Publications
Éric Tymoigne
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Working Paper No. 1061 | November 2024
Modern Money Theory on Fiscal and Monetary Policies: Empirics, Theory and Policymaking
View More View LessOriginally issued as EDI Working Paper No. 04, 2022
Drumetz and Pfister make several claims about the inadequacy and fallacies of Modern Money Theory (MMT) and conclude that MMT is nothing more than a political manifesto; there are no theoretical and empirical foundations behind it. This paper addresses this last point by focusing on the fiscal and monetary policy aspects of their criticisms. Contrary to what they claim, MMT is backed by a large body of empirical evidence, a rich institutional analysis, and a well-developed theoretical framework (including mathematical models). MMT provides a detailed analysis of the coordination between the fiscal and monetary branches of government, emphasizes that fiscal deficits are a stylized fact, and uses theoretical tools grounded in institutional realities to explain this stylized fact. In line with a large body of work, MMT concludes that fiscal policy, the provision of an elastic currency, and financial regulations have contributed to economic stability and growth; however government involvement can be improved by changing the policymaking praxis. MMT also concludes that fine-tuning of the economy via monetary policy is not effective and does not attribute the “great moderation” to better monetary management.Download:Associated Program:Author(s):Related Topic(s):
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Working Paper No. 1058 | November 2024
Retracing European and Chinese Monetary Thoughts on Chartalism, Nominalism, and the Origins of Monetary Systems
A monetary approach that combines Chartalism, Nominalism, and Command origins of monetary systems is often deemed to have emerged only recently, while the Aristotelian approach (Commodity, Metallism, and Market origins of monetary systems) is the only one that existed until the end of the eighteenth/early-nineteenth century. In the major studies of the history of monetary thought, the Chartalism-Nominalism-Command approach is mostly left unmentioned, or at best reduced to an incoherent banality. The paper shows that this approach has a long and rich intellectual history among European monetary thinkers. In Europe, Plato was its first exponent, albeit in a very rudimentary way, and so one may call it the “Platonic approach.” It is developed by Roman legists (such as Javolenus, Paulus, and Ulpian) and Medieval legists (such as Du Moulin, Hotman, and Butigella) who note that coins are similar to securities and that debts are serviced when nominal sums are paid rather than specific coins tendered. During the Renaissance and early modern period, a series of scholars and financial practitioners (such as Law, Dutot, Thomas Smith, and James Taylor) emphasize the financial logic behind monetary mechanics and the similarity of coins and notes. In the twentieth century, authors such as Innes, Knapp, Keynes, and Commons build onto the groundwork provided by these past scholars. In China, the Chartalism-Nominalism-Command approach develops independently and dominates from the beginning under Confucian and Legist thoughts. They emphasize the statecraft origins of monetary systems, the role of tax redemption, and the irrelevance of the material used to make monetary instruments. Clay, lead, paper, iron, copper, and tin are normal and convenient means to make monetary instruments, they are not special/emergency materials. The essence of a monetary instrument is not defined by its materiality but rather by its chartality, that is, by the promise it embeds. The Platonic approach rejects the categories and conceptualizations used by the Aristotelian approach and develops new ones, which leads to a different set of inquiries and understanding of monetary phenomena, problems, and history.Download:Associated Program:Author(s):Related Topic(s): -
Working Paper No. 996 | December 2021Modern Money Theory (MMT) has generated considerable scrutiny and discussions over the past decade. While it has gained some acceptance in the financial sector and among some politicians, it has come under strong criticisms from all sides of the academic spectrum and from conservative political circles. MMT has been argued to be both fascist and communist, orthodox and heterodox, dangerous and benign, unworkable and obvious, and unrealistic and clearly nothing new. The contradictory aspects of the range of criticisms suggest that there is at best a superficial understanding of the MMT framework. MMT relies on a well-established theoretical framework and is not inherently about changing the economic system; it is about changing the policymaking praxis to implement a given public purpose. That public purpose can be small or large and can be conservative or progressive; it ought not to be narrowly determined but rather should be set as democratically as possible. While MMT proponents tend to favor a public purpose that deals with what they see as major drawbacks of capitalist economies (persistent nonfrictional unemployment, unfair inequalities, and financial instability), their policy proposals do not lead to a major shift of domestic resources to the public purpose. If a major increase in government spending is implemented, MMT provides some guidance on how to do that in the least disruptive manner by drawing on past economic experiences. The point is to implement the public purpose at a pace that recognizes the potential constraint that comes from domestic resource availability and potential inflationary pressures from bottlenecks, rising import prices, and exchange rate depreciation, among others. In most cases, economies have more flexibility than what is admitted. In all cases, when monetary sovereignty prevails, the fiscal position and the public debt are poor metrics for judging the viability of a public purpose and its pace of implementation.
