Forstater Keynes for the Twenty-First Century [economics] (Palgrave, 2008)
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subsequent crisis, then agents and markets would come to anticipate the likelihood of that crisis and thereby forestall it. The main factor, however, that is currently found to explain NPLs and bank crises is excessively fast prior expansion in bank lending (and in broad money). This empirical work may be rescued from the Lucas critique by a combination of our inability to distinguish between trend and cycle looking forward and of the engagingly optimistic human trait of believing that each cyclical upswing is the start of a new and better trend: that, in the common parlance, we are entering a “new economy.”1
Another atheoretical way of estimating PDs that economists have developed is to try to back out the implied default risk of an agent from market valuations, whether equity or bond prices, using either Mertontype models or yield spreads. I have certain reservations about the likely accuracy of such implied predictions, both because the market may itself be prone to excessive swings of optimism and pessimism and have insufficient information, as in the case of Enron, and because the method for backing out default risk may not be able to distinguish between variations in credit risk and other factors, such as liquidity risk. Nonetheless, empirical models of this kind are now an important part of the armory of economists and supervisors and regulators.
This approach has normally been used to estimate the PD of a single agent. Now, however, in a valuable and original step forward, some Austrian economists connected with the Austrian National Bank (Elsinger, Lehar, and Summer 2003) have applied the same Merton-type methodology to seek to assess the PD of a portfolio of banks. Thus, can we use such models to predict the likelihood of failure of bank y conditioned on the prior failure of bank z?
As noted earlier, defaults, whether of banks or bank borrowers, are not constant over time but tend to come bunched together. There are two main potential causes of such temporal bunching. The first is that a common external shock may be responsible; the second is that a failure of one agent may make a second agent more fragile because of positive interconnections between them. This second source of fragility is normally termed contagion.
It is important to be able to distinguish between the two causes of bunched defaults, because the appropriate regulatory remedies will differ. In particular, rescuing individual banks will appear much more sensible if the main cause of financial fragility is contagion rather than a common shock.
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One of the most obvious channels of interconnectedness between banks, and hence of potential contagion, is the interbank market. Recently, considerable work has gone into the estimation of whether, conditioned on the failure of one bank, other banks would also fail as a result of interbank defaults. Examples of this genre include Wells 2002, Upper and Worms 2004, and Furfine 2003. In general, the results of this work are quite encouraging, especially when it is assumed that the failing bank can realize its assets quickly and thereby pay off creditors a significant proportion of its indebtedness.
This latter appreciation leads to three further issues. First, how quickly will reliable and credible information on the extent of the insolvency (of the initial failing bank) be available? Second, and conditional on the first issue, how far will agents withdraw funds from those other banks perceived most at risk (but not necessarily insolvent), just on the precautionary principle? And third, how far will asset sales, either by the initial insolvent bank or, much more likely, by those that perceive themselves at risk from secondary withdrawals (see the second issue, above), drive down asset prices and thereby weaken the solvency status of all of the remaining banks (besides adding to general fears)?
If these extra conditions are met, so that there is quick, reliable, credible information, few secondary withdrawals from other banks (on the precautionary principle), and not much panic selling of assets, then the generally favorable results from these studies—that there is little contagious risk from the interbank market—will stand; if not, they won’t.
What this suggests, in other words, is that there are potentially multiple channels for contagion and that any one channel may, or may not, become serious, depending on prior conditions. This again makes it difficult to undertake any fully satisfactory analysis and modeling. Once again, however, we hope that the modeling strategy that we have been exploring may allow us to examine multiple, simultaneous channels of contagion. However, our work is, at best, only a start.
CONCLUSIONS
If economic theory and formal models are to provide analytical support and guidance for issues relating to financial fragility, they must make the modeling of default a central feature of their work. This is not an easy exercise, although the treatment of default as an endogenously chosen variable, which was pioneered by Martin Shubik, seems a good starting point.
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In the meantime, of course, assessment of the probabilities of default lies at the heart of risk assessment in general and of Basel II in particular. Economists have made considerable advances in developing techniques for assessing PDs, notably Merton-type approaches. There does, however, remain a difficulty in distinguishing among the causes of bunched defaults, that is, financial crises, between the common effect of an adverse external shock and the contagious interactions between banks. In this latter field, much remains to be done.
