On the monetary nature of the interest rate in a Keynes–Schumpeter perspective

Abstract

Keynes, in the General Theory, explains the monetary nature of the interest rate by means of the liquidity preference theory. The objective of this article is twofold. The first objective is to point out the limits of the liquidity preference theory. The fundamental limitation of this theory is that it does not allow to realize the intent declared by Keynes in 1933 to elaborate a monetary theory of production The second objective is to present a more solid theory of the monetary nature of the interest rate. It will be shown that an essential element of this explanation is Schumpeter’s analysis of the role of bank money in a capitalist economy. In fact, this analysis represents a fundamental tool to explain the characteristics that, according to Keynes, distinguish a monetary economy from a real-exchange economy     

Was Keynes a Realist?

Lawson (1989a) has interpreted Keynes as a philosophical realist, adhering to the view that the economy has a constant inner structure. Against this it is claimed below that, although Keynes speaks about realism, it is not in this sense, but in the common sense way of referring to actually observable entities of an economic model. In addition, it can be shown that Keynes's views can be interpreted as instrumentalist—he emphasises characteristics such as usefulness and convenience, besides and instead of truth. Thus, truth and truthlike concepts do not, in Keynes's thinking, have the paramount position that they have in realist philosophy.     

Is a monetary union feasible for East Asia?

The empirical suitability of the East Asian economies for potential monetary integration is assessed. The structural vector autoregression (VAR) method is employed to identify the underlying shocks using a three-variable VAR model across the East Asian economies. The estimates of the EEC are used as a benchmark to compare the size of the underlying shocks and the speed of adjustment to shocks in both regions to determine the feasibility of forming an optimum currency area (OCA) in East Asia. The empirical results do not display strong support for forming an OCA in the East Asian region. The results do imply, however, that some small subregions are potential candidates for OCAs, since their disturbances are correlated and small and these economies adjust rapidly to shocks.     

Rule-based frameworks in historical perspective: Keynes’ and Friedman's monetary policies versus contemporary policy-rules

Abstract

This note suggests that Fazio's re-interpretation of Ferrara's discussion of distribution as a bilateral monopoly is incorrect. A more natural formalization of the work by Ferrara is proposed.     

Fiscal and monetary interactions when wage-setters are large: is there a role for corporatist policies?

This paper studies the macroeconomic consequences of alternative policy regimes in a closed economy where a central bank, a fiscal authority and a monopoly union interact via their effects on output and inflation. The analysis compares macroeconomic outcomes in a non-cooperative setting, where players may move sequentially or simultaneously, and in a regime of cooperation between the government and wage-setters. The cooperative regime captures a climate of accord among social parties that is finalised at common macroeconomic targets in the tradition of corporatism, as in the recent experience of “social pacts” in many European countries. The paper makes two main contributions. First, it shows that macroeconomic outcomes are suboptimal in the non-cooperative regime and may deliver extreme (undesirable) results even when all players share common ideal targets for output and inflation. All players would be better off with a less extreme value for output or inflation, yet they fail to reach a more advantageous allocation as long as there is an inherent conflict among their further objectives. Moreover, the result is robust to a change in the degree of central bank’s conservatism. Second, I find that cooperation between the government and the monopoly union towards common ideal targets for inflation, output and taxes enhances social welfare even in the absence of explicit coordination with the central bank.     

The prices of silver and exchange rates in a metallic monetary system—the cases of India and Iran

Using the notion of co-integration theory and a vector error correction modelling approach, this paper examines in retrospect the long-run relationship between the exchange rate of silver-based currencies and the intrinsic value of silver in India and Iran in a bivariate model. The results based on unit root and co-integration tests indicate a reliable long-run relationship between the price of silver and the exchange rate of silver-based currencies. Our findings also suggest a bi-directional relationship between the price of silver and exchange rate of pound per rupee in the case of India and a feedback relationship between the intrinsic value of qiran and the exchange rate of pound per qiran in the case of Iran.

Global reserve currency system: Why will the dollar standard give way to a tripolar currency order?

