Showing papers in "Metroeconomica in 2006"

Distributive and demand cycles in the us economy—a structuralist goodwin model

Abstract: There are regular counterclockwise cycles involving capacity utilization u (horizontal axis) and the labor share ψ (vertical axis) in the US economy since 1929. As in Goodwin’s cyclical growth model, ψ can be interpreted as a Lotka–Volterra predator variable and u as prey. In a phase diagram, dynamics around the u=0 schedule respond to effective demand that econometric estimation (1948–2002) shows to be profit-led. Distributive dynamics around the =0 curve demonstrate a long-term profit squeeze. Across cycles, the real wage and labor productivity grow at 0.57 per cent per quarter, holding the labor share broadly stable. Modeling the cycle in the (u, ψ) plane provides a parsimonious description of demand and distributive dynamics, consistent with the macroeconomics embedded in the work of Kalecki, Steindl, Goodwin and many subsequent authors.

Maturity, stagnation and consumer debt: a steindlian approach

Abstract: This paper extends a Steindlian model of growth and income distribution to incorporate borrowing by consumers. It shows that borrowing by consumers can improve growth prospects in the short run by increasing consumer demand. However, in the longer run the effects of increasing consumer borrowing are ambiguous because, by increasing consumer debt, it redistributes income towards the rich who have a higher propensity to save, thereby possibly depressing aggregate demand and growth despite the borrowing-induced expansion. The problem may be exacerbated by financial considerations involving the increase of the interest rate due to greater borrowing, but these considerations are not necessary for it. The problem is more likely to occur when autonomous investment demand is weak, i.e. when borrowing-induced consumption increases are most required to counter tendencies towards stagnation.

A post‐keynesian amendment to the new consensus on monetary policy

Abstract: A common view is now pervasive in policy research at universities and central banks, which one could call the New Keynesian consensus, based on an endogenous money supply. This new consensus reproduces received wisdom: in the long run, expansionary fiscal policy leads to higher inflation rates and real interest rates, while more restrictive monetary policy only leads to lower inflation rates. The paper provides a simple four-quadrant apparatus to represent the above, and it shows that simple modifications to the new consensus model are enough to radically modify received doctrine as to the likely effects of fiscal and monetary policies.

A model of interaction between the virtual and the real economy

Abstract: This paper demonstrates through a formal model how the wealth effect created by a stock market boom leads to the expansion of demand and output mostly through debt-financed private consumption. However, inherent in this expansion is the threat of a subsequent contraction caused by the rising burden of servicing debt and falling creditworthiness. The formal analysis captures more precisely these conditions; it shows that, even in the medium run, the growth rates of the wealth in the stock market and of the real economy may move in opposite directions.

Steindlian models of growth and stagnation

Abstract: Following an analysis of the relation between a standard Steindlian model of stagnation and Steindl’s own analysis, we modify the standard model by introducing endogenous changes in the markup and a reformulation of the investment function. These extensions, which address significant weaknesses of the standard model, find support in Steindl’s writing and leave intact some of Steindl’s key results. In a further extension, we add a labour market and analyse the stabilizing influence of a Marxian reserve-army mechanism. The implications of the extended model for the effects of increased oligopolization are largely in line with Steindl’s predictions.

The evolution of productivity gaps and specialization patterns

Abstract: This paper presents an industry-level model of growth and trade, in which evolving specialization patterns are the endogenous result of innovation, international technology spillovers, learning-by-doing and balance of payments-restricted growth. Differences between industries with regard to their share in consumption are shown to reinforce or mitigate the effects of specialization on aggregate productivity convergence patterns, depending on other parameters. The implications of the model are studied by means of simulation analyses for a wide range of parameter configurations.

Growth policy in the spirit of steindl and kalecki

Abstract: There are large differences between Steindl’s ideas on growth policies and the Brussels/Paris consensus. Steindl called for innovation and education policies, whereas the mainstream today rather favours deregulation and privatization. Steindl stressed the positive demand-side effects of the public sector and the contribution of lower household savings and anticyclical policies to growth. The economic mainstream praises the efficiency effects of a declining public sector, the importance of high savings for investment and warns of active anticyclical policies being an impediment to budget consolidation. Steindl and the Keynesians regarded the labour market situation as a consequence of economic growth. Today many economists see low growth as a result of labour market rigidities.

