Keynesian Framework Research Articles

Jürg Niehans and the Cashless Economy

Information technology has the potential to decrease substantially, if not completely, the demand for base money. This poses a problem for central banks as it seemingly eliminates a role for monetary policy, at least in the traditional sense. Recently, it has become commonplace to consider the role of monetary policy and the determination of the price level without any reference to money. The two predominant methods of analysis in this regard are the New Keynesian framework articulated by Woodford and the fiscal theory of the price level as described in Cochrane. Lost in the literature on “cashless” economies is the work of Jurg Niehans who, driven by the perplexities of the Eurodollar market, considered the role of monetary policy and price-level determination in the context of a neoclassical macroeconomic model. This article contrasts the framework and conclusions of Niehans with the contemporary approaches. It is argued that Niehans successfully anticipated the conclusions of the fiscal theory of the p...

A Model of Secular Stagnation: Theory and Quantitative Evaluation

This paper formalizes and quantifies the secular stagnation hypothesis, defined as a persistently low or negative natural rate of interest leading to a chronically binding zero lower bound (ZLB). Output-inflation dynamics and policy prescriptions are fundamentally different from those in the standard New Keynesian framework. Using a 56-period quantitative life cycle model, a standard calibration to US data delivers a natural rate ranging from − 1.5 percent to − 2 percent, implying an elevated risk of ZLB episodes for the foreseeable future. We decompose the contribution of demographic and technological factors to the decline in interest rates since 1970 and quantify changes required to restore higher rates. (JEL E12, E23, E31, E32, E43, E52)

Zeroing In: Asset Pricing Near the Zero Lower Bound

This paper analyzes the effect of the Zero Lower Bound (ZLB) on asset prices, risk premia, and the co-movement of asset returns using a New Keynesian framework with nominal rigidities. I find that the presence of the ZLB generates a new source of macroeconomic risk: the risk that the ZLB will be binding in the future. When the monetary policy rate is high, stocks and bonds are both risky, and bond risk premia are high. In contrast, at the ZLB, stock market risk increases but bond risk decreases. When the probability of the ZLB binding in the near future increases, investors cut spending to increase savings. This lowers current and future output and dividends. Lower expected dividends and higher equity risk premia lower current stock prices. Simultaneously, investors expect future short rates and bond risk premia to drop which raise long-term bond prices. These opposite exposures to the same ZLB risk sharply lower the correlation between stock and bond returns. In fact, the stock-bond correlation turns negative. I develop and calibrate a model that endogenously generates these observed changes while respecting unconditional macroeconomic and asset pricing moments.

Understanding the Aggregate Effects of Credit Frictions and Uncertainty

We examine the interaction of uncertainty and credit frictions in a New Keynesian framework. To do so, uncertainty is modeled as time-varying stochastic volatitlity - the product of monetary policy uncertainty, financial risk (micro-uncertainty), and macrouncertainty. The model is solved using a pruned third-order approximation and estimated by the Simulated Method of Moments. We find that: 1) Micro-uncertainty aggravates the information asymmetry between lenders and borrowers, worsens credit conditions, and has first-order effects on real economic activity. 2) When credit conditions are poor, as indicated by elevated credit spreads, additional micro-uncertainty shocks produce even larger real effects. 3) Poor credit conditions notably affect the transmission mechanism of monetary policy amplifying the real effects of monetary shocks while mitigating the economic boost from TFP shocks. 4) While macro-uncertainty and policy uncertainty exert relatively little direct impact on aggregate economic activity, policy uncertainty accounts for around 40% of the business cycle volatility by affecting the size of monetary policy shocks in the presence of nominal rigidities.

BOOK REVIEW: „Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework and its Applications“, Princeton University Press, Second Edition, 2015, by Jordi Galí

BOOK REVIEW: „Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework and its Applications“, Princeton University Press, Second Edition, 2015, by Jordi Galí

Inflation Expectations and Monetary Policy Design: Evidence from the Laboratory

Using laboratory experiments within a New Keynesian framework, we explore the interaction between the formation of inflation expectations and monetary policy design. The central question in this paper is how to design monetary policy when expectations formation is not perfectly rational. Instrumental rules that use actual rather than forecasted inflation produce lower inflation variability and reduce expectational cycles. A forward-looking Taylor rule where a reaction coefficient equals 4 produces lower inflation variability than rules with reaction coefficients of 1.5 and 1.35. Inflation variability produced with the latter two rules is not significantly different. Moreover, the forecasting rules chosen by subjects appear to vary systematically with the policy regime, with destabilizing mechanisms chosen more often when inflation control is weaker.

