Monthly Archives: February 2014

Exchange Rate Arrangements

The IMF publishes a report annually on exchange rate arrangements and restrictions for all its members. This document is surprisingly not oft-quoted. You may find it very useful.

The full report Annual Report On Exchange Arrangements And Exchange Restrictions can be obtained via courier from the IMF bookstore – it is a protected pdf on a CD and has about 3000 pages. The smaller version for 2013 (released December 2013) is here on the IMF website.

Interesting things: there are a few more currency unions other than the Euro Area and the central bank in those unions have a different arrangement than floating. So there’s ECCU (currency board with the US dollar as the anchor currency) and WAEMU, CAEMC (conventional pegs with the Euro as the anchor) in addition to the EMU (whose currency floats freely versus other currencies)

Table 1 (pages 16-17 in pdf view or pages numbered as 5-6) is very useful and lists all IMF members and the arrangements. There are 10 classifications: No separate legal tender, currency board, conventional peg, stabilized arrangement, crawling peg, crawl-like arrangement, pegged-exchange rates within horizontal bands, other managed arrangements, floating and free floating.

Thomas Palley: Explaining Stagnation

Thomas Palley has a write-up on the stagnation debate on his blog:

Explaining Stagnation: Why it Matters

Larry Summers (here) and Paul Krugman (here) have recently identified the phenomenon of stagnation.  Given that they are giants in today’s economic policy conversation, their views have naturally received enormous attention. That attention is very welcome because the issue is so important. However, there is also a danger that their dominance risks crowding out other explanations of stagnation, thereby short-circuiting debate.

Krugman has long emphasized the liquidity trap – zero lower bound to interest rates which supposedly prevents spending from reaching a level sufficient for full employment. Summers has added to this story by saying we have been in the throes of stagnation for a long while, but that has been obscured by years of serial asset price bubbles.

That is a good start to the conversation, but there are other views that dig deeper regarding the causes of stagnation.

Read more here

Neochartalism, Original Sin And The Backfire Effect

[This post is a sort of part 2 of the previous post Indebtedness And Liability Dollarization]

In the Neochartalist blogs, one frequently comes across the notion of monetary sovereignty, together with the notion of a “sovereign currency” – their notions of such things. One also sees an admission that countries whose governments have debt in foreign currency are constrained in boosting domestic demand to increase output and employment.

So this blog post by Bill Mitchell Defaulting on public debt as a way to progress has a few things to say about it.

Today I consider the idea that governments which have surrendered their sovereignty either by giving up their currency issuing monopoly, and/or fixing their exchange rate to the another currency, and/or incurring sovereign debt in a foreign currency might find defaulting on sovereign debt to be their best strategy in the current recession. I consider this in the context that any government that has surrendered their sovereignty is incapable of pursuing policies across the business cycle that serve the best interests of their population. While re-establishing their currency sovereignty may not require debt default, in many cases, default will necessarily be an integral part of the move back to full fiscal sovereignty. This is especially the case for nations that have borrowed in foreign currencies and/or surrendered their currency issuing capacities to a common monetary system. So here are some thoughts on when default is a way for a nation to progress.

[boldening: mine]

and then goes on the present the “balance-of-payments constraint” story as a mainstream economics story.

Now, it is clear from the above quote that Mitchell admits that nations with government have a constraint on fiscal policy. But the more troublesome fact is that he presents it as if the government doing this had some full volition to not have been indebted in foreign currency.

Incidentally Randy Wray writes a post – his latest and admits nations face a balance-of-payments problem and makes it look as if he has not shifted his extreme views:

I am not flippant about the many real constraints faced by a poor, developing nation. At an early stage of development, imports are very hard to get. The national currency faces little external demand. The world doesn’t want the nation’s produce, so it cannot export. Borrowing foreign currency can easily lead to excessive debt service and financial collapse.

Neither floating nor fixing is going to easily resolve these problems. That MMT does not have an easy solution to them does not, in my view, prove that MMT is flawed. My suspicion is that floating the currency and taking advantage of the sovereign’s ability to spend domestically is a step in the right direction. Capital controls are probably necessary—even more so if the country does not float. Foreign aid is probably necessary to finance needed imports.

