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In this study, we build a Kaleckian model incorporating institutional differences between the wage determination of regular employment and that of non-regular employment. Using this model, we investigate how an employment shift toward regular workers affects the capacity utilization rate and income distribution. Our results show that while such shift in employment decreases the capacity utilization rate and increases the wage share of regular workers, it either increases or decreases the wage share of non-regular workers. An increase in the flexibility of the labor market, as seen in an employment shift toward non-regular workers, increases the amplitude of business cycles. However, the introduction of a minimum wage fornon-regular workers stabilizes the economy.

We study a noncooperative policy game between monetary and fiscal policy, where only monetary policy can commit to future actions. The equilibrium outcome of the game depends on the strategies available to the monetary policymaker. If strategies are left unrestricted, the central bank can alter the incentives of the fiscal authority in a way that replicates the full commitment solution. If the central bank cannot commit to respond to fiscal policy, the fiscal authority generates fluctuations in government expenditure that undermine the stabilization goals of the central bank. (JEL E12, E23, E31, E52, E58, E62)

In standard solutions, the new-Keynesian model produces a deep recession with deflation in a liquidity trap. The model also makes unusual policy predictions: Useless government spending, technical regress, and capital destruction have large multipliers. These predictions become larger as prices become less sticky. I show that both sets of predictions are strongly affected by equilibrium selection. For the same interest-rate path, different choices of equilibria - either by the researcher's direct selection or the researcher's specification of expected Federal Reserve policy - can overturn all these results. A set of "local-to-frictionless" equilibria predicts mild inflation, no output reduction and negative multipliers during the liquidity trap, and its predictions approach the frictionless model smoothly, all for the same interest rate path.

This study estimates two types of Phillips curves––the price Phillips curve and nominal wage Phillips curve––for the Japanese economy and analyses the institutional structure of the dynamics of effective demand and income distribution in each period from 1977 to 2007. The estimated results allow us to make the following four findings. First, the Japanese economy was a profit-led regime and a counter-cyclical wage share regime until the 1990s. Second, although the combination of regimes can make the dynamics of effective demand and income distribution unstable, such dynamics were actually stable until the 1980s because wage share was sufficiently regulated by labour–management cooperation. Third, however, during the 1990s, the dynamics became unstable, because this regulation mechanism was weakened by a proportional increase in non-regular workers who were not members of labour unions. Finally, after the 2000s, the dynamics restabilized because Japanese firms quickened their speeds of employment adjustment and the distributive regime in Japan switched from a counter-cyclical wage share one to a pro-cyclical wage share regime.

In this paper, we explore the fluctuations of unemployment and vacancies in the Italian labour market over the last twenty years. For reasons of data availability on unfilled job openings, this period is split in two parts. The former is covered by a help-wanted time series, while the latter is analyzed by means of a harmonized vacancy rate. In both periods, in line with previous findings on the unemployment volatility puzzle, we find that the labour market tightness indicator is much more volatile than productivity. Moreover, we show that a matching model with segmented labour markets and on-the-job search has the potential to provide a rationale for this pattern.

Goodwin cycles result from the dynamic interaction between a profit-led demand regime and a reserve army effect in income distribution. The paper proposes the concept of a pseudo-Goodwin cycle. We define this as a counter-clockwise movement in output and wage share space which is not generated by the usual Goodwin mechanism. In particular, it does not depend on a profit-led demand regime. As a demonstration, a simple Minsky model is extended by adding a reserve army distribution adjustment mechanism. The wage share responds positively to output but generates no feedback. In the augmented Minsky model, cycles are generated purely through the interaction between financial fragility and demand. By design, demand is not influenced by changes in income distribution. But the model does exhibit a pseudo-Goodwin cycle in the output-wage share space. This holds true even if a wage-led demand regime is introduced. This demonstrates that the existence of a counter-clockwise movement of output and the wage share cannot be regarded as proof of the existence of a Goodwin cycle and a profit-led demand regime.

The paper develops a model of economic fluctuations in the medium run and their relation with the short-run macroeconomic equilibrium. The business cycle is the result of two separate forces. On the one hand, there is Harrodian instability. On the other hand, this instability is contained by the inherent contradictions of capitalism. I focus on two of these contradictions: the profit-squeeze that results from the tightening of the labor market as employment and utilization increase, and the financial instability hypothesis as formulated by Hyman Minsky. With the inclusion of overhead labor, the model can explain the U-shaped behavior of the wage share along the business cycle (wage share decreases for low levels of utilization and increases for higher levels) that prevailed in most of the post-WWII period, as well as the decrease in the wage share as utilization increases that has been observed in the most recent cycles.

