Showing papers in "PSL Quarterly Review in 2011"
TL;DR: The concept of the balance-of-payments equilibrium growth rate was originally developed by Thirlwall (1979, 1982a) and applied to a wide range of developed and less developed countries, drawing also on the recent work of Bairam as mentioned in this paper.
Abstract: We outline in this chapter the concept of the balance-of-payments equilibrium growth rate, as originally developed by Thirlwall (1979, 1982a), and then show its empirical application to a wide range of developed and less developed countries, drawing also on the recent work of Bairam (1988, 1990). The two original papers by Thirlwall are presented here basically in their original form, but with some modifications.
1,098 citations
TL;DR: In this paper, the authors present a survey of the development of the Thirlwall model, allowing for capital flows, interest payments on debt, terms of trade movements, and disaggregation of the model by commodities and trading partners.
Abstract: Thirlwall’s 1979 balance of payments constrained growth model predicts that a country’s long run growth of GDP can be approximated by the ratio of the growth of real exports to the income elasticity of demand for imports assuming negligible effects from real exchange rate movements. The paper surveys developments of the model since then, allowing for capital flows, interest payments on debt, terms of trade movements, and disaggregation of the model by commodities and trading partners. Various tests of the model are discussed, and an extensive list of papers that have examined the model is presented. JEL Codes: F32, F40, F43
122 citations
TL;DR: The authors assesses various critiques that have been levelled over the years against Thirlwall's Law and the balance-of-payments constrained growth model and concludes that none of these criticisms invalidate the model, which remains a powerful explanation of why growth rates differ.
Abstract: This paper assesses various critiques that have been levelled over the years against Thirlwall’s Law and the balance-of-payments constrained growth model. It starts by assessing the criticisms that the law is largely capturing an identity; that the law of one price renders the model incoherent; and that statistical testing using cross-country data rejects the hypothesis that the actual and the balance-of-payments equilibrium growth rates are the same. It goes on to consider the argument that calculations of the “constant-market-shares” income elasticities of demand for exports demonstrate that the UK (and by implication other advanced countries) could not have been balance-of-payments constrained in the early postwar period. Next Krugman’s interpretation of the law (or what he terms the “45-degree rule”), which is at variance with the usual demand-oriented explanation, is examined. The paper next assesses attempts to reconcile the demand and supply side of the model and examines whether or not the balance-of-payments constrained growth model is subject to the fallacy of composition. It concludes that none of these criticisms invalidate the model, which remains a powerful explanation of why growth rates differ. JEL Codes: E12, O41
34 citations
TL;DR: In this article, the robustness of Thirlwall's Law is investigated in a balance-of-payments-constrained growth model, and it is hypothesized that this robustness helps explain the widespread empirical success of the law.
Abstract: This paper contemplates the robustness of Thirlwall’s Law, a parsimonious expression that relates long run equilibrium growth in any one region to the product of world income growth and the ratio of the income elasticities of demand for exports and imports. Various extensions of the balance-of-payments-constrained growth model from which Thirlwall’s Law is derived are contemplated. In each case, Thirlwall’s Law is shown to reassert itself as a good approximation of the equilibrium growth rate. It is hypothesized that this robustness helps explain the widespread empirical success of Thirlwall’s Law. JEL Codes: O41, E12
23 citations
TL;DR: In this paper, the EFSF should evolve to permit more flexible and wide-ranging interventions, and be able to manage sovereign debt restructuring; with respect to SIFIs, very early corporate, market and supervisory responses are suggested.
Abstract: The path between financial meltdown and moral hazard in banking is, at best, narrow and impervious. During the financial crisis, public support became the standard responseto save the banks in difficulty, heightening and broadening the moral hazard issue: subordinated/senior debt holders and large depositors were bailed out and equity holders were partially sheltered. In the Eurozone, the implicit promise to bail-out governments in difficulty has encouraged SIFIs and other financial operators to speculate on the yield differential between sovereigns and the ECB money market interest rates. The policy framework proposed here is two-pronged: the EFSF should evolve to permit more flexible and wide-ranging interventions, and be able to manage sovereign debt restructuring; with respect to SIFIs, very early corporate, market and supervisory responses are suggested. Intervention of supervisory authorities with mandatory (special) powers would occur before the threshold of non-viability and, on a gone-concern basis, in terms of a European resolution procedure. JEL Codes: G01, G28, H12
21 citations
TL;DR: In this paper, the authors tried to isolate and understand the recurring common features of several recent market economies in the light of Keynesian theory with some crucial modifications introduced later, particularly by Kaldor and Minsky with respect to the financial sector.