Public debt as private wealth some equilibrium considerations

Abstract: Government bonds are interest-bearing assets. Increasing public debt increases wealth, income and consumption demand. The smaller government expenditure is, the larger consumption demand must be in equilibrium, and the larger must be public debt. Conversely, lower public debt implies higher government spending and taxation. Public debt plays, thus, an important role in establishing equilibrium. It distributes output between consumers and government. In case of insufficient demand, a larger public debt entails higher private consumption and less public spending. If upper bounds on public debt are introduced (as in the Maastricht treaty), such constraints place lower bounds on taxation and public spending and may rule out macroeconomic equilibrium. As an aside, a minor flaw in Domar's (American Economic Review, 34 (4), pp. 798–827) classical analysis is corrected.

The investment game with asymmetric information

Abstract: We analyze the effects of introducing asymmetric information and expectations in the investment game (Berg et al., Games and Economic Behavior, 1995, 10, 122‐42). In our experiment, only the trustee knows the size of the surplus. Subjects’ expectations about each other’s behavior are also elicited. Our results show that average payback levels increase with the average amount sent. Asymmetric information does not reduce the amounts sent and returned, as compared with previous experimental studies. The first movers’ choices increase with their expectations about the second movers’ payback, whose choices depend in turn on the difference between expected and actual amounts received.

Financial fragility and financial crisis in mexico

Abstract: The objective of this paper is to show how Mexico’s strategy of financial deregulation and liberalization set the stage for the crisis that the country suffered in December 1994. The theoretical underpinning is Post-Keynesian, and more precisely, a Minsky-inspired analytical perspective extended to the open economy. In the first section the authors carry out a theoretical discussion dealing with some Post-Keynesian theories of the business cycle. A second section is devoted to examining and identifying the stylized facts in the evolution of the Mexican economy, with special emphasis on the interaction between the financial and real variables. In the last section the authors propose a simplified model which shows how and why a strategy of financial deregulation and liberalization may lead to financial fragility and to a crisis.

A complete theory of comparative statics for differentiable optimization problems

Abstract: A new comparative statics formalism using generalized compensated derivatives is presented that, in contrast to existing methodologies, directly yields constraint-free semidefiniteness results for any differentiable, constrained optimization problem. The formalism provides a natural and powerful method of constructing comparative statics results, free of constraints and unrestricted in scope. New results on envelope relations, invariance conditions, rank inequalities and non-uniqueness are derived that greatly extend their utility and reach. The methodology is illustrated by deriving the comparative statics of multiple linear constraint utility maximization models and the principal-agent problem with hidden actions, both highly nontrivial and hitherto unsolved problems.

Demography in macroeconomic models: when labour supply matters for economic cycles

Abstract: The issue of the onset of Malthusian cycles is investigated by means of a demo-economic model incorporating the age structure of the population. It is shown that the delayed recruitment into the labour force is a major source of demo-economic instability, potentially leading to sustained oscillations. We also compare different modelling strategies for age structure, by showing that the results of our general model are borne out by those provided by a simpler model, based on a representation of age structure via time delays, which allows a deeper mathematical analysis. This suggests that simplified delay models may be of great help in understanding the qualitative properties of complex age structure models.

Asset price bubbles, liquidity preference and the business cycle

Abstract: In his Treatise on Money ,K eynes relied on two different themes to argue that the interest rate need not rise with rising levels of expenditure. One of these was the elasticity of the money supply, and the other was the interaction between financial and industrial circulation. A decrease (increase) in what Keynes called the bear position was similar in its impact to that of a policy-induced increase (decrease) in the money supply. In the General Theory, this second line of argument lost much of its force as it became reformulated under the rubric of Keynes liquidity preference theory of interest. Assuming that the expected return on capital adjusts to the interest rate in short-period equilibrium, Keynes ignored the effect of bull or bear sentiment in equity markets as a second-order complication that can be ignored in analyzing the equilibrium level of investment and output. The objective of this paper is to go back to this old theme from the Treatise and underscore its importance for Keynesian theory of the business cycle. This paper is motivated by the author’s perception that Keynes’ Treatise on Money sheds much better light on many of today’s economic problems than his better known General Theory (GT), whether it is the burst of the asset price bubble in the US, liquidity trap in Japan, currency crises in emerging markets or the threat of global deflation. Whereas financial circulation, asset price expectations and market speculation were an integral part of Keynes’ macroeconomic analysis in the former work, they have been pushed to the background in the latter. Keynes’ remarks in GT—both in his famous chapter on long-term expectations and the one on the trade cycle—about market speculation was much more forceful than anything one can find in his Treatise. However, these penetrating insights on how securities markets could malfunction were not woven back into his analysis of how investment and output

The mobilization of human resources as an effect of the depletion of environmental and social assets

Abstract: In this paper, the growth process is not fed by the accumulation of productive assets (physical and/or human capital, knowledge etc.), but by the depletion of environmental or social resources, which induces individuals to increase their labor supply in order to consume more of the market goods that substitute for the depleted resources. Hence, production is expanded, thus eroding the resources' ability to regenerate, which decreases with aggregate production. Within this context, the "green" net national product is derived and it is shown how a regulatory authority should manage the resources for achieving Pareto-optimality.