NOTE
1.Ministers of finance are particularly prone to this delusion, since their job, their raison d’être, is to introduce reforms that will raise average productivity and lower the natural rate of unemployment. So, if productivity rises or unemployment falls, they see it not as a cyclical phenomenon but as a sign of the success of their policies. Thus, a fiscal rule that demands surpluses during economic upswings to offset deficits during downturns is almost bound to fail, since ministers will rarely see themselves as being in an abovetrend state. Such above-trend periods are far easier to identify looking backward than looking forward.
Complaints about past failures to seize on good economic condi- tions—for example, to reduce debt levels—are easy to make after the event but harder to put forward convincingly at the time, when forward-looking expectations about the future are (excessively) optimistic.
REFERENCES
Dubey, P., J. Geanakoplos, and M. Shubik. 2000. Default in a general equilibrium model with incomplete markets. Cowles Foundation Discussion Paper 1247. Cowles Foundation for Research in Economics, Yale University.
Elsinger, H., A. Lehar, and M. Summer. 2003. Risk assessment for banking systems. Oesterreichische Nationalbank (Austrian National Bank), working paper 79.
Furfine, C. 2003. Interbank exposures: Quantifying the risk of contagion. Journal of Money, Credit and Banking 35:111–28.
Goodhart, C. 2000. Can central banking survive the IT revolution? In The future of monetary policy, ed. A. S. Posen. Special issue, International Finance 3 (2): 189–210.
———.2005. The foundations of macroeconomics: Theoretical rigour versus empirical realism. Paper presented at Louvain-la-Neuve Conference on the History of Economic Thought, January 20–22.
———.2005–06. What can academics contribute to the study of financial stability? The Economic and Social Review 36 (3): 189–203.
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———. 2006. Monetary and social relationships. In Money, financial instability and stabilization policy, ed. L. Randall Wray and Mathew Forstater. Cheltenham, UK: Edward Elgar.
Goodhart, C., P. Sunirand, and D. Tsomocos. 2004. A model to analyse financial fragility: Applications. Journal of Financial Stability 1 (1): 1–30.
———.2005. A risk assessment model for banks. Annals of Finance 1 (2): 197–224.
———.2006a. A model to analyse financial fragility. Economic Theory 27:107–42.
———.2006b. A time series analysis of financial fragility in the UK banking system. Annals of Finance 2 (1): 1–21.
Selgin, G. Forthcoming. Good money: Birmingham, button-makers, the Royal Mint, and the beginnings of modern coinage, 1775–1821. Ann Arbor, MI: University of Michigan Press.
Shubik, M. 1973. Commodity money, oligopoly, credit and bankruptcy in a general equilibrium model. Western Economic Journal 11:24–38.
Shubik, M., and C. Wilson. 1977. The optimal bankruptcy rule in a trading economy using fiat money. Journal of Economics 37:337–54.
Tsomocos, D. 2003a. Equilibrium analysis, banking and financial instability.
Journal of Mathematical Economics 39 (5–6): 619–55.
———. 2003b. Equilibrium analysis, banking, contagion and financial fragility.
Bank of England Working Paper 175.
Tsomocos, D., and L. Zicchino. 2005. On modelling endogenous default.
Financial Markets Group Discussion Paper 548.
Upper, C., and A. Worms. 2004. Estimating bilateral exposures in the German interbank market: Is there a danger of contagion? European Economic Review 48:827–49.
Wells, S. 2002. UK interbank exposures: Systemic risk implications. Financial Stability Review, Bank of England, December: 175–82.
Woodford, M. 1998. Doing without money: Controlling inflation in a postmonetary world. Review of Economic Dynamics 1:173–219.
———.2000. Monetary policy in a world without money. In The future of monetary policy, ed. A. S. Posen. Special issue, International Finance 3 (2): 261–72.
———.2003. Interest and prices. Princeton, NJ: Princeton University Press. Wray, L. R., ed. 2004. Credit and state theories of money: The contributions of A.
Mitchell Innes. Cheltenham, UK: Edward Elgar.
