An Introduction to Keynes & Fiscal Policy
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Bessemer Trust a Closer Look Debt Dynamics and Modern Monetary Theory in a Post COVID-19 World
Debt Dynamics and Modern Monetary Theory in a Post COVID-19 World A Closer Look. Debt Dynamics and Modern Monetary Theory in a Post COVID-19 World. In Brief. • U.S. and other developed economy debt levels are elevated relative to history, sparking questions over the sustainability of the debt and governments’ ability to continue spending to combat the economic impact of the novel coronavirus. • The U.S. post-crisis experience has the potential to differ from that of Japan’s after the 1990s banking crisis as a result of markedly different banking systems. JP Coviello • A post World War II style deleveraging in the U.S. seems less likely given growth Senior Investment dynamics; current labor, capital, productivity, and spending trends are obstacles to Strategist. such a swift deleveraging. • Unprecedented fiscal and monetary support in the wake of COVID-19 creates many questions about how governments can finance large spending programs over longer time horizons. • While the coordinated fiscal and monetary response to the crisis includes aspects of Modern Monetary Theory (MMT), a full implementation remains unlikely. However, a review of the theory can be instructive in thinking about these issues and possible policy responses. Governments and central banks around the world have deployed massive amounts of stimulus in Peter Hayward an effort to cushion economies from the devastating effects of the COVID-19 pandemic. Clients, Assistant Portfolio understandably, are concerned about what this could imply over the longer term from a debt and Manager, Fixed Income. deficit perspective. While humanitarian issues are the top priority in a crisis, and spending more now likely means spending less in the future, the financing of these expansionary policies must be considered. -
Monetary Policy in Economies with Little Or No Money
NBER WORKING PAPER SERIES MONETARY POLICY IN ECONOMIES WITH LITTLE OR NO MONEY Bennett T. McCallum Working Paper 9838 http://www.nber.org/papers/w9838 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 July 2003 This paper was prepared for presentation at the December 16-17, 2002, meeting of the Hong Kong Economic Association. I am indebted to Marvin Goodfriend, Lok Sang Ho, Allan Meltzer, and Edward Nelson for helpful comments and suggestions. The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research ©2003 by Bennett T. McCallum. 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. Monetary Policy in Economies with Little or No Money Bennett T. McCallum NBER Working Paper No. 9838 July 2003 JEL No. E3, E4, E5 ABSTRACT The paper's arguments include: (1) Medium-of-exchange money will not disappear in the foreseeable future, although the quantity of base money may continue to decline. (2) In economies with very little money (e.g., no currency but bank settlement balances at the central bank), monetary policy will be conducted much as at present by activist adjustment of overnight interest rates. Operating procedures will be different, however, with payment of interest on reserves likely to become the norm. (3) In economies without any money there can be no monetary policy. The relevant notion of a general price level concerns some index of prices in terms of a medium of account. -
Fiscal Policy in an Unemployment Crisis∗
Fiscal Policy in an Unemployment Crisis∗ Pontus Rendahly University of Cambridge, CEPR, and Centre for Macroeconomics (CFM) April 30, 2014 Abstract This paper shows that large fiscal multipliers arise naturally from equilibrium unemploy- ment dynamics. In response to a shock that brings the economy into a liquidity trap, an expansion in government spending increases output and causes a fall in the unemployment rate. Since movements in unemployment are persistent, the effects of current spending linger into the future, leading to an enduring rise in income. As an enduring rise in income boosts private demand, even a temporary increase in government spending sets in motion a virtuous employment-spending spiral with a large associated multiplier. This transmission mechanism contrasts with the conventional view in which fiscal policy may be efficacious only under a prolonged and committed rise in government spending, which engineers a spiral of increasing inflation. Keywords: Fiscal multiplier, liquidity trap, zero lower bound, unemployment inertia. ∗The first version of this paper can be found as Cambridge Working Papers in Economics No. 1211. yThe author would like to thank Andrea Caggese, Giancarlo Corsetti, Wouter den Haan, Jean-Paul L'Huillier, Giammario Impulitti, Karel Mertens, Emi Nakamura, Kristoffer Nimark, Evi Pappa, Franck Portier, Morten Ravn, Jon Steinsson, Silvana Tenreyro, and Mirko Wiederholt for helpful comments and suggestions. I am grateful to seminar participants at LSE, Royal Economic Society, UCL, European Univer- sity Institute, EIEF, ESSIM 2012, SED 2013, Bonn University, Goethe University, UAB, and in particular to James Costain, and Jonathan Heathcote for helpful discussions and conversations. Financial support is gratefully acknowledge from the Centre for Macroeconomics (CFM) and the Institute for New Economic Thinking (INET). -