Steindl on imperfect competition: the role of technical change

Abstract: Josef Steindl offers an innovative dynamic analysis of competition in Maturity and Stagnation in American Capitalism, with a key role for technical change. However, in his later writings he suggests that he had not gone far enough and that his account was not ‘sufficiently dynamic’, noting particularly his neglect of fundamental issues in technological development. Here, we critically examine the nature of technical change in Steindl’s analysis, pointing to ambiguities and contradictions that arise. Standard characterizations of the nature of technical change are then introduced and used to further integrate technical change into Steindl’s analysis of competition.

Explaining private provision of public goods by conditional cooperation: an indirect evolutionary approach

Abstract: We adopt an indirect evolutionary approach to investigate whether and when conditional cooperation can explain the voluntary contribution phenomenon often observed in public goods experiments and in real life. Formally, conditional cooperation is captured by a guilt parameter describing how much an individual feels guilty about contributing less than the average. We find that the evolutionary stability of conditional cooperation depends on what is known about the (individual) guilt parameter of other group members.

Risk‐aversion, optimal leverage and the investment–uncertainty relation

Abstract: We develop a partial equilibrium dynamic model in which firms are risk-averse. We analyse the determinants of the investment–uncertainty relationship by means of numerical techniques. When firms can borrow ‘outside’ resources at the riskless rate, an increase in price volatility depresses investment for realistic parameter values. In our model, portfolio considerations play an important role. When the marginal revenue of capital becomes more uncertain, the risk-averse firm's owners reduce their ‘short position’ in the risk-free asset, thus diminishing the firm's debt level. The contraction in leverage reduces the expected returns on investment because the expected marginal revenue product is higher than the user cost of capital. In turn, the reduction in expected yields tends to depress investment.

On high‐skill and low‐skill equilibria: a markov chain approach

Abstract: In this paper we propose to study the dynamics of human capital accumulation by means of a Markov chain. We identify the conditions for the emergence of ergodic and nonergodic dynamics, and relate them to various characteristics of an economic system. The model may generate high-skill and low-skill equilibria as well as intermediate situations. Policy implications are also discussed.

Taxation, social goods and the distribution of freedom

Abstract: The quantity of an individual’s freedom is thought to coincide with the width of her opportunity set, and this is defined by taking account of budgetary, institutional and legal constraints to choices. A simple cardinal measure of freedom is proposed on the ground of which some exercises in comparative statics are worked out. It is shown that individual choice freedom may be widened when a new good is publicly provided free or at a low price. Furthermore, it is argued that progressive taxation redistributes freedom in favour of the poor, all the more so when public revenues are used to finance the public provision of goods, in which case overall freedom may be augmented.

Interest Rate Pegs, Wealth Effects and Price Level Determinacy

Abstract: This paper analyses the issue of price level determinacy in an optimizing general equilibrium model with overlapping generations. It is shown that under a pure interest rate peg wealth effects rule out nominal indeterminacy but give rise to multiple equilibria.

DIFFERENTIAL DEPRECIATION AND THE 2 x 2 MODEL OF DISTRIBUTION, PRICING AND PRODUCTION

Abstract: In a two-sector model it is entirely arbitrary to take the depreciation rate to be the same in both sectors; capital is being used differently in the two sectors! With differential depreciation rates factor-intensity-reversal can arise even when both sectors have a Cobb–Douglas technology. Efficient allocations do not involve mutual tangency points between consumption–good and capital–good isoquants.

Taste for variety, taste for novelty and price behaviour

Abstract: In this paper we propose a formulation of preferences that exhibit both love for variety and love for novelty. This enables us to investigate the effects of ageing on imperfect substitutes, as they became progressively old-fashioned, due to the obsolescence of their aesthetic features. First, we assume that the industry is divided into several submarkets, each dominated by a monopolist producing a variety of a given vintage. We show that prices decrease, and the evolution of demand determines the equilibrium number of varieties at the point where the oldest vintage firm earns zero profits. Second, under a free entry condition assumption, the lifetime horizon of each variety will be characterized by decreasing prices accompanied by increasing demand levels.

Long run demand for labour in the consumer good industry

Abstract: We consider, for alternative models of production, the comparative statics of constant-returns economies in long run competitive equilibrium, for which reswitching, capital-reversing and consumption-reversal are all completely absent. Notwithstanding the ‘well-behaved’ nature of these economies, the use of labour per unit of output in the consumer good industry is always positively related to the real wage rate.