Keynesian Research Articles

Triple Deficits and Economic Growth in Kenya

The objective of this study was to determine the effect of triple deficits on economic growth in Kenya. The specific objectives of the study were: to establish the effect of budget deficits, current account deficits and savings investments deficits on economic growth in Kenya. Persistent deficits have been of great concern because of the internal and external vulnerabilities they pose to the Kenyan economy. The study was based on the Keynesian theory, Thirlwall’s theory, and endogenous growth model theory. Annual data ranging from the year 1990 to 2018 was used. The autoregressive distributed lag (ARDL) and error correction model (ECM) were used to establish the significance and impact of the variables on economic growth in Kenya in the short and long run. The research established that budget deficits had a significant effect on economic growth in the long run while current account deficits had a significant effect on economic growth in the short run. The study recommends adoption of macroeconomic policies that aim at reducing budget and current account deficits and encourage greater discipline to ensure optimal use of funds into productive sectors.

Historicizing the money of account—a rejoinder

“In Defence of the Nominalist Ontology of Money” by Geoffrey Ingham (published by the Journal of Post Keynesian Economics in 2021) contends that “Historicising the Money of Account: A Critique of the Nominalist Ontology of Money” (published by the same journal in 2020) is based on misunderstanding, misrepresentation, and imprecisions. The core proposition in “Historicising the Money of Account” is that the money of account, which is generally understood to be a universal attribute of money, is in fact an institution of late medieval and early modern times that has no significant equivalent in today’s world (or in the ancient world, for that matter). This reply is intended to provide further clarification on the historical and ontological specificity of the late medieval institution of the money of account.

Optimal policy design in nonlinear DSGE models: An n-order accurate approximation

We derive an n-order accurate approximation of optimal policy for a wide class of nonlinear DSGE models analytically. Using Taylor polynomials to approximate welfare and the equilibrium, the n,n+1 approximation relaxes symmetry in the objective and certainty equivalence in the solution, as implied by a Linear–Quadratic (LQ) approximation with n=1. When n>1, we illustrate how curvature in preferences and the constraints can affect optimal policy, deriving a solution that is n-order accurate as opposed to first-order accurate only. Comparing solutions when n=2 (a Quadratic–Cubic approximation) and n=1 (LQ), in a New Keynesian economy with nominal frictions, we find significant differences in the optimal response to shocks; the joint distributions of wage inflation, the output gap and nominal interest rates; welfare and accuracy.

The Advent of Neoliberal Capitalism Over The 20th Century

In this paper, I have attempted to trace the emergence of neoliberal capitalism as an economic system pertaining to the foundations of classical liberalism of the 18th century. The paper essentially draws a comparative analysis of the Keynesian theory of government intervention in economic activity as opposed to Hayek’s conceptualization of free-market capitalism, while tracing the advent, trajectory and scope of neoliberal capitalism in the global context.

Money Supply and Economic Activities in Malaysia

This study examined how economic activities affect the direction of money supply in Malaysia. The overnight policy rate is the interest rate set by Bank Negara Malaysia (BNM) as its monetary policy tool. Based on the Keynesian Economic Theory, the autoregressive distributed lag (ARDL) model was applied to analyse how the industrial production index, interest rate and consumer price index influenced money supply. The findings of this study supported the notion that economic growth significantly affected the money supply in the short run. There was no evidence of such a relationship in the long run. Maintaining a stable money supply is vital to limit adverse variations in economic activity. A stable money supply allows Malaysia to respond effectively during difficult times, especially the current covid19 pandemic.

We should Control the Economy and Not Let the Economy Control Us: How this May Be Achieved through a Macro-Economical Way

This letter proposes some solutions to our modern seemingly intractable economic problems. Keynesian theories, the bug-bear of modern economics, seem to hold little water nowadays. Modern economies appear to be in need of more radical solutions.

A Survey on the Evolution of Keynes' Economic Thought

There has been on-going controversy about the evolution of John Maynard Keynes’ thought on economic theory among economists of different schools of thought. Even though Keynes have always been considered a revolutionary in economic thought in relation with his ideas in the General Theory, Keynes did not always think about the economic thought the way he did in the General Theory. Some economists have argued that Keynes’ training in economics in Cambridge had made him subscribe to the Classical economics in his earlier years. Some has furthered this argument that Keynes’ Treatise on Money (1930) contained elements of the Classical economic theory, whereas others have opposed that Keynes have dropped the Classical economic theory by the time he wrote the Treatise and seemed to be in the process of developing what later became known as the Keynesian economics. However, there remain fundamental questions to be answered : What kind of economics training did Keynes receive in his earlier years as a student? To what extent had Keynes’ thought gone through a dramatic change in the successive years? How different was his economic thought in the Treatise on Money (1930)? How different was the Treatise from the General Theory (1936)? This essay surveys that Keynes started to acknowledge the shortcomings of the Classical economic theory by the time he wrote the Treatise on Money. Later on, when he gave the inaugural Finlay lecture at UCD titled National Self-Sufficiency(1933), there were even more distinct evidence in favor of his deviation from the Classical Theory. As a result, the goal of this paper is to argue that the Treatise and the National Self-Sufficiency pieces were the two primary sources that demonstrate the evolutionary path for the production of the General Theory. This is a significant issue to address, because this argument falls in line with different interpretations of the origins of the Keynesian economics, specifically the PostKeynesian line of thought which will be analyzed in detail in this paper.