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INDEX
African Americans
post–Civil War land redistribution proposal, 200–201
reparations, redistributive effects of, 203–4 slavery, legacy of, 15
aggregate demand, 7, 136, 138, 141, 209 aggregate demand management, 92, 97 Ahumada, Jorge, 114
Arestis, Philip, 186 Argentina, 168, 169, 171
crisis of 1930s, 105–6 crisis post-1937, 107
employment and growth, 138 Jefes program, 15, 17
Junta Reguladora de Granos, 106
Plan de Acción Económica Nacional, 105–6 Programa de Reactivación de la Economía,
107–9 Arndt, H. W., 121n Asian countries
adoption of development strategy, 160, 169, 171
economic growth of, 150 Ashley, W. J., 59, 63
Asimakopulos, Athanasios (Tom), 186, 191, 194n
Asimakopulos, Marika, 186
Barber, Clarence, 61 Basel II, 219, 222
Becker-Krueger trade model of discrimination, 201–2
Bell Kelton, Stephanie, 12, 139
Berle (Adolph, Jr.) and Means (Gardiner), 44, 45, 50, 51
oligopolistic market structure, 42–43 “trade-off” analysis, 43
Bezanson, Anne, 75
Bharadwaj, K., 187
A Biography of Dissenting Economists, 186 Blanchard, Olivier, 208
Bolton, George, 38n
Bortis, Heinrich, 194n
Brand, Bob, 33 Brannon Plan, 50
Brazelton, W. Robert, 5, 7, 9, 14 Brazil
application of conventional orthodoxy in, 155–57, 170
crisis of 1930s, 104–5 developmentalism/developmentalist
strategies in, 146, 147, 148, 151, 154, 168, 173n
inflation in, 9, 149
national agreement or compact, 153 Workers Party, 172n
see also Latin America Bresser-Pereira, Luiz Carlos, 5, 7, 8, 9,
10, 13
Bretton Woods agreements, 31, 32, 34, 211 Bretton Woods Conference, 26, 29 Bridges, E., 31
Britain
collapse of export market, 81 Macmillan Committee, 82 unemployment in staple industries,
81–82, 83 Britnell, George, 62–3
Bryce, Robert, 38n, 57, 58, 63, 64, 74 Bunge, A., 121n
Campbell, Robert, 72 Canada
Conservative Party, 58, 74
Cooperative Commonwealth Federation, 74 Keynesian era in, 65, 72–74
Liberal Party, 57, 58, 59, 73, 74
New Democratic Party, 58, 74
Sasketoon Manifesto (1975), 65 Social Credit Party, 58, 64
spread of Keynesianism to, 57–75 Toronto School of Economic History, 62 Union Nationale, 59
White Paper on Employment and Income (1945), 58, 65, 69, 72
Carvalho, Fernando, 121n
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INDEX |
Center for Full Employment and Price Stability (CFEPS), 49, 141
Chamberlain, Neville, 111
Chappelle, Dave, 203, 204 Chick, Victoria, 97, 192 China
impact of globalization on, 13–14 economic growth in, 85–86, 150, 158, 210
Churchill, Winston, 29 Clark, Colin, 71 Clark, S. D., 60
Clark, W. Clifford, 69 Clower, Robert, 66, 89, 99n Commons, John R., 173n Coxeter, Donald, 66 Coyne, James, 72 Cunningham, Wm., 63 Currie, Lauchlin, 69
Darity, William, Jr., 5, 14, 15
Davidson, Paul, 10, 47, 93, 97, 129, 194n De Cecco, M., 37n
default, modeling of, 213–22 Arrow-Debreu-Hahn paradigm, 215 Lucas revolution/critique, 214, 219–20 Merton-type methodology, 220, 222 transversality assumption, 213, 214, 216
Delli Gatti, Domenico, 97
DeLong, Brad, 34, 37n, 39n Deutsch, John J., 60 Dimand, Robert W., 5, 38n division-of-labor tradition, 95 Domar, Evsey, 117, 187 Dow, Sheila, 192
Dubey, P., 217
Eady, Wilfrid, 34
Early, James, 64
Economic Commission for Latin America and the Caribbean (ECLAC), 103, 111, 120, 122n
