Showing papers in "PSL Quarterly Review in 2014"

Inflation, indexation and interest income taxation

Abstract: The work looks at the various efforts being made to make tax systems inflation-proof, from both a theoretical and practical standpoint. As to the latter, the author examines the taxation of interest income in an inflationary situation and makes some recommendations aimed at reducing, if not eliminating, inequities that arise. As to the former, the author generalises the theoretical conclusions of Fisher’s theory by explicitly introducing income taxation among the variables that affect the Fisherian conclusion. The basic policy issue raised is that the Canadian solution does very little to solve the problems related to the taxation of capital gains and interest incomes in an inflationary situation.

Minsky and dynamic macroprudential regulation

Abstract: In the context of current debates about the proper form of prudential regulation and proposals for the imposition of liquidity and capital ratios, the paper examines Hyman Minsky’s work as a consultant to government agencies exploring financial regulatory reform in the 1960s. As the author explains, this often-overlooked early work, a precursor to Minsky’s “financial instability hypothesis”, serves as yet another useful guide to explaining why regulation and supervision in the lead-up to the 2008 financial crisis were flawed, and why the approach to reregulation after the crisis has been incomplete. KEYWORDS : Banking supervision, Macroprudential Regulation, Financial instability hypothesis (FIH) JEL CODES : G21, G01, G28

Risk sharing, public policy and the contribution of Islamic finance

Abstract: A major reason for the recurrent episodes of financial instability is the predominance of interest-based debt and leveraging. Financial stability is achievable through risk sharing finance instead of risk shifting that characterizes contemporary finance. A risk sharing system serves the true function of finance as facilitator of real sector activities and avoids the emergence of a “paper economy” where there is gradual decoupling of finance from the real sector. Islamic finance was initially proposed as a profit-loss sharing system, but its core principle is risk sharing. In prohibiting interest-based debt instruments, Islam grounds finance on a strong risk sharing footing. Although still a young industry that has come a long way, it has not managed to develop truly risk-sharing instruments that would allow individuals, households, and firms as well as whole economies to mitigate systematic and un-systematic risks. It is suggested that governments should intervene and issue macro-market instruments to provide their treasuries with a significant source of non-interest rate based financing while promoting risk sharing. Moreover, given that evidence across the world suggests that monetary policy’s transmission mechanism may be impaired, it is suggested that these government issued securities could also impart added potency to monetary policy. JEL Codes: P43, P4, E2 Keywords: Risk sharing, Macro-market securities, Islamic finance, Government policy

Export instability and economic development: a reappraisal

Abstract: Among the many problems besetting international economic relations, the instability of exports of developing countries has always been a major topic of analysis and discussion Although developing countries identify this issue as an important obstacle to development, most of the inquiries over the last 30 years about its causes and consequences have produced controversial results The economic literature on export instability is divided into two main streams, one analysing world markets for primary commodities and their quantity-price-earnings relationships, the other focussing on individual developing countries and their macroeconomic frameworks The present work comments on recent additions to each of these streams which have livened the debate, before offering a new contribution to the theoretical and empirical analysis of export instability

The policy response to macroeconomic and fiscal imbalances in Italy in the last fifteen years

Abstract: This paper reviews the main macroeconomic trends and the debate on policy priorities in Italy since the advent of EMU. It argues that, in the decade up to the outbreak of the global crisis (1998-2007), in Italy the reform process came to a virtual standstill and fiscal policy was inconsistent with the commitments taken on at the European level. The paper suggests that the lack of resolute policy reactions to the institutional dysfunctions and structural weaknesses was due to the fragmentation of the political constituency, while a variety of favourable contingent factors masked the difficulties of the productive system. Had Italy been better positioned in terms of public finances and structural features in 2007, some of the adverse effects of the global and sovereign crises would have been avoided. JEL Classification : E6, H3, K0, N1 Keywords: EMU, fiscal policy, macroeconomic imbalances, global crisis

Islamic finance: an alternative financial system for stability, equity, and growth

