Banking theories and macroeconomics

Mainstream models that allow for financial operations are characterized by the understanding of banks as intermediaries of outside money (IOM). This approach to banks became dominant thanks to a peculiar rhetorical device by Tobin (1963 Tobin, J. 1963. “Commercial Banks as Creators of ‘Money’.”Paper 205. New Haven, CT: Cowles Foundation. [Google Scholar]). In recent years, however, this understanding is being increasingly questioned and an old view of banks as originators of inside money (OIM) is being reconsidered. The present article highlights the fundamental differences of these alternative doctrines from a money supply perspective and provides a simple theoretical argument to consider the limits of a point of view à la Tobin and regard the OIM banking theory more general than the IOM theory.     

Adolphe Quetelet,the average man and the development of economic methodology *

Abstract

Quetelet's contribution to statistics has received adequate attention in Stigler (1986 Stigler, S. M. 1986. The History of Statistics. The Measurement of Uncertainty before 1900, Cambridge & London, MA: Belknap Press of Harvard University Press.  [Google Scholar], 1999 Stigler, S. M. 1999. Statistics on the Table. The History of Statistical Concepts and Methods, Cambridge & London, MA: Harvard University Press.  [Google Scholar]) and Porter's (1986) seminal works on the history of that scientific discipline. 24 24 See also Westergaard (1932 Westergaard, H. 1932. Contributions to the History of Statistics, London: King & Son.  [Google Scholar]: 167–70), Klein (1997 Klein, J. 1997. Statistical Visions in Time. A History of Time Series Analysis 1662–1938, Cambridge: Cambridge University Press.  [Google Scholar]: 122–31). Our contribution investigates Quetelet's influence on economic methodology. Other scholars have already investigated his influence on econometrics and empirical economics (Morgan 1990 Morgan, M. S. 1995. The History of Econometric Ideas, Cambridge: Cambridge University Press. [1990] [Google Scholar], Stigler 1999 Stigler, S. M. 1999. Statistics on the Table. The History of Statistical Concepts and Methods, Cambridge & London, MA: Harvard University Press.  [Google Scholar]), but we argue that his influence on theoretical economics should be considered significant as well. We devote attention to Quetelet's concept of the ‘average man’. For this purpose we briefly summarize Quetelet's methodology and examine the evolution of his ideas as expressed in his published works. We then investigate his influence on Jevons's ‘calculus of pleasures and pains’ and on the statistical investigations of the German historical school. We argue that the history of statistics, and especially Quetelet's contribution, should not be neglected by historians of economic thought as it provides important insights into the development of economic methodology.     

Exchange Rate Regimes and Inflation: Evidence from India

Abstract

Exchange rate stability is crucial for inflation management as a stable rate is expected to reduce domestic inflation pressures through a ‘policy discipline effect’ – restricting money supply growth, and a ‘credibility effect’ – inducing higher money demand and reduced velocity of money. Alternatively, the ‘impossibility trillema’ of Mundell (1961a Mundell, R. A. (1961a). Capital mobility and stabilization policy under fixed and flexible exchange rates. Canadian Journal of Economics and Political Science, 29, 475–485. doi: 10.2307/139336[Crossref], [Web of Science ®] , [Google Scholar], 1961b Mundell, R. A. (1961b). Flexible exchange rates and employment policy. Canadian Journal of Economics and Political Science, 27, 509–517. doi: 10.2307/139437[Crossref], [Web of Science ®] , [Google Scholar]) predicts that in the presence of an open capital account, a stable exchange rate may lead to lack of control on monetary policy and, hence, higher inflation. Using a monetary model of Inflation, this paper investigates the impact of the ‘empirically-claimed’ de facto stable exchange rate regime on inflation in India during different sub-periods of exchange rate stability. The results show that the impact of exchange rate regime on inflation is not visible in the Indian case, which could be because of the offsetting sterilization policy undertaken by the Reserve Bank of India (RBI) during expansionary money supply growth resulting from its large-scale intervention to even out exchange rate volatility.     

What Explains Herd Behavior in the Chinese Stock Market?

