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NBER WORKING PAPER SERIES IS-LM and MONETARISM Michael
NBER WORKING PAPER SERIES IS-LM AND MONETARISM Michael D. Bordo Anna J. Schwartz Working Paper 9713 http://www.nber.org/papers/w9713 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 May 2003 This paper was presented at the 2003 HOPE Conference on “The IS/LM Model: Its Rise, Fall, and Strange Persistence” at Duke University, April 25-27. The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research. ©2003 by Michael D. Bordo and Anna J. Schwartz. All rights reserved. Short sections of text not to exceed two paragraphs, may be quoted without explicit permission provided that full credit including © notice, is given to the source. IS-LM and Monetarism Michael D. Bordo and Anna J. Schwartz NBER Working Paper No. 9713 May 2003 JEL No. B22, B31, B41, E12, N12 ABSTRACT This paper discusses monetarist objections to the IS-LM model. We explore the views of two principal spokesmen for monetarism: Milton Friedman and the team of Karl Brunner and Allan Meltzer. Friedman did not explicitly state the reasons he generally chose not to use the IS-LM model in rejecting Keynesian views on the demand function for money, the role of autonomous expenditures in cyclical fluctuations, the potency of fiscal policy as against monetary policy, etc. He presented statistical findings, historical evidence, and econometric results to support his alternative analysis of macroeconomics, but his critics were unconvinced. In 1970, in an effort to use his critics’ common language, he set up a model with explicit terms for IS-LM to encompass both the quantity theory and the income-expenditure theory. -
Old, New and Post Keynesian Perspectives on the Is-Lm Framework: a Contrast and Evaluation
1 OLD, NEW AND POST KEYNESIAN PERSPECTIVES ON THE IS-LM FRAMEWORK: A CONTRAST AND EVALUATION Huw Dixon and Bill Gerrard 1.1 INTRODUCTION The IS-LM framework has been the standard model used for understanding and teaching Keynesian macroeconomics since 1960. Indeed, even a monetarist such as Friedman could subscribe to a modified version of the IS-LM model (1970); Sargent and Wallace (1975) formulated the first New Classical neutrality proposition with an IS-LM model of aggregate demand. The main decisive break from this tradition was Barro's textbook, Macroeconomics, whose first edition was 1984. This relegated the IS-LM analysis to an afterthought at the end of the book; the bulk of the textbook was devoted to the market clearing intertemporal equilibrium approach to macroeco nomics, which had its origins in the work of Lucas and Rapping (1969). In this paper we trace a brief history of the IS-LM framework, and how it has been reinterpreted over the last few decades by economists of an essentially "Keynesian" viewpoint. The IS-LM model was developed as a way of understanding Keynes's General Theory. What defines the IS-LM approach? There are two crucial factors: I. Output is an endogenous variable which is demand-determined. 2. The rate of interest is an endogenous variable, and affects both the demand for goods (investment and possibly consumption) and the demand for money. The IS-LM model can be viewed either as merely a model of aggregate demand (as in the AD-AS model), in which case (1) becomes the demand for output. -
Wage Restraint, Employment, and the Legacy of the General Theory's
Wage Restraint, Employment, and the Legacy of the General Theory’s Chapter 19 Oliver Landmann University of Freiburg i.Br. 1. Introduction The role of wages in the determination of aggregate employment remains one of the most hotly debated public policy issues in many European countries, and in Germany in particular. This is not surprising in view of the high-profile collective bargaining process in which organized labor and employers negotiate over wages under conditions of persistent high unemployment. Of course, neither side wishes to be seen as merely pursuing its narrow self-interest. Both employers and unions make every effort to argue as convincingly as possible that their respective bargaining positions are conducive to employment growth and macroeconomic stability. Employers invoke neoclassical labor market theory to reject any demands for wage increases in excess of labor productivity growth. Such wage increases, they argue, mean rising labor costs and hence cause job losses. Unions, in contrast, emphasize demand-side repercussions and appeal to the keynesian notion of the circular flow of income. They maintain that any attempt to boost employment through wage restraint is doomed to fail, mainly because this would reduce the purchasing power of consumers and thus domestic demand. Accordingly, they tend to put the blame for high unemployment on misguided fiscal and monetary policies. In contrast, the mainstream consensus regards the longer-term trends of output and employment as supply-determined and, therefore, rejects demand-side explanations of unemployment, except for the very short-run cyclical movements. Keynes (1936) devoted an entire chapter of his General Theory, the famous Chapter 19, to the macroeconomic effects of changes in money-wages. -
Labour Share Decline, Financialisation and Structural Change
