Rational spirits and the post Keynesian macrotheory of microeconomics

Summary The argument that post Keynesian theory rejects rationality and maximization as a basis of agent behaviour and is thus non-rational and lacking micro-foundations is contrasted by reference to Keynes' use of his early work on probability in the General Theory. Instead of presuming rational choice over perfectly known events, post Keynesian theory builds on Keynes' explanation of agents' rational beliefs in uncertain propositions about their knowledge of the world. These rational spirits lead to the recognition of the macro constraints to individual action or a macrofoundations of microeconomics linked to the role of money and to the role of liquidity preference as both a measure of rational belief and a determinant of money prices which equate the rates of return on all existing and newly produced goods. In this equilibrium prices will generally diverge from costs of production, in contrast to perfect competition but in concordance with the post Keynesian microeconomic theories of mark-up pricing.Comments by L. Hoogduin are gratefully acknowledged. He is relieved from any responsibility for my impressionistic presentation of Keynes' views on probability.     

Tax Level and Tax Internalization Effects on Union Wage Bargaining

High taxes and generous social benefits are often blamed for causing unemployment. The conventional view is that if taxes on labour are (too) high, jobs will be lost and that generous social benefits will exert an upward pressure on unions' wage claims. In the case where unions co-ordinate their wage bargaining strategy, this need not be the case. A simple model is used to illustrate the effects of the tax rate level and tax internalization on unions' wage bargaining strategy. A high marginal tax rate along with endogeneity of the average tax rate shifts the union's trade-off between wages and employment in favour of the latter. These shifts may have contributed to the success of the so-called polder model or tulip model of the Netherlands.     

The economics of dying: A misapplication of tools

Conclusions Unlike McKenzie and Tullock, we do not know how personsshould treat their bodily organs or what is an ideal exit. That depends upon their utility goals, which are defined in output terms specific to the decision maker. We contend that the body is an input into the utility production process, and therefore, as with any input, it must be maintained and repaired at a level consistent with the output goals for maximization of utility. Thus, from this framework, it is quite consistent for a person to die with healthy organs without any thought of belief in reincarnation or the desire to bequeath one's bodily organs to others, or religious values. Self interest is all that must prevail.Also, the fact that there are interrelationships between the organs in the system, and at points these relationships take on fixed factor characteristics such that reduced levels of operation in one organ can create disorientation or coma or damage to other organs, means that the body cannot die as M-T suggest. Zero capacity for all organs at death is a technical impossibility as well as being inconsistent with the output goals of utility maximizers.     

Interest rate policy of the deutsche bundesbank: An econometric analysis for 1975 to 1992

Summary Internal and external economic targets which a monetary authority tries to achieve make its interest rate policy partly endogenous. This article analyses the Bundesbank's interest rate policy since 1975, the year the Bundesbank published its first intermediate money growth target based on estimates of an inevitable inflation rate and expectations about economic development. Estimation of a discount rate reaction function suggests that German monetary policy responds primarily to the final objective of price level stability and to a smaller extent, to the intermediate money supply target. Moreover, cyclical movements and balance-of payments equilibria are found to significantly influence the Bundesbank's discount rate policy. Both the inflation rate and the current account enter the reaction function in a non-linear way. When inflation is above the targeted rate or when there is a current account deficit, discount rate responses are much stronger than in the case of below target inflation or a current account surplus. Internationally, the Bundesbank discount rate policy is limited by US short-term interest rate movements.     

The golden rule of accumulation and the open economy

Summary This paper examines the factors which determine the volume of consumption per capita in a small open economy in the long run. The analysis is based on a neoclassical model. It is proved that-in general — Phelps' golden rule of accumulation does not hold for an open economy. This conclusion follows from the decline in the terms of trade, which is generated in an open economy by an increase in the share of investment. The influence of labour supply and world expenditure on the consumption per capita also depend heavily on the induced change in the terms of trade. The analytical results of the model are illustrated by means of a few numerical examples.This paper is written within the framework of the research program Possibilities and Limitations of National and International Economic Policy, code K.H.T. XIII-85-44.     

Interdisciplinary economics

Summary Starting from Robbins and Hennipman and with the help of Becker and Lindenberg a theoretical framework has been constructed within which the strong points of economics and sociology are combined,viz,. the formal but relatively bare-bones modelling of economics and the often so much richer, in terms of social content, analysis of sociology. This theoretical framework also appears to enable more balanced analyses of the effectiveness and efficiency of legislation and regulation than the kind of law and economics so much in fashion at the moment, which is often not devoid of economism and in whichhomo econornicus still all too often figures as the prototype of man.(Economic Institute/Centre for Interdisciplinary Research on Labour Market and Distribution Issues (CIAV)); Associate of The Netherlands Interdisciplinary Demographic Institute (NIDI) in The Hague and the Interuniversity Center for Social Science Theory and Methodology (ICS). This article is an adapted version of my inaugural lecture.     