The Origins and Evolution of Progressive Economics Part Seven of the Progressive Tradition Series
AP PHOTO/FILE AP This January 1935 photo shows a mural depicting phases of the New Deal The Origins and Evolution of Progressive Economics Part Seven of the Progressive Tradition Series Ruy Teixeira and John Halpin March 2011 WWW.AMERICANPROGRESS.ORG The Origins and Evolution of Progressive Economics Part Seven of the Progressive Tradition Series Ruy Teixeira and John Halpin March 2011 With the rise of the contemporary progressive movement and the election of President Barack Obama in 2008, there is extensive public interest in better understanding the ori- gins, values, and intellectual strands of progressivism. Who were the original progressive thinkers and activists? Where did their ideas come from and what motivated their beliefs and actions? What were their main goals for society and government? How did their ideas influence or diverge from alternative social doctrines? How do their ideas and beliefs relate to contemporary progressivism? The Progressive Tradition Series from the Center for American Progress traces the devel- opment of progressivism as a social and political tradition stretching from the late 19th century reform efforts to the current day. The series is designed primarily for educational and leadership development purposes to help students and activists better understand the foundations of progressive thought and its relationship to politics and social movements. Although the Progressive Studies Program has its own views about the relative merit of the various values, ideas, and actors discussed within the progressive tradition, the essays included in the series are descriptive and analytical rather than opinion based. We envision the essays serving as primers for exploring progressivism and liberalism in more depth through core texts—and in contrast to the conservative intellectual tradition and canon. -
Supply Shocks, Demand Shocks, and Labor Market Fluctuations
Research Division Federal Reserve Bank of St. Louis Working Paper Series Supply Shocks, Demand Shocks, and Labor Market Fluctuations Helge Braun Reinout De Bock and Riccardo DiCecio Working Paper 2007-015A http://research.stlouisfed.org/wp/2007/2007-015.pdf April 2007 FEDERAL RESERVE BANK OF ST. LOUIS Research Division P.O. Box 442 St. Louis, MO 63166 ______________________________________________________________________________________ The views expressed are those of the individual authors and do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis, the Federal Reserve System, or the Board of Governors. Federal Reserve Bank of St. Louis Working Papers are preliminary materials circulated to stimulate discussion and critical comment. References in publications to Federal Reserve Bank of St. Louis Working Papers (other than an acknowledgment that the writer has had access to unpublished material) should be cleared with the author or authors. Supply Shocks, Demand Shocks, and Labor Market Fluctuations Helge Braun Reinout De Bock University of British Columbia Northwestern University Riccardo DiCecio Federal Reserve Bank of St. Louis April 2007 Abstract We use structural vector autoregressions to analyze the responses of worker ‡ows, job ‡ows, vacancies, and hours to shocks. We identify demand and sup- ply shocks by restricting the short-run responses of output and the price level. On the demand side we disentangle a monetary and non-monetary shock by restricting the response of the interest rate. The responses of labor market vari- ables are similar across shocks: expansionary shocks increase job creation, the hiring rate, vacancies, and hours. They decrease job destruction and the sep- aration rate. -
The Interaction Between Monetary and Fiscal Policy: Insights from Two Business Cycles in Israel