As such, applying MMT to policymaking does not mean that a government ought to be encouraged to record fiscal deficits or that the relation between the central bank and the treasury ought to be radically changed to allow direct financing. The fiscal balance is not a proper policy goal because it leads to irrelevant or incorrect policymaking and because it is largely outside the control of policymakers. The financial praxis of monetarily sovereign governments already conforms to MMT. Central banks and treasuries routinely coordinate their financial operations. Some governments have allowed direct financing of the treasury by the central bank; others have not but have developed equivalent ways to coordinate their fiscal and monetary operations that work around existing political constraints. Such routine coordination ensures an elastic financing of government operations that at least deals with domestic resources and is not intrinsically inflationary.Download:Associated Program(s):Author(s):Related Topic(s): -
Working Paper No. 890 | May 2017
Linking the State and Credit Theories of Money through a Financial Approach to Money
The paper presents a financial approach to monetary analysis that links the credit and state theories of money. A premise of the functional approach to money is that “money is what money does.” In this approach, monetary and mercantile mechanics are conflated, which leads to the conclusion that unconvertible monetary instruments are worthless. The financial approach to money strictly separates the two mechanics and argues that major monetary disruptions occurred when the two were conflated. Monetary instruments have always been promissory notes. As such, their financial characteristics are central to their value and liquidity. One of the main financial requirements of any monetary instrument is that it be redeemable at any time. As long as this is the case, the fair value of an unconvertible monetary instrument is its face value. While the functional approach does not recognize the centrality of redemption, the paper shows that redemption plays a critical role in the state and credit views of money. Payments due to issuer and/or convertibility on demand are central to the possibility of par circulation. The paper shows that this has major implications for monetary analysis, both in terms of understanding monetary history and in terms of performing monetary analysis.
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In the Media | March 2015
By Campbell R. Harvey and Éric Tymoigne
The Wall Street Journal, March 1, 2015. All Rights Reserved.
Despite the mystery, the whiff of scandal, and general public unfamiliarity with the concept, somebody out there is buying, and selling, not just bitcoin but dozens of other cryptocurrencies as well. The total market capitalization for these unregulated electronic forms of payment was roughly $4.04 billion as of mid-February, according to coinmarketcap.com, a website that tracks trading in alternative currencies. More than 500 altcoins, as they are also known, were represented on the site recently.
Read more: http://www.wsj.com/articles/do-cryptocurrencies-such-as-bitcoin-have-a-future-1425269375
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Working Paper No. 799 | May 2014
A Financial View
This paper develops the framework of analysis of monetary systems put together by authors such as Macleod, Keynes, Innes, and Knapp. This framework does not focus on the functions performed by an object but rather on its financial characteristics. Anything issued by anybody can be a monetary instrument and any type of material can be used to make a monetary instrument, as these are unimportant determinants of what a monetary instrument is. What matters is the existence of specific financial characteristics. These characteristics lead to a stable nominal value (parity) in the proper financial environment. This framework of analysis leads the researcher to study how the fair value of a monetary instrument changes and how that change differs from changes in the value of the unit of account. It also provides a road map to understanding monetary history and why monetary instruments are held.
