Fiscal and monetary interdependence

Where classical economics integrates the quantity theory of money with the concept of Ricardian equivalence, the tendency of recent macroeconomic presentations is to focus either upon money and inflation or upon taxation and debt. That neglect of classical monetary–fiscal integration is surprising, given an initiative by the International Monetary Fund that set credit, money, and fiscal policy within a single structure. This article places those ‘credit counterparts of broad money’ in the context of the Great Depression and the recent global financial crisis. The upshot is a set of conclusions: that, to counter the prospect of deflation, quantitative easing is a weak policy response; that fiscal deficits are better; and that cuts in taxation are preferable to increased government spending.     

The impact of monetary policy in the midst of big shocks

This paper studies the impact of Federal Reserve policies that created the largest deviations from price stability during the Fed׳s first 100 years: the post-World War I deflation, the deflation of the Great Depression, the inflation of World War II, and the Great Inflation of the 1970s. In terms of their macroeconomic impacts, I find that deflation was uniquely depressing in the 1930s because of cartel policies that prevented nominal prices and wages from adjusting to clear markets, and not because deflation is generically depressing. I find that the biggest impact of monetary policy during World War II was in debasing debt through inflation. I find that the main drivers of the 1970s economy were long-run changes in productivity and the labor market, and that there may have been little that the Fed could have done at this time to expand employment and output. More broadly, I find that macroeconomic performance would have been better over the Fed׳s first century had the Fed followed a monetary policy to deliver stable prices.     

论通货紧缩预警指标的选择 --以日本为例

上世纪90年代发生于日本的通货紧缩,对日本经济打击沉重,使日本经济陷入了长期的低迷状态。因此,研究怎样对通货紧缩进行预警不仅具有重要的理论意义,也具有重要的实际意义。本文利用日本1998～2002年的相关经济数据,分析了这次通货紧缩发生的一些先兆,旨在提出一套能对通货紧缩进行预警的指标体系。     

Hypothesis of Price Formation in Input–Output Tables

The goal of this paper is to check if different theoretical approaches to price formation can be verified in the structure of empirical input–output tables. From a propositive point of view, the hypothesis is made of two different markets (the ‘industrial’ market of intermediate and investment goods; and the ‘commercial’ market of final consumption goods), with two different mechanisms of price formation. The consequences of this hypothesis are outlined as regards deflation procedures. An empirical test of the theories about price formation and of the method of deflation suggested by the two-market hypothesis is made using 1985 Italian input–output tables at 1980 prices.     

THE 1930s AND THE PRESENT DAY – CRISES COMPARED

Many analysts are comparing the deep crisis of our times with the crash of 1929 and the Great Depression that followed in the 1930s. They generally argue that Barack Obama is driving the world to recovery along Roosevelt's ‘state superiority’ line. Alas, today's crisis rings alarm bells for the manner in which we must manage the future of democracy, the state and markets. Markets cannot be ‘ordered about’ and when in the face of sound logic and practice an attempt is made to do just this, markets become refractory, or – even worse – they may collapse.     

Predicting Major Economic Events with Accuracy: A New Framework for Scientific Macroeconomic Models

Despite intense studies over the last several hundred years, the questions about causes, forecasting, and prevention of economic crises remain unsolved. The poor performance of macroeconomic models during the Great Recession of 2008 has forced many economists to reexamine macroeconomic theories and search for credible alternatives to the agent‐based and general‐equilibrium models now currently used by most economists. This article derives a new category of macroeconomic model and applies it conceptually to explain the causes of economic crises. This model, known as the indeterministic balance sheet plus (IBS+) model, is a special breed of accounting models. It takes an indeterministic view of future balance sheets. This article proposes a classification of causes of economic crises using IBS+ models to analyze balance sheets of key economic sectors. Most economic crises are caused by mismanagement of balance sheets by key economic players, not by any fundamental flaw of capitalism. The frequency of economic crises can be minimized by proper risk management practices, but economic crises can never be completely eliminated. Historically, treating mismanagement of balance sheets as the main cause of economic crises is a generalization of Austrian business cycle theory, Fisher's debt deflation theory, and Minsky's financial instability hypothesis.     

Rules for a lender of last resort: An historical perspective

The Federal Reserve was established in 1913 to be a lender of last resort. Paul Warburg, its principal architect had in mind that a U.S. central bank would follow Bagehot׳s strictures ‘to lend freely at a penalty rate’ in the face of a scramble for high powered money. Yet the Federal Reserve Act never spelled out how the Fed was supposed to act as an LLR. This omission came to the fore in the Great Contraction 1929 to 1933 when the Fed failed to prevent four banking panics which turned a serious recession into the Great Contraction. Reforms in the 1930s corrected some of the Fed׳s failures but clamped down on financial activity for 40 years. The financial crisis problem returned in the 1970s with financial liberalization. The Fed abandoned Bagehot׳s strictures and adopted the ‘Too big to fail’ doctrine and ‘creative ambiguity’. This policy shift contributed to moral hazard and created new threats to financial stability with the rise of the ‘shadow banking system’. The subprime mortgage crisis prompted the Fed to take unprecedented LLR activities which have opened up a Pandora׳s box of perils. The Fed has moved away from rules based policy in its LLR function.     