Several prominent economists have argued that existing DSGE models cannot properly account for the evolution of key macroeconomic variables during and following the recent Great Recession. We challenge this argument by showing that a standard DSGE model with financial frictions available prior to the recent crisis successfully predicts a sharp contraction in economic activity along with a protracted but relatively modest decline in inflation, following the rise in financial stress in 2008:IV. The model does so even though inflation remains very dependent on the evolution of economic activity and of monetary policy. (JEL E12, E31, E32, E37, E44, E52, G01)

We argue that the vast bulk of movements in aggregate real economic activity during the Great Recession were due to financial frictions. We reach this conclusion by looking through the lens of an estimated New Keynesian model in which firms face moderate degrees of price rigidities, no nominal rigidities in wages, and a binding zero lower bound constraint on the nominal interest rate. Our model does a good job of accounting for the joint behavior of labor and goods markets, as well as inflation, during the Great Recession. According to the model the observed fall in total factor productivity and the rise in the cost of working capital played critical roles in accounting for the small drop in inflation that occurred during the Great Recession. (JEL E12, E23, E24, E31, E32, E52)

This paper excavates the set of ideas known as modern monetary theory (MMT). The principal conclusion is that the macroeconomics of MMT is a restatement of elementary well-understood Keynesian macroeconomics. There is nothing new in MMT's construction of monetary macroeconomics that warrants the distinct nomenclature of MMT. Moreover, MMT over-simplifies the challenges of attaining non-inflationary full employment by ignoring the dilemmas posed by Phillips curve analysis; the dilemmas associated with maintaining real and financial sector stability; and the dilemmas confronting open economies. Its policy recommendations also rest on over-simplistic analysis that takes little account of political economy difficulties, and its interest rate policy recommendation would likely generate instability. At this time of high unemployment, when too many policymakers are being drawn toward mistaken fiscal austerity, MMT's polemic on behalf of expansionary fiscal policy is useful. However, that does not justify turning a blind eye to MMT's oversimplifications of macroeconomic theory and policy.

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: E12, E31, E44, PSL Quarterly Review, V. 67, N. 271 (2014)

We first document a strong negative correlation between the level of household net worth, and aggregate business cycle volatility over the past 50 years in the United States. The early 1960s and the Great Moderation of the 1980s and 1990s were periods of high asset values and low volatility. The 1970s and the Great Recession were periods of low asset values and high volatility. We then develop a model in which the level of wealth determines the magnitude of equilibrium aggregate fluctuations. Fluctuations in the model are demand-driven and associated with fluctuations in confidence. Agents must commit to consumption choices before their individual employment status is realized. In the event of unemployment, consumption must be paid for out of savings or through costly borrowing. Asset prices in the model are endogenous, and reflect the liquidity value of wealth. In this environment, expectations of higher unemployment can become self-fulfilling: higher expected unemployment leads households to reduce spending and increase precautionary saving, and in response to falling demand firms reduce hiring. The labor market in the model is decentralized, and equilibrium wages do not necessarily clear the labor market. High levels of household wealth make the economy more robust, in the sense that demand becomes less sensitive to the expected unemployment rate, while lower levels of wealth make the economy more fragile. The paper offers the following interpretation of the Great Recession: a fall in asset values left the economy vulnerable to a sharp decline in confidence, which sharply reduced demand and employment.

This paper argues that the natural rate of unemployment hypothesis, in which equilibrium unemployment is determined by “structural†variables alone, is wrong: it is both implausible and inconsistent with the evidence. Instead, equilibrium unemployment is haunted by hysteresis. The curious history of the natural rate hypothesis is considered, curious because the authors of the hypothesis thought hysteresis to be relevant. The various methods that have been used to model hysteresis in economic systems are outlined, including the Preisach model with its selective, erasable memory properties. The evidence regarding hysteresis effects on output and unemployment is then reviewed. The implications for macroeconomic policy, and for the macroeconomics profession, are discussed.