effective demand failures, 92–93, 98 effective excess demand, 91–92 Elliott, G. A., 68
Elsinger, H., 220
Ely, Richard, 63 employer-of-last-resort (ELR) program,
15–17, 141–42 equal-value-in-exchange condition, 97–98
Fair Deal, 44
Fallgatter, Marvin, 64
Fay, C. R., 59
Federal Reserve-Treasury Accord of 1951, 44, 46, 47, 51
financial fragility, modeling of, 213, 216, 217 see also default, modeling of
Fisher, Irving, 134, 138, 142n, 187 Fisher-type debt inflation, 4, 6 Flux, A. W., 59
Fontana, Giuseppe, 192 Forstater, Mat, 139 Fowke, Vernon, 62–63 Friedman, Milton, 46, 212 Friedman, Thomas, 169 Furfine, C., 221
Furtado, Celso, 104, 113, 121n, 149, 161, 172n
Galbraith, J. K., 41, 43, 103, 104 Galbraith’s First Law, 212
The Great Crash, 41, 43
“How Keynes Came to America,” 57
The New Industrial State, 43 Galbraith, James K., 5, 8, 9, 13, 14, 15
ELR and immigration, 16–17 wage convergence, 14
see also inequality Gallegati, M., 97 Geanakoplos, J., 217 Gellner, Ernest, 153, 172n
general equilibrium theory/models, 93, 95, 98
The General Theory of Employment, Interest and Money, 1, 3, 5, 6, 11, 24, 42, 58, 60, 63, 64, 65, 68, 81, 89, 111, 116, 188, 189, 191, 192
central propositions, 1–2 criticisms of, 127–8 criticisms refuted, 128–31 explanation of, 131–36
theory of effective demand, 136, 139 Giblin, L. F., 71
Gini coefficient, 85 Gintis, Herb, 99n
Global Keynesianism, 14, 15, 211 Godley, Wynne, 7
sectoral balances approach, 6 González, N., 121n
González del Solar, F., 121n Goodhart, C. A. E., 10, 11, 12
mainstream models, lack of real-world features in, 4
possibility of default, 3
see also default, modeling of Goodwin, Richard, 185, 193 Gordon, Scott, 72
government deficits, 137–40, 141, 142
INDEX |
227 |
Grant, A. T. K., 31
Great Depression, 83, 92
Gregory, T. E., 213–14
Haberler, Gottfried, 67 Hahn, Frank, 3, 188 Hansen, Alvin, 44
A Guide to Keynes, 42 stagnation theory/thesis, 5, 41–42
Harcourt, G. C., 2, 6, 186, 190, 191, 193, 193n
Harris-Todaro model, 209 Harrod-Domar concerns, 5
Harrod, Roy F., 35, 36, 37n, 38n, 74, 83, 121n, 129, 131, 187, 192, 193
Hayek, Friedrich von, 3, 64, 132, 133, 137, 142n
Heller, Walter, 48, 49 Hicks, John, 66 Higgins, Benjamin, 63 Hirschman, Albert, 172n Howe, C. D., 69 Howett, Peter, 99n Hume, David, 129
Humphrey-Hawkins Act, 48
India, economic growth in, 150 inequality
patterns in, 210, 211–12
and unemployment, relationship between, 209–10
Ingram, John Kell, 63 Innes, A. Mitchell, 11, 135 Innis, Harold, 59, 62, 63, 74
International Bank for Reconstruction and Development, 26
International Monetary Fund, 26, 27, 38n, 162, 168
Isbister, Claude, 63 IS-LM, 94–95
Johnson, Harry, 69, 189, 202, 203 Joint Statement by Experts (on the
Establishment of an International Monetary Fund), 2, 32, 33, 38n
Kahn, Richard, 24, 29–30, 35, 37n, 137, 185
Kaldor, Nicholas, 81, 95, 142n, 185, 189, 192, 193
theory of distribution, 188–89 Kalecki, Michal, 7, 122n, 137, 185, 188,
191, 193, 194n, 195n profit equation of, 6
review article of The General Theory, 189–90
theory of distribution, 188–89 Kenyon, Peter, 190
Keynes, Florence, 23
Keynes, John Maynard, 1, 3, 11, 13, 23, 42, 49, 51, 57, 63, 64, 67, 68, 74, 85, 89, 90, 91, 92, 94, 95, 96, 98, 109, 114, 116, 120, 142n, 161, 185, 191, 192, 193, 194n