INFLATION EXPECTATIONS AND MONETARY POLICY DESIGN: EVIDENCE FROM THE LABORATORY

Using laboratory experiments within a New Keynesian framework, we explore the interaction between the formation of inflation expectations and monetary policy design. The central question in this paper is how to design monetary policy when expectations formation is not perfectly rational. Instrumental rules that use actual rather than forecasted inflation produce lower inflation variability and reduce expectational cycles. A forward-looking Taylor rule where a reaction coefficient equals 4 produces lower inflation variability than rules with reaction coefficients of 1.5 and 1.35. Inflation variability produced with the latter two rules is not significantly different. Moreover, the forecasting rules chosen by subjects appear to vary systematically with the policy regime, with destabilizing mechanisms chosen more often when inflation control is weaker.

Transparency, expectations anchoring and inflation target

In various speeches, former Fed Chairman Ben Bernanke contrasted the proposal of setting a higher inflation target by claiming that it could unanchor inflation expectations. A standard New Keynesian framework with learning supports this claim both asymptotically, because a higher inflation target shrinks the E-stability region when a central bank follows a Taylor rule, and in the transition phase, because a higher inflation target slows down the speed of convergence of expectations. Transparency helps anchoring expectations. However, the importance of being transparent diminishes with the level of the inflation target. Finally, the higher the inflation target, the more policy should respond to inflation and the less to output to guarantee E-stability. Hence, a policy that increases both the inflation target and the monetary policy response to output would be “reckless”.

Optimal monetary policy in a New Keynesian model with heterogeneous expectations

In a world where expectations are heterogeneous, what is the design of the optimal policy? Are canonical policies robust when heterogeneous expectations are considered or would they be associated with large welfare losses? We aim to answer these questions in a stylized simple New Keynesian model where agents׳ beliefs are not homogeneous. Assuming that a fraction of agents can form their expectations by some adaptive or extrapolative schemes, we focus on an optimal monetary policy by second-order approximation of the policy objective from the consumers׳ utility function. We find that the introduction of bounded rationality in the New Keynesian framework matters. The presence of heterogeneous agents adds a new dimension to the central bank׳s optimization problem—consumption inequality. Optimal policies must be designed to stabilize the cross-variability of heterogeneous expectations. In fact, as long as different individual consumption plans depend on different expectation paths, a central bank aiming to reduce consumption inequality should minimize the cross-sectional variability of expectations. Moreover, the traditional trade-off between the price dispersion and aggregate consumption variability is also quantitatively affected by heterogeneity.

ARE CONSUMPTION TAXES PREFERABLE TO INCOME TAXES FOR PREVENTING MACROECONOMIC INSTABILITY?

This paper examines the local determinacy implications of using consumption taxes and income taxes to finance a balanced budget fiscal policy for a variety of popular monetary policy rules. It is shown using a New Keynesian framework that the severity of the indeterminacy problem that arises under each tax system depends not only on the specification of the interest-rate feedback rule, but also on the magnitude of the steady state tax rate, the steady state government debt–output ratio, and the degree of price stickiness. Significant differences in the determinacy criteria across the two tax systems are found to exist. The robustness of the results is assessed by extending the baseline model to include capital accumulation and the taxation of bond interest income. From a policy perspective, our results suggest that future shifts toward indirect taxation could have nontrivial implications for the setting of monetary policy under balanced budget rules, in particular the ability of the Taylor principle to achieve determinacy.

Jurg Niehans and the Cashless Economy

Information technology has the potential to decrease substantially, if not completely, the demand for base money. This poses a problem for central banks as it seemingly eliminates a role for monetary policy, at least in the traditional sense. Recently, it has become commonplace to consider the role of monetary policy and the determination of the price level without any reference to money. The two predominant methods of analysis in this regard are the New Keynesian framework articulated by Woodford (2003) and the fiscal theory of the price level as described in Cochrane (2005). Lost in the literature on cashless economies is the work of Jurg Niehans (1982) who, driven by the perplexities of the Eurodollar market, considered the role of monetary policy and price level determination in the context of a neoclassical macroeconomic model. This paper contrasts the framework and conclusions of Niehans with the contemporary approaches. It is argued that Niehans successfully anticipated the conclusions of the fiscal theory of the price level.