a b s t r a c t We present a simple three-class model in the Kaleckian tradition to investigate the implications of a dominant managerial class for the dynamics of demand and distribution. Managers play a peculiar role in the economy, both because of their supervisory function – which results in surplus extraction and wage inequality – and because of their saving behavior. The adjustment of capacity utilization to accommodate goods market disequilibrium produces two distinct regimes with respect to the responsiveness of investment demand to profitability: a low investment-response regime, where effective demand appears to be both wage-led and inequality-led; and a high investment-response regime, where demand looks profit-led. In accordance with recent empirical evidence for the US, we introduce distributional dynamics that hinge on inequality squeezing workers’ wage growth. We find that the low investment-responsiveness regime produces a stable demanddistribution equilibrium only if the wage squeeze effect is relatively small. On the other hand, the equilibrium in the high investment-response regime is saddle-path stable. The main distributional implication of the wage squeeze and inequality is that the effect of redistribution toward workers in both the low investment response regime and the high investment response regime leads to declining inequality and capacity utilization. Hence, in both regimes, the inequality-led features of the equilibrium dominate the wage-led or profit-led nature of effective demand. These findings imply that distributive dynamics lead to a stronger basis for cohesion in the interests of managers and capitalists compared to workers and managers.

Endogenous money is a core component of post-Keynesian economics, but it has not been fully integrated into its macroeconomics. To do so requires replacing the accounting truism that ex post expenditure equals ex post income with the endogenous money insight that ex post expenditure equals ex ante income plus the ex post turnover of new debt. This paper derives this result after exploring precedents to this concept in the work of Schumpeter, Minsky, Keynes and Pigou.

This paper reflects on the development leading to the recent crisis and interprets this development as a series of events within a Minsky-Veblen Cycle. To illustrate this claim we introduce conspicuous consumption concerns, as described by Veblen, into a stock flow consistent Post Keynesian model and demonstrate that, under these conditions, a decrease in income equality leads to a corresponding increase in debt-financed consumption demand. Here Minskyian dynamics come into play: increased credit demand leads to a corresponding rise in credit supply, which, eventually, gives rise to a debt-financed consumption boom. As the solvency of households decreases and interest rates move up, banks reduce lending, triggering household bankruptcies and, finally, a recession. What follows is a stable period of consolidation, where past debts are repaid, financial stability is regained and conspicuous consumption motives may gradually take over again. We illustrate this approach to the current crisis and its explanatory validity by extending our stock-flow consistent model into a dynamic simulation.

This paper presents a Keynesian critique of Steve Keen's treatment of the aggregate demand–credit–endogenous money nexus. It argues his analytic intuition is correct but is developed in the wrong direction. Keen's fundamental relation describing determination of AD in an endogenous credit money economy suffers from two flaws. First, it neglects the core Keynesian problematic of leakages from and injections into the circular flow of income. Second, it falls into the theoretical morass regarding the black box of velocity of money via its adoption of a form of Fisher equation to determine AD. The paper contrasts Keen's treatment with a Keynesian structural framework.

In this paper, we investigate the nature of structural breaks in inflation by estimating a version of the New Keynesian Phillips curve (NKPC) in the presence of a unit root in inflation. We show that, with a unit root in inflation, the NKPC implies an unobserved components model that consists of three components: a stochastic trend component, a component that depends upon current and future forecasts of real economic activity, and a stationary component which is potentially serially correlated (or a component of inflation that is not explained by the conventional forward-looking NKPC). Our empirical results suggest that, with an increase in trend inflation during the Great Inflation period, the response of inflation to real economic activity decreases and the persistence of the inflation gap increases due to an increase in the persistence of the unobserved stationary component. These results are in line with the predictions of Cogley and Sbordone (2008), who show that the coefficients of the NKPC are functions of time-varying trend inflation.

We review the main identification strategies and empirical evidence on the role of expectations in the New Keynesian Phillips curve, paying particular attention to the issue of weak identification. Our goal is to provide a clear understanding of the role of expectations that integrates across the different papers and specifications in the literature. We discuss the properties of the various limited-information econometric methods used in the literature and provide explanations of why they produce conflicting results. Using a common dataset and a flexible empirical approach, we find that researchers are faced with substantial specification uncertainty, as different combinations of various a priori reasonable specification choices give rise to a vast set of point estimates. Moreover, given a specification, estimation is subject to considerable sampling uncertainty due to weak identification. We highlight the assumptions that seem to matter most for identification and the configuration of point estimates. We conclude that the literature has reached a limit on how much can be learned about the New Keynesian Phillips curve from aggregate macroeconomic time series. New identification approaches and new datasets are needed to reach an empirical consensus. (JEL C51, D84, E12, E24, E31)

I develop a New Keynesian model in which a type of government multiplier doubles when unemployment rises from 5 percent to 8 percent. This multiplier indicates the additional number of workers employed when one worker is hired in the public sector. Graphically, in equilibrium, an upward-sloping quasi-labor supply intersects a downward-sloping labor demand in a (employment, labor market tightness) plane. Increasing public employment stimulates labor demand, which increases tightness and therefore crowds out private employment. Critically, the quasi-labor supply is convex. Hence, when labor demand is depressed and unemployment is high, the increase in tightness and resulting crowding-out are small. (JEL E12, E24, E32, E62)

We estimate a state-of-the-art DSGE model to study the natural rate of interest in the United States over the last 20 years. The natural rate is highly procyclical, and fell substantially below zero in each of the last three recessions. Although the drop was of comparable magnitude across the three recessions, the decline was considerably more persistent in the Great Recession. We discuss the usefulness and limitations, particularly due to the zero lower bound, of the natural rate for the conduct of monetary policy.

