Associated Programs

Explorations in Theory and Empirical Analysis

Explorations in Theory and Empirical Analysis

On occasion, scholars at the Levy Institute conduct research that does not fall within a current program or general topic area. Such study might include examination of a subject of particular policy interest, empirical research that has grown out of work in a current program area, or initial exploration in an area being considered for a new research program. Recent studies have included those on Harrodian growth models, the economic consequences of German reunification, and campaign finance reform.

Research Program

Economic Policy for the 21st Century

Program Publications

  • Working Paper No. 998 | January 2022
    A Critique of Aggregate Indicators
    Economic analysts have used trends in total factor productivity (TFP) to evaluate the effectiveness with which economies are utilizing advances in technology. However, this measure is problematic on several different dimensions. First, the idea that it is possible to separate out the relative contribution to economic output of labor, capital, and technology requires ignoring their complex interdependence in actual production. Second, since TFP growth has declined in recent decades in all of the developed market societies, there is good reason to believe that the decline is an artifact of the slower rates of economic growth that are linked to austerity policies. Third, reliance on TFP assumes that measures of gross domestic product are accurately capturing changes in economic output, even as the portion of the labor force producing tangible goods has declined substantially. Finally, there are other indicators that suggest that current rates of technological progress might be as strong or stronger than in earlier decades.

  • Working Paper No. 994 | October 2021
    Biased Coefficients and Endogenous Regressors, or a Case of Collective Amnesia?
    The possible endogeneity of labor and capital in production functions, and the consequent bias of the estimated elasticities, has been discussed and addressed in the literature in different ways since the 1940s. This paper revisits an argument first outlined in the 1950s, which questioned production function estimations. This argument is that output, capital, and employment are linked through a distribution accounting identity, a key point that the recent literature has overlooked. This identity can be rewritten as a form that resembles a production function (Cobb-Douglas, CES, translog). We show that this happens because the data used in empirical exercises are value (monetary) data, not physical quantities. The argument has clear predictions about the size of the factor elasticities and about what is commonly interpreted as the bias of the estimated elasticities. To test these predictions, we estimate a typical Cobb-Douglas function using five estimators and show that: (i) the identity is responsible for the fact that the elasticities must be the factor shares; (ii) the bias of the estimated elasticities (i.e., departure from the factor shares) is, in reality, caused by the omission of a term in the identity. However, unlike in the standard omitted-variable bias problem, here the omitted term is known; and (iii) the estimation method is a second-order issue. Estimation methods that theoretically deal with endogeneity, including the most recent ones, cannot solve this problem. We conclude that the use of monetary values rather than physical data poses an insoluble problem for the estimation of production functions. This is, consequently, far more serious than any supposed endogeneity problems.

  • Working Paper No. 993 | September 2021
    Theory and Empirics
    This paper provides a theoretical and empirical reassessment of supermultiplier theory. First, we show that, as a result of the passive role it assigns to investment, the Sraffian supermultiplier (SSM) predicts that the rate of utilization leads the investment share in a dampened cycle or, equivalently,  that a convergent cyclical motion in the utilization-investment share plane would be counterclockwise. Second, impulse response functions from standard recursive vector autoregressions (VAR) for postwar US samples strongly indicate that the investment share leads the rate of utilization, or that these cycles are clockwise. These results raise questions about the key mechanism underlying supermultiplier theory.

  • Working Paper No. 989 | June 2021
    The paper provides an empirical discussion of the national emergency utilization rate (NEUR), which is based on a “national emergency” definition of potential output and is published by the US Census Bureau. Over the peak-to-peak period 1989–2019, the NEUR decreased by 14.2 percent. The paper examines the trajectory of potential determinants of capacity utilization over the same period as specified in the related theory, namely: capital intensity, relative prices of labor and capital, shift differentials, rhythmic variations in demand, industry concentration, and aggregate demand. It shows that most of them have moved in a direction that would lead to an increase in utilization. The main factor that can explain the decrease in the NEUR is aggregate demand, while the increase in industry concentration might have also played a small role.

  • Working Paper No. 986 | March 2021
    Evolution and Contemporary Relevance
    This paper traces the evolution of John Maynard Keynes’s theory of the business cycle from his early writings in 1913 to his policy prescriptions for the control of fluctuations in the early 1940s. The paper identifies six different “theories” of business fluctuations. With different theoretical frameworks in a 30-year span, the driver of fluctuations—namely cyclical changes in expectations about future returns—remained substantially the same. The banking system also played a pivotal role throughout the different versions, by financing and influencing the behavior of return expectations. There are four major changes in the evolution of Keynes’s business cycle theories: a) the saving–investment framework to understand changes in economic fluctuations; b) the capabilities of the banking system to moderate the business cycle; c) the effectiveness of monetary policy to fine tune the business cycle through the control of the short-term interest rate or credit conditions; and d) the role of a comprehensive fiscal policy and investment policy to attenuate fluctuations. Finally, some conclusions are drawn about the present relevance of the policy mix Keynes promoted for ensuring macroeconomic stability.