The fiscal and monetary response to COVID‐19: What the Great Depression has – and hasn't – taught us

Although some regard the New Deal of the 1930s as exemplifying an aggressive fiscal and monetary response to a severe economic crisis, the US fiscal and monetary policy responses to the COVID‐19 crisis have actually been far more substantial – and, so far, much more effective in reviving aggregate spending. Although many fear that these responses, and the large‐scale increase in bank reserves especially, must eventually cause unwanted inflation, the concurrent sharp decline in money's velocity has thus far more than offset any inflationary effects of money growth, while forward bond prices reflect a general belief that inflation will remain below 2 per cent for at least another decade. Notwithstanding the growth of the Fed's balance sheet, Fed authorities can always check inflation by sufficiently raising the interest return on bank reserves. Nonetheless, recent developments have heightened the risk of ‘fiscal dominance’ of monetary policy at some point in the future.     

A Silver Lifeboat,not Silver Fetters: Why and how the Silver Standard Insulated China from the 1929 Great Depression

We use counterfactual simulations based on an estimated dynamic stochastic general equilibrium model to demonstrate why China was affected less than other major countries during the first two years of the Great Depression. We show that being on a silver standard insulated China from the adverse consequences of the Great Depression by saving the country both from a tightening of monetary conditions and from a detrimental internal deflation. Without the insulation of the silver standard, China might have suffered from a cumulative output loss of between 11% and 23%, and its inflation might have become deflation. Copyright © 2015 John Wiley & Sons, Ltd.     

Financial Constraints on German Firms after the Crisis: Evidence from Threshold Panel Estimation

This article studies the existence and magnitude of financial investment constraints in Germany between 2006 and 2012 with a special emphasis on small and medium‐sized firms. The core contention is that the sensitivity of the investment rate to the cash flow rate is a function of a firm's financial position contributing to its access to external finance. The application of a nonlinear panel threshold model reveals that the marginal effect of the cash flow rate on the investment rate is almost twice as strong for ‘high debt’ firms compared to ‘low debt’ firms. This result holds for six out of seven balance sheet threshold variables. For a single specification, the results reveal a non‐monotonic relationship between the cash flow rate and investment rate. Firm size, however, does not explain differences in the cash‐flow‐investment nexus.     

BALANCE SHEET ECONOMICS OF THE SUBPRIME MORTGAGE CRISIS

As Copeland (1947; 1952) demonstrated with his money-flows accounts more than half a century ago, the balance sheets of economic entities are closely interrelated through a lender–borrower relationship. This paper is an attempt to describe the US subprime mortgage crisis in the framework of ‘balance sheet economics’, which was originally proposed by Stone (1966) and Klein (1977; 1983). Since it is almost impossible to collect all the balance sheets of economic entities, we use flow-of-funds accounts instead to simulate the negative consequences resulting from home mortgage delinquencies. We show that the pass-through sequence converges when the original delinquency is made up by loss of net worth in any of the economic entities. Most of the eventual loss is incurred by ‘Households and Nonprofit Organizations’ and ‘Rest of the World’. A portion of pass-through loss is eventually incurred by foreign countries with excess external assets, such as Japan, Ireland, etc.     

Financial Intermediaries,Credit Shocks and Business Cycles

We document the cyclical properties of aggregate balance sheet variables of the US commercial banks: (i) Bank credits and deposits are less volatile than output, while net worth and leverage ratio are several times more volatile, (ii) bank credits and net worth are procyclical, while deposits, leverage ratio and loan spread are countercyclical. We then present a real business cycle model with a financial sector to investigate how the dynamics of macroeconomic aggregates and balance sheet variables of the US banks are influenced by empirically disciplined shocks to bank net worth. Both calibrated and estimated versions of the model show that these financial shocks are important not only for explaining the dynamics of financial flows but also for the dynamics of macroeconomic variables. We find that the recent deterioration in aggregate net worth of the US banking sector contributed significantly to the 2007–09 recession.     

REAL BUSINESS CYCLE MODELS OF THE GREAT DEPRESSION: A CRITICAL SURVEY

Abstract.  Recent years have witnessed a revival of interest in the Great Depression of the 1930s. Among the differing new interpretations, the real business cycle (RBC) approach is particularly significant. It represents an outstanding methodological innovation in trying to cast the Great Depression within an 'equilibrium' framework. This paper critically reviews the RBC interpretation of the Great Depression, clarifying its theoretical and methodological foundations, and paving the way for future assessments of its validity.     

Verifying the state of financing constraints: Evidence from U.S. business credit contracts

Many policymakers are concerned that tight financing constraints for small businesses are stalling the recovery from the Great Recession. This paper empirically assesses two agency problems that induce such financing constraints—one resulting in a “firm balance sheet channel” and one resulting in a “bank balance sheet channel”. Evaluating specific models of these two agency problems against a comprehensive data set of U.S. small business credit contracts, I find strong support for the firm balance sheet channel but only weak support for the bank balance sheet channel. A complementary regression analysis confirms this result. Hence, policies seeking to improve firms’ balance sheets may be desirable to support small business lending in the recovery from the Great Recession.     