Testing Korteweg's rational expectations model for a small open economy

Summary Korteweg extended the Barro, Lucas, Sargent, Wallace type of rational expectations model to a small open economy. This paper tests Korteweg's model with Dutch data. A major error in the specification and estimation is pointed out and corrected: the differenced expected variables are not defined consistently. This error implies that Korteweg's and Bomhoff's previous empirical results on the model are invalid. The test results for the corrected model indicate that this model has to be rejected for The Netherlands. The restrictions implied by an extremely simple empirical alternative are, however, not rejected.I would like to thank Dr. Th.E. Nijman, Professors F. van der Ploeg, W.H. Buiter and J.J.M. Theeuwes and Dr. A. J. de Zeeuw for their stimulus and helpful comments on previous versions of this paper, and Professor P. Korteweg for his open-minded attitude towards this research. Responsibility for the contents remains, of course, with the author. Financial help, from the Stichting Bekker-La Bastide-Fonds and the Stichting A.A. van Beek-Fonds is gratefully acknowledged.     

Forward exchange,short term capital flows and monetary policy

Summary This paper re-examines the relationships between short term capital flows and monetary policy, in the light of a new theoretical approach of the forward exchange market. They contend that the traditional forward exchange market theory is a misleading one as it fails to give all the importance it deserves to the distinction between covered and uncovered exchange transactions and to the actual role of the arbitrageurs. As a consequence of this analysis, they demonstrate that the problem of monetary management in an open economy must be dealt with in a way different from what has been usual, and they conclude that monetary policy, central banks' intervention on the foreign exchange market and direct controls on capital movements can still have some efficiency in the struggle against inflation, either of the domestic or the imported type.     

Toegepaste welvaartseconomie en de marginale kostenregel

Enkele opmerkingen naar aanleiding van F. Hartog, Toegepaste welvaartseconomie, Stenfert Kroese N.V., Leiden 1964 216 blz     

Money versus credit in the determination of output for small open economies

It is well known that in a small open economy where there is perfect substitutability between domestic and foreign assets and costless portfolio adjustment, the monetary authorities, pursuing an exchange-rate target, cannot control the money supply, but can influence the balance of payments through the use of domestic credit. It has been argued that domestic credit is therefore the relevant variable in output determination as well. This paper demonstrates, however, using a new classical structural model, that under the conditions that render the money supply uncontrollable, neither money nor domestic credit affects output.     

Public pensions and political decision-making

Summary A simple decision-making model regarding the financing method and benefit level of a public old age pension is developed. In line with existing literature, the decision-making process is supposed to be in the form of direct democracy, initially, In order to apply the model to a situation of a representative democracy, to wit the Netherlands, five social groups are considered which may be assumed to influence the decisions taken by the government organization. The empirical results show unanimous support for the PAYG system actually chosen at the start of the pension scheme in 1956. The results are highly suggestive, furthermore, as regards the fact that the financing method of the pension scheme has recently become a parliamentary issue. If one endorses the view that long-term considerations should be given a more preeminent place in this context, which would demand a change of the decision-making structure in favour of the young, then the political support for such a change would seem to be present at the moment.The research reported in this paper is part of the project Economic Policy and Conflicts of Interests of the University of Amsterdam (PEPCI paper 85.03). Helpful comments by Professor P. Hennipman and by participants in the workshop on The Origin and Future of Social Security Schemes at the Wissenschaftszentrum Berlin, December 13–14, 1984, in particular by Professor Charles Blankart, are gratefully acknowledged.     

Problemen van planning op middellange termijn,gezien uit het gezichtspunt van het bedrijfsleven

Voordracht gehouden op 7 november 1964 in het kader van een door de Nederlandse Economische Hoogeschool te Rotterdam georganiseerde post-doctorale leergang over het onderwerp Problemen met betrekking tot de planning op middellange termijn in Europa.     

Betting on the EMS

Two speculative strategies within the European Monetary System are empirically evaluated. The potential profitability of speculating on a currency's devaluation at a realignment crucially depends on being able to predict timing and magnitude of the parity change. Such opportunity has been eliminated from the system since 1983. For the reverse strategy of borrowing low, investing high, the evidence since 1983 suggests significant profitable opportunities for the weaker EMS countries — Belgium, Denmark, France and Italy — unconditional on knowledge of the timing of realignments. We conclude that this is due to a peso problem type of premium.     

Kapitaalverkeer met het Buitenland

Summary A model of portfolio behaviour is developed, based on the assumption that the distribution of a portfolio over different countries is determined by the general level of returns and costs of investments in those countries. From the model an isocapital exports line is derived. With the help of this line it is shown under which circumstances perverse capital movements will occur. The model implies that only temporary compensating operations on the domestic money and capital markets may be sufficient to make a domestic monetary policy effective.A partial adjustment version of the model is estimated for company pension funds.De heer M. J. Broekhuisen, evenals de auteur werkzaam op de sectie wetenschappelijk onderzoek en econometrie van de Studiedienst van de Nederlandsche Bank N.V., is mij op voortreffelijke wijze behulpzaam geweest bij de berekeningen voor dit onderzoek. De verantwoordelijkheid voor eventuele tekortkomingen is echter volledig de mijne. In een bijlage wordt de betekenis van de gebruikte symbolen samengevat.     