  • Working Paper No. 974 | October 2020
    Financial Instability and Crises in Keynes’s Monetary Thought
    This paper revisits Keynes’s writings from Indian Currency and Finance (1913) to The General Theory (1936) with a focus on financial instability. The analysis reveals Keynes’s astute concerns about the stability/fragility of the banking system, especially under deflationary conditions. Keynes’s writings during the Great Depression uncover insights into how the Great Depression may have informed his General Theory. Exploring the connection between the experience of the Great Depression and the theoretical framework Keynes presents in The General Theory, the assumption of a constant money stock featuring in that work is central. The analysis underscores the case that The General Theory is not a special case of the (neo-)classical theory that is relevant only to “depression economics”—refuting the interpretation offered by J. R. Hicks (1937) in his seminal paper “Mr. Keynes and the Classics: A Suggested Interpretation.” As a scholar of the Great Depression and Federal Reserve chairman at the time of the modern crisis, Ben Bernanke provides an important intellectual bridge between the historical crisis of the 1930s and the modern crisis of 2007–9. The paper concludes that, while policy practice has changed, the “classical” theory Keynes attacked in 1936 remains hegemonic today. The common (mis-)interpretation of The General Theory as depression economics continues to describe the mainstream’s failure to engage in relevant monetary economics.

  • Working Paper No. 957 | June 2020
    The Long Period Method, Technical Change, and Gender
    This paper presents a critique of Karl Marx’s labor theory of value and his theory of falling profit rates from an intersectional political economy perspective. Specifically, I rely on social reproduction theory to propose that Marx-biased technical change disrupts the social order and leads to competition between workers. The bargaining power of workers cannot be dissociated from class struggle within the working class. I argue that technical change increases social conflict, which can counterbalance the long-run tendency of the profit rate to fall. The conclusion is that class struggle is multilayered and endogenous to the process of accumulation.

  • Working Paper No. 953 | April 2020
    Some Empirical Issues
    The paper makes three contributions. First, following up on Nikiforos (2016), it provides an in-depth examination of the Federal Reserve measure of capacity utilization and shows that it is closer to a cyclical indicator than a measure of long run variations of normal utilization. Other measures, such as the average workweek of capital or the national emergency utilization rate are more appropriate for examining long-run changes in utilization. Second, and related to that, it argues that a relatively stationary measure of utilization is not consistent with any theory of the determination of utilization. Third, based on data on the lifetime of fixed assets it shows that for the issues around the “utilization controversy” the long run is a period after thirty years or more. This makes it a Platonic Idea for some economic problems.

  • Working Paper No. 952 | April 2020
    Some Theoretical Issues
    This paper discusses some issues related to the triangle between capital accumulation, distribution, and capacity utilization. First, it explains why utilization is a crucial variable for the various theories of growth and distribution—more precisely, with regards to their ability to combine an autonomous role for demand (along Keynesian lines) and an institutionally determined distribution (along classical lines). Second, it responds to some recent criticism by Girardi and Pariboni (2019). I explain that their interpretation of the model in Nikiforos (2013) is misguided, and that the results of the model can be extended to the case of a monopolist. Third, it provides some concrete examples of why demand is a determinant for the long-run rate of utilization of capital. Finally, it argues that when it comes to the normal rate of utilization, it is the expected growth rate of demand that matters, not the level of demand.

  • Working Paper No. 949 | February 2020
    This paper extends the empirical stock-flow consistent (SFC) literature through the introduction of distributional features and labor market institutions in a Godley-type empirical SFC model. In particular, labor market institutions, such as the minimum wage and the collective bargaining coverage rate, are considered as determinants of the wage share and, in turn, of the distribution of national income. Thereby, the model is able to examine both the medium-term stability conditions of the economy via the evolution of the sectoral financial balances and the implications of functional income distribution on the growth prospects of the economy at hand. The model is then applied to the Greek economy. The empirical results indicate that the Greek economy has a significant structural competitiveness deficit, while the institutional regime is likely debt-led. The policies implemented in the context of the economic adjustment programs were highly inappropriate, triggering private sector insolvency. A minimum wage increase is projected to have a positive impact on output growth and employment. However, policies that would enhance the productive sector’s structural competitiveness are required in order to ensure the growth prospects of the Greek economy.