Abstract: Conventional finance has long been plagued by crises that cause economic dislocations and impede sustained economic growth, with banks and non-bank financial institutions requiring periodic bailouts. Numerous developing countries have been unable to mobilise domestic and foreign financial resources for development while many advanced countries continue to be plagued by recurring financial crises. A number of eminent economists have denounced the shortfalls of conventional banking and have advocated 100% reserve banking as the stable foundation for a financial system, a recommendation that happens to coincide with the Islamic financial system. The Islamic financial system is characterised by a two-tier banking system with 100% reserve deposit system and risk-sharing equity or investment banking akin to a mutual fund, and the prohibition of interest and interest-based transactions. Islamic finance promotes risk sharing and an efficient risk-sharing vehicle would be a stock market that operates along Islamic principles that prohibit interest and interest-based leverage. JEL codes : P43, G15, Z12 Keywords: Islamic finance, financial stability, interest, risk sharing

A search for distinctive features of demand-led growth models

Abstract: This paper aims at a critical and constructive assessment of some extensions of Keynes’s analysis of effective demand to the long period and growth. A criticism is addressed to a single-cause interpretation of the demand-led growth models and to the notion of normal capacity utilization adopted in such models. A positive argument tries to find a distinctive characterization of those extensions in the productive and financial conditions that make effective the autonomous changes in aggregate demand. It suggests a notion of normal capacity utilization as a range of distributions of normal utilization, related to the cost minimizing choice of techniques and to the persistence of the long term expectations of normal prices underlying the investment decisions. In such a context a long-period analysis with normal prices should avoid a dual steady growth where constant relative prices of capital goods correspond to constant proportions among the stocks of fixed capital. Keywords : Growth, Keynesian long-period analysis, capacity utilization, productive-financial capacity JEL codes : B50, E22, O4

Structural asymmetries at the roots of the eurozone crisis: what’s new for industrial policy in the EU?

Abstract: In this paper, we analyze and try to measure productive and technological asymmetries between central and peripheral economies in the eurozone. We assess the effects such asymmetries would likely bring about on center–periphery divergence/convergence patterns, and derive some implications as to the design of future industrial policy at the European level. We stress that future European Union (EU) industrial policy should be regionally focused and specifically target structural changes in the periphery as the main way to favor center–periphery convergence and avoid the reappearance of past external imbalances. To this end, a wide battery of industrial policy tools should be considered ranging from subsidies and fiscal incentives to innovative firms, public financing of R&D efforts, sectoral policies, and public procurements for home-produced goods. All in all, future EU industrial policy should be much more interventionist than it currently is, and dispose of much larger funds with respect to the present setting in order to effectively pursue both short-run stabilization and long-run development goals. Keywords: Center–Periphery Structural Symmetries, EU Industrial Policy JEL Codes: E12, F15, O25, O52

Dualism and the internal integration of the underdeveloped economies

Abstract: The work re-examines the nature and causes of economic dualism in the underdeveloped countries and considers some of its implications for development policy. Dualism may be defined as the co-existence of a “modern” sector and a “traditional” sector within the domestic economic framework of a country. Existing theories attempt to explain the differences between the two sectors in terms of sociological and technological factors. In contrast, the author argues that the most significant aspect of economic dualism as it exists in the present-day underdeveloped countries is that scarce inputs such as capital funds, foreign exchange and public economic facilities are being made available on excessively favourable terms to the larger units in the modern sector, and on excessively unfavourable terms to the small economic units in the traditional sector. This interpretation emphasises the importance of domestic policies to promote integration by removing the causes of unequal access to scarce economic resources.

The limited role of fiscal policy in an open economy

Abstract: The paper imposes the workings of the labor market on open-economy models of fiscal policy under fixed and under flexible exchange rates. The author then reexamines the conventional conclusion that fiscal policy is fully effective under fixed rates, but is fully offset under floating rates. For this purpose “fiscal policy” is an increase in government expenditures or a reduction in taxation covered by the issue of non-monetary debt that either domestic nationals or foreigners are eligible to buy.

Integration and development of the Italian economy, 1951-1971: a re-examination

Abstract: The work represents a re-examination of the development of the Italian economy over the 20 year period from 1951 to 1971. The author first addresses cyclical versus structural interpretations. Analysis of the three main phases of the economy’s development since World War II is then provided. The first phase is 1951-58, when development factors were largely of domestic origin. The second phase is 1959-63, the years characterised by rapid integration and growth. The third phase is 1964-71, the years of the “rationalisation” of production, as well as when growth seemed less certain and more blatantly contradictory. Looking at the entire period under consideration, one may find a unifying factor in the absence of a policy constantly aimed at managing the development process.