Cambridge Journal of Economics 2019, 43, 1073–1102 doi:10.1093/cje/bez025 Advance Access publication 7 June 2019 Downloaded from https://academic.oup.com/cje/article/43/4/1073/5512530 by Seoul National University Library user on 16 August 2020 Labour share decline, financialisation and structural change Riccardo Pariboni and Pasquale Tridico* The purpose of this article is to explain the determinants behind the decline of la- bour share in the last three to four decades in OECD countries. In our view, this de- cline was determined by financialisation and was deepened by the structural changes that occurred almost simultaneously in those economies. Financialisation, or finance- dominated capitalism, from the 1980s onwards, was a key element in the strategic offen- sive of the advanced countries’ dominant classes to appropriate higher shares of national income and to restore their control over the political process, a control that had been threatened by a generalised advancement of the labour movement in the 1970s. The development of a finance-dominated capitalism was helped by the process of global- isation, which affected not only OECD countries but also many others. A new, though unstable, macroeconomic model emerged, which we will call financial capitalism. In financial capitalism, trade unions lost power vis-à-vis capital, labour flexibility increased enormously, and a structural change from manufacturing to services was accelerated in rich countries. This resulted in negative consequences for labour share and income inequality. After having provided a theoretical discussion of the determinants of the compression of the wage share, making reference to the relevant literature, we submit our hypotheses to empirical scrutiny, performing a panel data analysis on 28 OECD Countries. -
Keynesian Models of Depression. Supply Shocks and the COVID-19 Crisis
Keynesian models of depression. Supply shocks and the COVID-19 Crisis. Escañuela Romana, Ignacio1 Abstract. The objective of this work is twofold: to expand the depression models proposed by Tobin and analyse a supply shock, such as the Covid-19 pandemic, in this Keynesian conceptual environment. The expansion allows us to propose the evolution of all endogenous macroeconomic variables. The result obtained is relevant due to its theoretical and practical implications. A quantity or Keynesian adjustment to the shock produces a depression through the effect on aggregate demand. This depression worsens in the medium/long-term. It is accompanied by increases in inflation, inflation expectations and the real interest rate. A stimulus tax policy is also recommended, as well as an active monetary policy to reduce real interest rates. On the other hand, the pricing or Marshallian adjustment foresees a more severe and rapid depression in the short-term. There would be a reduction in inflation and inflation expectations, and an increase in the real interest rates. The tax or monetary stimulus measures would only impact inflation. This result makes it possible to clarify and assess the resulting depression, as well as propose policies. Finally, it offers conflicting predictions that allow one of the two models to be falsified. Keywords: macroeconomics, equilibrium, supply shock, COVID-19, depression. JEL codes: E10, E12, E20, E30, I10. 1. Object and results. This work expands on Tobin’s Keynesian models (1975), analyses their local stability, and studies their evolution in the face of a supply shock (specifically, the Covid-19 pandemic). First, an equation for the real interest rate, based on Taylor’s curve, is added. -
Analysis of the Liquidity Preference Theory of Interest
University of Montana ScholarWorks at University of Montana Graduate Student Theses, Dissertations, & Professional Papers Graduate School 1950 Analysis of the liquidity preference theory of interest Earl M. Stephanson The University of Montana Follow this and additional works at: https://scholarworks.umt.edu/etd Let us know how access to this document benefits ou.y Recommended Citation Stephanson, Earl M., "Analysis of the liquidity preference theory of interest" (1950). Graduate Student Theses, Dissertations, & Professional Papers. 4820. https://scholarworks.umt.edu/etd/4820 This Thesis is brought to you for free and open access by the Graduate School at ScholarWorks at University of Montana. It has been accepted for inclusion in Graduate Student Theses, Dissertations, & Professional Papers by an authorized administrator of ScholarWorks at University of Montana. For more information, please contact [email protected]. m wm&is g f t h e m m m e m ? m mm ® ? ky ..... Bari M . Stephenson. - 1C* A** Montana State University, 1950 Presented, in partial fulfillment of the requirement for the degree of Master of Arte Montana State University Approved* Chairman of Board Of Examiners La >. I- Bean, Graduate School UMI Number: EP40284 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. Dissertation Publishing UMI EP40284 Published by ProQuest LLC (2014). Copyright in the Dissertation held by the Author. -
Macro-Economics of Balance-Sheet Problems and the Liquidity Trap
Contents Summary ........................................................................................................................................................................ 4 1 Introduction ..................................................................................................................................................... 7 2 The IS/MP–AD/AS model ........................................................................................................................ 9 2.1 The IS/MP model ............................................................................................................................................ 9 2.2 Aggregate demand: the AD-curve ........................................................................................................ 13 2.3 Aggregate supply: the AS-curve ............................................................................................................ 16 2.4 The AD/AS model ........................................................................................................................................ 17 3 Economic recovery after a demand shock with balance-sheet problems and at the zero lower bound .................................................................................................................................................. 18 3.1 A demand shock under normal conditions without balance-sheet problems ................... 18 3.2 A demand shock under normal conditions, with balance-sheet problems ......................... 19 3.3 -