A New Keynesian Framework for Monetary Policy Analysis in Iran’s Economy. A Dynamic Stochastic General Equilibrium Approach

This paper focuses on New Keynesian framework for monetary policy analysis of Iran. It considers a dynamic stochastic general equilibrium (DSGE) models. This article expands a sensitivity analysis of the optimal rules to deep structural parameters and investigating properties of an optimal simple rule with respect to prevailing type of shocks which is the main purpose of the article. Finally, the study highlights how an optimal policy rule depends on model structure, on the model calibration and nominal rigidities. 
 According to the research findings, based on the theoretical expectations, the effect of a positive shock inflicted on the government investment leads to an increase and gradual accumulation of fixed capital formation in the public sector. Among estimated parameters, consumption is the first affected and reduces, then employment increases consequently, finally production will also be affected. Also with the shock of oil revenues, increased oil revenues which results in public investment at first, because of the increase in oil revenues, the government enhances development expenditure. Though, increase in development expenditure is more than increase in current expenditure. Enhancing development expenditure and construction spending causes total spending increase. As a result of increased production of oil income, consumption and total investment will rise. This leads to inflation too.

A post Keynesian framework of exchange rate determination: a Minskyan approach

This paper proposes a general framework to analyze exchange rate determination from a post Keynesian perspective based on chapter 17 of the General Theory. The paper shows that this framework accounts for both the importance of context and time-specific expectations put forward by existing post Keynesian exchange rate theory, and for the hierarchic and structured nature of the international monetary system that is crucial to understanding exchange rate movements in developing and emerging countries (DECs). To analyze these currency hierarchies, the paper presents a novel Minskyan approach that emphasizes the structural determinants of these hierarchies and currency positions in international debtor–creditor relations. This approach can better account for DECs’ continued monetary subordination and points to the endogenous and self-perpetuating nature of international monetary hierarchies.

Credible Wage Bargaining and the Joint Dynamics of Unemployment and Inflation

Empirically, unemployment is highly volatile while inflation displays inertia, even though marginal cost is pro-cyclical. It was argued that real wage rigidities would no longer help replicate these facts, once firms determine employment and hours per worker. In this paper, real wage stickiness stems from wage bargaining with credible threat points, that we embed into a New Keynesian framework in which firms adjust both labor margins. This model notably reproduces the large jump in unemployment in the Great Recession. Moreover, inflation inertia is made consistent with pro-cyclical marginal cost since the credible bargaining induces strategic complementarities between firms.

Inflation, its volatility and the inflation-growth tradeoff in India

Purpose – The purpose of this paper is to amend the New Keynesian Phillips Curve (NKPC) model to include inflation volatility. It provides results on the determinants of inflation volatility and expected inflation volatility for ordinary least squares and autoregressive distributed lags (1,1) models and for change in inflation volatility and change in expected inflation volatility using error correction mechanism (ECM) models. Output gap affects change in expected inflation volatility alone (in the ECM model) and not in the other models. Major determinants of inflation volatility and expected inflation volatility are identified. To the best of the authors knowledge this is the first paper to augment the NKPC to include inflation volatility. Design/methodology/approach – Recent analysis has indicated the importance of inflation volatility for the monetary transmission mechanism in India (Kapur and Behera, 2012). In the analysis of such monetary policy mechanisms the NKPC has proved to be a useful tool. Thus Patra and Ray (2010) for India and Brissimis and Magginas (2008) for the USA find considerable support for the standard NKPC. The purpose of this paper is to synthesize and integrate these two models by extending the standard NKPC framework to include inflation volatility and test its significance for the case of India. Findings – In the case of inflation volatility output gap, lagged output gap and lagged inflation volatility are all insignificant. The level of inflation has a negative significant impact whereas the level of expected inflation has a positive and significant impact. In the case of expected inflation volatility lagged output gap has a negative and significant impact, the price level has a positive and significant impact whereas expected price has a negative and weakly significant impact. ECM reveals change in inflation variability falls significantly with lagged inflation volatility and lagged inflation and less significantly with change in expected inflation. It rises with lagged expected inflation although the coefficient is only weakly significant. Lagged output gap and change in output gap are insignificant. Originality/value – This paper makes two original contributions. First, it extends the New Keynesian framework to include inflation volatility. Second, it estimates this model for India. To the best of the authors knowledge this is the first paper to make these contributions.

Accounting for Financialization: Stock-Flow-Consistent Political Economy

We adopt the Post Keynesian input-output framework pioneered by Wynne Godley to delve into both the causes and consequences of financialization. The distinction between National Income accounting and stock-flow-consistent modelling is showcased. Also, the political economy foundations of financial economics are unearthed. Constructively, the elements of a planned strategy to reinvent the accumulation of capital are sketched. Also, we show how “asset-based reserve requirements” and the issue of government bills and bonds can be “creatively manipulated” by the state to deliver superior and stable social outcomes.