This paper discusses central banks’ use of the interest rate as the instrument of monetary policy, in light of a reconsideration of macroeconomic theory induced by the financial crisis and Great Recession. Three main guiding principles for the future conduct of interest rate policy are identified: beware real effects; beware positive feedbacks; and beware discontinuities. The paper also reflects on the use of policy targets as a “quasi-instrument” of stabilization policy.

The last three decades have witnessed the emergence of a new species of capitalism. In spite of marked differences between its national varieties, a common characteristic of this species can be found in the global monopolisation of knowledge. This monopolisation involves hierarchical relations among firms and between capital and labour, because the capital of some firms includes the exclusive ownership of much of the knowledge used in production. Since the 1994 Trade-Related Aspects of Intellectual Property Rights agreements, the growing commoditisation of knowledge has extended the role of closed science and closed markets at the expense of open science and open markets. The intrinsic long-term dynamics of this species of capitalism is increasingly characterised by financialisation, inequality and stagnation. In order to exit from the current crisis, we must change many features of intellectual monopoly capitalism and rely on an eclectic approach that draws insights from liberal, Keynesian and Marxian traditions.

In modern capitalist economies, income distribution has a tendency to be in favor of shareholders. This paper interprets pro-shareholder distribution as a decrease in the retention ratio of firms and an increase in the profit share. We introduce labor supply constraints into a post-Keynesian growth model with debt accumulation and investigate the effects of changes in the natural rate of growth, retention ratio, profit share, and interest rate on the rate of capacity utilization and the financial structure of firms. We further analyse the stability of the steady-state equilibrium and the transitional dynamics toward the equilibrium and show that, depending on conditions, there could be cyclical fluctuations such that the financial structure changes periodically between speculative finance and Ponzi finance.

We offer the first direct evidence of an implicit contract in a goods market. The evidence we offer comes from the market for Coca-Cola. We demonstrate that the Coca-Cola Company left a substantial amount of written evidence of its implicit contract with its consumers—a very explicit form of an implicit contract. In general, observing implicit contracts directly is difficult because of their implicit nature. To overcome the difficulty, we adopt a narrative approach. Based on the analysis of a large number of historical documents obtained from the Coca-Cola Archives and other sources, we offer evidence of the Coca-Cola Company not only saying that it had an important implicit contract with its consumers, but also acting on it. This study makes an additional and unique contribution by exploring quality as a margin of adjustment available to Coca-Cola. We present evidence that the implicit contract included a promise not only of a constant nominal price but also a constant quality. We document the dedication to a 6.5oz serving of the "Secret Formula." Indeed, during a period of over 70 years, we find evidence of only a single case of true quality change. By studying the margin of adjustment the Coca-Cola Company chose in response to changes in market conditions, we demonstrate that the perceived costs of breaking the implicit contract were large. In addition, we are able to offer one piece of direct evidence on the magnitude of these costs by studying the events surrounding the failed introduction of the New Coke in 1985.

With integrated trade and financial markets, a collapse in aggregate demand in a large country can cause 'natural real interest rates' to fall below zero in all countries, giving rise to a global 'liquidity trap'. This paper explores the policy choices that maximize the joint welfare of all countries following such a shock, when governments cooperate on both fiscal and monetary policy. Adjusting to a large negative demand shock requires raising world aggregate demand, as well as redirecting demand towards the source (home) country. The key feature of demand shocks in a liquidity trap is that relative prices respond perversely. A negative shock causes an appreciation of the home terms of trade, exacerbating the slump in the home country. At the zero bound, the home country cannot counter this shock. Because of this, it may be optimal for the foreign policy-maker to raise interest rates. Strikingly, the foreign country may choose to have a positive policy interest rate, even though its 'natural real interest rate' is below zero. A combination of relatively tight monetary policy in the foreign country combined with substantial fiscal expansion in the home country achieves the level and composition of world expenditure that maximizes the joint welfare of the home and foreign country. Thus, in response to conditions generating a global liquidity trap, there is a critical mutual interaction between monetary and fiscal policy.