[emphasis: mine]

Oh yeah doesn’t prove that the muddle which has come to be known as “modern monetary theory” is flawed? Wow!

But let’s get back to government borrowing in foreign currency. The original sin hypothesis is that many nations actually do not have a choice but to borrow in foreign currency. Now I won’t repeat the argument of the originators but present my own to argue that the hypothesis is roughly right. But the originators’ solution – creating policies to increase the size of financial system is far from a good solution.

Here’s how: What determines the trade balance? Imports depend on income and the income elasticity of demand for imports and exports the same but different elasticities. Now, there is also a price angle to this, but without much argument for now, Post-Keynesians argue that non-price factors are more important. Roughly this is because price is just one aspect of why the ultimate economic unit (consumers/households and producers purchasing machines for example) buys what it buys.

In neoclassical theory, absolute advantage any producer has doesn’t last long and is eliminated presumably because of the “price mechanism” and it is only comparative advantage which matters. And there is a market mechanism which resolves imbalances supposedly. But in a world full of giant corporations based in a few nations, this is hardly a good assumption. Worse, comparative advantage story is the reason used to push free trade agreements between nations. And since imbalances are rarely resolved by price adjustments, neoclassical economists start blaming the government – as if governments cannot solve the problem by coordination.

And the “income elasticity of demand for imports” is what non-price competitiveness is about. It is true price adjustments have a role to play but this has been massively exaggerated by economists.

That’s a model way of saying that competitiveness is important and that in a world of free trade, if domestic demand is boosted and if exports aren’t growing sufficiently fast, a fast rise in output will lead to an income-induced effect on imports and the balance of payments will deteriorate.

Ignoring revaluation gains/losses, a current account deficit implies a rise in net indebtedness to foreigners (or a fall in net international investment position in general). Non-residents are continuously making choices on their portfolio allocation and based on their preferences allocate their wealth into various assets including the liabilities of resident economic units of the nation we are discussing. In general they prefer a mix of assets in domestic and foreign currencies and such things depend on a lot of things such as expected returns on assets, expectations of the movement of the exchange rate and so on. At one extreme is the case where all liabilities of residents to non-resident are denominated in the domestic currency. If this increases, the exchange rate may move to clear the supplies of assets and liabilities. But it is possible that no movement of the exchange rate – while still maintaining external stability – may clear the market and only if the government adjusts its liabilities in various currencies so that the stocks of assets and liabilities are consistent with international investors’ portfolios will it lead to some stability in the foreign exchange markets. In practice the adjustment is also from the asset side: central banks sales of foreign currency in the foreign exchange market. So with the risk that the exchange rate may become unstable, central banks or the government Treasury – sometimes via their “exchange stabilization fund” issue debt in foreign currency. And unable to take protection for trade in goods and services, they suffer when balance of payments deteriorates.

So the Neochartalist story that somehow the government shouldn’t borrow in foreign currencies is vacuous. Only a few nations have the ability to attract investors to purchase their debt in domestic currency and typically these nations are successful in international trade. But this by no means guarantees continued success – if net indebtedness to foreigners keeps rising relative to output because trade in international markets for goods and services turns weak, then output gives in. And a shift in investors’ portfolio preferences also can lead to the original sin, even if one starts with zero government debt in foreign currency.

In general however, success in international trade leads to further success and failure leads to more failure. And the latter are unable to increase domestic demand by fiscal or monetary policy. Hence we see the massive differences in the national income of nations.

The culprit of all this is of course free trade. Economists now admit they had been incorrect on things such as capital controls (ie their pre-crisis notion that capital controls are bad) that but nobody wants to change the current rules of the game in international trade in goods and services. If anything more free trade is imposed.

Now the backfire effect: in the “modern monetary theory” blogs, examples such as those of Pakistan are presented as if it was Pakistan’s policy makers huge error to have borrowed in foreign currency and to their fans this appears to strengthen the view that in the supposed world which the Neochartalists fantasize, there is no balance-of-payments constraint. And the error is the failure to recognize that “money” has an international aspect in addition to what it has to do with the government and banks.