Structural Change in Post Keynesian Monetary Theory: A Non-Compensatory Disequilibrium Framework

Post Keynesian Economics has shifted away and even renegade from Keynes' original research program, i.e., the Unemployment Equilibrium thesis, endogenous money and liquidity preference determination of interest rate in which money and uncertainty play a fundamental part. This paper attempts to bring back the Keynesian counter-revolution spirit into Post Keynesian Monetary Theory by introducing a Non-Compensatory Disequilibrium Framework (NCDF) that allows structural breaks in budget constraints that lead to a model where Walras’ Law does not hold.

Keynes's Treatise on Probability: The First Century

ABSTRACT On the centenary of the Treatise on Probability's publication, this paper explores six related topics: varieties of realism; Ramsey's critique; Keynes's response; radical uncertainty; the continuity/discontinuity question regarding Keynes's philosophy and economics; and the possibility of a non-Platonic interpretation of logical probability. Several new perspectives are presented.

Probability and arguments: Keynes’s legacy

Abstract John Maynard Keynes’s A Treatise on Probability is the seminal text for the logical interpretation of probability. According to his analysis, probabilities are evidential relations between a hypothesis and some evidence, just like the relations of deductive logic. While some philosophers had suggested similar ideas prior to Keynes, it was not until his Treatise that the logical interpretation of probability was advocated in a clear, systematic and rigorous way. I trace Keynes’s influence in the philosophy of probability through a heterogeneous sample of thinkers who adopted his interpretation. This sample consists of Frederick C. Benenson, Roy Harrod, Donald C. Williams, Henry E. Kyburg and David Stove. The ideas of Keynes prove to be adaptable to their diverse theories of probability. My discussion indicates both the robustness of Keynes’s probability theory and the importance of its influence on the philosophers whom I describe. I also discuss the Problem of the Priors. I argue that none of those I discuss have obviously improved on Keynes’s theory with respect to this issue.

"Perspectives Fiscal Policy as a Stabilization Tool: Discretionary and Non Discretionary Policies"

Global financial crisis of 2008 and the Covid 19 led slowdown have brought Keynesian fiscal stabilization policies back to the forefront of all academic debates. But what the world is experiencing should be treated as an exceptional situation that should not be used to advance the case to fine-tune the economy every time using discretionary fiscal measures. The pre-crisis broad macroeconomic consensus still holds, and stabilization should first be left to monetary policy. On the fiscal front government should rely more on rule-based inbuilt stabilizers for short-term management of cyclical fluctuations in case of demand shocks and long-run fiscal policy should focus more on growth and developing enabling factors to attract more investment. Fiscal stabilizers on the expenditure side should be strengthened to provide an adequate safety net to economically vulnerable sections of the society.

On two recent attempts to introduce animal spirits in macroeconomics: Heresy or enlightened church reform?

As noted by Alan Greenspan in 2008, one key flaw in standard models is that they treat animal spirits as a simple ‘add factor’ rather than as a structural one. This paper evaluates the extent to which two recent approaches placing the emphasis on animal spirits – namely Farmer’s ‘Neo-Paleo-Keynesian’ (NPK) project and Akerlof and Shiller’s behavioural approach – manage to overcome this flaw. By following the powerful religious metaphor introduced by Farmer, according to which general equilibrium theory underlying standard models should be regarded as a ‘church’, this paper stresses two points. First, animal spirits turn out to be devilish features that are inconsistent with the church’s commandments. Second, by trying to reconcile them with the church, these two approaches are unable to truly reform it as required by Greenspan; rather, they appear to be heretical stances that are forced to violate some fundamental dogmas of the church. JEL codes: E12, E13, E32 Keywords:Animal spirits, general equilibrium, research programmes, Keynesian economics, macroeconomic models

Beveridge on idleness

Beveridge's wartime proposals to eliminate idleness relied on the precepts of Keynesian economics and substantial extensions in the powers of central government to regulate industry and labour. Using convention theory, this paper demonstrates how these stipulations proved politically untenable. With the disappearance of full employment in the 1980s, the labour market problems Beveridge encountered in his youth have re-emerged accompanied by old problems of working poverty. Established forms of labour market analysis are obsolescent and employment rights disappear. The paper suggests a more decentralized and variable analysis of relations between work and idleness may offer a way forward.

