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An Alternative Framework of Central Banking from a Post Keynesian Perspective

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An Alternative Framework of Central Banking from a Post Keynesian Perspective 1 An Alternative Framework of Central Banking from a Post Keynesian Perspective Jalal Qanas Submitted in accordance with the requirements for the degree of Doctor of Philosophy The University of Leeds Leeds University Business School Economics Division March 2018 2 The candidate confirms that the work submitted is his own and that appropriate credit has been given where reference has been made to the work of others. This copy has been supplied on the understanding that it is copyright material and that no quotation from the thesis may be published without proper acknowledgement The right of Jalal Qanas to be identified as Author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988. © 2018 The University of Leeds and Jalal Qanas 3 Acknowledgments Firstly, I would like to thank my supervisors Professor Giuseppe Fontana and Emeritus Professor Malcolm Sawyer for the patience, motivation, continuous guidance, discussions, comments, support and the immense knowledge they have given me throughout my Ph.D. Besides, I want to thank Professor Gary Dymski and Dr. Annina Kaltenbrunner for their grateful comments at my first- year transfer. In addition, I want to thank my internal and external examiners for their grateful discussion and comments at my Viva. Also want to thank all the good friends I made at the Economics division of the University of Leeds, friends who were rather a family, with whom I have not only shared thoughts, questions, and discussions, but they also encouraged and supported me during difficult times in my Ph.D. Most notably, these include: Stefanos Ioannou, Antonio Rodriguez, Marco Passarella, Catherin Dolan, Rob Sweeney, Peter Hughes, Eirini Petratou, Sylvia Strawa, Rosa Canelli, Manuel Ojeda Cabral, Hanna Szymborska, Bianca Orsi, Albertus Hendartono, Douglas Alencar, Ahmed Elsayed, as well as Michael Ononugbo. Besides, I want to thank my previous master supervisors Professor Marc Lavoie and Professor Mario Seccareccia from the University of Ottawa, Canada, who encouraged me and suggested me to pursue my studies at the University of Leeds. Also, I want to thank my previous master supervisor Professor Christian Deschamps from the University de Bourgogne, France, for the encouragement and support. Last but not least, I want to express my sincere gratitude to the most important people in my life for all the love, support, patience, and care they have given me, and for all the delightful moments they have allowed me to share with them. So special thanks to my dad Bahjat, my mum Shamma, my brothers and sisters: Nidal, Wael, Basel, Amal, Jamal, Ebtihal, Nibal, and Belal. Besides, I also want to thank my parents in law Daniel Szabo and Ines Scouteguazza, and my brothers and sisters in law for the support and care they gave me. Also, to my best friends Nawar Kassomeh, Maria Alzirkili, Hani Burni, Feras Alzouabi, Tammam Dibo, Shadi Kheder, Walaa Dakkak, Chris and Sujat, Hazem Karfoul, Maamoon Katbeh, Danny Hill. 4 The most important thanks and gratitude are to my great wife Denise Szabo and my beautiful little angel Oriana Qanas, who without your support and patience this thesis would not take place. So, this goes for you all. I am also deeply grateful to the University of Leeds for supporting me financially throughout my studies. 5 To My Dad & My Mum; My Wife & My Daughter 6 Abstract This thesis investigates central banking theory and policy, by critically analysing, testing the existence mainstream approach and then provide an alternative framework for Central banking theory and policy from a post-Keynesian’s perspective. My main contribution is to deliver a comprehensive understanding of the nature, roles, functions, and objectives of a modern central bank, to achieve economic stability and promote the well-being of our society. Besides some theoretical chapters that provide a more in-depth understanding in central banking theories and policies, this thesis could mainly be divided into three main parts: the first part, investigating the role of central banking in the financialisation era, by discussing and analysing the impact of monetary policy on securitisation. Our finding indicates a weak role of the central bank as a bankers’ bank, as banks’ behaviour in term of increasing liquidity via securitisation is reducing the efficacy of central bank’s intended policy. The second part investigates the crucial interrelationship between central banks and governments. I critically discuss the competing theories of monetary-fiscal policy relationship, and I apply a Stock-Flow Consistent modelling to provide an alternative framework in understanding the importance of monetary-fiscal policy interrelation within a post-Keynesian approach in order to achieve a sustainable financial and economic stability. The third part goes beyond the central bank role towards banks and the government, to critically shed the light and assess the role of a central bank as a social regulator. Investigating the relationship between central banking and inequality, and the role of policy rate of interest as a distributive macroeconomic variable within different economic paradigms, then applying a SFC modelling to provide an alternative fair rate of interest rule to reduce inequality and achieve sustainable economic growth. Although other researchers have studied these issues, this study has the distinctive feature of providing a broader theoretical and empirical guideline to central banking. Furthermore, this study will be the first one to develop a holistic and comprehensive alternative framework, guideline and dynamics of central banking in a macroeconomic model in the advanced world economy. 7 Table of Contents Acknowledgments ................................................................................................. 3 Abstract ................................................................................................................. 6 Table of Contents .................................................................................................. 7 List of Figures ..................................................................................................... 10 List of Tables ....................................................................................................... 11 Abbreviation ........................................................................................................ 12 Preface ............................................................................................................... 14 Introduction ......................................................................................................... 16 Chapter 1: History of Central Banks (Functions & Objectives) ............................. 20 1.1 Introduction ........................................................................................... 20 1.2 Before the Second World War ............................................................... 20 1.3 The Keynesian Era (1945 to 1970s) ...................................................... 25 1.4 Monetary Targets and the New Consensus Era (the 1970s to 2007) .... 31 1.5 From the Crisis of 2007 to Today .......................................................... 45 1.6 Conclusion ............................................................................................ 49 1.7 Appendix I ............................................................................................. 51 Chapter 2: New Consensus Macroeconomics (NCM) and Post-Keynesians Critiques .............................................................................................................. 57 2.1 Introduction ........................................................................................... 57 2.2 The New Consensus Model .................................................................. 58 2.3 Post-Keynesian Critiques of NCM ......................................................... 62 2.4 Conclusions .......................................................................................... 70 Chapter 3: Financialisation and Central Banking: The Impact of Monetary Policy on Securitisation .................................................................................................. 72 3.1 Introduction ........................................................................................... 72 3.2 Financialisation ..................................................................................... 73 3.3 Securitisation ........................................................................................ 75 3.4 Securitisation and Monetary Policy ....................................................... 81 3.5 Empirical analysis ................................................................................. 84 3.5.1 Data and Methodology ............................................................................... 84 3.5.2 Empirical results .......................................................................................... 87 3.6 Critical Assessment of the Role of Securitisation in the Financial Market 91 3.7 Conclusion ............................................................................................ 94 8 Chapter 4: The Theory of Monetary-Fiscal Policy Interaction in Different Paradigms: Separation, Coordination or Interrelation .......................................... 96 4.1 Introduction ........................................................................................... 96 4.2 The Separation of Monetary and Fiscal
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