At present, the solution is for the world leaders to provide a coordinated fiscal expansion and induce the creditor nations to increase domestic demand and hence increase latter’s level of imports. But the long term solution is to move away from a system of free trade. And that is far from the “MMT” overkill description of the world and overly simplified solutions.

Indebtedness And Liability Dollarization

In the previous post, I commented on Neochartalists’ questionable intuitions on the external sector of an economy – let me add more. There is a silly notion in there that somehow public debt held by foreigners (but in domestic currency) is not debt in ordinary sense at all and things such as that. I will try to show that this is highly misleading. So supposedly since (if) the government can make drafts at its central bank, it doesn’t owe anything in the ordinary sense. This is the worst economic intuition.

First, the Neochartalists start on the wrong foot by using phrases such as “non-convertible currencies” when starting discussions. This is dubious. All currencies are convertible. First official convertibility still exists and second market convertibility is the more important one. The official and legal language use the phrase convertible and convertibility and one frequently sees discussions of FCAC – achieving full capital account convertibility. So it is distortion of language to say some currencies are non-convertible and so on.

I will try to outline how this intuition arises. First, a closed economy doesn’t have a national debt. People mix the phrases public debt and national debt but as if that is not enough, they mix up the concepts as well. So let us be clear:

public debt = debt of the public sector, and,

national debt = net indebtedness of all resident sectors to non-residents (including equity securities held by foreigners).

And a closed economy has no national debt.

So the “national debt” is the negative of the net international investment position. Of course, the phrase “external debt” is used sometimes to count only debt which is not equity securities but this notion is slightly misleading. Also because financial assets are identically equal to liabilities, some nations are creditors and others debtors.

Of course, the world as a whole can be thought of as a closed economy but the difference is that is different from a textbook closed economy which has a single currency and a single central government.

So a closed economy doesn’t have a national debt to begin with because there are no foreigners to begin with. The public debt is a mirror of the private sector stock of financial assets (net). So the government can expand fiscal policy to increase demand and output and is only constrained by the nation’s capacity to produce and inflationary pressures. Any challenge to the public sector by the financial markets can be taken care of because the government will have the ability to make drafts at the central bank. It is true that a portion of the income generated by output goes to bond-holders, but it can easily be shown that this doesn’t rise in an unbounded way.

So far nothing “MMT” – a standard notion known from ages to Keynesians such as Nicholas Kaldor to James Tobin.

But the Neochartalists (“MMTers”) extrapolate this notion to mean any official debt held by non-residents is not an issue  – in select cases by bringing in the phrase “sovereign currency”. Monetary sovereignty is a concept existent before Neochartalists started writing but this phrase “sovereign currency” is slightly dubious. Mainstream economists on the other hand have confused the issue of talking of the public debt as if it is the national debt.

So suppose we start with a scenario in which the public debt is 100% of GDP, the private sector’s net stock of financial assets is 40% and the net indebtedness of all sectors to foreigners is 60% of GDP. One can think of more general situations but let us suppose for simplicity that the 60% held by foreigners is the debt of the central government in domestic currency. What would have led to this configuration of stocks? Current account deficits mainly. A current account deficit means a fall in assets held abroad or a rise in gross indebtedness to foreigners or a mix of the two – meaning a rise in net indebtedness to foreigners. Of course, this is not the only way – revaluations of assets and liabilities, both due to the movement of exchange rates and a change in the price of assets and liabilities can affect the international investment position, but a lot of it typically is due to current account balances.

So is this 60% not debt at all in the ordinary sense of the word? Well as long as foreigners have the ability to redenominate the debt, there is an issue. This process by which debt in domestic currency is converted to debt in foreign currency is called liability dollarization. Of course this involves the intervention of the central bank in foreign exchange markets but the alternative to let the currency find its course when there are destabilizing forces acting is silly.