This paper discusses the problem of public debt in the long run. The working premise is that debt has negative effects on growth, mainly because it stimulates consumption spending that ultimately crowds out capital accumulation. Since this is a controversial viewpoint among Keynesian economists, the paper first provides an impressionistic survey of empirical evidence that supports the working premise before turning to a family of two-class growth models in the Kaldor–Pasinetti tradition that provide a theoretical environment conducive to gaining a deeper understanding of the burden of debt, both across overlapping generations of workers and across social classes. These models show how public debt can have regressive effects on the distribution of income and wealth as well as negative effects on growth. The policy implication is that fiscal consolidation needs to address these regressive effects, thus shifting the conversation away from the productivity-based narrative associated with neoclassical theory to a distributional narrative in the classical and Keynesian traditions.

his paper provides an alternative formalization of Minsky's theory of financial instability and examines the conditions under which perpetual cycles emerge from endogenous changes in financial practices. The main features of our model are found in its emphasis on (1) the interaction between debt and portfolio dynamics, (2) the importance of margins of safety in the evolution of firms' indebtedness, and (3) the decisive role of the dynamics of capital gains and expectations in asset markets. The general framework of financial instability is combined with two Keynesian models of growth and distribution (Kaleckian vs Kaldorian).

The paper provides an overview of the concept of wage-led growth, both as an analytical concept and as an economic policy strategy. At the core of our analysis is the distinction between wage-led and profit-led demand regimes. The Kaleckian tradition in macroeconomics asserts that a higher wage share will have expansionary effects. Bhaduri and Marglin (1990) generalize the model by allowing for classical mechanisms. The paper presents a two-country short run model to clarify the key concepts surrounding a wage-led vs a profit-led demand regime. It distinguishes carefully between partial and total effects and it analyses demand regimes with respect to national as well as international changes in the wage share. We also review the empirical literature. Our reading is that the available evidence indicates that demand in most economies is domestically wage led. Changes in functional income distribution also have supply-side effects. Available evidence suggests that higher wage growth induces higher productivity growth. Neoliberalism resulted in an increase in inequality and a decline in the wage share, but growth has nowhere been based on the profit-led growth process. Rather neoliberalism has given rise to either debt-led or export-led growth regimes. The paper concludes by outlining a wage-led growth strategy and by discussing its limitations.

This contribution focuses on a coherent new way of thinking about the macroeconomy in terms of both economic theory and economic policies. The central bank should focus on financial stability; for fiscal policy in the short term and in the long term to address demand issues is very important. Interest rate policy should be such that the real rate of interest is in line with trend rate of growth in the economy. Fiscal and monetary policies, though, should be coordinated closely. Major central bank cooperation and intervention in the foreign exchange market is necessary to control the exchange rate. Regional and industrial policies to create the required capacity are important, along with incomes policies, to contain inflationary/deflationary pressures. Distribution of income and wealth is another important policy dimension in view of its importance in terms of the great recession.

In this paper, we reconsider Minsky's financial instability hypothesis from the point of view of mathematical macrodynamic modeling. We start from a simple prototype small scale model of private debt and income with fixed prices. This system is similar to the Lotka-Volterra predator-prey system, in which private debt plays the role of predator and income plays the role of prey. Then, we extend the model step by step by introducing variable prices, inflation expectation, public debt and a budget equation of the consolidated government including the central bank. We also study the effect of macroeconomic stabilization policies by means of monetary and fiscal policies.

Keynesians know that if US austerity advocates had received just a few more votes in the November 2008 election, there would have been no fiscal stimulus or financial rescue in 2009 and the Great Recession would have turned into a second great depression. ‘Keynesian’ means recognizing the crucial role of aggregate demand, grasping the paradox of saving, advocating fiscal stimulus (tax cuts as well as government spending) in a recession despite the temporary increase in debt that it generates, and recognizing that monetary stimulus alone is inadequate in a severe recession. Contrary to the claims of austerity advocates, fiscal stimulus in general (and tax cuts in particular) did not fail during the Great Recession, but on the contrary helped avert a depression. The Keynesian multiplier is much larger in recession than in prosperity, but empirical studies often estimate its value in prosperity instead of recession. Keynesians should support austerity in prosperity and stimulus in recession. Unless a second Keynesian revolution is launched and succeeds in persuading both the economics profession and the public, the next severe recession may become a depression.