The interaction between monetary and fiscal policy: insights from two business cycles in Israel Kobi Braude and Karnit Flug1 Abstract Comparing the two significant recessions Israel experienced over the last decade, we highlight the importance of sustained fiscal discipline and credible monetary policy during normal times for expanding the set of policy options available at a time of need. In the first recession Israel was forced to conduct a contractionary fiscal and monetary policy, whereas in the second one it was able to pursue an expansionary policy. The difference in the effect of the policy response between the two recessions is sizable: it exacerbated the first recession while it helped to moderate the second one. Keywords: Fiscal policy, fiscal discipline, public debt, monetary policy, counter-cyclical policy, business cycles JEL classification: E52, E62, H6 1 Bank of Israel. We thank Stanley Fischer and Alon Binyamini for helpful comments and Noa Heymann for her research assistance. BIS Papers No 67 205 Introduction Over the last decade Israel experienced two significant business cycles. The monetary and fiscal policy response to the recession at the end of the decade was very different from the response to recession of the early 2000s. In the earlier episode, following a steep rise in the budget deficit and a single 2 percentage point interest rate reduction, policy makers were forced to make a sharp reversal and conduct a contractionary policy in the midst of the recession. In the second episode, monetary and fiscal expansion was pursued until recovery was well under way. This note examines the factors behind the difference in the policy response to the two recession episodes. -
Unemployment, Aggregate Demand, and the Distribution of Liquidity
Unemployment, Aggregate Demand, and the Distribution of Liquidity Zach Bethune Guillaume Rocheteau University of Virginia University of California, Irvine Tsz-Nga Wong Federal Reserve Bank of Richmond February 13, 2017 Abstract We develop a New-Monetarist model of unemployment in which distributional considerations matter. Households who lack commitment are subject to both employment and expenditure risk. They self- insure by accumulating real balances and, possibly, claims on firms profits. The distribution of liquidity is endogenous and responds to idiosyncratic risks and monetary policy. Despite the ex-post heterogeneity our model can be solved in closed form in a variety of cases. We show the existence of an aggregate demand channel according to which the distribution of workers across employment states, and their incomes in those states, affects the distribution of liquid wealth and firms’ profits. An increase in unemployment benefits or wages has a positive effect on aggregate demand and can lead to higher employment. Moreover, an increase in productivity has a multiplier effect on firms’ revenue. JEL Classification Numbers: D83 Keywords: unemployment, money, distribution. 1 Introduction We develop a New-Monetarist model of unemployment in which liquidity and distributional considerations matter. Our approach is motivated by the strong empirical evidence that household heterogeneity in terms of income and wealth, together with liquidity constraints, affect aggregate consumption and unemployment (e.g., Mian and Sufi, 2010?; Carroll et al., 2015). There is a recent literature that formalizes search frictions and liquidity constraints in goods markets that reduce the ability of firms to sell their output, their incentives to hire, and ultimately the level of unemployment (e.g., Berentsen, Menzio, and Wright, 2010; Michaillat and Saez, 2015). -
AS-AD and the Business Cycle
Chapter AS-AD and the Business Cycle CHAPTER OUTLINE 1. Provide a technical definition of recession and describe the history of the U.S. business cycle and the global business cycle. A. Dating Business-Cycle Turning Points B. U.S. Business-Cycle History C. Recent Cycles 2. Explain the influences on aggregate supply. A. Aggregate Supply Basics 1. Why the AS Curve Slopes Upward a. Business Failure and Startup b. Temporary Shutdowns and Restarts c. Changes in Output Rate 2. Production at a Pepsi Plant B. Changes in Aggregate Supply 1. Changes in Potential GDP 2. Changes in Money Wage Rate and Other Resource Prices 3. Explain the influences on aggregate demand. A. Aggregate Demand Basics 1. The Buying Power of Money 2. The Real Interest Rate 3. The Real Prices of Exports and Imports B. Changes in Aggregate Demand 1. Expectations 2. Fiscal Policy and Monetary Policy 3. The World Economy C. The Aggregate Demand Multiplier 4. Explain how fluctuations in aggregate demand and aggregate supply create the business cycle. A. Aggregate Demand Fluctuations B. Aggregate Supply Fluctuations C. Adjustment Toward Full Employment 710 Part 10 . ECONOMIC FLUCTUATIONS CHAPTER ROADMAP What’s New in this Edition? Chapter 29 is now the first chapter in which the students en‐ counter the AS‐AD model. This chapter now uses some of the material from the second edition’s Chapter 23 introduc‐ tion to AS‐AD to explain the beginning about aggregate supply and aggregate demand. The connection between the AS‐AD model and business cycle has been rewritten and made even more straightforward for the students. -
Some Answers FE312 Fall 2010 Rahman 1) Suppose the Fed