How can this happen? One simplified example. Suppose the value of the domestic currency is given by FC 1 = DC 1,000. Around this point, foreigners sell public debt in domestic currency in large quantities, but let us say they sell DC 1tn worth of public debt in domestic currency to resident banks and exchange the currency for foreign currency with banks acting as dealers in the foreign exchange market. Assuming banks are at overdraft at their foreign correspondent, at this point, banks’ assets and liabilities have increased by DC 1tn and for foreigners, the composition of claims on residents has changed. Now suppose the central bank intervenes at this point and makes an exceptional financing transaction by borrowing FC 1bn of foreign currency from non-residents and selling it to resident banks and makes a compensating transaction (usually called ‘sterlization’ – a misnomer) with banks by buying the government bonds from them. The banks then use the foreign currency to close their open position. The result of these series of transactions is that the composition of the debt to foreigners has changed from domestic currency to foreign currency, with the public sector now left with debt in foreign currency equivalent of FC 1bn. So the debt in domestic currency has dollarized and surely the ones with the dubious intuition that debt in domestic currency “is not really debt” will agree that now the government appears indebted.

(Alternatively one can think of the central bank losing foreign reserves from its existing stock and later making exceptional financing transactions to borrow in foreign currency to replete the lost reserves).

So in the above, a debt of DC 1tn of the government (in domestic currency) was dollarized to FC 1bn (in foreign currency) during a process in which the the foreign exchange markets forced the hands of central bank to intervene. Under what conditions do these happen? According to an IMF paper Official Foreign Exchange Intervention:

Disorderly market conditions are characterized by illiquidity in the foreign exchange market, wide bid-offer spreads relative to tranquil periods, and sudden changes in foreign exchange market turnover and order flow.

Of course there are other characteristics such as widening of long-term bond yields, widening of interbank rates, increases in forward premia in the foreign exchange markets and so on.

So much for the intuition that debt in domestic currency to foreigners is something special. It is but in a different sense: as long as foreigners continue to hold debt in domestic currency, international investment position is protected from revaluation losses for the nation. That is completely different from the vacuous punchline found in Neochartalists’ blogs that the “government debits securities account and credits reserves account”, to mean indebtedness to foreigners is not an issue. As long as the risk of liability dollarization exists, the naive intuition mentioned earlier fails. A lot of things written float on the wings of the almighty dollar, because although the United States is a net debtor of the rest of the world, there are several complications in the analysis of its balance of payments – complications which allow an economist to interpret things any which way he prefers.

The problems of the world are not easy to solve because of imbalances. One needs efforts to reverse these imbalances with an expansionary bias rather than a deflationary bias as is the case now. And it is quite different from the Neochartalists’ Panglossian notion of simply deficit spending and ignoring the income-induced effect on imports of the rise in domestic output. But for them, continuous current account deficits are not imbalances: Imbalances? What Imbalances? as the title of a paper says, sugarcoating it as a “dissenting view”.

Thomas Palley Dismembers MMT

Thomas Palley has written another critique of Neochartalism aka “Modern Monetary Theory” in the blogosphere.

Title and abstract:

Modern money theory (MMT): the emperor still has no clothes 

Eric Tymoigne and Randall Wray’s (T&W, 2013) defense of MMT leaves the MMT emperor even more naked than before (excuse the Yogi Berra-ism). The criticism of MMT is not that it has produced nothing new. The criticism is that MMT is a mix of old and new, the old is correct and well understood, while the new is substantially wrong. Among many failings, T&W fail to provide an explanation of how MMT generates full employment with price stability; lack a credible theory of inflation; and fail to justify the claim that the natural rate of interest is zero. MMT currently has appeal because it is a policy polemic for depressed times. That makes for good politics but, unfortunately, MMT’s policy claims are based on unsubstantiated economics (The full paper is HERE).

To me, the most striking contradictions of what’s called Modern Monetary Theory is the notion that external constraints go away and a nation simply has to float its exchange rate in the markets.

Palley points out:

What is bizarre about this defensive invocation of flexible exchange rates is that it does not work and it also puts MMT in the company of Milton Friedman (1953), who was the ultimate booster of flexible exchange rates. Friedman argued that exchange rate speculation was stabilizing because profit-seeking speculators would close the gap between the exchange rate warranted by fundamentals and the actual exchange rate. They would sell when the exchange rate was over-valued relative to fundamentals, and buy when it was below. Such arguments run counter to the destabilizing speculation logic of Minsky’s (1992) financial instability hypothesis, with which MMT claims close affinity.

