DOCSLIB.ORG

Keynesian Economics

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Keynesian Economics Keynesian Economics By Abigail March Period 1 Major Topics ▪ The Recession of 1937-38 ▪ Keynesian Economics and its impacts ▪ Wagner-Steagall Housing Act and Fair Labor Standards Act Recession of 1937 ▪ An economic downturn that occurred during the Great Depression in the United States. ▪ Lasted from May of 1937 to June of 1938 ▪ Americas third worst recession in the twentieth century. Real GDP fell 11% and industrial production fell 32% ▪ “The recession within the Depression.” Recession of 1937 theory 1 ▪ In 1936, the Roosevelt Administration began to worry about the potential of inflation. ▪ The Treasury Department responded by directing the incoming gold holdings away from the Federal Reserve. This caused the monetary base to freeze. Recession of 1937 theory 1 ▪ The economy began its downturn in the spring of 1937 and plummeted during the following fall. The Treasury Department realized their mistake and redirected the gold back to the Federal Reserve and the economy began its recovery in the summer of 1938. ▪ It is thought that the reasoning behind the decision of the Treasury Department was because there was a fear among the people that the value of the dollar would be decreased. Recession of 1937 theory 2 ▪ Another possible reason behind the Recession of 1937 is the contraction in the money supply caused by policies and contractionary fiscal policies in addition to Federal Reserve and Treasury Department decisions. ▪ In 1936, to prevent an “injurious credit expansion,” Federal policymakers doubled reserve requirement ratios to soak up banks’ excess reserves, which is money above the amount banks were required to hold as a fraction of customers’ deposits, by creating the Revenue Act of 1935 . Recession of 1937 theory 2 ▪ While this was put in place so was the Treasury Departments decision to route the gold away from the Federal Reserve. ▪ People who agree with this viewpoint believe that both had a large impact upon the economy decay, not solely the Treasury Departments mistake Keynesian Economic Theory ▪ Created by the British economist John Maynard Keynes, Keynesian economics is a theory of total spending in the economy, called aggregate demand, and its effects on output and inflation. ▪ A Keynesian believer agrees that aggregate demand is influenced by a host of economic decisions—both public and private—and sometimes behaves erratically. The public decisions include, most prominently, those on monetary and fiscal (i.e., spending and tax) policies. ▪ According to Keynesian theory, changes in aggregate demand, whether anticipated or unanticipated, have their greatest short-run effect on real output and employment, not on prices. Keynesian Economic Theory ▪ A l0t of people who agree with the Keynesian Economic Theory – are more concerned about combating unemployment than about conquering inflation. – Think that prices, and especially wages, respond slowly to changes in supply and demand, resulting in periodic shortages and surpluses, especially of labor. Keynesian Economic Theory ▪ Unfortunately it was rejected by Roosevelt. ▪ The Second World War was considered to save the economy. John Maynard Keynes ▪ Born: June 5, 1883, Cambridge, United Kingdom. Died: April 21, 1946, Tilton ▪ British economist. Studied at Eton College and King's College, Cambridge – Philosophy and Mathematics ▪ As a young man he was homosexual but later found a love for woman as well and fell in love with and married Lydia Lopokova. ▪ Only education in Economics was a few lectures he attended as graduate student. Wagner-Steagall Housing Act ▪ The Act required that for each new public housing unit created, a unit of substandard quality must be removed. This one-to-one policy ensured that the federal program would increase the quality of housing, but not the quantity. ▪ Operational decisions were left to local authorities, ensuring that communities that did not want public housing could avoid it and those that did could determine the project’s location, virtually guaranteeing that housing projects would remain racially segregated. Wagner-Steagall Housing Act ▪ The Housing Act of 1937 set very low maximum income requirements for public housing residents. This policy was intended to alleviate fears that public housing would compete with the private market, but it ultimately led to high concentrations of poverty within public housing projects. ▪ Housing was left up to local officials. Fair Labor Standards Act ▪ The Fair Labor Standards Act (FLSA) establishes minimum wage, overtime pay, recordkeeping, and youth employment standards affecting full-time and part-time workers in the private sector and in Federal, State, and local governments. ▪ The Fair Labor Standards Act of 1938 originated in President Franklin Roosevelt's New Deal. Fair Labor Standards Act ▪ The Labor Standards Act - banned child