approach to monetary policy, 9 assumption of rational expectations by,
191 Bancor plan, 10
British unemployment, policies re, 82–84 China, policies applied to, 84–87 Clearing union, 29
The Economic Consequences of the Peace, 199–202
Essays in Persuasion, 24
on German reparations, 34, 199–200, 202, 204
How to Pay for the War, 128 interest rates, call for lower, 9
international monetary system, reform of, 10
“involuntary unemployment” state, 92 legacy of, 1, 86–87
money in neoclassical model, holding, 3 as negotiator, 17
and persuasion, 23–39
as political economist, 110 properties of money, 3, 133–35 postwar policy, impact on, 5 Russia, policies applied to, 84–87 “semi-inflation,” 4, 140
stability issues, 4 theory, core of , 91
Treasury missions to the U.S., 25–37 Treatise on Money, 11, 24, 58, 64, 81,
130, 133 “true inflation,” 7
unemployment, structural/ involuntary/”demand deficient,” 81
“whirlwinds of speculation,” 3
at World Monetary Conference, 110 Keynesian
demand management policies, 140 “disproportionalities” argument, 5 national models, 207–8 revolution, 103, 185 unemployment theory, 209
228 |
INDEX |
Keyserling, Leon H., 5, 9, 41, 43–52 anti-recessionary policy, 44–46 Conference on Economic Progress pamphlets, 44, 51–52
Conference on Economic Progress reports, 46
Council of Economic Advisors, 44 Economic Report to the President, 46 Freedom Budget, 46, 48
full employment and output growth, points to accomplish, 48–50
Full Employment without Inflation, 48 monetary and fiscal policy, premises re,
47–48
money supply, growth of, 46–47 National’s Economic Budget, 46, 48 social equity, 46, 51
Keyserling, Mary Dublin, 51
Kinda-Hass, Boguslawa, 194n King, John, 194n
Knapp, Georg Friedrich, 11, 133, 135 Kregel, Jan, 1, 2, 3, 5, 8, 11–12, 15, 97,
121n
on employer-of-last resort (ELR) program, 16–17
labor, reserve of, 208–9 Lange, Oscar, 64, 65, 69 Latin America
absence of true nations, 154 conventional orthodoxy in, 145, 146,
148, 151 failure of, 150
necessary rejection of, 171 demand management in, 103 developmentalism/developmentalist
strategies in, 146–48, 151 reasons for demise of, 148–50
foreign exchange rates, control of, 150 national development strategy, defined,
157–8
new developmentalism
compared to conventional orthodoxy, 162–70
compared to old developmentalism, 158–62
description of, 152-4 formulation of, 151–52 government deficits, 161
as a “third discourse,” 155–56 Latin American structuralism, 8, 13, 148
main ideas, 114–15 unemployment, view of, 116 macroeconomic strategy, 116
growth and employment, theory of, 116–20
inflation, theory of, 118 Lavoie, Marc, 194n Leffingwell, Richard, 23, 37n Lehar, A., 220 Leijonhufvud, Axel, 5, 66
Lend-Lease Act, 26, 28, 30, 31–32 Lerner, Abba, 13, 69, 91
Lewis, Arthur, 172n, 209
List, George F., 115, 173n Lock, John, 129
López, Julio, 5, 8, 9, 13, 17 Love, J. L., 121n
Mackintosh, William A., 68–69 Macmillan, Harold, 192
Maharashtra job guarantee program, 15–16 mainstream
macro and distribution theory, 95 theory/literature/economics, 93, 96, 98 see also neoclassical theory/models
Malaysia, wealth redistribution program, 204 Mallorquín, Carlos, 103n, 121n Manoilescu, M., 113–14, 115, 121n Marcuzzo, Maria Cristina, 17, 36, 37n Margariños, M., 121n
