Paper No. 238 | June 1998

    This paper explores some of the links between macroeconomic policy and industrial strategy. The perspective of the present paper is to emphasize the role of the output and investment activities of enterprises rather than the general focus on the labor market in the determination of economic performance. We have explored this aspect in some detail in connection with the inflation barrier, and argue that such a barrier should be viewed in terms of a lack of capacity. We briefly review the balance of trade constraint on growth and employment. The overall implications of those two sets of analyses is that macroeconomic performance would be enhanced by appropriate industrial strategy, and that inappropriate macroeconomic policies will damage industrial performance. Policies designed to restrain inflation by lowering the level of aggregate demand will tend to depress investment and harm capacity. Improved industrial performance requires a climate conducive to investment and research and development, which in turn depends on, inter alia, high and stable levels of aggregate demand.

  • Working Paper No. 223 | January 1998

    Visiting Scholar Malcolm Sawyer, of the University of Leeds, commemorates Michal Kalecki's 100th birthday by considering how Kalecki's macroeconomic analysis of developed capitalist economies should be adapted in light of the institutional changes that have occurred since he did his major work. Sawyer believes that although Kalecki's reputation rests on his theoretical work, his theorizing was firmly based on his perceptions of the institutional, political, and social realities of the economies he sought to analyze. According to Sawyer, Kalecki's work is best viewed as a mixture of "high-brow a-institutional" theory and "low-brow" institution-specific applied theory. Because it is "virtually inevitable that the analysis of any . . . 'middle-brow' theorist will be rendered to some degree obsolete by the passage of time," Sawyer sets out to evaluate to what extent Kalecki's theories are still relevant and how they might be adapted for the new millennium.

  • Working Paper No. 211 | November 1997

    The distribution of income is conspicuous by its absence from most mainstream macroeconomic analysis. Visiting Scholar Malcolm Sawyer, of the University of Leeds, makes an effort to remedy this situation by discussing three aspects of the relationship between macroeconomics and the distribution of income: the effect of conflicts over the distribution of income on the NAIRU (nonaccelerating inflation rate of unemployment), the effect of the distribution of income on aggregate demand, and the effect of monetary policy on the distribution of income.

  • Working Paper No. 208 | October 1997

    No further information available.

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  • Working Paper No. 207 | August 1997

    In this paper, Philip Arestis, of the University of East London, and Visiting Scholar Malcolm Sawyer, of the University of Leeds, assert the need for revived and revised Keynesian policies to secure full employment. They do not support "fine tuning," but argue for a medium-term approach that includes both demand-side and supply-side strategies. Their approach is Keynesian in two ways. First, they contend that a laissez-faire market economy does not ensure full employment. Second, they believe that a more equal distribution of market power, income, and wealth is both a desirable goal in itself and a vehicle for increasing prosperity. They discuss the constraints that prevent full employment and policies to deal with them.

  • Working Paper No. 203 | August 1997
    A Critical Appraisal

    The nonaccelerating inflation rate of unemployment, or NAIRU, has acquired a central role in macroeconomic theory. Fear of inflation has led to a reluctance to allow the unemployment rate to fall below the estimated NAIRU. If so much weight is going to be placed on an estimate of a theoretical variable, it is extremely important to know how valid that theory is and how valid the estimates of that variable are. Visiting Scholar Malcolm Sawyer finds that the mechanism by which an economy would reach a NAIRU has been inadequately specified and that NAIRU models have ignored the role of aggregate demand by implicitly invoking Say's law that supply creates its own demand. He concludes that it is unwise to use the estimated NAIRU as a policy variable unless and until it can be established on stronger theoretical and empirical grounds.

  • Working Paper No. 202 | August 1997

    The nonaccelerating inflation rate of unemployment, or NAIRU, is generally viewed as a supply-side-determined, short-run equilibrium rate of unemployment. In most NAIRU models, aggregate demand plays no essential role in determining equilibrium unemployment. However, Visiting Scholar Malcolm Sawyer demonstrates that the relationship between the real wage and employment (often mistakenly called labor demand) cannot be fully articulated without reference to aggregate demand. In Sawyer's model, investment shifts the real wage-employment relationship by adding to the capital stock. Therefore, in a sufficiently expansionary environment, the NAIRU can be made compatible with full employment.

Publication Highlight

Working Paper No. 1008
A GARCH Approach to Modeling Chilean Long-Term Swap Yields
Author(s): Tanweer Akram, Khawaja Mamun
May 2022

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