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Working Paper No. 788 | March 2014
Modern Money Theory and Interrelations between the Treasury and the Central Bank
View More View LessThe Case of the United States
One of the main contributions of Modern Money Theory (MMT) has been to explain why monetarily sovereign governments have a very flexible policy space that is unconstrained by hard financial limits. Not only can they issue their own currency to pay public debt denominated in their own currency, but they can also easily bypass any self-imposed constraint on budgetary operations. Through a detailed analysis of the institutions and practices surrounding the fiscal and monetary operations of the treasury and central bank of the United States, the eurozone, and Australia, MMT has provided institutional and theoretical insights into the inner workings of economies with monetarily sovereign and nonsovereign governments. The paper shows that the previous theoretical conclusions of MMT can be illustrated by providing further evidence of the interconnectedness of the treasury and the central bank in the United States.
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Working Paper No. 778 | November 2013
A Reply to Critics
One of the main contributions of Modern Money Theory (MMT) has been to explain why monetarily sovereign governments have a very flexible policy space that is unencumbered by hard financial constraints. Through a detailed analysis of the institutions and practices surrounding the fiscal and monetary operations of the treasury and central bank of many nations, MMT has provided institutional and theoretical insights about the inner workings of economies with monetarily sovereign and nonsovereign governments. MMT has also provided policy insights with respect to financial stability, price stability, and full employment. As one may expect, several authors have been quite critical of MMT. Critiques of MMT can be grouped into five categories: views about the origins of money and the role of taxes in the acceptance of government currency, views about fiscal policy, views about monetary policy, the relevance of MMT conclusions for developing economies, and the validity of the policy recommendations of MMT. This paper addresses the critiques raised using the circuit approach and national accounting identities, and by progressively adding additional economic sectors.
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Working Paper No. 716 | April 2012
A Minskyan Approach
This paper presents a method to capture the growth of financial fragility within a country and across countries. This is done by focusing on housing finance in the United States, the United Kingdom, and France. Following the theoretical framework developed by Hyman P. Minsky, the paper focuses on the risk of amplification of shock via a debt deflation instead of the risk of a shock per se. Thus, instead of focusing on credit risk, for example, financial fragility is defined in relation to the means used to service debts, given credit risk and all other sources of shocks. The greater the expected reliance on capital gains and debt refinancing to meet debt commitments, the greater the financial fragility, and so the higher the risk of debt deflation induced by a shock if no government intervention occurs. In the context of housing finance, this implies that the growth of subprime lending was not by itself a source of financial fragility; instead, it was the change in the underwriting methods in all sectors of the mortgage markets that created a financial situation favorable to the emergence of a debt deflation. Stated alternatively, when nonprime and prime mortgage lending moved to asset-based lending instead of income-based lending, the financial fragility of the economy grew rapidly.
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Working Paper No. 654 | March 2011
Financial Fragility Indexes
With the Great Recession and the regulatory reform that followed, the search for reliable means to capture systemic risk and to detect macrofinancial problems has become a central concern. In the United States, this concern has been institutionalized through the Financial Stability Oversight Council, which has been put in charge of detecting threats to the financial stability of the nation. Based on Hyman Minsky’s financial instability hypothesis, the paper develops macroeconomic indexes for three major economic sectors. The index provides a means to detect the speed with which financial fragility accrues, and its duration; and serves as a complement to the microprudential policies of regulators and supervisors. The paper notably shows, notably, that periods of economic stability during which default rates are low, profitability is high, and net worth is accumulating are fertile grounds for the growth of financial fragility.
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Working Paper No. 637 | November 2010
Some Postrecession Regulatory Implications
Over the past 40 years, regulatory reforms have been undertaken on the assumption that markets are efficient and self-corrective, crises are random events that are unpreventable, the purpose of an economic system is to grow, and economic growth necessarily improves well-being. This narrow framework of discussion has important implications for what is expected from financial regulation, and for its implementation. Indeed, the goal becomes developing a regulatory structure that minimizes the impact on economic growth while also providing high-enough buffers against shocks. In addition, given the overarching importance of economic growth, economic variables like profits, net worth, and low default rates have been core indicators of the financial health of banking institutions.