This article examines the causes of herd behavior in the Chinese stock market. Using the nonlinear model of Chang, Cheng, and Khorana [2000 Chang, E. C., J. W. Cheng, and A. Khorana. “An Examination of Herd Behavior in Equity Markets: An International Perspective.” Journal of Banking and Finance, 24, (2000), pp. 1651–1679.[Crossref], [Web of Science ®] , [Google Scholar]], the authors of this article find robust evidence of herding in both the up and down markets. They contribute to the existing literature by exploring the underlying reasons for herding in China. It is shown that analyst recommendation, short-term investor horizon, and risk are the principal causes of herding. However, the authors cannot find evidence that relates herding to firm size, nor can they detect significant differences in herding between state-owned enterprises and non–state-owned enterprises.     

Rethinking liquidity creation: Banks,shadow banks and the elasticity of finance

In this article, the authors use the concept of the hierarchy of money found in the works of Minsky (2008 Minsky, H. [1986]2008. Stabilizing an Unstable Economy. New Haven, CT: Yale University Press. [Google Scholar][1986]), Foley (1987 Foley, D. 1987. “Money in Economic Activity.” In The New Palgrave: Money, edited by J. Eatwell, M. Milgate, and P. Newman, 519–525. New York, NY: W.W. Norton.[Crossref] , [Google Scholar]), Wray (1990 Wray, L. R. 1990. Money and Credit in Capitalist Economies: The Endogenous Money Approach. Aldershot, UK: Edward Elgar. [Google Scholar]), and Bell (2001 Bell, S. 2001. “The Role of the State and the Hierarchy of Money.” Cambridge Journal of Economics 25 (2):149–63.[Crossref], [Web of Science ®] , [Google Scholar]) to analyze the process of liquidity creation in modern capitalist economies where shadow banks play an active role. They abandon the narrow focus on banks as the creators of money as well as the idea that nonbank financial institutions are mere intermediaries between savers and borrowers. Instead, the authors demonstrate that, similar to banks, nonbank financial institutions and foreign banks (through their cross-border activities) create liquidity endogenously by leveraging over the liabilities of entities hierarchically above them. The authors further elucidate Kregel’s concept of “fictitious” liquidity in the context of the hierarchy of financial liabilities, distinguishing it from “true” liquidity. By bringing shadow banks and the euro-currency markets into to the pyramid of financial liabilities, they develop a more complete framework of liquidity creation in modern capitalist economies. Their “extended” pyramid is useful for analyzing not only the fragility that may arise from the interactions between firms, households and banks, but also that which may originate through the interactions between banks, shadow banks and foreign banks.     

Beveridge's analysis of unemployment in 1909: the reserve of labour

Abstract

The aim of this paper is to provide a rational reconstruction of Beveridge's theory of unemployment published in 1909. First and foremost, it shows that his theory of unemployment is coherent – what Beveridge refers to as ‘the reserve of labour’ represents ‘unemployment’ as a whole; unemployment is due to the imperfection of the labour market and associated friction and the organisation of the labour market is necessary. Second, it suggests that as early as 1909, a negative relationship already existed between unemployment and job vacancies and that the segmentation of the labour market and imperfect information are key factors of friction. The first part of the paper provides a reconstruction of Beveridge's theory of the reserve of labour (1909) including causes and factors of unemployment and unemployment policies. The second part shows that certain founding principles of the ‘Beveridge curve’ (Beveridge 1944 Beveridge, W. H. 1944 [1953]. Full Employment in a Free Society, London: George Allen and Unwin.  [Google Scholar] [1953]) were already to be found in his 1909 book and that links can be established between Beveridge (1909 Beveridge, W. H. 1909. Unemployment: A Problem of Industry, London: Longmans, Green and Co.  [Google Scholar]), Phelps (1970 Phelps, E. S. 1970. The new microeconomic in inflation and employment theory. The American Economic Review, 59(2): 147–60. [Web of Science ®] , [Google Scholar]) and Pissarides (2000 Pissarides, C. A. 2000. Equilibrium Unemployment Theory, Cambridge, MA: MIT Press.  [Google Scholar]).     