labor. - the first minimum wage (25 cents per hour) was established. - The work week was limited to 44 hours per week (revised in 1940 to 40 hours per week). - A 1963 amendment called the Equal Pay Act prohibited differences in pay based on sex. Resources ▪ http://www.maynardkeynes.org/ ▪ http://www.imf.org/external/pubs/ft/fandd/2014/09/basics.htm ▪ https://en.wikipedia.org/wiki/John_Maynard_Keynes ▪ http://www.theguardian.com/books/2015/mar/08/universal-man-seven- lives-john-maynard-keynes-review ▪ http://www.federalreservehistory.org/Events/DetailView/27 ▪ http://www.investopedia.com/terms/k/keynesianeconomics.asp? layout=orig ▪ https://www.google.com/webhp?sourceid=chrome- instant&ion=1&espv=2&ie=UTF-8#q=what%20is%20the%20recession %20of%201937 Resources ▪ http://www.voxeu.org/article/what-caused-recession-1937-38-new- lesson-today-s-policymakers ▪ http://www.bostonfairhousing.org/timeline/1937-Housing-Act.html ▪ http://www.encyclopedia.com/doc/1G2-3406400301.html .
Load more

Recommended publications
  • Research & Policy Brief No.47
    Research & Policy Briefs From the World Bank Malaysia Hub No. 47 May 24, 2021 Demand and Supply Dynamics in East Asia during the COVID-19 Recession Ergys Islamaj, Franz Ulrich Ruch, and Eka Vashakmadze The COVID-19 pandemic has devastated lives and damaged economies, requiring strong and decisive policy responses from governments. Developing Public Disclosure Authorized the optimal short-term and long-term policy response to the pandemic requires understanding the demand and supply factors that drive economic growth. The appropriate policy response will depend on the size and duration of demand and supply shocks. This Research & Policy Brief provides a decomposition of demand and supply dynamics at the macroeconomic level for the large developing economies of East Asia. The findings suggest that both demand and supply shocks were important drivers of output fluctuations during the first year of the pandemic. The demand shocks created an environment of deficient demand—reflected in large negative output gaps even after the unprecedented policy response—which is expected to last through 2021. The extant deficient demand is suggestive of continued need to support the economic recovery. Its size should guide policy makers in calibrating responses to ensure that recovery is entrenched, and that short-term supply disruptions do not lead to long-term declines in potential growth. The Pandemic-Induced Shock Low external demand will continue to affect economies reliant on tourism, while sluggish domestic demand will disproportionally affect The pandemic, national lockdowns, and reverberations from the rest economies with large services sectors. Understanding the demand of the world inflicted a massive shock to the East Asia and Pacific and supply factors that drive economic growth is critical for region in 2020 (World Bank 2020a).
    [Show full text]
  • Epidemics in the Neoclassical and New Keynesian Models∗†
    Epidemics in the Neoclassical and New Keynesian Models∗† Martin S. Eichenbaum‡ Sergio Rebelo§ Mathias Trabandt¶ June 19, 2020 Abstract We analyze the e§ects of an epidemic in three standard macroeconomic models. We find that the neoclassical model does not rationalize the positive comovement of consumption and investment observed in recessions associated with an epidemic. Intro- ducing monopolistic competition into the neoclassical model remedies this shortcoming even when prices are completely flexible. Finally, sticky prices lead to a larger recession but do not fundamentally alter the predictions of the monopolistic competition model. JEL Classification: E1, I1, H0 Keywords: Epidemic, comovement, investment, recession. ∗We thank R. Anton Braun, Joao Guerreiro, Martín Harding, Laura Murphy, and Hannah Seidl for helpful comments. †Matlab/Dynare replication codes will be made available by the end of June 2020 at the following URL: https://sites.google.com/site/mathiastrabandt/home/research ‡Northwestern University and NBER. Address: Northwestern University, Department of Economics, 2211 Campus Dr, Evanston, IL 60208. USA. E-mail: [email protected]. §Northwestern University, NBER, and CEPR. Address: Northwestern University, Kellogg School of Man- agement, 2211 Campus Dr, Evanston, IL 60208. USA. E-mail: [email protected]. ¶Freie Universität Berlin, School of Business and Economics, Chair of Macroeconomics. Address: Boltz- mannstrasse 20, 14195 Berlin, Germany, German Institute for Economic Research (DIW) and Halle Institute for Economic Research (IWH), E-mail: [email protected]. 1Introduction Acentralfeatureofrecessionsisthepositivecomovementbetweenoutput,hoursworked, consumption, and investment. In this respect, the COVID-19 recession is not unique. At least since Barro and King (1984), it has been recognized that, absent aggregate productivity shocks, it is di¢cult for many models to generate comovement in macroeconomic aggregates.