Ten years after its introduction, the Euro is in an existential crisis. The crisis is the outcome of economic policies that have aimed at labour market flexibility and financial integration. This paper argues, firstly, that the aggregate demand regime in the Euro area is wage led. While an increase in wages (other things equal) does have a negative effect on investment and on net exports, it does have a positive effect on consumption. As the Euro area is a relatively closed economy, the consumption effect overpowers the investment effect and the export effect. Secondly, we argue that in the Euro area two growth models have emerged: a credit-led and an export-led model. These have given rise to the imbalances that are at the heart of the Euro crisis. Wage flexibility has proven insufficient to prevent these imbalances. Thirdly, we advocate a system of coordinated wage bargaining that aims at wages rising in line with productivity growth and a substantially upward-revised inflation target. If the project of European economic integration is to survive, it needs a drastic change in direction. An important building block of this redirection is a rethinking of the role of wage policy.

This paper analyzes the role of stock prices in driving monetary policy for price stability in a non-Ricardian DSGE model. It shows that the dynamics of the interest rate consistent with price stability requires a response to stock-price changes that depends on the shock driving them: a supply shock (e.g. productivity) does not require an additional, dedicated response relative to the standard Representative-Agent framework, while a demand shock does. Moreover, we show that implementing the flexible-price allocation by means of an interest-rate rule that reacts to deviations of the stock-price level from the flexible-price equilibrium incurs risks of endogenous instability that are the higher the less profitable on average equity shares. On the other hand, reacting to the stock-price growth rate is risk-free from the perspective of equilibrium determinacy, and can be beneficial from an overall real stability perspective.

With the release of Treasury papers from the 1970s under the 30-year rule we have a much more complete picture of the dispute in the 1970s between the Treasury and the Cambridge Economic Policy Group (CEPG), especially given the role of three Cambridge economists--Nicholas Kaldor, Wynne Godley and Francis Cripps--as ministerial advisers at the time. The records show some eventual closing of the gap between the Treasury and the CEPG regarding the latter's proposition of stable private-sector NAFA (where NAFA stands for net acquisition of private sector assets) and its implications for demand management and the balance of payments. In contrast, the initial differences on counterinflation policy and, above all, on import controls versus free trade were wider at the end of the decade than at the start of it. Copyright The Author 2012. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved., Oxford University Press.

There was a short period, at the eve of the Second World War, when the development of macroeconomic theory pushed imperfect competition to the fore. During these “years of high theory,” as Shackle called them, many issues were raised concerning income distribution and the trade cycle. Analysis of the relationship between imperfect competition and income distribution is the point of departure for this paper. The first section reviews how market imperfections were integrated into analysis of income distribution. The second section examines the role of income distribution effects in the trade cycle theories developed during the 1930s; the first part focusing on Kalecki’s 1939 theory based on a linear saving function, while the second part is devoted to Kaldor’s 1940 model analysis based on a non-linear saving function.JEL classification : B22, E12, E32, D33, D43

This paper aims at providing a critical assessment of the new ‘Farmerian’ economics, i.e. the recent Farmer’s attempt to provide a new microfoundation of the General Theory grounded on modern search and business cycle theories. Specifically, I develop a theoretical model that summarizes the main arguments of the suggested approach by showing that a special importance has to be attached to the search mechanism, the choice of units and ‘animal spirits’ modelling. Thereafter, referring to selfmade real-business-cycle experiments, I discuss the main empirical implications of the resulting framework. Finally, I consider its policy implications by stressing the problematic nature of demand management interventions and the advisability of extending the role of the central bank in preventing financial bubbles and crashes.

We present a simple macrodynamic model of the real-financial markets inter action with a dynamic multiplier representing the goods market and a structured portfolio choice between money holdings and equities. This is contrasted with Blanchard's (1981) alternative approach, where interest-bearing bonds and equities are perfect substitutes and are subject to myopic perfect foresight, with the result that the usual saddle-point dynamics is established, and where therefore the jump-variable technique of the rational expectations approach is needed in order to tame the explosive nature of the model by assumption. We consider this latter representation a very virtual one in contrast to our descriptive treatment of the interaction of the real with the financial markets. Our implied dynamical system has three dimensions: output, share prices and capital gains expectations. We show that this model exhibits a financial accelerator mechanism that endangers the stability of its stationary solution, at least when it becomes sufficiently strong. Furthermore, we show that this type of instability can definitely be overcome if actual capital gains are taxed to a sufficient degree. This tax policy is therefore effective as compared to an interest rate policy of Taylor type, showing that monetary policy may not impact the markets for risky financial assets, unless it is interpreted as state of confidence for the current situation of the economy and may therefore be fairly overrated in the current macrodynamic literature. By contrast, all policy measures that stabilise the profit rate of the economy may add to the stability implications of the assumed Asada et al. (2010) type tax on capital gains.