THE RELATIONSHIP BETWEEN ECONOMIC GROWTH AND GOVERNMENT SPENDING: A CASE STUDY OF OIC COUNTRIES

This paper presents the results for testing for causal relationship between economic growth and goverment spending for OIC countries covering the time series data 1970~2006. There are usually two propositions regarding the relation between economic growth and government spending: Wagner’s Law states that as GDP grows, the public sector tends to grow; and the Keynesian framework postulates that public expenditure causes GDP to grow. The primary strength and originality of this paper is that we used aggregate data as well as disaggregate data for Granger causality test. By testing for causality between economic growth and government spending, we find that government spending does cause economic growth in Iran, Nigeria and Tunisia, which are compatible with Keynesian’s theory. However, the economic growth does cause the increase in goverment spending in Algeria, Burkina Faso, Benin, Indonesia, Libya Malaysia, Marocco, and Saudi, which are well-suited with Wagner’s law.

Post Keynesyen ktisat Okulu Perspektifinden Modern ktisadi DDzende Piyasa Baaarisizliklari Ve Minskyen Finansal Kirilganlik Hipotezi: 2008 Krizi zerine Yazinsal Bir nceleme (Market Failures and Minskian Financial Instability Hypothesis in the Modern Economics Architecture Within Post Keynesian Framework: A Review on 2008 Crisis)

Turkish Abstract: Post Keynesyen Iktisat Okulu, Cambridge ekolune dayanan ve Keynesyen Doktrin’in ana savlarini makroekonomik reel problemler olcusunde yorumlamak amaci tasiyan Heterodoks bir iktisat okuludur. Epistemolojik ve ontolojik acidan Neo Klasik iktisat okulu paradigmasinin zitti varsayimlara sahiptir. Calismada para arzinin buyuk onem tasidigi ve 2008 Krizi ile onemi bir kez daha anlasilan Minsky’nin Finansal Kirilganlik Hipotezi ve Post Keynesyen iktisat okulu ana onermeleri isiginda piyasa basarisizliklari ve 2008 Krizi tartisilmaktadir.English Abstract: Post Keynesian Economics School which is Heterodox Economics Thought School, based on Cambridge School, and main aim is to scrutinizing macroeconomic real problems with Keynesian theses. Post Keynesian Economics School which has contrary presuppositions to Neo Classical Economics Thought with epistemilogical and ontological methods. In this research, Financial Instability Hypothesis which has been remembered again and was understood its importance with 2008 Crisis and market failures and 2008 Crisis are discussed on Post Keynesian framework.

Inflation Expectations and Monetary Policy Design: Evidence from the Laboratory

Using laboratory experiments within a New Keynesian framework, we explore the interaction between the formation of inflation expectations and monetary policy design. The central question in this paper is how to design monetary policy when expectations formation is not perfectly rational. Instrumental rules that use actual rather than forecasted inflation produce lower inflation variability and reduce expectational cycles. A forward-looking Taylor rule where a reaction coefficient equals 4 produces lower inflation variability than rules with reaction coefficients of 1.5 and 1.35. Inflation variability produced with the latter two rules is not significantly different. Moreover, the forecasting rules chosen by subjects appear to vary systematically with the policy regime, with destabilizing mechanisms chosen more often when inflation control is weaker.

Econometrics as a Pluralistic Scientific Tool for Economic Planning: On Lawrence R. Klein's Econometrics

Lawrence R. Klein (1920-2013) played a major role in the construction and in the further dissemination of econometrics from the 1940s. Considered as one of the main developers and practitioners of macroeconometrics, Klein's influence is reflected in his application of econometric modelling to the analysis of economic fluctuations and economic policies for which he was awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel in 1980. The purpose of this paper is to give an account of Klein's image of econometrics focusing on his early period as an econometrician (1944-1950), and more specifically on his period as a Cowlesman (1944-1947). Independently of how short this period might appear, it contains a set of fundamental publications and events, which were decisive for Klein's conception of econometrics, and which formed Klein's unique way of doing econometrics. At least four features are worth mentioning, which characterise this uniqueness. First, Klein was the only Cowlesman who carried on the macroeconometric programme beyond the 1940s, even if the Cowles had already abandoned it. Second, his pluralistic approach in terms of economic theory allowed him not only to use the Walrasian framework appraised by the Cowles Commission and especially by T.C. Koopmans, but also the Marxian and Keynesian frameworks, enriching the process of model specification and motivating economists of different stripes to make use of the nascent econometrics. Third, Klein differentiated himself from the rigid methodology praised at Cowles; while the latter promoted the use of highly sophisticated methods of estimation, Klein was convinced that institutional reality and economic intuition would contribute more to econometrics than the sophistication of these statistical techniques. Last but not least, Klein never gave up what he thought was the political objective of econometrics: economic planning and social reform.