    [Show full text]
  • The Socialization of Investment, from Keynes to Minsky and Beyond
    Working Paper No. 822 The Socialization of Investment, from Keynes to Minsky and Beyond by Riccardo Bellofiore* University of Bergamo December 2014 * [email protected] This paper was prepared for the project “Financing Innovation: An Application of a Keynes-Schumpeter- Minsky Synthesis,” funded in part by the Institute for New Economic Thinking, INET grant no. IN012-00036, administered through the Levy Economics Institute of Bard College. Co-principal investigators: Mariana Mazzucato (Science Policy Research Unit, University of Sussex) and L. Randall Wray (Levy Institute). The author thanks INET and the Levy Institute for support of this research. The Levy Economics Institute Working Paper Collection presents research in progress by Levy Institute scholars and conference participants. The purpose of the series is to disseminate ideas to and elicit comments from academics and professionals. Levy Economics Institute of Bard College, founded in 1986, is a nonprofit, nonpartisan, independently funded research organization devoted to public service. Through scholarship and economic research it generates viable, effective public policy responses to important economic problems that profoundly affect the quality of life in the United States and abroad. Levy Economics Institute P.O. Box 5000 Annandale-on-Hudson, NY 12504-5000 http://www.levyinstitute.org Copyright © Levy Economics Institute 2014 All rights reserved ISSN 1547-366X Abstract An understanding of, and an intervention into, the present capitalist reality requires that we put together the insights of Karl Marx on labor, as well as those of Hyman Minsky on finance. The best way to do this is within a longer-term perspective, looking at the different stages through which capitalism evolves.
    [Show full text]
  • Demand Composition and the Strength of Recoveries†
    Demand Composition and the Strength of Recoveriesy Martin Beraja Christian K. Wolf MIT & NBER MIT & NBER September 17, 2021 Abstract: We argue that recoveries from demand-driven recessions with ex- penditure cuts concentrated in services or non-durables will tend to be weaker than recoveries from recessions more biased towards durables. Intuitively, the smaller the bias towards more durable goods, the less the recovery is buffeted by pent-up demand. We show that, in a standard multi-sector business-cycle model, this prediction holds if and only if, following an aggregate demand shock to all categories of spending (e.g., a monetary shock), expenditure on more durable goods reverts back faster. This testable condition receives ample support in U.S. data. We then use (i) a semi-structural shift-share and (ii) a structural model to quantify this effect of varying demand composition on recovery dynamics, and find it to be large. We also discuss implications for optimal stabilization policy. Keywords: durables, services, demand recessions, pent-up demand, shift-share design, recov- ery dynamics, COVID-19. JEL codes: E32, E52 yEmail: [email protected] and [email protected]. We received helpful comments from George-Marios Angeletos, Gadi Barlevy, Florin Bilbiie, Ricardo Caballero, Lawrence Christiano, Martin Eichenbaum, Fran¸coisGourio, Basile Grassi, Erik Hurst, Greg Kaplan, Andrea Lanteri, Jennifer La'O, Alisdair McKay, Simon Mongey, Ernesto Pasten, Matt Rognlie, Alp Simsek, Ludwig Straub, Silvana Tenreyro, Nicholas Tra- chter, Gianluca Violante, Iv´anWerning, Johannes Wieland (our discussant), Tom Winberry, Nathan Zorzi and seminar participants at various venues, and we thank Isabel Di Tella for outstanding research assistance.
