Comments on “The Corporate State,Economic Performance,and Social Policy”

This paper provides an introduction to the Minsky-Veblen Cycles as a specific example of pluralist economic thinking in the context of the recent global economic crisis. It illustrates how pluralism can be applied to economic research. Specifically, the Minsky-Veblen Cycles combine three elements of institutional and post-Keynesian thought to explain key features of the current crisis. These elements are (1) John Maynard Keynes's postulate of effective demand, (2) Hyman Minsky's financial instability hypothesis, and (3) Thorstein Veblen's concept of conspicuous consumption. In this paper, we have a two-fold approach to them: First, we systematize the connection between the Minsky-Veblen Cycles as a theoretical argument and the epistemological rationale of a pluralist approach to economics. Second, we contrast the implications of our approach for incorporating behavioral assumptions in macroeconomic arguments to mainstream claims for a "microfoundation" of macroeconomic theory.     

Is UK economics teaching changing? Evaluating the new subject benchmark statement

This paper evaluates the recent reform to the curricular governance framework for UK Economics teaching: the revised Subject Benchmark Statement document for Economics (SBSE). The crisis of confidence in economics which was amplified by the global financial crisis presented an opportunity for fundamental change in economics teaching. The paper asks whether the new SBSE represents change. We ask whether the new SBSE is pluralist with regard to economic theory and method; how it treats the economy and its wider socio-political dimension; what are its educational goals and approach; and overall, how much change has it brought? The paper concludes that the new SBSE does not constitute change: it still exhibits limited pluralism, ignores ethics, power and politics and ignores key educational goals.     

International policy coordination mechanism with respect to the moral hazards of financial intermediaries

This paper examines the impact of cross-border financial externalities on moral hazards of the banking sector, and an international policy coordination mechanism to reduce the moral hazards of the banking sector considering cross-border financial externalities. We demonstrate that the moral hazard of banking, such as reducing the monitoring efforts, is aggravated by cross-border financial externalities, while the introduction of an international policy coordination mechanism might reduce the moral hazard caused by these externalities. Moreover, international policy coordination is less likely to be sustained when the policy maker is short-sighted and the banking sector has greater political influence. However, when the distortionary cost of a liquidity aids policy is lower with high administrative transparency, and cross-border financial externality is greater, the coordination mechanism is more likely to be sustained. The results imply that efforts to launch an effective international financial coordination mechanism should start with countries with higher administrative transparency, more political stability, and enhanced financial integration.     

How does capital regulation react to monetary policy? New evidence on the risk-taking channel

Before the subprime crisis, financial stability was a microprudential issue addressed by capital regulation and unrelated to monetary policy. The financial crisis put this paradigm to the test and turned the spotlight on the relationship between financial stability and monetary policy. Hence, the following question arises: how does capital regulation react to monetary policy? This article seeks to answer this question. We analyze the link involving monetary policy and capital regulation through the risk-taking channel in Brazil. The findings suggest that banks react to monetary policy by changing the amount of loan provisions as well as the capital adequacy ratio (CAR). An important novelty of the study is the evidence that there is no trade-off between provisions and CAR, which are important tools used by banking supervisors. The key result of the article is that banks react to the macroeconomic environment differently from what is expected by banking supervision, i.e., there exists a paradox between the microprudential view and the macroprudential view. Thus, in terms of practical implication, a banking supervision strategy for financial stability must take into account the effects of monetary policy.     

Assessing the macroeconomic impact of alternative macroprudential policies

This article assesses effects on the wider economy and overall costs and benefits of two alternative macroprudential policies - loan-to-value ratios on mortgage lending and variable bank capital adequacy targets. It also traces the potential effects of such policies if introduced prior to the subprime crisis. The work is performed within the National Institute Global Econometric Model, with a focus on Germany, Italy and the UK. Detailed banking sectors and addition of a macroprudential block to our model enable effects of policies to be captured. A systemic risk index tracks the likelihood of the occurrence of a banking crisis and establishes thresholds at which macroprudential policies should be activated by the authorities. Capital adequacy impacts the economy by acting on the spread between borrowing and lending of corporates and households, while loan-to-value transmits through its impact on the housing market. We find generally loan-to-value policy has a lesser effect than capital adequacy on crisis probabilities and net benefits, but there is considerable cross country variation. We show that the introduction of macroprudential policy prior to the crisis would have led to improvement in a number of key macroeconomic measures and might thus have reduced the incidence of the crisis.     

Which Vested Interests Do Central Banks Really Serve? Understanding Central Bank Policy Since the Global Financial Crisis

Inspired by Thorstein Veblen’s ideas, I analyze the behavior of central banks from the perspective of how institutions are captured by vested interests. Since the global financial crisis in 2008, there has been a shift in the conduct of monetary policy. Much like the behavior of asset holders themselves, who, in times of crisis, sought to trade off lower returns with more stable asset values, monetary policy changed from a de facto policy of stabilizing rentier income to one of preserving asset prices or rentier wealth. I analyze this particularly through the lenses of what happened with quantitative easing (QE) in the US, which coincided with a collapse of real interest rates, while asset prices were stabilized. This can also be seen in the way the banking sector was supported by QE where the market for mortgage-backed securities was sustained even as it actually meant a lower profitability for the overall U.S. banking sector during the QE interventions.     