Zero Nominal Interest Rates, Unemployment, Excess Reserves and Deflation in a Liquidity Trap
A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Murota, Ryu-ichiro; Ono, Yoshiyasu Working Paper Zero nominal interest rates, unemployment, excess reserves and deflation in a liquidity trap ISER Discussion Paper, No. 748 Provided in Cooperation with: The Institute of Social and Economic Research (ISER), Osaka University Suggested Citation: Murota, Ryu-ichiro; Ono, Yoshiyasu (2009) : Zero nominal interest rates, unemployment, excess reserves and deflation in a liquidity trap, ISER Discussion Paper, No. 748, Osaka University, Institute of Social and Economic Research (ISER), Osaka This Version is available at: http://hdl.handle.net/10419/92845 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under -
Inflation Targeting in Canada
In‡ation Targeting in Canada: Optimal Policy or Just Being There? Peter Howitt Brown University October 2, 2006 Paper presented at the Festschrift in Honour of David Laidler, University of Western Ontario, August 18-20, 2006. Parts of the paper are drawn from my unpublished essay entitled “Learning Abnout Monetary Theory and Policy,” which bene…tted from many conversations on the subject with David Laidler and also with Joel Fried. John Crow, Chuck Freedman, Nicholas Rowe, T.K. Rymes and seminar participants at Carleton University and the Laidler Festschrift provided valu- able comments. 1 Introduction David Laidler has had the good sense not to have taken too seriously the notion that people are rational maximizers, always acting under rational expectations. One of the central themes of his work is that money is a device for economizing on the costs of processing information. People use it as a bu¤er stock that automatically absorbs unforeseen changes in income and expenses without the need for deliberation. They also use it as a unit of account, measure of value and standard of deferred payment because it is convenient to use, conventional and easily understood, even if this seems to introduce biases and ine¢ ciencies into their decision making and even if economists can think of better measures and standards.1 In this respect David stands apart from the mainstream of macroeconomics, which has been characterized over the years by what he has called an irrational passion for dispassionate rationality. But unlike many other critics of unbounded rationality, David does not put his ideas forth as an attack on free market economics. -
Asset Choice, Liquidity Preference, and Rationality Under Uncertainty Author(S): David Dequech Source: Journal of Economic Issues, Vol
Asset Choice, Liquidity Preference, and Rationality under Uncertainty Author(s): David Dequech Source: Journal of Economic Issues, Vol. 34, No. 1 (Mar., 2000), pp. 159-176 Published by: Association for Evolutionary Economics Stable URL: http://www.jstor.org/stable/4227537 . Accessed: 21/09/2011 17:24 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. Association for Evolutionary Economics is collaborating with JSTOR to digitize, preserve and extend access to Journal of Economic Issues. http://www.jstor.org Je JOURNALOF ECONOMIC ISSUES Vol. XXXIV No. I March 2000 Asset Choice, LiquidityPreference, and Rationalityunder Uncertainty David Dequech The aim of this paper is to apply in the context of asset choice and liquiditypref- erence some new ideas (developedelsewhere) aboutthe determinationof the state of expectation and about rationalityunder uncertainty.More specifically, the primary objective of the paper is to clarify the influence of confidence and animal spirits on asset choice and liquiditypreference. The paper begins with a discussion of the determinantsof the state of expecta- tion, which summarizes a more detailed treatmentpresented in Dequech [1999a]. The paper proceeds by developing a modified version of Keynes's model of asset choice (as found in Chapter 17 of The General Theory)and, in particular,by speci- fying variables that reflect the influence of animal spirits and confidence. -
Mr. Keynes on the Causes of Unemployment<Article-Title>The
Review: Mr. Keynes on the Causes of Unemployment Author(s): Jacob Viner Source: The Quarterly Journal of Economics, Vol. 51, No. 1 (Nov., 1936), pp. 147-167 Published by: Oxford University Press Stable URL: http://www.jstor.org/stable/1882505 . Accessed: 12/06/2011 11:43 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at . http://www.jstor.org/action/showPublisher?publisherCode=oup. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. Oxford University Press is collaborating with JSTOR to digitize, preserve and extend access to The Quarterly Journal of Economics. http://www.jstor.org MR. KEYNES ON THE CAUSES OF UNEMPLOYMENT' The indebtednessof economiststo Mr. -
Keynes, the Keynesians and Monetarism
A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Congdon, Tim Book — Published Version Keynes, the Keynesians and Monetarism Provided in Cooperation with: Edward Elgar Publishing Suggested Citation: Congdon, Tim (2007) : Keynes, the Keynesians and Monetarism, ISBN 978-1-84720-139-3, Edward Elgar Publishing, Cheltenham, http://dx.doi.org/10.4337/9781847206923 This Version is available at: http://hdl.handle.net/10419/182382 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc-nd/3.0/legalcode www.econstor.eu © Tim Congdon, 2007 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher.