Research Topics

Evolution and Contemporary Relevance

This paper traces the evolution of John Maynard Keynes’s theory of the business cycle from his early writings in 1913 to his policy prescriptions for the control of fluctuations in the early 1940s. The paper identifies six different “theories” of business fluctuations. With different theoretical frameworks in a 30-year span, the driver of fluctuations—namely cyclical changes in expectations about future returns—remained substantially the same. The banking system also played a pivotal role throughout the different versions, by financing and influencing the behavior of return expectations. There are four major changes in the evolution of Keynes’s business cycle theories: a) the saving–investment framework to understand changes in economic fluctuations; b) the capabilities of the banking system to moderate the business cycle; c) the effectiveness of monetary policy to fine tune the business cycle through the control of the short-term interest rate or credit conditions; and d) the role of a comprehensive fiscal policy and investment policy to attenuate fluctuations. Finally, some conclusions are drawn about the present relevance of the policy mix Keynes promoted for ensuring macroeconomic stability.

The paper discusses the Sraffian supermultiplier (SSM) approach to growth and distribution. It makes five points. First, in the short run the role of autonomous expenditure can be appreciated within a standard post-Keynesian framework (Kaleckian, Kaldorian, Robinsonian, etc.). Second, and related to the first, the SSM model is a model of the long run and has to be evaluated as such. Third, in the long run, one way that capacity adjusts to demand is through an endogenous adjustment of the rate of utilization. Fourth, the SSM model is a peculiar way to reach what Garegnani called the “Second Keynesian Position.” Although it respects the letter of the “Keynesian hypothesis,” it makes investment quasi-endogenous and subjects it to the growth of autonomous expenditure. Fifth, in the long run it is unlikely that “autonomous expenditure” is really autonomous. From a stock-flow consistent point of view, this implies unrealistic adjustments after periods of changes in stock-flow ratios. Moreover, if we were to take this kind of adjustment at face value, there would be no space for Minskyan financial cycles. This also creates serious problems for the empirical validation of the model.

Since the 1980s, economic recoveries in the United States have been delivering the vast majority of income growth to the wealthiest households. This policy note updates the analysis in One-Pager No. 47 and Policy Note 2015/4 with the latest data through 2015, looking at the distribution of average income growth (with and without capital gains) between the bottom 90 percent and top 10 percent of households, and between the bottom 99 percent and top 1 percent of households.

Little has changed when considering the distribution of average income growth in the current recovery (up to 2015) between the bottom 90 percent and top 10 percent of families, with or without capital gains. Although average real income for the bottom 90 percent of households is no longer shrinking, these families still capture a historically small proportion of that growth—only between 18 percent and 22 percent. The growing economy continues to deliver the most benefits to the wealthiest families.

A Critical Assessment of Fiscal Fine-Tuning

The present paper offers a fundamental critique of fiscal policy as it is understood in theory and exercised in practice. Two specific demand-side stabilization methods are examined here: conventional pump priming and the new designation of fiscal policy effectiveness found in the New Consensus literature. A theoretical critique of their respective transmission mechanisms reveals that they operate in a trickle-down fashion that not only fails to secure and maintain full employment but also contributes to the increasing postwar labor market precariousness and the erosion of income equality. The two conventional demand-side measures are then contrasted with the proposed alternative—a bottom-up approach to fiscal policy based on a reinterpretation of Keynes’s original policy prescriptions for full employment. The paper offers a theoretical, methodological, and policy rationale for government intervention that includes specific direct-employment and investment initiatives, which are inherently different from contemporary hydraulic fine-tuning measures. It outlines the contours of the modern bottom-up approach and concludes with some of its advantages over conventional stabilization methods.

Do all types of demand have the same effect on output? To answer this question, I estimate a cointegrated vector autoregressive (VAR) model of consumption, investment, and government spending on US data, 1955–2007. I find that: (1) economic growth can be decomposed into a short-run (transitory) cycle gravitating around a long-run (permanent) trend made of consumption shocks and government spending; (2) the estimated fluctuations are investment dominated, they coincide remarkably with the business cycle, and they are highly correlated with capacity utilization in both labor and capital; and (3) the long-run multipliers point to a large induced-investment phenomenon and to a smaller, but still significantly positive, government spending multiplier, around 1.5. The results cover a lot of theoretical ground: Paul Samuelson’s accelerator principle, John Kenneth Galbraith’s stress on consumption and government spending, Jan Tinbergen's investment-driven business cycle, and Robert Eisner’s inquiries on the investment function. The results are particularly useful to distinguish between economic policies for the short and long runs, albeit no attempt is made at this point to inquire into the effectiveness of specific economic policies.