How ‘Islamic’ is Islamic Banking?

Islamic Banks hold well over US $700 billion in assets and are growing at over 15% p.a. Islamic Banking and Finance (IBF) involves wider ethical and moral issues than simply ‘interest-free’ transactions. Its advocates argue that these make it more economically efficient than conventional banking and promote greater economic equity and justice. To what extent, then, do actual Islamic Banking practices live up to the ideal, and how different are they from conventional banking? A preliminary investigation shows that, three decades after its introduction, there remain substantial divergences between IBF's ideals and its practices, and much of IBF still remains functionally indistinguishable from conventional banking. This runs counter to claims by IBF advocates that it would rapidly differentiate itself from conventional banking. However, despite not providing an alternative to conventional banking and finance, IBF does strengthen a distinctly Islamic identity by providing the appropriate Islamic terminology for de facto conventional financial transactions.     

The transition crisis in Bulgaria

In 1996-97, while making its way through a difficult processof economic and political transformations, Bulgaria was hitby a severe economic crisis. This paper seeks to reveal andanalyse the underlying factors and causes of this crisis. Itfocuses on empirical issues but also highlights some basic causalitiesand interrelations between economic variables during the crisisas well as the role of economic policy. The economic turmoilin Bulgaria is addressed from three different perspectives:(1) the historic roots of the crisis; (2) the actual evolutionof the fiscal, banking and currency crises, and (3) the politicaleconomy of the transition in Bulgaria.     

Financial crisis in the Russian Federation: Are the Russians learning to tango?

The paper presents some evidence about the rise and fall of financial markets in Russia in the course of 1998, and discusses the causes and likely consequences of the crisis for the Russian economy. It also discusses some important policy issues regarding the effects of global financial integration. The central message is that the Russian financial disaster is a typical example of crisis contagion, although the underlying vulnerability of the economy was a problem which no investor could ignore. In particular, financial stabilization remained extremely fragile owing to the deterioration of the fiscal situation and the vulnerability of the banking system.     

Do political factors influence banking crisis?

This paper investigates the impending political determinants of banking crisis in advanced economies. In particular, we consider the impact of domestic credit growth on the likelihood of banking crisis and analyse possible constraints on the part of the governments in curbing the unsustainable credit growth. The endogeneity corrected results reveal that the household credit growth has greater impact on the likelihood of banking crisis than the enterprise credit growth. The political channel shows that if governments are concerned about domestic approval rates, then there is a higher chance of credit boom, which in turn increases the prospect of banking crisis. Interestingly, the findings reveal that the presence of an independent and well-functioning central bank mitigates the crisis probability and reduces the opportunistic behaviour of governments.     

Applying the Lessons of Asia: The IMF's Crisis Management Strategy following the Global Financial Crisis

ABSTRACT

The paper reviews the International Monetary Fund's (IMF's) non-concessional lending programs following the global financial crisis, with a view to understanding how the IMF applied the lessons of the Asian crisis in designing its approach to crisis management. For this purpose, the paper focuses on the 2008 programs in Hungary, Iceland, Latvia and Ukraine – the first of its kind since the early 2000s – and compares them with the 1997 programs in Indonesia, Korea and Thailand. Our analysis finds the European programs better funded and their structural conditionality more focused. Other than these, the overall thrust of the programs was similar: fiscal and monetary tightening, coupled with banking reforms. The real difference was not so much about content but about philosophy. Relative to the Asian programs, the European programs were characterized by more emphasis on ownership, greater collaboration among stakeholders, more realistic assumptions and greater transparency about the risks and the logic of policy actions, and more built-in flexibility of targets and policy options. This approach to crisis management incorporated the changes that had been made since the Asian crisis in the IMF's policies and procedures to manage capital account crises more effectively.     

Introduction to "Exchange Rates in Europe and Australasia: Fundamental Determinants, Adjustments and Policy Implications"

The papers in this issue are concerned with the behaviour of exchange rates — their fundamental determinants, adjustment processes and policy implications. The authors combine theory with empirical evidence, test hypotheses as well as show the relevance of their analysis for policy. This Introduction addresses several questions. What are the contributions of the articles to the economics of exchange rates? Are they significant in increasing our understanding of the current issues and in addressing questions of policy? How can one explain the movements in the European and the Asian currencies? What can we expect to happen to the euro with the enlargement of the euro area? Do the papers provide frameworks to guide empirical research? In this Introduction, we highlight aspects of each paper that addresses these issues.     

Adjusting an institutional framework to a globalising world: the creation of new institutions in the EEC, 1957-1992

ABSTRACT

This article explores the development of all new EEC institutions between 1957 and 1992 within policy areas relevant to the possible development of a European single currency. It argues that if most institutions created pre-1992 were not crisis management institutions as would be the case post-2008, some important institutions were created in response to the perception of a structural international banking/political/economic crisis, particularly in the 1970s. This comparison in time underlines the continuity of reflections about the missing elements of a functioning single currency area, the obstacles to reform, and sheds light on the radical institutional changes that occurred post-2008.     