The Challenge of Radical Political Economics

The aim of this paper is to develop a theoretical framework for the study and integration of financial innovation in the institutional structures that support the operation of the monetary system. The background of the analysis comes from original institutional economics (Bush and Tool 2003 Bush, Paul Dale and Marc R. Tool. “Foundational Concepts for Institutionalist Policy Making.” In Institutional Analysis and Economic Policy, edited by Paul D. Bush and Marc R. Tool, pp. 1–46. Dordrecht, Germany: Kluwer Academic Publishers, 2003.[Crossref] , [Google Scholar]; Foster [1942] 1981 Foster, J. Fagg. “John Dewey and Economic Value.” Journal of Economic Issues 15, 4 ([1942] 1981): 871–879. [Google Scholar], [1949] 1981 Foster, J. Fagg. “The Relation Between Theory of Value and Economic Analysis.” Journal of Economic Issues 15, 4 ([1949] 1981): 899–905. [Google Scholar]; Veblen [1914] 1964 Veblen, Thorstein. The Instinct of Workmanship and the State of the Industrial Arts. New York, NY: Augustus M. Kelley, [1914] 1964. [Google Scholar], [1889] 1996 Veblen, Thorstein. The Theory of the Leisure Clash. London: Dover, [1889] 1996. [Google Scholar]), the state theory of money (Ingham 2004 Ingham, Geoffrey. The Nature of Money. London: Polity, 2004. [Google Scholar]; Papadopoulos 2009 Papadopoulos, Georgios. “Between Rules and Power: Money as an Institution Sanctioned by Political Authority.” Journal of Economic Issues 43, 4 (2009): 951–969.[Taylor &; Francis Online] , [Google Scholar]), and a specific account of social ontology based on constitutive and normative rules as well as the notion of collective intentionality (Searle 2005 Searle, John. “What Is an Institution?” Journal of Institutional Economics 1, 1 (2005):1–22.[Crossref] , [Google Scholar], 2010 Searle, John. Making the Social World. Oxford, UK: Oxford University Press, 2010. [Google Scholar]). The aim is a dynamic framework for the analysis of the institutional evolution of money, whereby institutional change comes from technology, and the state acts both as regulator of the institutional adjustment and guarantor of the stability and the efficiency of the monetary system. In that sense, the framework outlines the context and principles for the government regulation of financial innovation.     

A Simple Model to Teach Business Cycle Macroeconomics for Emerging Market and Developing Economies

The canonical neoclassical model is insufficient to understand business cycle fluctuations in emerging market and developing economies. The author reformulates the model proposed by Aguiar and Gopinath (2007 Ahumada, I., and F. Butler. 2009. La enseñanza de la economía en México. Working Paper 672. Washington, DC: Inter-American Development Bank, Research Department. [Google Scholar]) in a simple setting that can be used to teach business cycle macroeconomics for emerging market and developing economies at the undergraduate level. The simplified model is employed for qualitatively explaining facts such as the highly countercyclicality of the trade balance and the higher volatility of output and consumption compared with those observed in advanced countries.     

On Money and Output in the Euro Area: Is Money Redundant?

This paper examines the relationship between money and future movements in output at business-cycle frequencies in the euro area. Importantly, the evidence suggests that the money stock is found to significantly affect output independent of the real interest rate. This finding supports the argument made by Meltzer (2001) Meltzer, A. H. 2001. “The transmission process”. In The Monetary Transmission Process: Recent Developments and Lessons for Europe, Edited by: Deutsche, Bundesbank. 112–130. London: Palgrave.  [Google Scholar] that the effects of monetary policy actions on the real economy are not fully captured by the short-term real rate.     

Nonlinearity in real exchange rates: an approach with disaggregated data and a new linearity test

Employing disaggregated real exchange rates from nine European counties in 16 goods categories, we assess in this study the nonlinearity in the real exchange rates. Surprisingly, we find evidence for nonlinearity in only four (10) out of 143 series with the linearity test proposed by Harvey et al. (2008 Harvey, D. I., Leybourne, S. J. and Xiao, B. 2008. A powerful test for linearity when the order of integration is unknown. Studies in Nonlinear Dynamics and Econometrics, 12 Art 8[Web of Science ®] , [Google Scholar]) at the 5% (10%) significance level. This result differs greatly from those of Juvenal and Taylor (2008 Juvenal, L. and Taylor, M. P. 2008. Threshold adjustment of deviations from the law of one price. Studies in Nonlinear Dynamics and Econometrics, 12 Art 8[Web of Science ®] , [Google Scholar]), Imbs et al. (2003 Imbs, J., Mumtaz, H., Raven, M. O. and Rey, H. 2003. Nonlinearities and real exchange rate dynamics. Journal of the European Economic Association, 1: 639–49. [Crossref] , [Google Scholar]), Sarno et al. (2004 Sarno, L., Taylor, M. P. and Chowdhury, I. 2004. Nonlinear dynamics in deviations from the law of one price: a broad-based empirical study. Journal of International Money and Finance, 23: 1–25. [Crossref], [Web of Science ®] , [Google Scholar]) and Berka (2009 Berka, M. 2009. “Non-linear adjustment in law of one price deviations and physical characteristic of good”. In Review of International Economics Vol. 17, 51–73.  [Google Scholar]), who report ample evidence for nonlinearity for the same or similarly disaggregated real exchange rate datasets.     