This paper argues that the framework within which financial reforms have been discussed is not appropriate to promoting financial stability. Improving capital and liquidity buffers will not advance economic stability, and measures of profitability and delinquency are of limited use to detect problems early. The paper lays out an alternative regulatory framework and proposes a fundamental shift in the way financial regulation is performed, similar to what occurred after the Great Depression. It is argued that crises are not random, and that their magnitude can be greatly limited by specific pro-active policies. These policies would focus on understanding what Ponzi finance is, making a difference between collateral-based and income-based Ponzi finance, detecting Ponzi finance, managing financial innovations, decreasing competitions in the banking industry, ending too-big-to-fail, and deemphasizing economic growth as the overarching goal of an economic system. This fundamental change in regulatory and supervisory practices would lead to very different ways in which to check the health of our financial institutions while promoting a more sustainable economic system from both a financial and a socio-ecological point of view.
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Working Paper No. 605 | June 2010
An Evolutionary Approach to the Measure of Financial Fragility
Different frameworks of analysis lead to different conceptions of financial instability and financial fragility. On one side, the static approach conceptualizes financial instability as an unfortunate byproduct of capitalism that results from unpredictable random forces that no one can do anything about except prepare for through adequate loss reserves, capital, and liquidation buffers. On the other side, the evolutionary approach conceptualizes financial instability as something that the current economic system invariably brings upon itself through internal market and nonmarket forces, and that requires change in financial practices rather than merely good financial buffers. This paper compares the two approaches in order to lay the foundation for the empirical analysis developed within the evolutionary approach. The paper shows that, with the use of macroeconomic data, it is possible to detect financial fragility, especially Ponzi finance. The methodology is applied to residential housing in the US household sector and is able to capture some of the trends that are known to be sources of economic difficulties. Notably, the paper finds that Ponzi finance was going on in the housing sector from at least 2004 to 2007, which concurs with other works based on more detailed data.Download:Associated Program:Author(s):Related Topic(s): -
Public Policy Brief No. 105 | October 2009
The Obama administration has implemented several policies to “jump-start” the American economy—efforts that have largely focused on preserving the financial interests of major banks. The authors of this new policy brief believe that maintaining the status quo is not the solution, since it overlooks the debt problems of households and nonfinancial businesses—and re-creating the financial conditions that led to disaster will simply set the stage for a recurrence of the Great Depression or a Japanese-style “lost decade.” They recommend a more radical policy agenda, such as federal spending programs that directly provide jobs and sustain employment, thereby helping to restore the creditworthiness of borrowers, the profitability of firms, and the fiscal position of state and federal budgets.
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Public Policy Brief Highlights No. 105A | October 2009<p>The Obama administration has implemented several policies to “jump-start” the American economy—efforts that have largely focused on preserving the financial interests of major banks. The authors of this new policy brief believe that maintaining the status quo is not the solution, since it overlooks the debt problems of households and nonfinancial businesses—and re-creating the financial conditions that led to disaster will simply set the stage for a recurrence of the Great Depression or a Japanese-style “lost decade.” They recommend a more radical policy agenda, such as federal spending programs that directly provide jobs and sustain employment, thereby helping to restore the creditworthiness of borrowers, the profitability of firms, and the fiscal position of state and federal budgets.</p>
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Working Paper No. 574.4 | August 2009
A Critical Assessment of Seven Reports on Financial Reform: A Minskyan Perspective, Part IV
View More View LessSummary Tables
This four-part study is a critical analysis of several reports dealing with the reform of the financial system in the United States. The study uses Minsky’s framework of analysis and focuses on the implications of Ponzi finance for regulatory and supervisory policies. The main conclusion of the study is that, while all reports make some valuable suggestions, they fail to deal with the socioeconomic dynamics that emerge during long periods of economic stability. As a consequence, it is highly doubtful that the principal suggestions contained in the reports will provide any applicable means to limit the worsening of financial fragility over periods of economic stability. The study also concludes that any meaningful systemic and prudential regulatory changes should focus on the analysis of expected and actual cash flows (sources and stability) rather than capital equity, and on preventing the emergence of Ponzi processes. The latter tend to emerge over long periods of economic stability and are not necessarily engineered by crooks. On the contrary, the pursuit of economic growth may involve the extensive use of Ponzi financial processes in legal economic activities. The study argues that some Ponzi processes—more precisely, pyramid Ponzi processes—should not be allowed to proceed, no matter how severe the immediate impact on economic growth, standards of living, or competitiveness. This is so because pyramid Ponzi processes always collapse, regardless how efficient financial markets are, how well informed and well behaved individuals are, or whether there is a “bubble” or not. The longer the process is allowed to proceed, the more destructive it becomes. Pyramid Ponzi processes cannot be risk-managed or buffered against; if economic growth is to be based on a solid financial foundation, these processes cannot be allowed to continue. Finally, a supervisory and regulatory process focused on detecting Ponzi processes would be much more flexible and adaptive, since it would not be preoccupied with either functional or product limits, or with arbitrary ratios of “prudence.” Rather, it would oversee all financial institutions and all products, no matter how new or marginal they might be.