Economy and sociology

Abstract: The article analyses the reciprocal relations between Economics and Sociology. The author begins with Pareto’s position on general Sociology, which entails a fairly strict division between the two fields of scientific enquiry, calling attention to the new points of view that make it advisable to modify this approach. On this connection, the author first emphasises the distinction between that economic life, often held to be the normal ‘material’ of economic science and which is only the expression of bourgeois economic organisation, and the economic life of other organisations based on fundamentally different conditions. Secondly, he notes the survival of these other forms of organisation in bourgeois society - which therefore is considered as an agglomeration of dissimilar elements. The author then makes a comprehensive study of the scanty observations gathered in a field other than that of the bourgeois organisation. In his opinion this material should be elaborated and should find its place in the analytical economic schemata forming part of a discipline called “Integral Economics”. On the other hand, the task of “Economic Sociology” is to point out the regularities of the economic conduct of individuals and of the economic structure of social groups as they occur in real life.

1974, a downturn of the long wave?

Abstract: As its title suggests, the work looks at whether 1974 is a downturn of a long economic movement. In order to answer this question, the author first justifies the hypothesis that the years 1945 to 1973 represented a long upward swing. The focal point of a decisive turn in the long wave, 1972-1974, is then considered. Finally, the prevalence of downswing phenomena since 1974 is assessed.

The Underground Economy in the U.S.A: Preliminary New Evidence on the Impact of Income Tax Rates (and Other Factors)on Aggregate Tax Evasion, 1975-2008

Abstract: This empirical study seeks to identify determinants of the underground economy in the U.S. in the form of aggregate federal personal income tax evasion over the period 1975-2008, with a specific focus upon the impact of higher federal income tax rates on tax evasion. In this study, we use the most recent data available on aggregate personal income tax evasion, data that are derived from the General Currency Ratio Model and measured in the form of the ratio of unreported AGI to reported AGI. Most other studies of federal income tax evasion for the U.S. do not use data this current. It is found that the impact of increases in the federal income tax rate on aggregate personal income tax evasion may, on balance, be ambiguous, possibly suggesting that the income effect is negative and outweighs the positive substitution effect for the representative taxpayer. It is also found that the degree of aggregate personal income tax evasion may be an increasing function of the percentage of federal personal income tax returns characterized by itemized deductions and a decreasing function of the Tax Reform Act of 1986 (during the first two years of implementation), the ratio of the tax free interest rate yield on high grade municipals to the interest rate yield on ten year Treasury notes, and higher audit rates of filed federal income tax returns (as a measure of risk from tax evasion) by IRS personnel. Finally, unpopular wars may provide a secondary benefit for and therefore act as an inducement for greater tax evasion. JEL Codes: G18, G28, H26 Keywords: tax evasion; substitution effect; income effect; incentives; disincentives

On the Stability of an Islamic Financial System

Abstract: In an Islamic economy, the financial sector functions to support the real sector. There are no interest rate based debt instruments. Financial assets are based on risk and return sharing and are contingent claims. Real as well as monetary forces determine the rate of return. As in traditional general equilibrium theory, there is a price system comprised of a real rate of return to capital and a price level of commodities that simultaneously clears asset and commodity markets. An Islamic financial system is shown to be stable, namely the economy evolves from short-term equilibrium to a stable long-term equilibrium. Key Words: Islamic Finance, Financial Stability, Equilibrium, Chicago Plan JEL codes : E2, E3, E4, and F4.

The transfer gap of the United States

Abstract: 72 1024x768 The present paper restates a previous hypothesis of the author ’ s regarding the payments deficit of the United States , according to which it could most appropriately be explained as a transfer problem. According to this view, the United States makes financial transfers to foreign countries - military expenditures, government loans, private loans, and direct investment - in amounts which for various reasons it is unable to match with real transfers, that is, with an excess of exports over imports of goods, and services. The author offers additional support for this hypothesis by means of statistical illustration, and points out why the official prescriptions for removing the payments imbalance is useless, or worse. Normal 0 14 st1\:*{behavior:url(#ieooui) } /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Tabella normale"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-parent:""; mso-padding-alt:0pt 5.4pt 0pt 5.4pt; mso-para-margin:0pt; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman";}