The recent financial crisis highlighted some of the underlying defects in the dollar-based reserve system. This paper argues that the era of the US hegemonic stability and unipolarity, which provided the foundation for the dollar’s sustenance as the pre-eminent global reserve currency, has already peaked and the global economy of the future will revolve around a multipolar order. The rise of China, along with other emerging markets, is rapidly redrawing the traditional Western dominated global economic system. The structural challenges facing the American economy along with the extraordinary expansion of Federal Reserve’s balance sheet and the explosion of the US government debt will diminish the attractiveness of the dollar standard going forward. Our analysis suggests that a tripolar currency order—consisting of the dollar, the yuan and the euro—will replace the dollar standard in the coming decades.     

Aggregate Demand and Aggregate Supply: Will the Real Keynes Please Stand Up?

Two recent articles in this journal present conflicting interpretations of the Aggregate Demand/Aggregate Supply (D/Z) model contained in Chapter 3 of Keynes's General Theory. This paper evaluates the two interpretations to determine which aligns more closely with Keynes's own views.     

Keynes‐Marx and Keynes‐Wicksell Models of Monetary Growth: A framework for future analysis

This paper reconsiders and generalizes a dichotomizing two-sector real growth model of Marglin which claims that the steady state of capitalist economies is plagued by secular inflation. We show that this implication need not be true from the perspective of a more general steady state analysis and that the Marglin model can be embedded into a general Keynes‐Marx‐Friedman or Keynes‐Wicksell framework where money is superneutral, where therefore inflation is due solely to excessive monetary growth, where the private sector is basically asymptotically stable and where there is a steady state rate of employment that differs from the 'natural' rate of employment of monetarist models of inflation. We consider this model a benchmark model that requires equally general alternatives if the above implications are to be rejected.     

The international spillover of china’s monetary policy: a case study of a developing country

This paper aimed to investigate the evidence on the transmission of China’s monetary policy shocks to macroeconomic variables in Iran. Since 1990, China has become one of the main trading partners of Iran; therefore, it is expected that China’s macroeconomic shocks have some consequences on Iran’s Economy. In this study, a structural vector autoregressive model is used to explore such a transmission. The findings of the study reveal that the China’s monetary policy changes significantly affect the Consumer Price Index (CPI) as Iran’s CPI meaningfully increases with the expansion of China’s money supply. Furthermore, it was found that Iran’s other economic variables, including the real GDP, real effective exchange rate, and interest rate, do not significantly reflect the China’s monetary shocks; even though confirm the expected sign and direction.     

Financial crises and sudden stops: Was the European monetary union crisis different?

We estimate a two-region model of the Euro area, with the purpose of identifying the shocks that caused the 2008–2009 recession and the subsequent 2010 sovereign bond crisis. One striking result is that both crises were demand-driven in the core Euro area countries, whereas region-specific permanent technology shocks explain most of the output growth slowdown in the peripheral countries. Adverse technology shocks became particularly important during the sovereign bond crisis. This is in line with cross-country evidence on the effects of sudden stops.     

A coming ‘Magnesian’ age? Small states,the global system,and the international community

Since Plato, we have considered that the ideal polis, or political community, is the small state, akin to the idyllic ‘Magnesia’ of the Laws. The Platonic ideal, however, generally has been considered unrealistic. Even in the ancient world, the Alexandrine model ‐ an expanding, pluralistic network of large trading cities under a single aegis ‐ came to contradict it. Subsequent history, especially the imperialism of the nineteenth century which swallowed up many small polities around the world, seemed to prove that only large and powerful entities were ‘fit’ to survive. Why, then, are there still so many small‐sized countries in the world today? Why is their number actually increasing? Decolonisation, the end of bipolarity, democratisation, trade liberalisation and the digital revolution are five factors that have given small states more freedom. Yet many are vulnerable, and the economics of their situations are precarious. The workings of the global system, particularly the globalisation of business, may harm them even while promoting their freedom. The international community, a large part of which is now in fact made up of small states, should be prepared to act, for the global public good as well as out of sheer political and also environmental self‐interest, to help safeguard the livelihood of the world's many and varied small states, whose ‘Magnesian’ venues and values can be of both functional and normative importance for mankind as a whole.     