See also, Working Paper Nos. 574.1, 574.2, and 574.3.
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Working Paper No. 574.3 | August 2009
A Critical Assessment of Seven Reports on Financial Reform: A Minskyan Perspective, Part III
View More View LessG30, OECD, GAO, ICMBS Reports
This four-part study is a critical analysis of several reports dealing with the reform of the financial system in the United States. The study uses Minsky’s framework of analysis and focuses on the implications of Ponzi finance for regulatory and supervisory policies. The main conclusion of the study is that, while all reports make some valuable suggestions, they fail to deal with the socioeconomic dynamics that emerge during long periods of economic stability. As a consequence, it is highly doubtful that the principal suggestions contained in the reports will provide any applicable means to limit the worsening of financial fragility over periods of economic stability. The study also concludes that any meaningful systemic and prudential regulatory changes should focus on the analysis of expected and actual cash flows (sources and stability) rather than capital equity, and on preventing the emergence of Ponzi processes. The latter tend to emerge over long periods of economic stability and are not necessarily engineered by crooks. On the contrary, the pursuit of economic growth may involve the extensive use of Ponzi financial processes in legal economic activities. The study argues that some Ponzi processes—more precisely, pyramid Ponzi processes—should not be allowed to proceed, no matter how severe the immediate impact on economic growth, standards of living, or competitiveness. This is so because pyramid Ponzi processes always collapse, regardless how efficient financial markets are, how well informed and well behaved individuals are, or whether there is a “bubble” or not. The longer the process is allowed to proceed, the more destructive it becomes. Pyramid Ponzi processes cannot be risk-managed or buffered against; if economic growth is to be based on a solid financial foundation, these processes cannot be allowed to continue. Finally, a supervisory and regulatory process focused on detecting Ponzi processes would be much more flexible and adaptive, since it would not be preoccupied with either functional or product limits, or with arbitrary ratios of “prudence.” Rather, it would oversee all financial institutions and all products, no matter how new or marginal they might be.
See also, Working Paper Nos. 574.1, 574.2, and 574.4.
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Working Paper No. 574.2 | August 2009
A Critical Assessment of Seven Reports on Financial Reform: A Minskyan Perspective, Part II
View More View LessTreasury, CRMPG Reports, Financial Stability Forum
This four-part study is a critical analysis of several reports dealing with the reform of the financial system in the United States. The study uses Minsky’s framework of analysis and focuses on the implications of Ponzi finance for regulatory and supervisory policies. The main conclusion of the study is that, while all reports make some valuable suggestions, they fail to deal with the socioeconomic dynamics that emerge during long periods of economic stability. As a consequence, it is highly doubtful that the principal suggestions contained in the reports will provide any applicable means to limit the worsening of financial fragility over periods of economic stability. The study also concludes that any meaningful systemic and prudential regulatory changes should focus on the analysis of expected and actual cash flows (sources and stability) rather than capital equity, and on preventing the emergence of Ponzi processes. The latter tend to emerge over long periods of economic stability and are not necessarily engineered by crooks. On the contrary, the pursuit of economic growth may involve the extensive use of Ponzi financial processes in legal economic activities. The study argues that some Ponzi processes—more precisely, pyramid Ponzi processes—should not be allowed to proceed, no matter how severe the immediate impact on economic growth, standards of living, or competitiveness. This is so because pyramid Ponzi processes always collapse, regardless how efficient financial markets are, how well informed and well behaved individuals are, or whether there is a “bubble” or not. The longer the process is allowed to proceed, the more destructive it becomes. Pyramid Ponzi processes cannot be risk-managed or buffered against; if economic growth is to be based on a solid financial foundation, these processes cannot be allowed to continue. Finally, a supervisory and regulatory process focused on detecting Ponzi processes would be much more flexible and adaptive, since it would not be preoccupied with either functional or product limits, or with arbitrary ratios of “prudence.” Rather, it would oversee all financial institutions and all products, no matter how new or marginal they might be.