Lagged development and economic dualism

Abstract: The work explores the hypothesis that today’s lagging economies, such as Italy, are not completely lacking in firms that are capable of achieving high levels of productivity, rather they simply do not have enough of them to absorb a sizeable portion of the potential labour supply. To test this hypothesis the author presents evidence on the number and productivity of micro-firms in various countries. Problems of distribution raised by differences in levels of productivity are then dealt with. Finally, the author argues that advanced economies in a previous phase of development most likely did not face the problems of dualism that lagging economies do today. Thus, an appropriate development policy for lagging economies cannot be modelled on the one valid for advanced economies of today, or even those of yesteryear, but rather calls for ad hoc reflection.

Peculiarities of Japan’s multinationalism: facts and theories

Abstract: A variety of theories have been advanced to explain the present trend of business firms toward multinational operations, first noticed in the United States but now spreading to other industrial countries. The theoretical works thus far have revolved around the behaviour of Western multinationals, with their Japanese counterparts being either treated as a special case or as mere newcomers who will inevitably follow the same path. The differences found in the industrial pattern of Japanese multinationals, however, call for further and more systemic analysis. The present work describes and interprets the uniqueness of Japan’s emerging multinationalism and considers the applicability of existing theories. The author first describes the patterns and competitiveness of Japanese multinationals, before evaluating the relevance of existing Western theories as applied to the Japanese case.

The balance of payments of developing countries

Abstract: 72 1024x768 In spite of the large literature on development and the growing number of estimates of future trade or savings “ gaps ” there are no acceptable or consistent estimates showing the past history or existing state of the balance of payments of developing countries as a group. Moreover, assessing the likely impact of changes in trade or aid policies designed to help the developing world depends on understanding the present situation. The present paper fills this statistical gap, which is so important for policy discussions. The estimates provided are crude, however, they shed light on the magnitude and interrelations of important problems. Normal 0 14 /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Tabella normale"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-parent:""; mso-padding-alt:0pt 5.4pt 0pt 5.4pt; mso-para-margin:0pt; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman";}

The theory of employment: two approaches compared

Abstract: Introducing the publication of a long 1956 letter by Franco Modigliani (FM) to Paolo Sylos Labini (PSL) on the draft of PSL’s book, Oligopoly and Technical Progress , the paper critically reviews the theoretical background of FM’s comments, showing how the pre-Keynesian roots dominate the so-called neoclassical synthesis as well as its shaky foundations. The paper also discusses FM’s interpretation of PSL’s oligopoly theory, as well as their collaboration (and differences) on policy issues, such as their opposition to the 100% money wage indexation adopted in Italy from the mid-1970s to the mid-1980s. Keywords : Macroeconomic theory, Oligopoly, Neoclassical synthesis, Modigliani, Sylos Labini JEL code : B31, D43, E13, E64

CRR/CRD IV: the trees and the forest

Abstract: This paper offers a review of the new CRR/CRD IV capital regulatory framework for banks in the EU, which represents the transposition into European law of the Basel III standard. Major shortcomings of the Second Capital Accord are examined, and the repair work is assessed in the light of the recognised need to amend the flaws. It is argued that the necessary adjustments must be evaluated in the holistic framework provided by the Banking Union approach. The main features of the new system are reviewed as components of an interconnected, complex network. The critical analysis highlights the significant improvements with respect to the Basel II standard, but it also brings to the fore the weaknesses which continue to characterise the new capital regulatory framework. Keywords: capital regulation, Basel III, risk, Banking Union, Modigliani-Miller JEL Codes: G01, G13, G21, G28

World inflation, the developing countries, and “an integrated programme for commodities”

Abstract: The paper looks at world inflation, the problems it poses for developing countries and what they can do to facilitate a return to conditions of stable world economic growth. The author first reviews the concept of world inflation and its evolution, noting that it was well under way before the collapse of the international monetary system in 1973. The issues facing developing countries are then dealt with, and in particular the special problems that have resulted from world inflation. Finally, the New International Economic Order and the “Integrated Programme for Commodities” are analysed.