So in recent times, Turkey is good example because of its large current account deficits. It’s exchange rate keep plummeting and CBRT – the central bank had to massively raise interest rates to prevent a runaway exchange rate. And this came after a huge central bank intervention of selling foreign reserves which didn’t soothe nerves of creditors.

USDTRYchart credit:

Paradoxically the government of Turkey issued a 31-year US dollar denominated bond to augment foreign reserves, yet again dispelling the Neochartalists’ notion that somehow governments can choose to be not indebted in foreign currencies.

I guess to the blog reader, Neochartalism comes out as something new because he/she is likely not aware of Post-Keynesian economics anyway but as Palley points out, ‘the criticism is that MMT is a mix of old and new, the old is correct and well understood, while the new is substantially wrong’.

Tobinesque Models

Paul Krugman writes today on his blog on James Tobin’s work:

Let me offer an example of how this ended up impoverishing macroeconomic analysis: the strange disappearance of James Tobin. In the 1960s Tobin developed and elaborated a sophisticated view(pdf) [original link corrected] of financial markets that offered insights into things like the role of intermediaries, the effects of endogenous inside money, and more. I’ve found myself using Tobinesque analysis a lot since the financial crisis hit, because it offers a sophisticated way to think about the role of finance in economic fluctuations.

But Tobin, as far as I can tell, disappeared from graduate macro over the course of the 80s, because his models, while loosely grounded in some notion of rational behavior, weren’t explicitly and rigorously derived from microfoundations. And for good reason, by the way: it’s pretty hard to derive portfolio preferences rigorously in that sense. But even so, Tobin-type models conveyed important insights — which were effectively lost.

Compare that to his article in response to another article on Wynne Godley which appeared in the New York Times – completely dismissing Godley’s work.

Three things: first Krugman claimed earlier that we needn’t look at old ideas:

But it is kind of funny to see a revival of old-fashioned macro hailed, at least by some, as the key to a reconstruction of the field

directly contradicting what he says today.

Second – obviously not having read Wynne Godley, he missed the point that Wynne’s analysis has significant improvement of James Tobin’s work.

Third, of course, Krugman’s understanding of monetary economics in general is poor, as can be seen when he gets into debates with heteredox economists and makes the most elementary errors. So it is strange he is lecturing others on this and fails once again to acknowledge heteredox economists.

Here’s Marc Lavoie describing in his article From Macroeconomics to Monetary Economics: Some Persistent Themes in the Theory Work of Wynne Godley in the book Contributions to Stock-Flow Modeling: Essays in Honor of Wynne Godley:

As Godley points out on a number of occasions, he himself owed his formalization of portfolio choice and of the fully consistent transactions-flow matrices to James Tobin. Godley was most particularly influenced and stimulated by his reading of the paper by Backus et al. (1980), as he writes in Godley (1996, p. 5) and as he told me verbally several times. The discovery of the Backus et al. paper, with its large flow-of-funds matrix, was a revelation to Godley and allowed him to move forward. But as pointed out in Godley and Lavoie (2007, p. 493), despite their important similarities, there is a crucial difference in the works of Tobin and Godley devoted to the integration of the real and monetary sides. In Tobin, the focus is on one-period models, or on the adjustments from the initial towards the desired portfolio composition, for a given income level. As Randall Wray (1992, p. 84) points out, in Tobin’s approach ‘flow variables are exogenously determined, so that the models focus solely on portfolio decisions’. By contrast, in Godley and Cripps and in further works, Godley is preoccupied in describing a fully explicit traverse that has all the main stock and flow variables as endogenous variables. As he himself says, ‘the present paper claims to have made … a rigorous synthesis of the theory of credit and money creation with that of income determination in the (Cambridge) Keynesian tradition’ (Godley, 1997, p. 48). Tobin never quite succeeds in doing so, thus not truly introducing (historical) time in his analysis, in contrast to the objective of the Godley and Cripps book, as already mentioned earlier. Indeed, when he heard that Tobin had produced a new book (Tobin and Golub, 1998), Godley was quite anxious for a while as he feared that Tobin would have improved upon his approach, but these fears were alleviated when he read the book and realized that there was no traverse analysis there either.