We do not have a good measure of the effects of fiscal policy in a recession because the methods that we use to estimate the effects of fiscal policy—both those using the observed outcomes following different policies in aggregate data and those studying counterfactuals in fitted model economies—almost entirely ignore the state of the economy and estimate “the” government multiplier, which is presumably a weighted average of the one we care about—the multiplier in a recession—and one we care less about—the multiplier in an expansion. Notable exceptions to this general claim suggest this difference is potentially large. Our lack of knowledge stems significantly from the focus on linear dynamics: vector autoregressions and linearized (or close-to-linear) dynamic stochastic general equilibrium (DSGE) models. Our lack of knowledge also reflects a lack of data: deep recessions are few and nonlinearities hard to measure. The lack of statistical power in the estimation of nonlinear models using aggregate data can be addressed by exploiting estimates of partial-equilibrium responses in disaggregated data. Microeconomic estimates of the partial-equilibrium causal effects of a policy can discipline the causal channels inherent in any DSGE model of the general equilibrium effects of policy. Microeconomic studies can also provide measures of the dependence of the effects of a policy on the states of different agents, which is a key component of the dependence of the general-equilibrium effects of fiscal policy on the state of the economy. (JEL E12, E13, E32, E62, H50)

This paper studies the optimal long-run inflation rate (OIR) in a small New Keynesian model, where the only policy instrument is a short-term nominal interest rate that may occasionally run against a zero lower bound (ZLB). The model allows for worst-case scenarios of misspecification. The analysis shows first, if the government optimally commits, the OIR is below 1 percent annually. Second, if the government re-optimizes each period, the OIR rises markedly to 17 percent. Third, if the government commits only to an inertial Taylor rule, the inflation bias is eliminated at very low cost in terms of welfare for the representative household. (JEL E12, E31, E43, E52, E58)

Geoff Harcourt has been a thoroughgoing Keynesian committed to the achievement of sustainable (environmental and otherwise) and equitable (nationally and internationally) economic development and growth, and full employment of the available labour force. Achieving such an objective would require, inter alia, the maintenance of a high level of aggregate demand consistent with the full employment of labour, and the provision of sufficient productive capacity to enable that full employment, where sufficient is to be interpreted in terms of quantity, quality and geographical distribution. In this paper the ways in which fiscal policy should be used to sustain high levels of aggregate demand, necessary though not sufficient for full employment, are explored. Geoff has been a long-standing advocate of incomes policies to contain inflation without resorting to demand deflation. We argue that with the failures of inflation targeting, itself based on demand deflation, the need to develop incomes policies should again be on the policy agenda. This is an important ingredient in Geoff Harcourt's economic policy toolkit.

The dominant role of the »new consensus models« in central banks’ policy-making in the last two decades has triggered the reaction of post-Keynesian economists to examine alternatives to inflation-targeting monetary strategies and to Taylor-type interest rate rules. This paper develops a simple macroeconomic model in order to pinpoint the distributional/demand effects of rentiers’ interest income in a money/debt-using and demand determined economy. The ultimate objective of this model is to provide a starting point for the development of a post-Keynesian approach to interest rate policy that differs from the »activist« and the »parking-it« approaches. © 2011, Edward Elgar Publishing Ltd.. All rights reserved.

In a seminal paper on Marxian business cycle theory, Goodwin (1967) presented a model which assumed that a higher wage share leads to lower investment and thus a general economic slowdown. In contrast Kalecki (1971) was arguing that a higher wage share would have an expansionary effect because the consumption propensity out of wage income is higher than that out of profit income. Based on a general model that allows for wage-led as well as profit-led demand regimes, this paper estimates the effects of a change in the wage share on aggregate private domestic demand with quarterly data for 12 OECD countries. JEL classification: E11, E12, E20, E22, E25

The study aims to analyze US economy for the term 1990-2009 with emphasis on price formation and provide evidence on the mechanism through which business cycles occur. According to New Keynesian thinking major structural trait of the economy is non-clearing markets under imperfect competition with asymmetry and uncertainties. Generally empirical evidence is quite scarce in NK literature whereas theoretical research is abundant. Recent empirical research in the field has revealed evidence in favor of wage rigidity in developed economies. In this study econometric estimation of six equations on price formation has also revealed evidence for wage rigidity in the form of “inertia”. Inertia may be either due to expectations” or presence of “staggered wage contracts”. Thus we conclude that business cycle dynamics of fluctuations in output and employment should be followed in the labor markets and relevant models of the economy should concentrate on them to explain dynamics.