See also, Working Paper Nos. 574.1, 574.3, and 574.4.
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Working Paper No. 574.1 | August 2009
A Critical Assessment of Seven Reports on Financial Reform: A Minskyan Perspective, Part I
View More View LessKey Concepts and Main Points
This four-part study is a critical analysis of several reports dealing with the reform of the financial system in the United States. The study uses Minsky’s framework of analysis and focuses on the implications of Ponzi finance for regulatory and supervisory policies. The main conclusion of the study is that, while all reports make some valuable suggestions, they fail to deal with the socioeconomic dynamics that emerge during long periods of economic stability. As a consequence, it is highly doubtful that the principal suggestions contained in the reports will provide any applicable means to limit the worsening of financial fragility over periods of economic stability. The study also concludes that any meaningful systemic and prudential regulatory changes should focus on the analysis of expected and actual cash flows (sources and stability) rather than capital equity, and on preventing the emergence of Ponzi processes. The latter tend to emerge over long periods of economic stability and are not necessarily engineered by crooks. On the contrary, the pursuit of economic growth may involve the extensive use of Ponzi financial processes in legal economic activities. The study argues that some Ponzi processes—more precisely, pyramid Ponzi processes—should not be allowed to proceed, no matter how severe the immediate impact on economic growth, standards of living, or competitiveness. This is so because pyramid Ponzi processes always collapse, regardless how efficient financial markets are, how well informed and well behaved individuals are, or whether there is a “bubble” or not. The longer the process is allowed to proceed, the more destructive it becomes. Pyramid Ponzi processes cannot be risk-managed or buffered against; if economic growth is to be based on a solid financial foundation, these processes cannot be allowed to continue. Finally, a supervisory and regulatory process focused on detecting Ponzi processes would be much more flexible and adaptive, since it would not be preoccupied with either functional or product limits, or with arbitrary ratios of “prudence.” Rather, it would oversee all financial institutions and all products, no matter how new or marginal they might be.
See also, Working Paper Nos. 574.2, 574.3, and 574.4.
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Working Paper No. 573.2 | August 2009
Deregulation, the Financial Crisis, and Policy Implications
This study analyzes the trends in the financial sector over the past 30 years, and argues that unsupervised financial innovations and lenient government regulation are at the root of the current financial crisis and recession. Combined with a long period of economic expansion during which default rates were stable and low, deregulation and unsupervised financial innovations generated incentives to make risky financial decisions. Those decisions were taken because it was the only way for financial institutions to maintain market share and profitability. Thus, rather than putting the blame on individuals, this paper places it on an economic setup that requires the growing use of Ponzi processes during enduring economic expansion, and on a regulatory system that is unwilling to recognize (on the contrary, it contributes to) the intrinsic instability of market mechanisms. Subprime lending, greed, and speculation are merely aspects of the larger mechanisms at work.
It is argued that we need to change the way we approach the regulation of financial institutions and look at what has been done in other sectors of the economy, where regulation and supervision are proactive and carefully implemented in order to guarantee the safety of society. The criterion for regulation and supervision should be neither Wall Street’s nor Main Street’s interests but rather the interests of the socioeconomic system. The latter requires financial stability if it’s to raise, durably, the standard of living of both Wall Street and Main Street. Systemic stability, not profits or homeownership, should be the paramount criterion for financial regulation, since systemic stability is required to maintain the profitability—and ultimately, the existence—of any capitalist economic entity. The role of the government is to continually counter the Ponzi tendencies of market mechanisms, even if they are (temporarily) improving standards of living, and to encourage economic agents to develop safe and reliable financial practices.
See also, Working Paper No. 573.1, “Securitization, Deregulation, Economic Stability, and Financial Crisis, Part I: The Evolution of Securitization.”