Draft link here.

Effects Of Interest Payments On Debt

Earlier I had two posts on this and now I have merged them. (Feb 16 2014, 2:41am UTC)

Tyler Cowen has a blog post which dismisses the idea that distribution of income has an effect on aggregate demand – in particular payment of interest on debt. Merijn Knibbe has a post at the Real World Economics Review blog arguing Cowen is incorrect but Knibbe’s argument is not so accurate.

How does high debt and/or higher interest payments have contractionary effects of aggregate demand?

First, if interest rates are constant, increased borrowing for expenditure on goods and services although will initially lead to a rise in aggregate demand, at some point interest payments will start to become important to have a reverse effect if debt rises too high compared to income. The interest payments flow either to banks and other lenders who will pay dividends or they flow to the holders of the securitized loans. The ultimate beneficiary will be households. The households who have received the dividends or interest payments are presumably richer anyway and have a lower propensity to consume compared to households with lower income and hence an effect on aggregate demand.

Second, if there is a rise in interest rates, there is an additional effect even if debt/income isn’t changing as higher interest is paid on floating rate loans such as household mortgages, and this will lead to a fall in consumption than before. This then has a negative effect on aggregate demand. Of course a rise in the rate of interest itself has some effect on borrowing and hence aggregate demand but here we are talking of interest payments only. (There are also other effects such as fall in wealth because a rise in interest rates may lead to a fall in bond prices leading to a fall of wealth of holders and the resultant wealth effect but this is not important for this post).

Of course in general there are several moving parts, and one has to be careful: for example, “negative effect” doesn’t mean a fall. 

Knibbe’s argument is however different:

When you pay back your debt to an MFI the asset side as well as the liability side of the balance sheet shrinks with the same amount as respectively the liability side and the asset side of the household or company which pays back the debt. And the money has gone – into thin air. In the case of a pension fund, however, only the composition of the asset side changes as ‘debt’ assets are changed for ‘money’ assets.

and that

… The amount of money decreases. The money does disappear from the stream of aggregate demand.

That isn’t a right argument because banks pay dividends out of profits and that too has an effect on the money stock. Also the destruction of money is not too relevant here. What matters is how much the propensity of consume of the households receiving the dividends is. So the net effect depends on how much the differences in propensities of the various economic units relevant here are.

Also in his post, Knibbe seems to make a distinction between banks and pension funds, as if borrowing from banks has a different effect on aggregate demand than borrowing from some non-bank lender – which is not a good intuition and is essentially a mix of loanable funds model and endogenous money model.

A lot of people misread the notion “loans make deposits”. Those arguments are important to discard the textbook model of the money multiplier but it is sometimes implicitly extrapolated to various incorrect notions. One should look at the stock of money from something such as Tobin’s asset allocation model rather than thinking creation of money being synonymous to increase in aggregate demand. In general a rise in borrowing for expenditure on goods and services (both from banks and non-banks) leads to a higher output and income and hence higher wealth of asset allocators who would want to hold a higher amount of deposits (because their wealth has risen) and this will to a higher stock of money than the recent past. So the higher stock of money will then be coincident to higher output but cannot be said to have been the reason for an increase in aggregate demand or output. Similarly a fall in the stock of money cannot be said to be cause of a fall in aggregate demand. So high interest payment on debts has an effect on aggregate demand and output via the distribution of income and not because bank deposits reduce at the moment interest is paid.


After I posted the above, I received a nice comment by Kostas Kalevras according to whom not all profits of are paid as dividends and there are additional complications that it matters what the counterpart of the saving is – whether in the form of capital formation or accumulation of financial assets.

Normally it is said saving is a leakage to demand but this is not right. For a firm, the retained earning in any period – i.e., the undistributed profits are its saving. But as Kostas points out, net lending is important. To see this imagine two firms – same retained earning but one with accumulation of fixed capital such as buildings and another accumulating financial assets as counterpart to the retained earning. The first firm has a higher contribution to demand because of the investment expenditure. And net lending/net borrowing is the thing to look at.