The paper argues that beyond the deviations of the long-term interest rate the monetary authority may cause, it is the rate determined by the market conventional expectations that prevails eventually. Lasting influence requires the authority to be capable of changing the market conventional expectations, not only refinancing conditions. The paper also explores the implicit financial transactions behind interest rate determination in post-Keynesian simple macro-models. It points out symmetry between the money and finance markets in equilibrium models. As a consequence of endogenous money, the finance market cannot but clear along with the money market, which sheds light on the rejection of the ›loanable funds‹ theory. In disequilibrium business cycle models, on the other hand, the symmetry is between the financial and goods markets, as in the ›loanable funds‹ theory.

Germany has experienced a period of extreme nominal and real wage moderation since the mid 1990s. Contrary to the expectations of liberal economists this has failed to improve Germany’s mediocre economic performance. However, Germany is now running substantial current account surpluses. One possible explanation for Germany’s disappointing performance is found in Kaleckian theory, which highlights that the domestic demand effect of a decline in the wage share will typically be contractionary, whereas net exports will increase (Blecker 1989). The size of the foreign demand effect will critically depend on the degree of openness of the economy. The paper aims at estimating the demand side of a Bhaduri-Marglin (1990) –type model empirically for Germany. The paper builds on the estimation strategy of Stockhammer, Onaran and Ederer (2007) and Hein and Vogel (2008a, 2008b). The main contribution lies in a careful analysis of the effects of globalization. Since Germany is a large open economy by now it is a particularly interesting case study.

This paper explains the key factors that determine the effectiveness of government purchases as a means of increasing output and employment in New Keynesian models, through a series of simple examples that can be solved analytically. Delays in the adjustment of prices or wages can allow for larger multipliers than exist in the case of fully flexible prices and wages; in a fairly broad class of simple models, the multiplier is 1 in the case that the monetary authority maintains a constant path for real interest rates. The multiplier can be considerably smaller, however, if the monetary authority raises real interest rates in response to increases in inflation or real activity resulting from the fiscal stimulus. A large multiplier is especially plausible when monetary policy is constrained by the zero lower bound on nominal interest rates; in such a case, expected utility is maximized by expanding government purchases to at least partially fill the output gap that would otherwise exist owing to the central bank's inability to cut interest rates. However, it is important in such a case that neither the increased government purchases nor the increased taxes required to finance them be expected to persist beyond the period over which monetary policy is constrained by the zero lower bound.

We compare the “New Consensus” (NC) in macroeconomics as expounded in Woodford (2003) and the Post-Keynesian (PK) approach regarding the causes of a “liquidity trap” (LT). We argue that in the NC a LT is a phenomenon caused by unusually large transitory shocks that depress the “neutral” interest rate temporarily. We show that this is the case because it is assumed that the “neutral” or “natural” interest rate converges in the long run to a gravitation center whose (positive) lower bound is determined by the rate of time preference of the representative household. By contrast, in the PK approach, the economy may also exhibit a “structural” or long-lasting LT even in the absence of large adverse shocks. This may be the case if a combination of high precautionary saving, low investment spending and stringent conditions for access to bank credit stemming from a high degree of uncertainty and liquidity preference makes the sum of the steady-growth “neutral” interest rate and the inflation rate fall short of the term/risk premium on long-term interest rates.

In order to prescribe adequate remedies to treat the current financial crisis one has to understand what in the first place went wrong. An age ago, older generations wrote that disease could not be cured without an accurate diagnosis. In contrast to mainstream 'efficient markets hypothesis' we argue that Minsky's financial instability hypothesis gives numerous valuable insights into sources and possible consequences of current global financial crisis. Furthermore, two decades ago Hyman P. Minsky predicted possible developments and perils of ever growing process of securitization of illiquid assets.

We estimate vector autoregressions with drifting coefficients and stochastic volatility to investigate whether US inflation persistence has changed. We focus on the inflation gap, defined as the difference between inflation and trend inflation, and we measure persistence in terms of short- to medium-term predictability. We present evidence that inflation-gap persistence increased during the Great Inflation and that it fell after the Volcker disinflation. We interpret these changes using a dynamic new Keynesian model that highlights the importance of changes in the central bank's inflation target. (JEL E12, E31, E52, E58)