Research Topics

Originally issued as EDI Working Paper No. 14, May 2023
The Central Bank of the United States, the Federal Reserve, has a dual mandate to maintain both full employment and price stability. However, inflation-fighting had always eclipsed the full employment objective without much accountability. Today, the Federal Reserve provides regular testimony before Congress on how well it is achieving its dual mandate. Professor Galbraith wrote that section into law (among others), which requires the Federal Reserve to report to Congress on its work.

According to Professor Galbraith, the law intentionally kept the scope of Federal Reserve policy wide. The purpose was not to impose some economic theory on the policymaker, but to promote an open dialogue between the Federal Reserve and Congress over what monetary policy is and does. And yet, the legacy of monetarism continues to influence monetary policy today: the belief that there is a trade-off between inflation and unemployment firmly guides contemporary Federal Reserve policy. Even as the Federal Reserve’s own research finds that labor markets are not the driver of inflation, economists, including at the Fed, continue to insist that unemployment and labor market slack are the way to fight price increases. In this keynote, Professor Galbraith highlights other, more effective and enlightened ways of dealing with inflation.

According to Frank Veneroso, a broad subset of today’s US stock market has become what he calls a “pure price-chasing bubble.” Examination of the history of comparable pure price-chasing bubbles shows there has been a set of key causal factors that contributed to these rare market events. The most extreme such case was an over-the-counter market in Kuwait called the “Souk al-Manakh.” This exemplar of a pure price-chasing phenomenon may shed light—albeit unflattering—on the current US equity market, Veneroso contends.

The Economic Implications of the Pandemic

The spread of the new coronavirus (COVID-19) is a major shock for the US and global economies. Research Scholar Michalis Nikiforos explains that we cannot fully understand the economic implications of the pandemic without reference to two Minskyan processes at play in the US economy: the growing divergence of stock market prices from output prices, and the increasing fragility in corporate balance sheets.

The pandemic did not arrive in the context of an otherwise healthy US economy—the demand and supply dimensions of the shock have aggravated an inevitable adjustment process. Using a Minskyan framework, we can understand how the current economic weakness can be perpetuated through feedback effects between flows of demand and supply and their balance sheet impacts.

Applying Minsky’s Theory of Financial Fragility to International Markets

This inquiry argues that the successful completion of the transition process in the post-Soviet economies is constrained by the prevailing social structure and low levels of technological progress, both of which require institutional reforms aimed at increasing growth in national income, productivity, and the degree of export competitiveness. Domestic policy implementation has not shown significant improvements on these fronts, given its short-term orientation, but instead resulted in stagnating growth rates, continuously accumulating levels of external debt, and decreasing living standards. The key to a successful completion of the transition process is therefore a combination of policies targeted at the dynamic transformation of production structures within an environment of financial stability and favorable macroeconomic conditions.

Recent research stresses the macroeconomic dimension of income distribution, but no theory has yet emerged. In this note, we introduce factor shares into popular growth models to gain insights into the macroeconomic effects of income distribution. The cost of modifying existing models is low compared to the benefits. We find, analytically, that (1) the multiplier is equal to the inverse of the labor share and is about 1.4; (2) income distribution matters mostly in the medium run; (3) output is wage led in the short run, i.e., as long as unemployment persists; (4) capacity expansion is profit led in the full-employment long run, but this is temporary and unstable.

This paper provides a brief exposition of financial markets in Post Keynesian economics. Inspired by John Maynard Keynes’s path-breaking insights into the role of liquidity and finance in “monetary production economies,” Post Keynesian economics offers a refreshing alternative to mainstream (mis)conceptions in this area. We highlight the importance of liquidity—as provided by the financial system—to the proper functioning of real world economies under fundamental uncertainty, contrasting starkly with the fictitious modeling world of neo-Walrasian exchange economies. The mainstream vision of well-behaved financial markets, channeling saving flows from savers to investors while anchored by fundamentals, complements a notion of money as an arbitrary numéraire and mere convenience, facilitating exchange but otherwise “neutral.” From a Post Keynesian perspective, money and finance are nonneutral but condition and shape real economic performance. It takes public policy to anchor asset prices and secure financial stability, with the central bank as the key public policy tool.