Technical progress, the production function and dualism

Abstract: While a great deal has been written in recent years on the problem of economic dualism, rather little has been done to connect it with the nature of technical progress. The purpose of the present work is to suggest a view of the production function and its relation to technical progress, which may lead to insights into the phenomenon of economic dualism. It is suggested that the nature of the production function and of technological progress may serve, in the extreme case, as a bottleneck to the inducement to invest, and in the less extreme case, as a factor that stifles the inducement to invest in the backward sector as compared to the advanced sector. In addition, other elements are considered which are closely linked to the inducement to invest, and which operate in a differential manner between two sectors.

The role of commercial banks in foreign exchange speculation

Abstract: The article suggests that, contrary to popular belief, banks can play a useful role in foreign exchange speculation if they are given a chance to draw a permanent profit from it and are convinced of the ability of the monetary authorities to maintain the exchange rate within certain pre-established boundaries. The author proposes a model to argue that banks’ speculative activity is beneficial both in stabilizing the exchange rate in the face of non-speculators’ operation and in repelling a sudden attack by occasional speculators.

Monetary policy in Italy: the limited role of monetarism

Abstract: The work assesses the role of monetary policy in Italy. An overall definition of the operational indications arising out of monetarism is provided before they are compared with the objectives and strategies of Italian monetary policy. It is shown that, despite the diffusion of the monetarist theses, the Bank of Italy’s analysis and strategy in recent years have been moving in the opposite direction, with the role of the stock of money being significantly reduced. The author examines how far this evolution is justified by the corresponding evolution of the financial system.

Overdrafts and monetary policy

Abstract: The article analyses the overdraft system of bank lending and its potentially harmful effects on monetary policy. From the point of view of the economy as a whole, and for the purposes of monetary policy, three features characterize a banking system that uses the overdraft, as contrasted with the fixed loan, method of lending. First, a different significance attaches to “money supply” as an indicator of liquidity. Secondly, a different significance attaches to bank advances as an indicator of the volume of bank credit and of its effects on the level of spending. Finally, and most importantly, the monetary authorities face an additional difficulty in their efforts to keep the economy on an even keel. The author examines each of these features in turn.

Comparative productivity levels in the developed countries

Abstract: In the past decade the concern with economic growth has been so great that the empirical study of productivity levels has been relatively neglected. Estimates of the present standing of different countries must therefore rely mainly on extrapolations of work done a decade ago. One reason why this field has been neglected is that the O.E.E.C explored the subject of real G.N.P. levels pretty thoroughly in studies published from 1954 to 1959 and these still provide a reasonably firm basis for extrapolation. The present work uses such studies in order to estimate the relative productivity levels in 1965 of 8 West European countries, Japan, the U.S.A. and the U.S.S.R.

Vilfredo Pareto. The economist in the light of his letters to Maffeo Pantaleoni

Abstract: The article is part of a special issue on occasion of the publication of the entire scientific correspondence of Vilfredo Pareto with Maffeo Pantaleoni. The author reconstructs the beginning of their correspondence, the debate in pure mathematical economics and draws main conclusions on the different views of Pareto with respect to Marshal, Edgeworth and Fisher.

World market instability in primary commodities

Abstract: The work considers what the future course of prices will be in the aftermath of the remarkable increases in primary commodity prices in 1973-74. To do so, the author examines the historical trend and cyclical movements of the prices of various commodities in the period since World War II. The causes and consequences of instability and the economic policies that nations have designed to deal with instability and other aspects of primary commodities are then considered. In this regard, conflicts in commodity policies between commodity exporting and importing nations are analysed.

Monetary base and the control of credit in Italy

Abstract: 72 1024x768 The most important instrument at the disposal of monetary authorities for the control of credit and the achievement of economic policy objectives consists in the regulation of the quantity of the monetary base. The present paper attempts to define the concept of monetary base, in general and in the Italian system, and then, by way of some econometric analysis, tries to estimate the effects of variations in the amount of monetary base on the level of interest rates and on the amount of credit. The empirical analysis is meant to be a test of the ways through which monetary base affects the amount of credit and interest rates, rather than a complete analysis of the behaviour of the demand for monetary base by the public and of the factors which influence the demand and supply of credit. Normal 0 14 /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Tabella normale"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-parent:""; mso-padding-alt:0pt 5.4pt 0pt 5.4pt; mso-para-margin:0pt; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman";}