A Distinctive Feature of the Business Cycle in Latin America and the Caribbean

Using two standard cycle methodologies (classical and deviation cycle) and a comprehensive sample of 83 countries worldwide, including all developing regions, we show that the Latin American and Caribbean cycle exhibits two distinctive features. First, and most important, its expansion performance is shorter and, for the most part, less intense than that of the rest of the regions considered; in particular, that of East Asia and the Pacific. East Asia’s and the Pacific’s expansions last five years longer than those of Latin American and the Caribbean, and its output gain is 50 percent greater. Second, the Latin American and Caribbean region tends to exhibit contractions that are not significantly different from those other regions in terms of duration and amplitude. Both these features imply that the complete Latin American and Caribbean cycle has, overall, the shortest duration and smallest amplitude in relation to other regions. The specificities of the Latin American and Caribbean cycle are not confined to the short run. These are also reflected in variables such as productivity and investment, which are linked to long-run growth. East Asia’s and the Pacific’s cumulative gain in labor productivity during the expansionary phase is twice that of Latin American and the Caribbean. Moreover, the evidence also shows that the effects of the contraction in public investment surpass those of the expansion, leading to a declining trend over the entire cycle. In this sense, we suggest that policy analysis needs to increase its focus on the expansionary phase of the cycle. Improving our knowledge of the differences in the expansionary dynamics of countries and regions can further our understanding of the differences in their rates of growth and levels of development. We also suggest that, while the management of the cycle affects the short-run fluctuations of economic activity and therefore volatility, it is not trend neutral. Hence, the effects of aggregate demand management policies may be more persistent over time, and less transitory, than currently thought.

A Structural VAR Analysis

This paper investigates private net saving in the US economy—divided into its principal components, households and (nonfinancial) corporate financial balances—and its impact on the GDP cycle from the 1980s to the present. Furthermore, we investigate whether the financial markets (stock prices, BAA spread, and long-term interest rates) have a role in explaining the cyclical pattern of the two private financial balances. We analyze all these aspects estimating a VAR—between household and (nonfinancial) corporate financial balances (also known as the corporate financing gap), financial markets, and the economic cycle—and imposing restrictions on the matrix A to identify the structural shocks. We find that households and corporate balances react to financial markets as theoretically expected, and that the economic cycle reacts positively to corporate balance, in accordance with the Minskyan view of the operation of the economy that we have embraced.

The Methodological Puzzles of the Financial Instability Analysis

The recent revival of Hyman P. Minsky’s ideas among policymakers, economists, bankers, financial institutions, and the mass media, synchronized with the increasing gravity of the subprime financial crisis, demands a reappraisal of the meaning and scope of the “financial instability hypothesis” (FIH). We argue that we need a broader approach than that conventionally pursued, in order to understand not only financial crises but also the periods of financial calm between them and the transition from stability to instability. In this paper we aim to contribute to this challenging task by restating the strictly financial part of the FIH on the basis of a generalization of Minsky’s taxonomy of economic units. In light of this restatement, we discuss a few methodological issues that have to be clarified in order to develop the FIH in the most promising direction.

This paper investigates the relationship between asset markets and business cycles with regard to the US economy. We consider the Goldman Sachs approach (2003) developed to study the dynamics of financial balances.

By means of a small econometric model we find that asset market dynamics are fundamental to determining the long-run financial sector balance dynamics. The gap between long-run equilibrium values and the actual values of the financial balances help to explain the cyclical path of the economy. Among all financial sectors balances, the financing gap in the corporate sector shows a leading effect on business cycles, in a Minskyan spirit. The last results appear innovative with respect to Goldman Sachs’s findings. Furthermore, our econometric results are robust and quite stable.