Abstract: Episodes of financial crises are usually recognizable as belonging to a general pattern despite their different historical specificities. The present essay attempts to isolate and understand the recurring common features of several recent crises in advanced market economies in the light of Keynesian theory with some crucial modifications introduced later, particularly by Kaldor and Minsky with respect to the financial sector. While financial innovations are devised continuously to escape regulations on the formal credit system by creating substitutes for bank credit, fragility increases along with the internal illiquidity of the financial system. The proclivity of the system to financial crisis arising from negative shocks can be understood against the background of systemic illiquidity coupled with rapid expansion of a range of credit substitutes in a network of tightly interlocked assets of financial firms. JEL Codes: E11, E40, G1
20 citations
TL;DR: The authors argues that the actual experience does seem to indicate that the gains in productive efficiency have more than compensated for the losses in allocative efficiency, and this judgement helps to make sense of the Chinese anomaly that a seemingly inefficient financial system has co-existed with the outstanding performance of financial deepening and economic development over the past three decades.
Abstract: Despite fundamental market reforms, the Chinese financial system has remained a mixed system. From the perspectives of the mainstream doctrines of financial liberalization, this system is easily judged to be entailing serious allocative inefficiencies. Nevertheless, from alternative theoretical perspectives, the system might have been conducive to promoting productive efficiency. This paper argues that the actual experience does seem to indicate that, hitherto, the gains in productive efficiency have more than compensated for the losses in allocative efficiency. This judgement helps to make sense of the Chinese anomaly that a seemingly inefficient financial system has co-existed with the outstanding performance of financial deepening and economic development over the past three decades. JEL Codes: G21, N65, O16
18 citations
TL;DR: In this article, a critical assessment of the financial reforms adopted or proposed at the European level is presented, arguing that the limitations of a purely prudential approach to regulation may not be overcome by setting up new institutions and making prudential requirements more stringent.
Abstract: The paper offers a critical assessment of the financial reforms adopted or proposed at the European level. The reshaping of the EU institutional architecture and the adoption of the new Basel 3 rules should reduce the national margins of discretion that have up to now characterised supervisory practices, often leading to light touch supervision, and restrain the growth of bankarisation, hence excessive systemic leveraging. However, the limitations of a purely prudential approach to regulation may not be overcome by setting up new institutions and make prudential requirements more stringent. In addition, given unavoidable national banking specificities, more severe rulebooks homogenously applied across the EU countries could further worsen the inconsistencies of a one-size-fits-all rule. The criticisms directed at the new regulatory framework assume particular relevance in the EU, whose peculiar construction requires that the financial sector should not be permitted to jeopardise its critical fiscal equilibrium. This opens the way to the adoption of structural measures, as the one presented by the Vickers Commission on ring-fencing. Looking at the financial system as a whole, we argue that even these measures do not offer effective protection for the economy and tax-payers, and that much more radical interventions are needed. JEL Codes: G21, G28, E6
12 citations
Journal Article•
TL;DR: The negative popular and political reaction should not have come as a surprise, at least for three reasons: the design of the Obama stimulus plan and its difference from the expenditure policies of the Roosevelt Administration; the political environment that has eviscerated fiscal policy and placed monetary policy at the centre of economic policy and produced “debt driven” growth; the difference between policies appropriate to treating an income deflation and a debt deflation as mentioned in this paper.
Abstract: Most economists expected that the “Great Recession” produced by the financial meltdown of 2008 would usher in a resurgence of traditional Keynesian economics and a decline of what has come to be called “market fundamentalism”. By contrast, also due to the inadequate size of the 2009 stimulus package, the resurgence of support for Keynesian expenditure policies has been extremely short lived. However, the negative popular and political reaction should not have come as a surprise, at least for three reasons: the design of the Obama stimulus plan and its difference from the expenditure policies of the Roosevelt Administration; the political environment that has eviscerated fiscal policy and placed monetary policy at the centre of economic policy and produced “debt driven” growth; the difference between policies appropriate to treating an income deflation and a debt deflation. JEL Codes: G01, B50, N12, H12
12 citations
TL;DR: In this article, the authors investigated the effects of the tax system on the economic factors that triggered the financial crisis and examined three cases in which the tax regime interacted with these factors, reinforcing them.
Abstract: This paper investigates the effects of the tax system on the economic factors that triggered the financial crisis. We examine three cases in which the tax regime interacted with these factors, reinforcing them. First, we focus on the taxation of residential building: while the importance of capital gains taxes is disputed, the deductibility of mortgage interest may have contributed to the financial crisis by creating some of the raw materials for the securitization industry. Second, a narrow perspective on the tax treatment, together with specific provisions, may have fostered performance-based remuneration of managers, resulting in overemphasis of short-term profitability and incentive to excessive risk-taking. Third, the securitization process, which played a key role in the outbreak of the financial crisis, was accompanied by opportunities for tax arbitrage and reduction of the overall tax wedge paid by investors, through offset of incomes that are ordinarily taxed at different rates; a de facto exemption of CDS premiums received by non-residents supplemented the tax arbitrage. JEL Codes: H31, H32, G01, R21
9 citations
TL;DR: In this paper, the authors consider recent patterns in global food markets and discuss some of the implications of recent moves to regulate financial activity in commodity futures markets in the US and the EU.