Het Liquid Iteiskarakter Van Spaartegoeden

Summary Before 1964, the Netherlands Bank did not count savings balances at money-creating banks and savings banks as secondary liquid assets or secondary liquidity (that is, near-money). Secondary liquid assets comprise claims on the public authorities and money-creating institutions, so far as they are held by other than money-creating institutions, which can be converted in large amounts into money at relatively short term without much expense or great loss on the transaction, or which can be used at their par value to make payments in satisfaction of current tax assessments.However, towards the end of the 1950's it became apparent from the rising value of the velocity of circulation of savings balances at financial institutions that these assets were acquiring increased significance for current payments. In 1964, this phenomenon induced the Netherlands Bank to count a certain part of the savings balances — indicated as liquid savings balances — as secondary liquidity, whereas the remaining part (true savings balances) was not. The Bank did so for better being able to impute the responsibility for monetary disturbances to the various sectors of the economy.Savings balances acquiring increased significance for current payments is a result of increased competition among financial institutions for the savings of the households sector. This increased competition is due to the fact that the households feel the need of more services rendered by the financial institutions as their income rise. Nowadays those financial institutions whose balance sheets do not comprise an item Current Accounts permit households to use their savings balances for making current payments. On the other hand, there is a tendency towards creating new types of accounts that serve as current accounts for the households in particular. If this tendency is followed up, the liquid assets character of savings balances will grow weaker.Rede, uitgesproken bij de aanvaarding van het ambt van gewoon hoogleraar in de staathuishoudkunde aan de Nederlandse Economische Hogeschool te Rotterdam op 28 september 1967.     

Fiscal Pacts

Fiscal pacts have recently played important roles in stabilization policies, particularly in Latin America. The ability of pacts to achieve austerity is examined in a game of competition among pressure groups for fiscal influence. Coalitions can freely communicate about what strategies to play and make contingent threats to the strategies of others. The credibility of fiscal pacts (strong, coalition-proof and far-sighted strong equilibria) is shown to depend critically on how acquiescence to private sector pressure enters the government's payoff function. We interpret these results in the context of austerity successes and failures in Mexico, Brazil, and Argentina.     

Interpretation of error covariances with nonrandom data: An empirical illustration of returns to college education

Conclusion This paper reviews two models of selectivity and gives an interpretation of the covariance terms that are particular to self-selectivity models. While the second model examined in this paper has been discussed elsewhere, the estimates presented for the first model have not been discussed in previous papers. More importantly though, the paper proposes an hypothesis about the expected relationship between error covariances. According to this hypothesis, if all individuals who are faced with the choice between two regimes (1 and 2) choose the regime which yields a maximum value, then the expected relationship between covariances is ₁ < ₂ . If all individuals choose that regime which yields a minimum value, then the expected relationship between covariances is ₁ > ₂ . This relationship holds for a very general class of selectivity models, so long as individuals are choosing between regimes by comparing the expected value (to them) of each regime.This paper was written while I was working under the professional development program at CNA.     

Utility and economics

Summary Although utility has been the central concept in economics, economists have paid relatively little attention to its measurement. Generally, utility is measured indirectly via the revealed preference approach. We discuss problems with this approach and next introduce alternative direct measurement methods. The direct measurement methods are seen to spawn a so-called theory of preference formation, which explains differences in utility functions of different individuals. The similarities of this theory with related theories in sociology and psychology, and various sorts of empirical evidence, are reviewed. The paper concludes with a discussion of the implications of these findings for economic theories.This is a slightly adapted version of my inaugural address at Tilburg University. I thank Tom Wansbeek for his helpful comments.     

Cash Management, Payment Patterns and the Demand for Money

We analyse cash management and payments behaviour using 1990–1994 panel data for Dutch households. The results largely confirm the transactions demand for money theory, including an income elasticity of substantially less than one, and they are consistent with the hypothesis of technology resulting in households' economizing on currency balances. The results indicate up to 40 per cent lower transactions balances in the future, which is affirmed by direct questioning on future expectations. The effect on total money outstanding is considerably lower, due to significant amounts of missing money in hoards, which are insensitive to new developments in the payments system.     

Market Structure and Innovation: A Survey of the Last Twenty Years

A survey of the research on the relationship between market structure and innovation is given. Starting in 1975, the emphasis is on the last two decades, as well as on the most recent developments. Especially on the theoretical front, many important insights have been drawn. These can be applied to antitrust enforcement, or provide the microfoundations for models of economic growth. On the empirical front, research lagged far behind theory. This recently changed with the so called bounds approach which is discussed as a matter of looking into future developments in this area.