Robust control and central banking behaviour

This paper seeks to explain the recent behaviour of the two main central banks in the recent financial crisis, applying a robust control tool through a Neo-Keynesian monetary policy model. The direct forbearer of this paper is the Giordani and Söderlind (2004) study. It begins with the origin, purpose and theoretical grounds of robust control, indicating that it is one way to face model uncertainty, as an alternative to the Bayesian approach. In the middle section, we seek to obtain the course of the model's main variables: interest rates, inflation and output. The model constructor also wants the participating agents to have the same doubts that he has regarding its validity; therefore, robust control is considered as a “fine-tuning” of the rational expectations approach. The impulse-response functions are obtained, with the monetary authority acting as a Stackelberg-type leader, affected by a perturbation on the supply side. The two relevant equilibria are obtained and compared in robust control with dynamic economy (the reference equilibrium and the worst possible case equilibrium) with that obtained when operating with rational expectations. The alternative course for the reference model set forth in the paper by Dennis (2008) is also analysed. We mainly find that the different results depend on the behaviour of the law of motion of the state variables, specifically the shadow prices that influence the private sector's expectations. Lastly, the paper relates the recent monetary policy performance when facing the financial crisis that began in the summer of 2007.     

Vision,Value, and Pluralism: A Comment on Analytical Political Economy

The choice of value theory reflects one’s vision of how markets function within a capitalist market economy. This choice is crucial for understanding how pluralism will play a part in prompting a paradigm shift within the discipline of economics. What is lacking in recent discussions of pluralism is how the various theories of value and distribution relate to each other. Uniting heterodox economists in this way will support the development of criteria for teaching and research, both of which facilitate a paradigm shift. A consensus would avoid the methodological issues associated with analytical political economy which advocates mathematical modeling and applications for unifying the schools of thought.

This article suggests a way to relate the theories of value and distribution, as reflective of the differences in vision of how markets function within a capitalist market economy and discusses a few of the challenges for creating a consensus.     

Liquidity and Twin Crises

This paper proposes a simple analytical framework for understanding 'twin crises'– i.e. crises where a currency crisis and banking crisis occur simultaneously and reinforce each other. The distinguishing feature of such crises is the spill‐over effects across financial institutions through collateral constraints, declines in market values of assets, currency mismatches on the balance sheet and the endogenous amplification of financial distress through asset sales. We explore the role of liquidity and the role of monetary policy in such crises. In particular, a central question is whether raising interest rates in the face of a twin crisis is the appropriate policy response. Raising interest rates has two countervailing effects. Holding the domestic currency becomes more attractive (other things being equal), but the value of the domestic banking system falls due to the fall in asset prices. When assets are marked to market, there is a potential for endogenously generated financial distress that leads to a collapse of asset prices, as well as the exchange rate. It is thus possible that raising interest rates can have the perverse effect of exacerbating both the currency crisis and the banking crisis.     

Competition policy: ten lessons learnt from the financial crisis

The financial crisis brought great challenges also for competition policy. The aim of this paper is to summarize the most important insights for competition policy that could be derived from the turbulent period 2008–2010. The financial crisis is seen as project that demanded sound management from competition policy and enforcement. The insights will be presented in the instructive form of ‘lessons learnt’ which represents a common approved project management technique. We come to the result that the financial crisis is not the result of ‘too much competition’, but of regulatory failure and that the main answers to the financial crisis have to come from ‘smart regulation’. The relaxation of competition policy would be the wrong policy response in troubled times since competition policy can play an important role in bringing the crisis economy back on track. In contrast to banking we see no economic rationale for rescue packages for other economic sectors by referring to systemic risk. The renaissance of industrial policy is viewed with great skepticism since empirical evidence shows that the effort of picking ‘winners’ all too often results in saving ‘losers’.     

The unresolved problem of gratuitous credit in Austrian banking theory

Ludwig von Mises called gratuitous credit, the ability banks have to create new credit, the chief problem in a theory of banking. This paper traces how Mises and succeeding generations of Austrian-school economists have grappled with this problem, but have failed to find resolution. The result is that Austrian economists disagree on a variety of issues in banking and business cycle theory, such as whether there is an endogenous business cycle under free banking, or cycles only occur under central banking. Before a resolution can be attempted, current thinking must be clarified. This paper divides Austrian economists into five schools of thought. It points to a possible resolution in the economic development writings of Joseph Schumpeter.     

Germany and the Euro-Zone Crisis: The European Reformation of the German Banking Crisis and the Future of the Euro

Analysis of the German response to the euro crisis has been framed around a narrative of the relationship between domestic sacrifice and hegemony and sustains an assumption that the German commitment to the euro is proven. Such analysis downplays the importance of the banking crisis in Germany in explaining the decision-making of the German government around the euro-zone debt crisis. Giving German interests in relation to the German banking crisis analytical weight can explain both the positions taken by the German government and their consequences for the underlying structural problems the euro-zone faces as a monetary union. Since the outcomes of German policy have advanced German interests, German handling of the euro-zone crisis cannot sustain a claim that Germany has demonstrated its commitment to the euro.