Problem Set 7 – Some Answers FE312 Fall 2010 Rahman 1) Suppose the Fed reduces the money supply by 5 percent. a) What happens to the aggregate demand curve? If the Fed reduces the money supply, the aggregate demand curve shifts down. This result is based on the quantity equation MV = PY, which tells us that a decrease in money M leads to a proportionate decrease in nominal output PY (assuming of course that velocity V is fixed). For any given price level P, the level of output Y is lower, and for any given Y, P is lower. b) What happens to the level of output and the price level in the short run and in the long run? In the short run, we assume that the price level is fixed and that the aggregate supply curve is flat. In the short run, output falls but the price level doesn’t change. In the long-run, prices are flexible, and as prices fall over time, the economy returns to full employment. If we assume that velocity is constant, we can quantify the effect of the 5% reduction in the money supply. Recall from Chapter 4 that we can express the quantity equation in terms of percent changes: ΔM/M + ΔV/V = ΔP/P + ΔY/Y We know that in the short run, the price level is fixed. This implies that the percentage change in prices is zero and thus ΔM/M = ΔY/Y. Thus in the short run a 5 percent reduction in the money supply leads to a 5 percent reduction in output. -
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. -
Working Paper
WP 2020-12 December 2020 Working Paper Charles H. Dyson School of Applied Economics and Management Cornell University, Ithaca, New York 14853-7801 USA Social Externalities and Economic Analysis Marc Fleurbaey, Ravi Kanbur, and Brody Viney It is the Policy of Cornell University actively to support equality of educational and employment opportunity. No person shall be denied admission to any educational program or activity or be denied employmen t on the basis of any legally prohibited discrimination involving, but not limited to, such factors as race, color, creed, religion, national or ethnic origin, sex, age or handicap. The University is committed to the maintenance of affirmative action prog rams which will assure the continuation of such equality of opportunity. 2 Social Externalities and Economic Analysis Marc Fleurbaey, Ravi Kanbur, Brody Viney ThisThis version: versio Augustn: Aug 6,us 2020t 6, 20201 Abstract This paper considers and assesses the concept of social externalities through human interdependence, in relation to the economic analysis of externalities in the tradition of Pigou and Arrow, including the analysis of the commons. It argues that there are limits to economic analysis. Our proposal is to enlarge the perspective and start thinking about a broader framework in which any pattern of influence of an agent or a group of agents over a third party, which is not mediated by any economic, social, or psychological mechanism guaranteeing the alignment of the marginal net private benefit with marginal net social benefit, can be attached the “externality” label and be scrutinized for the likely negative consequences that result from the divergence .These consequences may be significant given the many interactions between the social and economic realms, and the scope for spillovers and feedback loops to emerge. -
An Assessment of Modern Monetary Theory
An assessment of modern monetary theory M. Kasongo Kashama * Introduction Modern monetary theory (MMT) is a so-called heterodox economic school of thought which argues that elected governments should raise funds by issuing money to the maximum extent to implement the policies they deem necessary. While the foundations of MMT were laid in the early 1990s (Mosler, 1993), its tenets have been increasingly echoed in the public arena in recent years. The surge in interest was first reflected by high-profile British and American progressive policy-makers, for whom MMT has provided a rationale for their calls for Green New Deals and other large public spending programmes. In doing so, they have been backed up by new research work and publications from non-mainstream economists in the wake of Mosler’s work (see, for example, Tymoigne et al. (2013), Kelton (2017) or Mitchell et al. (2019)). As the COVID-19 crisis has been hitting the global economy since early this year, the most straightforward application of MMT’s macroeconomic policy agenda – that is, money- financed fiscal expansion or helicopter money – has returned to the forefront on a wider scale. Some consider not only that it is “time for helicopters” (Jourdan, 2020) but also that this global crisis must become a trigger to build on MMT precepts, not least in the euro area context (Bofinger, 2020). The MMT resurgence has been accompanied by lively political discussions and a heated economic debate, bringing fierce criticism from top economists including P. Krugman, G. Mankiw, K. Rogoff or L. Summers. This short article aims at clarifying what is at stake from a macroeconomic stabilisation perspective when considering MMT implementation in advanced economies, paying particular attention to the euro area.