Eric Tymoigne

A Hard-Nosed Look at Worsening U.S. Household Finance

Arguably, the stability of household finances is the biggest single unknown in the U.S. economy today. We have published several pieces on the issue. After analyzing the household sector closely, the author proposes some hard-nosed solutions for the nation.

Modern Money Theory 101: 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.

Modern Money Theory: A Reply to Palley

Abstract Modern Money Theory (MMT) has explained why monetarily sovereign governments have a very flexible policy space that is unconstrained by hard financial limits. It has provided institutional and theoretical insights about the workings of economies with monetarily sovereign and non-sovereign governments. It has also provided policy insights with respect to financial stability, price stability and full employment. Yet there have been many critics of MMT, including Palley (2014). 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 Palleys criticism of MMT using the circuit approach and national accounting identities, and by progressively adding additional economic sectors.

Detecting Ponzi Finance: 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 U.S. 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.

Asset Prices, Financial Fragility, and Central Banking

The paper reviews the current literature on the subject in both the New Consensus and the Post Keynesian framework. It shows that both approaches give to central banks a wrong goal (inflation, distribution, curbing speculation, etc.) 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 ObubbleO does not matter for policy purposes, and that the current regulatory system lacks an institution that is able to deal effectively with solvency crisis.

Measuring Macroprudential Risk Through Financial Fragility: 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.

Measuring Macroprudential Risk: 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 Minskys 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.

Fisher's Theory of Interest Rates and the Notion of "Real": 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.

The Minskyan System, Part I 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 Minskys 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.

Job Guarantee and Its Critiques: Insights from the New Deal Experience

Unemployment brings economic, psychological, and social hardship to individuals and their community. Common policies to combat unemployment include the promotion of economic growth and training, but a less common policy focuses on the right to work. This policy proposal decouples the goals of economic growth and full employment, and allows willing individuals to work in order to maintain their morale and employability while participating in socially beneficial activities. Since the 1990s, debates regarding the right to work have been revived. Criticisms have been wide ranging and the paper evaluates some of them by going back to the New Deal work programs. The paper shows that some of these criticisms are warranted while others are not. The paper concludes that a job guarantee program can provide significant benefits as long as it is organized around a vision of labor as a fulfilling and rewarding activity. However, this vision is almost certain to clash with existing labor market structures and dominant political interests. As a consequence, if put in place, Job Guarantee may be organized as a minimalist, make-work, low-wage program and that would be a mistake.