L. Randall Wray

A Post-Keynesian View of Central Bank Independence, Policy Targets, and the Rules-Versus-Discretion Debate

This paper addresses three issues surrounding monetary policy formation: policy independence, choice of operating targets, and rules versus discretion. According to the New Monetary Consensus, the central bank needs policy independence to build credibility; the operating target is the overnight interbank lending rate, and the ultimate goal is price stability. This paper provides an alternative view, arguing that an effective central bank cannot be independent as conventionally defined, where effectiveness is indicated by ability to hit an overnight nominal interest rate target. Discretionary policy is rejected, as are conventional views of the central banks ability to achieve traditional goals such as robust growth, low inflation, and high employment. Thus, the paper returns to Keyness call for low interest rates and euthanasia of the rentier.

Minsky's Analysis of Financial Capitalism

In this paper, the authors discuss Minskys analysis of the evolution of one variety of capitalism-financial capitalism-which developed at the end of the nineteenth century and was the dominant form of capitalism in the developed countries after World War II. Minskys approach, like those of Schumpeter and Veblen, emphasized the importance of market power in this stage of capitalism. According to Minksy, modern capitalism requires expensive and long-lived capital assets, which, in turn, necessitate financing of positions in these assets as well as market power in order to gain access to financial markets. It is the relation between finance and investment that creates instability in the modern capitalist economy. Financial capitalism emerged from World War II with an array of new institutions that made it stronger than ever before. As the economy evolved, it moved from this more successful form of financial capitalism to the fragile form of capitalism that exists today.

Does Excessive Sovereign Debt Really Hurt Growth? A Critique of 'This Time is Different', by Reinhart and Rogoff

The worst global downturn since the Great Depression has caused ballooning budget deficits in most nations, as tax revenues collapse and governments bail out financial institutions and attempt countercyclical fiscal policy. With notable exceptions, most economists accept the desirability of expansion of deficits over the short term but fear possible long-term effects. There are a number of theoretical arguments that lead to the conclusion that higher government debt ratios might depress growth. There are other arguments related to more immediate effects of debt on inflation and national solvency. Research conducted by Carmen Reinhart and Kenneth Rogoff is frequently cited to demonstrate the negative impacts of public debt on economic growth and financial stability. In this paper we critically examine their work. We distinguish between a nation that operates with its own floating exchange rate and nonconvertible (sovereign) currency, and a nation that does not. We argue that Reinhart and Rogoff’s results are not relevant to the case of the United States.

Veblen's Theory of Business Enterprise and Keynes's Monetary Theory of Production

It has long been recognized that Thorstein Veblen and John Maynard Keynes share a common approach to the nature of “business enterprise” or “monetary production” in the modern capitalist economy (Dillard 1948; Dowd 1964). Keynes’s most explicit treatment was in the early drafts of the General Theory, unfortunately the final version dropped some of the clearest statements. Veblen’s best known exposition was in the Theory of Business Enterprise. This paper will provide a concise summary of Veblen’s views on the “credit economy,” comparing that with Keynes’s “monetary economy.” While there are many similarities, Veblen’s version is in some important respects more complete, and still relevant for developing an understanding of modern business practice. On one hand, this is not surprising as Keynes had let many of the monetary details “fall into the background.” However, as Matthew Wilson (2006) argues, it is surprising that most followers of Keynes have not mined the Theory of Business Enterprise for arguments that nicely complement and extend Keynes’s better known approach. Veblen and the Distinction between the Money Economy and the Credit Economy

The 'War on Poverty' after 40 Years: A Minskyan Assessment

Hyman Minsky is best known for his work in the area of financial economics, and especially for his financial instability hypothesis. In recent years, some authors have also recognized his advocacy of the “employer of last resort” as part of his “big government” intervention to help maintain stability. However, very little research has been undertaken regarding Minsky’s early involvement in the “War on Poverty.” This paper will trace the development of Minsky’s thinking on antipoverty policies to his support for welfare reform and federal job creation programs

Coins, Bodies, Games, and Gold

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A Keynesian Presentation of the Relations among Government Deficits, Investment, Saving, and Growth

In a recent paper, Wallace Peterson warnVd that one of the legacies of President Reagans two terms is the large government deficit, which will be used as an argument against the use of government spending to resolve social and economic problems. [Peterson 1988]. Recently, both the Council of Economic Advisors and the Chairman of the Board of Governors of the Federal Reserve System presented their views of the impact government deficits and saving have on investment and economic growth. I will briefly summarize their views, present the Keynesian alternative, and examine the empirical evidence.

The Elgar Companion to Hyman Minsky

This Companion provides a timely and engaging treatment of Hyman Minsky’s approach to economics, which is enjoying a renewed appreciation because of its prescient analysis of the slow but sure transformation of the capitalist economy in the post-war period. Many have called the global financial crisis that began in the United States in 2007 a ‘Minsky crisis’, and these original contributions demonstrate precisely why both academic economists as well as policymakers have turned to Minsky for guidance. The book brings together the foremost Minsky scholars to provide a comprehensive overview of his approach, with extensions to bring the analysis up to date.

Endogenous Money: Structuralist and Horizontalist

While the mainstream long argued that the central bank could use quantitative constraints as a means to controlling the private creation of money, most economists now recognize that the central bank can only set the overnight interest rate-which has only an indirect impact on the quantity of reserves and the quantity of privately created money. Indeed, in order to hit the overnight rate target, the central bank must accommodate the demand for reserves, draining the excess or supplying reserves when the system is short. Thus, the supply of reserves is best characterized as horizontal, at the central banks target rate. Because reserves pay relatively low rates, or even zero rates (as in the United States), banks try to minimize their holdings. Over time, they continually innovate, as they seek to minimize costs and increase profits. This includes innovations that reduce the quantity of reserves they need to hold (either to satisfy legal requirements, or to meet the needs of check cashing and clearing), and also innovations that allow them to increase the rate of return on equity within regulatory constraints, such as those associated with Basle agreements. Such behavior has been a central concern of the structuralist approach-which argued that it is too simplistic to hypothesize simple horizontal loan-and-deposit supply curves.

Is Goldilocks Doomed

Recent economic statistics confirm that our Goldilocks l economy continues to grow at a relatively swift pace, in spite of financial turmoil in Asia, Latin America, and Russia, as well as economic recession in about one-third of the world. The length of the expansion is record-setting, it is already the longest expansion in U.S. history, and the expansion may continue for some time to come. For many, the most potent symbol of the strength of the expansion has been the remarkable turn around of the federal governments budget, from chronically large deficits to a substantial surplus. One has to go all the way back to the demilitarization of the economy after World War II to find a comparable shift of the fiscal stance. By most accounts, the surplus will continue indefinitely. Indeed, the Congressional Budget Office(CBO) is projecting a rise in the federal budget surplus through the next 10 years from 1.2 percent of GDP for 1999 to 2.8 percent of GDP for 2009. Such projections are, of course, contingent on continued economic growth and present budget policies. What we wish to do here is to take the CBOs projections (which are not substantially different from those used by the administration) at face value and to determine what these mean for the private sector of the economy. Government budget surpluses imply that the private sector will have an offsetting deficit. As the United States is importing more than it exports, the implication is that U.S. households and firms, taken as a whole, must continue to borrow on an increasing scale. Indeed, it