    [Show full text]
  • Predicting Recessions: Financial Cycle Versus Term Spread
    BIS Working Papers No 818 Predicting recessions: financial cycle versus term spread by Claudio Borio, Mathias Drehmann and Dora Xia Monetary and Economic Department October 2019 JEL classification: C33, E37, E44 Keywords: financial cycle, term spread, recession risk, panel probit model BIS Working Papers are written by members of the Monetary and Economic Department of the Bank for International Settlements, and from time to time by other economists, and are published by the Bank. The papers are on subjects of topical interest and are technical in character. The views expressed in them are those of their authors and not necessarily the views of the BIS. This publication is available on the BIS website (www.bis.org). © Bank for International Settlements 2019. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISSN 1020-0959 (print) ISSN 1682-7678 (online) Predicting recessions: financial cycle versus term spread1 Claudio Borio, Mathias Drehmann and Dora Xia2 Abstract Financial cycles can be important drivers of real activity, but there is scant evidence about how well they signal recession risks. We run a horse race between the term spread – the most widely used indicator in the literature – and a range of financial cycle measures. Unlike most papers, ours assesses forecasting performance not just for the United States but also for a panel of advanced and emerging market economies. We find that financial cycle measures have significant forecasting power both in and out of sample, even for a three-year horizon. Moreover, they outperform the term spread in nearly all specifications.
    [Show full text]
  • How Would Modern Macroeconomic Schools of Thought Respond to the Recent Economic Crisis?
    ® Economic Information Newsletter Liber8 Brought to You by the Research Library of the Federal Reserve Bank of St. Louis November 2009 How Would Modern Macroeconomic Schools of Thought Respond to the Recent Economic Crisis? “Would financial markets and the economy have been better off if the Fed pursued a policy of quantitative easing sooner?” —Daniel L. Thornton, Vice President and Economic Adviser, Federal Reserve Bank of St. Louis, Economic Synopses The government and the Federal Reserve’s response to the current recession continues to be hotly de bated. Several questions arise: Was a $780 billion economic stimulus bill appropriate? Was the Troubled Asset Re lief Program (TARP) beneficial? Should the Fed have increased the money supply sooner? Should Lehman Brothers have been allowed to fail? Some answers to these questions lie in economic theory, and whether prudent decisions were made depends on whom you ask. This article examines three modern schools of economic thought and how each school would advise was the best way to respond to the most recent crisis. The New Keynesian Approach New Keynesian economics, the “new” version of the school based on the works of the early twentieth- century economist John Maynard Keynes, is founded on two major assumptions. First, people are forward looking; that is, they use available information today (interest rates, stock prices, gas prices, and so on) to form expectations about the future. Second, prices and wages are “sticky,” meaning they adjust gradually. One example of “stickiness” is a union-negotiated contract, which is fixed for a definite period of time. Menus are also an example of price stickiness: The cost associated with reprinting menus causes a restaurant owner to be reluctant about replacing them.
    [Show full text]
  • Nber Working Paper Series the New-Keynesian Liquidity
    NBER WORKING PAPER SERIES THE NEW-KEYNESIAN LIQUIDITY TRAP John H. Cochrane Working Paper 19476 http://www.nber.org/papers/w19476 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 September 2013 I thank Tom Coleman, Bill Dupor, Martin Eichenbaum, Jesús Fernández-Villaverde, Miles Kimball, Narayana Kocherlakota, Ed Nelson, Ivan Werning, Johannes Weiland, anonymous referees, and many seminar participants for many helpful comments. I thank CRSP and the Guggenheim Foundation for research support. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer- reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications. © 2013 by John H. Cochrane. 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. The New-Keynesian Liquidity Trap John H. Cochrane NBER Working Paper No. 19476 September 2013, Revised October 2014 JEL No. E12,E3,E4,E6 ABSTRACT In standard solutions, the new-Keynesian model produces a deep recession with deflation in a liquidity trap. The model also makes unusual policy predictions: Useless government spending, technical regress, and capital destruction have large multipliers. These predictions become larger as prices become less sticky. I show that both sets of predictions are strongly affected by equilibrium selection. For the same interest-rate path, different choices of equilibria – either by the researcher's direct selection or the researcher's specification of expected Federal Reserve policy – can overturn all these results.