Keynes vs. the Post Keynesians on the Principle of Effective Demand *

Abstract

The American Post Keynesians – those who attach importance to the capital ‘P’ and the absence of a hyphen between ‘post’ and ‘Keynesian’– claim to be Keynes' most literal interpreters or the ‘truest’ Keynesians (Holt et al. 1998 Holt, R. P.F., Rosser, J. B. Jr. and Wray, L. R. 1998. Paul Davidson's Economics Jerome Levy Economics Institute Working Paper no. 251. Blithewood, NY (www.levy.org) [Google Scholar]: 17). This paper compares the Post Keynesian interpretation of the Principle of Effective Demand, i.e. the D/Z-model, with Keynes' own presentation in chapter 3 of the General Theory– and finds substantial differences. A re-interpretation of the D/Z-model is offered that would bring it into line with chapter 3.     

Nonlinear Mean Reversion across National Stock Markets: Evidence from Emerging Asian Markets

This paper seeks empirical evidence of nonlinear mean-reversion in relative national stock price indices for Emerging Asian countries. It is well known that conventional linear unit root tests suffer from low power against the stationary nonlinear alternative. Implementing the nonlinear unit root tests proposed by Kapetanios et al. (2003 Kapetanios, G., Shin, Y. and Snell, A. 2003. Testing for a unit root in the nonlinear STAR framework. Journal of Econometrics, 112: 359–379. [Crossref], [Web of Science ®] , [Google Scholar]) and Cerrato et al. (2009 Cerrato, M., de Peretti, C., Larsson, R. and Sarantis, N. 2009. “A nonlinear panel unit root test under cross section dependence”. Working Papers 28, Department of Economics, University of Glasgow [Google Scholar]) for the relative stock prices of Emerging Asian markets, we find strong evidence of nonlinear mean reversion, whereas linear tests fail to reject the unit root null for most cases. We also report some evidence that stock markets in China and Taiwan are highly localized.     

Structural changes and regional disparity in China's inflation: a revisit

The study re-examined the time series properties and regional disparities in Chinese inflation by extending the work of Chong, Zhang, and Feng (2011 Chong, Tai-Leeung, Terence, Ning Zhang and Feng, Qu. 2011. Structural Changes and Regional Disparity in China's Inflation. Economics Bulletien, 31(1): 572–583.  [Google Scholar]). For this purpose we employed the Lagrange Multiplier (LM) unit root test with one structural break and two structural breaks suggested by Lee and Strazicich (2003 Lee, Junsoo, Mark, C. and Strazicich. 2003. Minimum LM Unit Root Test with Two Structural Breaks. Review of Economics and Statistics, 85(4): 1082–1089. [Crossref], [Web of Science ®] , [Google Scholar], 2004 Lee, J. and Strazicich, M. 2004. Minimum LM unit root test with one structural break. Working Paper 04–17, Boone, North Carolina: Department of Economics, Appalachian State University.  [Google Scholar]) and a recently developed ADF type unit root test with two structural breaks of Narayan and Popp (2010 Narayan, Paresh Kumar and Stephan Popp. 2010. A New Unit root test with Two Structural Breaks in Level and Slope at Unknown Time. Journal of Applied Statistics, 37(9): 1425–1438. [Taylor & Francis Online], [Web of Science ®] , [Google Scholar]). We found that national, urban and rural series of the overall inflation series, clothing, and food, national series of education and residence and the rural series of residence and education are stationary. We also found regional disparity in Chinese inflation, but the disparities existed only in education inflation series.     