Abstract: The argument for effective financial regulation to curb financial activity and associated volatility in primary commodity markets is now more compelling than ever, in the context of the renewed increase in food prices. However, as in much other financial regulation, the devil is in the detail. This paper considers recent patterns in global food markets and discusses some of the implications of recent moves to regulate financial activity in commodity futures markets in the US and the EU. Specific regulatory issues are considered and alternative strategies are considered. JEL Codes: F02, F14, G18, N50 Keywords: Finance, Commodities, Food
TL;DR: The financial and economic crisis brings to a reconsideration of macroeconomics: as it happened in the past, after the Great Crash of 1929 as well as after the Second World War and after the collapse of the Bretton Woods system in 1971 and the subsequent oil crisis.
Abstract: The financial and economic crisis brings to a reconsideration of macroeconomics: as it happened in the past, after the Great Crash of 1929 as well as after the Second World War and after the collapse of the Bretton Woods system in 1971 and the subsequent oil crisis. A brief critical survey of mainstream macroeconomics (the neoclassical synthesis and its variants, and its criticisms on the side of Keynesians and Sraffians) is followed by a brief survey of the elements of alternative macroeconomic analysis developed by Keynes and Kalecki, Minsky and Sylos Labini, and others. JEL Codes: B22, E00, E12, E13
Journal Article•
TL;DR: Two of the major provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed into law on July 21 2010, aim to reduce speculation with financial institutions own funds using highly leveraged derivatives.
Abstract: Two of the major provisions of the Dodd‐Frank Wall Street Reform and Consumer Protection Act, passed into law on July 21 2010, aim to reduce speculation with financial institutions own funds using highly leveraged derivatives. The so‐called “Volcker rule” limits the ability to trade as principal in what is known as “proprietary trading” and the Lincoln Amendment or the “push out” rule limits derivatives dealing for regulated, insured banks. A complement to the Lincoln amendment requires that all over the counter derivatives be cleared through official mechanisms and traded on regulated exchanges similar to those used for commodities. JEL Codes: E11, G01, B50, H12
Journal Article•
TL;DR: In this paper, the influence of Fritz Machlup and the Bellagio Group on world monetary reform is explored. But the authors focus on the early stages of the process of monetary reform and do not consider the later stages.
Abstract: This paper explores the influence of Fritz Machlup and the Bellagio Group on world monetary reform. After an examination of the literature, the paper addresses research into Machlup’s framing of the problem of world monetary reform, his method, his selection of economists to join the Bellagio Group, his close working relationship with the treasury and central bank officials who were the deputies of the Group of Ten, and his creation of a broad platform of joint conferences, papers and books to promote their work. Taking an historico-biographical approach, this paper draws on the archives and published works of Fritz Machlup, Robert Triffin and their contemporaries. JEL Codes: B22, B31, F31, F33 Keywords: world monetary system, Fritz Machlup, Bellagio Group
Journal Article•
TL;DR: The authors focused on the theoretical and applied debate on the factors leading to the financial crisis and its policy implications, in an attempt to contribute to our understanding of the main economic event of the past decade, still in many ways unfolding.
Abstract: Nearly three years after the deluge, the financial crisis is in many different ways still with us: from its consequences on the real economy, to the clearly perceived risk of new catastrophes, from its role in engendering social malaise and political events such as the revolts in Arab countries, to its impact on the theoretical and policy debate in economics. With the present issue, once again our journal focuses its attention on the crisis – the theoretical and applied debate on the factors leading to it and its policy implications – in an attempt to contribute to our understanding of the main economic event of the past decade, still in many ways unfolding. JEL Codes: E11, G01, B50, H12
Journal Article•
TL;DR: In this article, the authors argue that the growing presence of foreign banks in Asian emerging market economies, invited on the grounds that they would enhance competition and induce domestic banking systems to adopt better technologies and practices, is likely to alter banking behaviour in ways that are inimical to growth and inclusion and increase instability.
Abstract: Financial systems in Asian emerging market economies are seen as resilient because of their performance during and after the 2008 crisis. But such assessments focus on the current status rather than the direction of evolution of those systems, many of which are being substantially liberalised. One consequence is the growing presence of foreign banks in these markets, invited on the grounds that they would enhance competition and induce domestic banking systems to adopt better technologies and practices. By contrast, it is here maintained that what they are likely to do is alter banking behaviour in ways that are inimical to growth and inclusion and increase instability. JEL Codes: F23, G15, G21, G28