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Working Paper No. 573.1 | August 2009
The Evolution of Securitization
This study analyzes the trends in the financial sector over the past 30 years, and argues that unsupervised financial innovations and lenient government regulation are at the root of the current financial crisis and recession. Combined with a long period of economic expansion during which default rates were stable and low, deregulation and unsupervised financial innovations generated incentives to make risky financial decisions. Those decisions were taken because it was the only way for financial institutions to maintain market share and profitability. Thus, rather than putting the blame on individuals, this paper places it on an economic setup that requires the growing use of Ponzi processes during enduring economic expansion, and on a regulatory system that is unwilling to recognize (on the contrary, it contributes to) the intrinsic instability of market mechanisms. Subprime lending, greed, and speculation are merely aspects of the larger mechanisms at work.
It is argued that we need to change the way we approach the regulation of financial institutions and look at what has been done in other sectors of the economy, where regulation and supervision are proactive and carefully implemented in order to guarantee the safety of society. The criterion for regulation and supervision should be neither Wall Street’s nor Main Street’s interests but rather the interests of the socioeconomic system. The latter requires financial stability if it’s to raise, durably, the standard of living of both Wall Street and Main Street. Systemic stability, not profits or homeownership, should be the paramount criterion for financial regulation, since systemic stability is required to maintain the profitability—and ultimately, the existence—of any capitalist economic entity. The role of the government is to continually counter the Ponzi tendencies of market mechanisms, even if they are (temporarily) improving standards of living, and to encourage economic agents to develop safe and reliable financial practices.
See also, Working Paper No. 573.2, “Securitization, Deregulation, Economic Stability, and Financial Crisis, Part II: Deregulation, the Financial Crisis, and Policy Implications.”
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Working Paper No. 547 | October 2008
“Keynesianism” All Over Again?
Recently, national newspapers all over the world have suggested that we should reread John Maynard Keynes, and that Hyman P. Minsky provides a valuable framework for understanding the world in which we live. While rereading Keynes and discovering Minsky are noble goals, one should also remember the mistakes that were made in the past. The mainstream interpretation and implementation of Keynes’s ideas have been very different from what Keynes proposed, and they have been reduced to simple “fiscal activism.” This led to the 1950s and 1960s “Keynesian” era, during which fine-tuning was supposed to be a straightforward way to fix economic problems. We know today that this is not the case: just playing around with taxes and government expenditures will not do. On the contrary, problems may worsen. If one wants to get serious about Keynes and Minsky, one should understand that the theoretical and policy implications are far-reaching. This paper compares and contrasts Minsky’s views of the capitalist system to the tenets of the New Consensus, and argues that there never has been any true Keynesian revolution. This is illustrated by studying the Roosevelt and Kennedy/Johnson eras, as well as Keynes’s reaction to the former and Minsky’s critique of the latter. Overall, it is argued that the theoretical framework and policy prescriptions of Irving Fisher, not Keynes, have been much more consistent with past and current government policies.
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Working Paper No. 543 | September 2008
The Financial Theory of Investment
Expanding on an approach developed by financial economist Hyman Minsky, the authors present an alternative to the standard “efficient markets hypothesis”—the relevance of which Minsky vehemently denied. Minsky recognized that, in a modern capitalist economy with complex, expensive, and long-lived assets, the method used to finance asset positions is of critical importance, both for theory and for real-world outcomes—one reason his alternate approach has been embraced by Post Keynesian economists and Wall Street practitioners alike.
Coauthors L. Randall Wray and �ric Tymoigne argue that the current financial crisis, which began with the collapse of the US subprime mortgage market in 2007, provides a compelling reason to show how Minsky’s approach offers us a solid grounding in the workings of financial capitalism. They examine Minsky’s extension to Keynes’s investment theory of the business cycle, which allowed Minsky to analyze the evolution, over time, of the modern capitalist economy toward fragility—what is well known as his financial instability hypothesis. They then update Minsky’s approach to finance with a more detailed examination of asset pricing and the evolution of the banking sector, and conclude with a brief review of the insights that such an approach can provide for analysis of the current global financial crisis.