    [Show full text]
  • Missing Disinflation and Missing Inflation
    Missing Disinflation and Missing Inflation: A VAR Perspective∗ Elena Bobeica and Marek Jaroci´nski European Central Bank In the immediate wake of the Great Recession we didn’t see the disinflation that most models predicted and, subse- quently, we didn’t see the inflation they predicted. We show that these puzzles disappear in a vector autoregressive model that properly accounts for domestic and external factors. This model reveals strong spillovers from U.S. to euro-area inflation in the Great Recession. By contrast, domestic factors explain much of the euro-area inflation dynamics during the 2012–14 missing inflation episode. Consequently, euro-area economists and models that excessively focused on the global nature of inflation were liable to miss the contribution of deflationary domestic shocks in this period. JEL Codes: E31, E32, F44. 1. Introduction The dynamics of inflation since the start of the Great Recession has puzzled economists. First, a “missing disinflation” puzzle emerged when inflation in advanced economies failed to fall as much as expected given the depth of the recession (see, e.g., Hall 2011 on the United States and Friedrich 2016 on the rest of the advanced ∗We thank Marta Ba´nbura, Fabio Canova, Matteo Ciccarelli, Luca Dedola, Thorsten Drautzburg, Paul Dudenhefer, Philipp Hartmann, Giorgio Primiceri, Chiara Osbat, Mathias Trabandt, and three anonymous referees for their com- ments. This paper is part of the work of the Low Inflation Task Force of the ECB and the Eurosystem. The opinions in this paper are those of the authors and do not necessarily reflect the views of the European Central Bank and the Eurosys- tem.
    [Show full text]
  • Demand Shock, Liquidity Management, and Firm Growth During the Financial Crisis
    Finance and Economics Discussion Series Divisions of Research & Statistics and Monetary Affairs Federal Reserve Board, Washington, D.C. Demand Shock, Liquidity Management, and Firm Growth during the Financial Crisis Vojislav Maksimovic, Mandy Tham, and Youngsuk Yook 2015-096 Please cite this paper as: Maksimovic, Vojislav, Mandy Tham, and Youngsuk Yook (2015). “Demand Shock, Liquid- ity Management, and Firm Growth during the Financial Crisis,” Finance and Economics Discussion Series 2015-096. Washington: Board of Governors of the Federal Reserve System, http://dx.doi.org/10.17016/FEDS.2015.096. NOTE: Staff working papers in the Finance and Economics Discussion Series (FEDS) are preliminary materials circulated to stimulate discussion and critical comment. The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the research staff or the Board of Governors. References in publications to the Finance and Economics Discussion Series (other than acknowledgement) should be cleared with the author(s) to protect the tentative character of these papers. Demand Shock, Liquidity Management, and Firm Growth during the Financial Crisis Vojislav Maksimovic, Mandy Tham, and Youngsuk Yook∗ October 2015 ABSTRACT We examine the transmission of liquidity across the supply chain during the 2007–09 financial crisis, a period of financial market illiquidity, for a sample of unrated public firms with differential demand shocks. We measure differential demand by comparing firms that primarily supply to government customers with those that primarily supply to corporate customers. A difference-in-difference analysis shows little evidence that relatively high demand firms provide more or less liquidity to their own suppliers.