The Interest Rate Brake on Maturity Transformation

Must banks match asset and liability maturities, as William Barnett and Walter E. Block (2009 Barnett, William and Walter E. Block. “Time Deposits, Dimensions and Fraud.” Journal of Business Ethics 88, 4 (2009): 711–716.[Crossref], [Web of Science ®] , [Google Scholar], 2011 Barnett, William and Walter E. Block. “Rejoinder to Bagus and Howden on Borrowing Short and Lending Long.” Journal of Business Ethics 100, 2 (2011): 229–238.[Crossref], [Web of Science ®] , [Google Scholar]), as well as Ivan Jankovic (2011) Jankovic, Ivan. “Economic Calculation, Maturity Mismatching and the Credit Cycle.” New Perspectives on Political Economy 7, 1 (2011): 105–124. [Google Scholar], surmise? While we agree with these authors that issuances of fiduciary media breed financial instability, we disagree that maturity transformation represents such a case. Maturity transformation — otherwise known as borrowing short-term and lending long-term — guided by several base legal principles, does not result in the issuance of fiduciary media. Most notable among these principles is that any credit issued must be funded by borrowing of a positive duration, i.e., not via a demand deposit. We demonstrate that two factors instigate larger degrees of maturity transformation than would otherwise be the case, breeding potential instability: a continual increase in the credit supply and the provision of a lender of last resort. We also show that the interest rate is a natural stabilizing brake on the over-issuance of longer-dated credit against short-term financing.     

Irving Fisher's debt deflation analysis: From the Purchasing Power of Money (1911) to the Debt-deflation Theory of the Great Depression (1933)

Abstract

In 1933, Irving Fisher proposed an explanation for the Great Depression based on the distinction between the price level and price change effect of deflation in a context of over-indebtedness. This paper compares the debt-deflation theory of Fisher (1933 Fisher, I., 1933. The debt-deflation theory of great depressions, Econometrica 1 (1933), pp. 337–57. DOI: 10.2307/1907327[Crossref], [Web of Science ®] , [Google Scholar]) with the dynamic depression process he had expounded almost 20 years earlier in the Purchasing Power of Money (1911). The role played by both price level and price change effects in the analyses of Fisher (1933, 1911) are clarified in the context of the disequilibrium model of Tobin (1975 Tobin, J., 1975. Keynesian models of recession and depression, American Economic Review 65 (1975), pp. 195–202.[Web of Science ®] , [Google Scholar]). More precisely, we show that the stationary equilibrium is assumed to be locally unstable according to Fisher's 1911 insights and globally unstable according to his 1933 analysis.     

The effectiveness of fiscal and monetary policy responses to twin crises

We study how effective fiscal and monetary policy responses are during a twin crisis. Using the dataset provided by Laeven and Valencia (2008 Laeven, L and Valencia, F. (2008) Systemic banking crises: a new database. IMF Working Paper No. 08/224 [Google Scholar]), we identify 57 episodes of twin crises. Following the methods proposed in Baldacci et al. (2009 Baldacci, E. 2009. Gupta, S. and Mulas-Granados, C., How effective is fiscal policy response in systemic banking crises?, IMF Working Paper No. 09/160 [Google Scholar]) and Hutchison et al. (2010 Hutchison, M. 2010. Noy, I. and Wang, L., Fiscal and monetary policies and the cost of sudden stops, Journal of International Money and Finance, 29, 973–87 [Google Scholar]), we construct the variables measuring the duration and output cost of a twin crisis. We find that fiscal policy does not seem to be associated with the shortening of a twin crisis. Regarding monetary policy, we find that monetary tightening is associated with the lengthening of a twin crisis duration, consistent with the result in Hutchison et al. (2010 Hutchison, M. 2010. Noy, I. and Wang, L., Fiscal and monetary policies and the cost of sudden stops, Journal of International Money and Finance, 29, 973–87 [Google Scholar]) dealing with a sudden stop crisis. In addition, our results show that while a mild monetary expansion is effective in reducing a twin crisis duration, over-expansionary monetary policy loses its effectiveness.     