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Working Paper No. 483 | November 2006
A Critique
By providing five different criticisms of the notion of real rate, the paper argues that this concept, as Fisher defined it or as a definition, is not relevant to economic analysis. Following Keynes and other post-Keynesians, the article shows that the notion of real rate is microeconomically and macroeconomically unfounded. Adjusting interest rates for inflation does not protect the purchasing power of wealth, and it is impossible to do so at the macroeconomic level. In addition, an empirical interpretation of the break in the correlation between interest rates and inflation since 1953 is provided.
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Working Paper No. 481 | November 2006
An Alternative to the Functional Approach
The paper argues that the functional approach of money does not provide a good method to study monetary history and monetary mechanisms. An alternative approach is developed and illustrated by analyzing the role of tobacco and cowry shells in past monetary systems. It is shown that any monetary system has specific properties that most students of money do not take into account when theorizing about money or analyzing its history. This leads them to miss some important points, and to see monetary systems where none exist. Hence, one can doubt some of the past research on the subject, at least until further investigation is conducted that is based, not on what we think "money" is, but on what its essential properties are. By comprehending what the main characteristics of a monetary system are, one is able to improve regulation of the system and get some insights into the financial mechanisms of sovereign governments.
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Working Paper No. 456 | June 2006The paper reviews the current literature on the subject in both the New Consensus and Post Keynesian frameworks. It shows that both approaches give to central banks a wrong goal (inflation, distribution, curbing speculation, and so on) and a wrong instrument (interest rate rule). The paper claims that central banks should focus their attention on maintaining financial stability and leave other problems to public institutions better suited for this task. In doing so they should develop new tools of intervention and leave policy interest rates unchanged, close to or at zero percent. Central banks have been created to deal with financial matters (government finance and financial stability) and should stick to this. Central banks, then, have a large amount of improvements to make, both as reformers and as guides for the financial community. Their main instrument should be an analysis of the financial fragility of the financial system and of the different economic sectors. In this context, it is shown that the notion of "bubble" does not matter for policy purposes, and that the current regulatory system lacks an institution that is able to deal effectively with solvency crisis.Download:Associated Program:Author(s):
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Working Paper No. 455 | June 2006
System Dynamics Modeling of a Stock Flow–Consistent Minskyan Model
This is the last part of a three-part analysis of the Minskyan Framework. The paper presents a model that studies some of the features presented in Parts I and II. The model is Post-Keynesian in nature and puts a large emphasis on the role of conventions and the importance of the financial side. In doing so, it provides an innovative way to determine aggregate investment and to introduce nonlinearities in the modeling of Minsky’s framework. This nonlinearity relies on the shifting property of conventions and the behavioral and psychological assumptions that they carry. Another specific characteristic of the model is that it is stock-flow consistent and explicitly takes into account the amortization of principal and refinancing loans. All of the modeling is done by using system dynamics, a flexible but rigorous modeling tool that gives the modeler a good understanding of the dynamics of complex models.Download:Associated Program:Author(s): -
Working Paper No. 453 | June 2006
Dynamics of the Minskyan Analysis and the Financial Fragility Hypothesis
This is the second part of a three-part analysis of the Minskyan framework. It studies in detail the dynamics at the root of the endogenous financial weakening of capitalist economic systems. This part combines the properties presented in part I with other important concepts, such as the paradox of leverage and conventional expectations, to explain the Financial Instability Hypothesis. It is demonstrated that the signs of fragility are not always visible and that financial weakening can take many different (even though well-defined) routes. This is used to draw some conclusion about the appropriate way to test for this hypothesis and the limit of data.Download:Associated Program:Author(s): -
Working Paper No. 452 | June 2006
Properties of the Minskyan Analysis and How to Theorize and Model a Monetary Production Economy
This is the first part of a three-part analysis of the Minskyan framework. Via an extensive review of the literature, this paper looks at 12 essential elements necessary to get a good understanding of Minsky's theory, and argues that those elements are central to comprehend how a monetary production economy works. This paper also shows how important these 12 elements are for the modeling of the Minskyan framework, and how the omission of one of them may be detrimental to an understanding of the essential dynamics that Minsky put forward: the Financial Instability Hypothesis.Download:Associated Program:Author(s):
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