    [Show full text]
  • From a Recession to the COVID-19 Pandemic: Inflation–Unemployment
    economies Article From a Recession to the COVID-19 Pandemic: Inflation–Unemployment Comparison between the UK and India Vijay Victor 1,* , Joshy Joseph Karakunnel 1 , Swetha Loganathan 1 and Daniel Francois Meyer 2 1 Department of Economics, CHRIST University, Bengaluru 560029, Karnataka, India; [email protected] (J.J.K.); [email protected] (S.L.) 2 College of Business and Economics, University of Johannesburg, Auckland Park 2006, South Africa; [email protected] * Correspondence: [email protected] Abstract: The recession in India and the UK peaked in 2017 due to the implications of new policy initiatives. The outbreak of the COVID-19 pandemic at the beginning of 2020 intensified the crisis, causing a drastic decline in aggregate demand and output. India and the UK have resorted to monetary and fiscal stimulus packages to face the economic crisis. This study investigated the inflation–unemployment dynamics during the recession and COVID-19 times in India and the UK. Using a generalized additive model (GAM), the results of this study revealed that the recession had given way to stagflation in India. In contrast, in the UK, it has led to a more severe recession in the short-run. During the downturn, policy initiatives aggravate the recession and eventually turn to stagflation in India due to inflation caused by the weak supply side. However, in the UK, the policy initiatives during this downturn pushed the economy into a deeper recession due to reduced demand. The outbreak of the COVID-19 pandemic has had a similar recessionary impact on both Citation: Victor, Vijay, Joshy Joseph economies.
    [Show full text]
  • Structural Conditions and Macroeconomic Responses to Shocks : a Sensitivity Analysis for Four European Countries
    STRUCTURAL CONDITIONS AND MACROECONOMIC RESPONSES TO SHOCKS : A SENSITIVITY ANALYSIS FOR FOUR EUROPEAN COUNTRIES Luca Barbone and Pierre Poret CONTENTS Introduction ........................................................ 132 1 . Increased competition and effects on aggregate pricing and wage-setting behaviour .................. 133 A . The response of aggregate prices to increased competition in product markets .......................................... 134 B. Product market flexibility and aggregate wage response ......... 135 C. The effects of wage and price flexibility : a simple model ........ 136 II. Using INTERLINK for a sensitivity analysis : choices and problems ... 138 A . Changes in parameters ...................................... 138 B. Nature of the exercise ....................................... 141 111 . Simulation results : aggregate demand shocks ...................... 142 A . Expansionary demand shock in single-country mode ............ 142 B. The effects of a concerted European demand stimulus .......... 147 IV. Simulation results : supply shocks ................................ 147 A . A domestic supply shock .................................... 151 B . An across-the-board energy shock ............................ 151 Conclusions ........................................................ 154 Bibliography ....................................................... 158 At the time of writing. the authors were Administrators in the Country Studies Branch of the Economics and Statistics Department. They are grateful to their
    [Show full text]
  • Keynes and Marx by Claudio Sardoni University of Rome “La Sapienza”
    Keynes and Marx by Claudio Sardoni University of Rome “La Sapienza” I. Introduction Soon after the publication of The General Theory, Keynes manifested his dissatisfaction with the ‘final product’ of the intellectual process which had started in 1931-32 and he stated an intention to re-cast his ideas in a clearer and more satisfactory way. Joan Robinson thought that starting from Marx, rather than orthodox economics, would have saved Keynes ‘a lot of trouble’ (1964: 96). The object of this chapter is to inquire into the possibility that Keynes could have re-written The General Theory by giving Marx more attention and more credit than he did in the 1936 edition of the book. The interest in this issue does not derive, however, from any evidence that Keynes changed his opinion of Marx after 1936: it remained highly critical. Such interest rather derives from the fact that, in the quest for a clearer formulation of his fundamental ideas, Keynes, in my opinion, could have chosen to go, at least partly, ‘back’ to the approach that he had followed earlier on in the process which led to the publication of The General Theory. In fact, at a relatively early stage (1933) of this process, Keynes’s analysis of a capitalist economy and his critique of the orthodox view had come close to Marx’s approach. Keynes soon abandoned his 1933 approach and, in The General Theory, he formulated the critique of orthodox economics in a different way from Marx. In the chapter, I argue that the reason for the change may be found in the fact that the economic theory criticised by Keynes was significantly different from the Ricardian theory to which Marx referred.
    [Show full text]