Estimating the money demand function for Saudi Arabia using divisia monetary aggregate

ABSTRACT This paper constructs the broader Divisia monetary aggregate (D2) for the Kingdom of Saudi Arabia over the period from 1999 to 2018. Unlike the traditional money supply aggregate (M2), movements of the Divisia monetary aggregate seems to reflect the domestic economic developments and hence can be very useful when setting macroeconomic policies in the Kingdom. In addition, the paper applies the Keynesian Money Demand Theory to estimate the demand for money using the Divisia monetary aggregate. The findings confirm the stability of the money demand function for Saudi Arabia.

Why is Bitcoin not Money? A Post-Keynesian view

Bitcoin got increasing popularity and was considered by the public as a great investment due to huge overvaluation in 2017. In parallel, economists and high-level technicians started to advocate the use of bitcoin and other cryptographic currencies as an alternative to national currencies. However, bitcoin is far from being considered as money, so it is hard for a monetary and payment system to emerge based on these technologies. This paper, apart from briefly presenting the Bitcoin System, shows why bitcoin is not money in the light of the Keynesian theory. We use Keynesian essential properties of Money and Modern Money Theory to define money, and to show that cryptographic currencies are not money. We then go back to Keynes' theory of portfolio choice, established in Chapter 17 of the General Theory, to show what bitcoin really is: at most, bitcoin is a perfect virtual commodity, a virtual liquid speculative asset.

A Keynesian Revolution or Austerity? The IMF and the COVID-19 Crisis

This commentary for the “Political Economy Section COVID-19 Collection’’ discusses ideational continuity and change at the International Monetary Fund (IMF) in the context of the COVID-19 pandemic. It argues that, despite an initial advice to increase the government spending, the Fund has later reverted back to the market orthodoxy recommending fiscal discipline and balanced government budget in the longer-term. The piece argues that, although a global crisis and increased government spending by influential member states such as the United States might have prompted an ideational shift at the Fund, a lack of clear theorization of longer-term Keynesian policies in academic circles and in the economics profession, prevented a paradigmatic change at the Fund.

Covid-19 and the euthanasia of interest rates: A critical assessment of central bank policy in our times

We compare the New Keynesian and Austrian explanations for low interest rates in the light of the Corona crisis. From a New Keynesian perspective low interest rates are the result of structural changes in the society and the economy as well as the cyclical downswing triggered by the Corona pandemic. In contrast, from the perspective of Austrian economic theory, interest rates have been pushed down on trend by central banks for a long time to stimulate growth, with the global financial crisis of 2007/08 and the Corona crisis of 2020 acting as powerful accelerators of the euthanasia of interest. New Keynesian theory would suggest that interest rates can be adjusted upward again when conditions change, without creating economic and financial disturbances. Against this, Austrian theory finds that central banks have backed themselves into a corner by creating persistent low-interest expectations.

The financial crisis: a history of the economic schools of thought

"Crisis is a very important aspect of our everyday life and no matter of the dimension we refer to this represents a period in the evolution of a society marked by great difficulties and anxiety. From an economic point of view this is a normal and necessary event, leading to marvellous growth and development. Even so, the authorities are often not prepared or do not know how to mitigate and manage its shortfalls. The main objective of this paper is to focus around the financial crisis development in the perspective of Classical, Neoclassical and Keynesian economics. Even hundreds years apart, all of the three schools have captured the determinants, implications and some measures to mitigate the imbalances which are still relevant today. The question remains though, so why the world did not resolve the puzzle of financial distress taking into consideration the age of these types of events, the number and the forms they hit our society in the last decades. This study will try to summarize the main ideas of ones of the greatest minds of the past in order to bring some light over the financial crisis phenomena."

Instrument-Based versus Target-Based Rules

Abstract We study rules based on instruments versus targets. Our application is a New Keynesian economy where the central bank has non-contractible information about aggregate demand shocks and cannot commit to policy. Incentives are provided to the central bank via punishment which is socially costly. Instrument-based rules condition incentives on the central bank’s observable choice of policy, whereas target-based rules condition incentives on the outcomes of policy, such as inflation, which depend on both the policy choice and realized shocks. We show that the optimal rule within each class takes a threshold form, imposing the worst punishment upon violation. Target-based rules dominate instrument-based rules if and only if the central bank’s information is sufficiently precise, and they are relatively more attractive the less severe the central bank’s commitment problem. The optimal unconstrained rule relaxes the instrument threshold whenever the target threshold is satisfied.

In defence of the nominalist ontology of money

“Historicizing the money of account: a critique of the nominalist ontology of money” (Journal of Post Keynesian Economics, 3, 43) argues that “money itself” is always something more than money of account; that nominalists mistakenly believe that Keynes shared their position; and that money of account is historically specific to medieval Europe. This response contends that the case is based on misinterpretation, misunderstanding, and imprecise arguments.