Reforming the international monetary system: a stock-flow-consistent approach

Abstract:

The emergence and persistence of large trade imbalances as well as the volatility of financial flows among countries have been attributed, at least in part, to the inadequacy of the current international monetary system after the breakdown of Bretton Woods. From a different perspective, the current eurozone crisis is also the result, in our view, of a flawed institutional setting. These problems call for reforms to mitigate or avoid the recessionary bias that is the outcome of current systems, as Keynes predicted in the discussion preceding the Bretton Woods agreements. In this paper we briefly review the evidence on international imbalances, and survey the rapidly growing literature on the subject. We introduce a set of models based on the stock-flow-consistent approach pioneered by Godley (1999 Godley, W. “Open Economy Macroeconomics Using Models of Closed Systems.” Working Paper no. 281, Levy Economics Institute of Bard College, 1999. [Google Scholar]) and Lavoie and Godley (2003 Lavoie, M., and Godley, W. “Two-Country Stock-Flow Consistent Macroeconomics Using a Closed Model Within a Dollar Exchange Regime.” CERF Working Paper no. 10, University of Cambridge, 2003. [Google Scholar]). We discuss how to use these models to explore potential reform of the international monetary system.     

The Political Power of Big Business: A Response to Bell and Hindmoor

There has been a recent resurgence of interest in debates about the power of business (Culpepper 2011 Culpepper, P. (2011). Quiet Politics and Business Power: Corporate Control in Europe and Japan, Cambridge: Cambridge University Press. [Google Scholar]; Bell 2012 Bell, S. (2012). The Power of Ideas: The Ideational Mediation of the Structural Power of Business. International Studies Quarterly, 56(4), 661–73. doi: 10.1111/j.1468-2478.2012.00743.x[Crossref], [Web of Science ®] , [Google Scholar]) and Bell and Hindmoor (2013 Bell, S., Hindmoor, A. (2013). The Structural Power of Business and the Power of Ideas: The Strange Case of the Australian Mining Tax. New Political Economy, ,forthcoming. Available from: http://dx.doi.org/10.1080/13563467.2013.796452 [19 (3), pp. 470–486, cross-references updated] [Google Scholar]) make an important, theoretically informed, but empirically rooted, contribution to that debate. In this response, we address both aspects of their contribution, arguing that their treatment of Lindblom is partial and, consequently, so is their explanation of the case. As such, we largely rely on their narrative of the evolution of the Australian mining tax, focusing first on critically examining Bell and Hindmoor's theoretical position, before turning to their analysis of the case.     

Purchasing power parity for G-7 countries: panel SURADF tests

In this study, the panel Seemingly Unrelated Regressions Augmented Dickey–Fuller (SURADF) tests advanced by Breuer et al. (2001 Breuer, J. B., McNown, R. and Wallace, M. S. 2001. Misleading inferences from panel unit-root tests with an illustration from purchasing power parity. Review of International Economics, 9: 482–93. [Crossref] , [Google Scholar]) are used to test the validity of Purchasing Power Parity (PPP) for G-7 countries over the period 1980M1 to 2008M5. The empirical results from several panel-based unit root tests indicate that PPP does not hold for G-7 countries under study; however, Breuer et al.'s (2001 Breuer, J. B., McNown, R. and Wallace, M. S. 2001. Misleading inferences from panel unit-root tests with an illustration from purchasing power parity. Review of International Economics, 9: 482–93. [Crossref] , [Google Scholar]) panel SURADF tests unequivocally indicate that PPP is valid for half of the G-7 countries.     

The Role of Monetary Policy in the New Keynesian Model: Evidence from Vietnam

This paper re-designs the New Keynesian model developed by Ireland (2004 Ireland, P. N. (2004). Technology shocks in the New Keynesian model. The Review of Economics and Statistics, 86(4), 923–936. doi: 10.1162/0034653043125158[Crossref], [Web of Science ®] , [Google Scholar]) and then uses the Vietnamese data from January 1995 to December 2012 to estimate the model's parameters. The empirical results show that the State Bank of Vietnam had been more aggressive as well as more responsive to aggregate fluctuations in the period before August 2000 than in the latter period. Thus, this change in the policy stance could be a potential reason for the declining importance of monetary policy in generating movements in output growth, inflation, interest rate, and the output gap across the subsamples. Another notable finding is the dominant role of the cost-push shock in explaining fluctuations in inflation, interest rate, and the output gap, leading to a policy implication that more attention should be devoted to developing substitute and complement industries so as to mitigate negative effects of the cost-push shocks by reducing the degree of dependence on imports.