Vicarelli’s Keynes (and today’s international disorder)

The article speculates about the legacy of Fausto Vicarelli’s interpretation of John Maynard Keynes’s work in the times of a major global crisis. In particular, it puts an emphasis on those aspects of Keynes’s “method” that Vicarelli rightly considered as revolutionary in his Keynes, of 1977, as well as in other writings. The article then turns to Vicarelli’s reconstruction of Keynes’s early work in international economics (Indian Currency and Finance, Economic Consequences of the Peace) and reflects upon the continuing relevance of the philosophy inspiring Keynes’s plans of global reform in the Forties, also in the light of Vicarelli’s (Keynes-inspired) vision of the problem of policy space at the international level.     

Is there a self-enforcing monetary constitution?

A self-enforcing monetary constitution has rules that agents acting within the system will uphold even in the presence of deviations from ideal knowledge and complete benevolence. It thus does not require external enforcement. What would such a constitution look like? I show that two regimes—a version of nominal gross domestic product targeting that relies on market implementation of monetary policy, and free banking—meet these requirements for self-enforcing monetary constitutions. The analysis draws insights from political economy, and from constitutional political economy in particular.     

Testing for the stability of money demand in Italy: has the Euro influenced the monetary transmission mechanism?

Stability of money demand is a crucial issue for the efficacy of monetary policy. This is particularly true in the presence of significant exogenous shocks to the monetary system. By implementing the most recent econometric testing procedures, this article intends to investigate the consistency of the stability of money demand in Italy, one of the larger European Monetary Union (EMU) countries, before and after the EMU. Among others, the objective is, indeed, to ascertain the effect of a change in the currency regime on the monetary aggregates and to provide a valid empirical model which is a viable tool for policy performance.     

Keynes,Sraffa and the labour market ∗

The paper argues that input–output analysis existed long before it received its name and Wassily Leontief made it popular as a tool of empirical analysis and a foundation of economic policy. It grew out of an attempt to ascertain the capacity of an economic system to reproduce itself and generate a surplus that can be used for various purposes. Primitive pronouncements are encountered in early civilizations, for example Mesopotamia, in terms of the ratio of the amount of grain produced and the amount of it used up, directly and indirectly. These ideas reappeared in a more sophisticated form at the time of the inception of systematic economic analysis in the 17th and 18th centuries in Europe and found a two-sector expression in François Quesnay's Tableau économique. The material input–output structure was then considered the core of the economic system that contained one of the keys to basically all other important economic phenomena and magnitudes. The way in which the potentialities embodied in the input–output structure, conceived as a system of production, have, or have not, been exploited over time define both the problems and perspectives of contemporary input–output analysis. Three aspects will be scrutinized more closely: the problem of value added, the treatment of fixed capital and the problem of technical change. Happily enough, while the problems are huge, the prospects are encouraging. There is no fear that input–output analysts will soon have to look for new fields of research because the old ones have been exhausted.     

Money,reserves, and the transmission of monetary policy: Does the money multiplier exist?

With the use of non-traditional policy tools, the level of reserve balances has risen in the US from roughly $20 billion before the financial crisis to well past $1 trillion. The effect of reserve balances in macroeconomic models often comes through the money multiplier, affecting the money supply and the bank lending. In this paper, we document that the mechanism does not work through the standard multiplier model or the bank lending channel. If the level of reserve balances is expected to have an impact on the economy, it seems unlikely that a standard multiplier story will explain the effect.     

ECB monetary policy and the DM–dollar exchange rate: evidence from a Bayesian VAR

Since the start of the European Monetary Union (EMU) in January 1999, the DM has depreciated considerably against the currencies of major industrial countries. Whether there is a systematic failure of vector autoregressive (VAR) models fitted to the pre-EMU period to predict forward looking variables in the year 1999 is investigated. Conditional forecasts are used in order to capture the potential effects of real shocks and to assess the ECB's reaction to these shocks. The findings suggest that neither real shocks nor the actual ECB-policy reaction can explain the exchange-rate devaluation. This points to important effects of increased uncertainty following the regime shift resulting in an increased risk premium in the foreign exchange market.