The 1987 US Stock Market Crash

Will the Crash of 1987 be followed by a deep depression like the crash of 1929?Professor Anna Schwartz, who collaborated with Professor Milton Friedman in writing‘The Monetary History of the United States’, argues that the 1987 crash will only be followed by a severe recession if the Federal Reserve allows a collapse of the money supply as it did in the early 1930s.     

Using Weighted Least Squares to Deflate Input–Output Tables

This article proposes a balancing procedure for the deflation of input–output (I-O) tables from the viewpoint of users. This is a ‘subjective’ variant of the Weighted Least Squares (WLS) method, already known in the literature. It is argued that it is more flexible than other methods, and it is shown that SWLS subsumes the first-order approximation of RAS as a special case. Flexibility is due to the facts that (a) users can attach differential ‘reliability’ weights to first (unbalanced) estimates, depending on the confidence they have in the different parts of their pre-balancing work, (b) differently from RAS, one is not bound to take any row or column total as exogenously given, and (c) additional constraints can be added to it. The article describes also how SWLS was utilised to estimate a yearly (1959–2000) series of constant-price I-O tables for the Italian economy.     

Accounting,economics and management in France: the slow emergence of an 'accounting science'

The relationship (or what might be better described as the absence of a relationship) between accounting, economics and management is an important feature of a French tradition built on a society in which accountants have been regarded as the ‘poor relations’ of the business community. This pattern is presented in the second part of the title of this article as ‘the slow emergence of an accounting science’. French business traditions have influenced accounting mainly through the property rights established by the French Revolution. The French bourgeoisie's concern with inheritance gave rise to a form of accounting which emphasized the balance sheet and inventory valuation, rather than cash flow analysis. Throughout the 19th century accounting in France was taught as a technical subject, secondary to the ‘noble’ disciplines such as engineering, law and later, economics. In the mid-20th century, the state, via the ‘Conseil National de la Comptabilité’ (the National Accounting Council) laid down accounting principles under the ‘Plan Comptable’. The separation between financial accounting and cost accounting reflected that between entrepreneurs or owners on the one hand and engineers or administrators on the other. Unlike the Anglo-Saxon countries, France did not recognize accountancy as a profession in its own right until recently. Recent years have seen a radical transformation of French accounting policies and conventions under the combined influence of the emerging requirements of financial markets, the globalization of business and the growing independence of the accountancy profession.     

The Dollar, the Oil Price and Policy Divergence

There is currently a clear divergence of policy between the United States, Japan and Germany. With the US in recession and concern growing over the severity of the slump, interest rates have been cut in a move to revive the economy. In contrast Japan and Germany are both experiencing strong growth and monetary policy remains tight to combat inflation. This divergence was seen most clearly when the Federal Reserve Board lowered its discount rate to 6 per cent on 1 February, the day after the Bundesbank had raised its Lombard rate to 9 per cent. With G7 increasingly concerned about domestic factors, less emphasis is placed upon stable exchange rates and as a result the dollar is at an all-time low. The last two G7 communiqués have stressed ‘stability oriented monetary policies’, an ambiguous phrase which fails to define ‘stability’ either in terms of exchange rates, inflation or growth. Thus both the German and Japanese policy of high interest rates to reduce inflation and low US interest rates aimed at stimulating the economy can be termed as ‘stability oriented’. This analysis focuses on these divergent policy responses in two alternative scenarios to the world forecast we presented last month. The first scenario considers what might happen if the Federal Reserve Board were to stimulate the US economy by further cuts in interest rates, whilst Japanese and German rates were unchanged in the face of inflationary pressures. This case may be relevant if the recent US loosening of monetary policy is not sufficient to encourage growth because of a ‘credit crunch’, so that a more expansionary policy is required by the Fed. As a consequence, policy diverges further and the dollar weakens. The second scenario focuses upon a reduction in inflationary pressures in Japan and Germany brought about by an oil price fall. In this case we assume that US policy is already loose enough to avoid a prolonged recession, but that German and Japanese monetary policy is relaxed as inflationary forces recede. In this case policies converge. Each scenario thus concentrates on one of !he two features which are causing the policy divergence amongst G3 countries: recession in the US, inflation in Germany and Japan.     

2010,中国经济展望

2009年,在经历金融危机的洗礼后,全球经济演绎了由低谷上行的走势。2010年,加息及退出政策渐行渐进,中国以及世界经济又将走出何种轨迹?     

Financial Pressure and Balance Sheet Adjustment by Firms*

This paper examines the financial policies and balance sheet adjustment of companies. Using a large panel of UK‐listed firms we consider how companies resolve pressures on their balance sheet, estimating models for dividends, new equity issuance and investment. The results indicate that companies resolve balance sheet pressures by each of these means. Financial policies, through dividends and new equity issuance, and real investment decisions, respond to the underlying level of debt and the borrowing cost of servicing that debt. Dividends are estimated to be slow to adjust in the short run.