For financial firms, the difference in saving and net lending will be small, but let’s still take net lending. So here is the chart obtained by the Federal Reserve’s Z.1 Flow of Funds data for the United States:

Financial Business - Net Lending

Net lending increased during the crisis but has dropped again.

So we have come a long way from interest payments on debt completely disappearing. Dividends distributed are income for shareholders, as are interest payments on bonds issued (or loans taken) by these firms (even wages and other costs) and it matters to whom it flows and their propensities to consume. Also the additional important complications noted above. (Of course since now I am talking data, payments to foreigners also matters but that’s not important for now).

Thomas Palley’s Three Class Growth Model

Thomas Palley has a new paper titled The middle class in macroeconomics and growth theory: A three class neo-Kaleckian – Goodwin model


This paper presents a three class growth model with labor market conflict. The classes are workers, a middle management middle class, and a “top” management capitalist class. The model introduces personal income distribution that supplements conventional concerns with functional income distribution. Endogenously generated changes in personal income distribution can generate endogenous shifts from profit-led to wage-led regimes and vice-versa. A three class economy generates richer patterns of class conflict because the middle class has shared interests and conflicts with both capitalists and workers. Changes that benefit the middle class do not necessarily increase growth or employment or benefit workers.

The link can be found in his blog here

Nicholas Kaldor’s Collected Economic Essays

A lot of commenters on this blog have asked me about a list of papers of Nicholas Kaldor. I have scanned the covers and the table of contents of his Collected Economic Essays (Volumes 1-9) for the list. These papers are of course not exhaustive but the most important.

The volumes are out of print and used copies are exorbitantly priced. Some of the papers are available at jstor. It requires a subscription but allows you to read papers free online with some restrictions (which isn’t so bad) – you only have to create a login to use this.

Here’s the table of contents of the 9 volumes and their covers. A good way of reading is going in the reverse.

Volume 1: Cover


Volume 1: Contents


Volume 2: Cover


Volume 2: Contents


Volume 3: Cover


Volume 3: Contents


Volume 4: Cover


Volume 4: Contents


Volume 5: Cover


Volume 5: Contents


Volume 6: Cover


Volume 6: Contents


Volume 7: Cover


Volume 7: Contents


Volume 8: Cover


Volume 8: Contents


Volume 9: Cover


Volume 9: Contents

New Keenesian Economics

Nick Edmonds has written a nice short critique of Steve Keen’s new definition of “aggregate demand”.

Let me add a bit more.

First, Keen has changed his definition of aggregate demand. So the previously we were given rigourous proofs using Lebesgue integrals to show that aggregate demand is gdp plus change in debt (as if it is right to the penny). It is now corrected to:

Keen AD(source: Keen’s paper)

Second, there is an undertone in Keen’s papers and videos that he is doing something new – which even Post-Keynesians haven’t done before. This is not true. Wynne Godley wrote a textbook named Macroeconomics in 1983 with his colleague Francis Cripps – and in my opinion – a work of a supreme genius. In recent years before his death, he greatly improved his analysis with Marc Lavoie. In both these books and the papers written by the three authors, money is central to the dynamical analysis. Of course like any other subject, this is always work in progress and Keen shouldn’t give the impression to his audience that he is the first one to write dynamical Post-Keynesian models, especially when he seems to struggle at basic steps.

Let us take Keen’s new equation. It seems to suggest that if some economic unit takes out a loan from the banking system, aggregate demand necessarily rises. If some economic unit such as a production firm takes out more loans but some other economic unit such as a household reduces its propensity to consume, the total effect on output depends on these things and may fall as well if the drop in the propensity to consume is high. I suppose Keen will have to explain this by saying the velocity of money has changed but then this just means that what he calls “velocity of money” is a thing defined by his equations (which anyway make no sense whatsoever) and hence doesn’t say anything.

Apologies – this is a bit harsh and Keen has many nice things about him but he should contemplate on his ideas.