Marglin, Steve, 193
Marris, R. L., 190
Marshall, Alfred, 63, 94, 95, 96, 130, 187, 194n
Marshallian context/process, 91, 99 Marshall Plan, 34
Marx, Karl, 130, 131, 165, 193 Meade, James, 187
Mikesell, Raymond, 61
Minsky, Hyman, 4, 7, 14, 15, 16, 47, 97, 134, 135, 138, 217
aggregate markup of price of consumption goods, 7–8
explosive euphoria, 4
financial instability hypothesis, 6 full employment, ELR, 16 sectoral balances approach, 6
Mitchell, Wesley, 173n
Modigliani, Franco, 67
Moggridge, D., 27, 28, 29, 30, 32, 35, 37n money
chartalist/Cartalist (or, state money) approach, 11, 216
commodity money, 215–16
credit money/creditary approach, 11, 215–16
Credit and State Theories of Money, 215
INDEX |
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evolution of, 215
Good Money, 215 properties of, 97
see also Post Keynesian economics Moore, Basil, 5, 7, 9, 10, 97, 192 Morgenthau, Henry, 28, 30 Mosler, Warren, 139, 141
Myint, Hla, 69 Myrdal, Gunnar, 172n
NAIRU, 7, 211 Nakano, Yoshiaki, 151 Naldi, Nario, 23n Neill, Robin, 57n
neoclassical theory/models, 93–94 see also mainstream
neoliberal ideology
see Latin America, conventional orthodoxy New Deal, 44
The New Palgrave: A Dictionary of Economics, 43
non-Liontief system, 96 Norman, Montagu, 82 Noyola, Juan F., 114, 122n Nurkse, Ragnar, 172n
O’Connell, Arturo, 103n
Ohlin, Bertil, 66, 203
Okun’s Law, 96
Oresme, Nicolas, 72
Orwell, George, 82
Pasinetti, Luigi, 185, 193, 194n Penido, Federico, 121n Philipps, Frederick, 37n Phillips curve, 90
Pigou, Arthur C., 187 Pinto, Anibal, 114
Plumptre, Wynne, 58, 62, 64, 68, 71 Pollock, D., 121n
Post Keynesian economics balance-of-payments–constrained growth
model, 181
Cambridge-Cambridge controversies, 194n definition of, 90, 186
distribution theory, 6 monetary theory, 97 money and finance, 192 object of analysis, 187 pioneers of, 185–95
postwar inflationary episodes, explanation of, 193
theories of accumulation, 191–92
theories of determination of size of markup, 190–91
theories of growth, 193
Prebisch, Raúl, 109, 120, 121n, 161, 172n career, 110
Bretton Woods agreements and IMF, position on, 112–13
Introduction to Keynes, 103
Keynesian theory, departure from, 111
The Means to Prosperity, reaction to, 110–11
as political economist, 110 World Monetary Conference, 111
Presnell, L. S., 27, 37n
Project LINK, 207, 208
Rangel, Ignácio, 161, 172n Rank, Otto, 173n
Reagan Administration, 49 Reddaway, Brian, 194n Renan, Ernest, 153, 172n Ricardo, David, 193 Robbins, Lionel, 28, 35, 36
Robertson, D. H., 24, 37n, 66 Robinson, Austin, 194n
Robinson, Joan, 130, 137, 140, 185, 187, 191, 192, 193, 194n
Accumulation of Capital, 189
definition of post-Keynesian economics, 2, 186
theory of distribution, approach to, 189 Rodrik, Dani, 84
Roosevelt Administration, 44 Roosevelt, Franklin, 26 Rosentein-Rodan, Paul, 172n Rosselli, Annalisa, 23n Rowe-Dutton, Ernest, 38n Rowthorn, Bob, 193
Russia
experience with orthodox models, 169 impact of globalization on, 13–14 unbalanced growth in, 85–86
Rutherford, Ernest, 59
Rymes, T. K., 57, 63
Sachs, Ignacy, 103n
Safarian, A. E., 62
Samuelson, Paul, 188
Sanfilippo, Eleonora, 23n, 37n
Sawyer, Malcolm, 186
Sayers, Richard, 213–14
Say’s Law, 3, 92, 95
Schajt, Hjalmar, 121n
Schmoller, Gustav, 173n