Riccardo Realfonzo

Fiscal policy in the monetary theory of production: an alternative to the "new consensus" approach

This paper provides an alternative view to the new consensus approach, from the standpoint of the monetary theory of production. It is shown that output growth is demand driven, so that fiscal policies, as well as direct state intervention above all in the labor market, are effective for increasing output and employment. This also applies to the current dynamics, particularly to the effects of the economic policy of the European Union, where, as will be shown, respect for the Maastricht parameters has contributed to determine poor macroeconomic performance.

Introduction: The Monetary Theory of Production

On 10 October 1932 Keynes resumed the Michaelmas term at King’s College in Cambridge with a new title for his lectures; namely, The Monetary Theory of Production’. At around that time, Keynes used the same title for a contribution to a Festschrift for Arthur Spiethoff (Keynes, 1933). In this short paper Keynes discusses the difference between a real-exchange economy and a monetary economy, the distinction being that in the latter, but not in the former, money plays an essential role in the determination of the aggregate level of output and employment. According to Keynes, the lack of understanding of this non-neutral role of money is at the root of many problems in economics. In particular, the failure of the economic discipline to provide satisfactory explanations and solutions to real world problems, such as economic crises, is due to the lack of a theory for a monetary economy; what Keynes termed a monetary theory of production (MTP): In my opinion the main reason why the problem of crises is unsolved, or at any rate why this theory is so unsatisfactory, is to be found in the lack of what might be termed a monetary theory of production. The distinction which is normally made between a barter economy and a monetary economy depends upon the employment of money as a convenient means of effecting exchanges — as an instrument of great convenience, but transitory and neutral in its effect. It is regarded as a mere link between cloth and wheat… It is not supposed to affect the essential nature of the transaction from being, in the minds of those making it, one between real things, or to modify the motives and decision of the parties to it. Money, that is to say, is employed, but is treated as being in some sense neutral… That, however, is not the distinction which I have in mind when I say that we lack a monetary theory of production. An economy, which uses money but uses it merely as a neutral link between transactions in real things and real assets and does not allow it to enter into motives or decisions, might be called — for want of a better name — a real exchange economy. The theory which I desiderate would deal, in contradistinction to this, with an economy in which money plays a part of its own and affects motives and decisions and is, in short, one of the operative factors in the situation, so that the course of events cannot be predicted, either in the long period or in the short, without a knowledge of the behaviour of money between the first state and the last. And it is this which we ought to mean when we speak of a monetary economy. (Keynes 1933, pp. 408–9; italics in original)

Bank Mergers, Monopoly Power and Unemployment: A Monetary Circuit Approach

In the present macroeconomic debate there is widespread agreement between neoclassical scholars and supporters of the standard Keynesian theory concerning the following points: (a) money supply is exogenous (depending on the autonomous decisions of the central banks); (b) money can be significant only where it is required for keeping a stock of liquid wealth; (c) income distribution reflects the marginal productivity of inputs.

Money, Capital Turnover, and the Leisure Class: Thorstein Veblen’s Tips for a Monetary Theory of Production

Many contemporary scholars maintain that significant similarities can be traced between Veblen’s theoretical framework and Keynes’s approach, with particular reference to the so-called monetary theory of production (hereafter MTP). In particular, Vining (1939) argues that Veblen should be counted as one of the authors who ‘anticipated’ Keynes’s theory of effective demand, and his monetary conception of the interest rate. Vianello (1961, p. 252) stresses the shared conviction — on the part of both Veblen and Keynes — that the interest rate is not determined by the supply-demand mechanism, and that its variations play a crucial role in determining economic crises. Dillard (1987) emphasizes that Veblen’s dichotomy between industrial and pecuniary employment is a key issue of the MTP and that relevant analogies between Veblen’s and Keynes’s views of the functioning of monetary economies are to be considered: Money is a form of private property that wealth holders in business enterprise economy at times treasure more than income itself. It is a device for limiting losses in a profit-and-loss economy. The moral of Veblen’s teaching is that in a pecuniary economy, monetary values dominate industrial values. (Dillard, 1987, p. 1646)

The Real Effects of a Euro Exit: Lessons from the Past

Abstract: In the debate between supporters and critics of the euro, the opposing ideological extremes have gotten it wrong. The most important lesson we can learn from the experience of the past is that the outcome, in terms of growth, distribution, and employment, depends on how a country remains in the euro; or, in the case of a euro exit, on the quality of the economic policies that are put in place once the country regains control of monetary and fiscal matters, and not on the fact of abandoning the previous exchange system. At the same time, historical experience suggests that countries with higher per capita income and more stable political institutions would be more likely to benefit from a euro exit.

An Overinvestment (but Anti-Austrian) Explanation of the Turning Points of the Cycle: Italian Contributions of the Early 20th Century

Abstract The aim of this paper is to compare the Austrian theory of the business cycle with the approaches developed in Italy, during the first decades of the 20th century, mainly by Marco Fanno and Costantino Bresciani-Turroni. It is shown that — although, in both cases, an overinvestment explanation of fluctuations was accepted — Italian economists developed a different theory, both of the starting and of the upper turning point of the cycle. In particular, they argued that fluctuations are mainly caused by the improvement in firms’ expectations, while the growing phase of the cycle may be stopped by social conflict (i.e., by workers’ reaction to ‘forced saving’). Hence, according to these scholars — and outside the Austrian approach — (a) capitalist instability (the alternation of expansionary and contractionary phases) may not be due to exogenous interventions by banks, the State or the unions and (b) the business cycle may be driven by real variables, in that they did not assign a crucial role in the turning points of the cycle either to costs or to the Austrian ‘shortage’ of money supply. A formal model is proposed to test the logical consistency of this theory.

Does fiscal policy affect the monetary transmission mechanism? A monetary theory of production (MTP) response to the new consensus macroeconomics (NCM) perspective

Drawing on the contributions of Augusto Graziani to the so-called monetary theory of production, this article aims to show that an accommodative monetary policy—as defended in the new consensus macroeconomics theory and supported by current practice around the world—has the maximum effect in stimulating aggregate demand and income when it is implemented in conjunction with a coordinated discretionary fiscal policy that boosts the demand for and the supply of loans via the reduction of the liquidity risk and the insolvency risk. As a result, the potentially beneficial effects of the traditional Keynesian fiscal multiplier are significantly amplified.

The Effects of a Euro Exit on Growth, Employment, and Wages

A technical analysis shows that the doomsayers who support the euro at all costs and those who naively theorize that a single currency is the root of all evil are both wrong. A euro exit could be a way of getting back to growth, but at the same time it would entail serious risks, especially for wage earners. The most important lesson we can learn from the experience of the past is that the outcome, in terms of growth, distribution, and employment, depends on how a country remains in the euro; or, in the case of a euro exit, on the quality of the economic policies that are put in place once the country regains control of monetary and fiscal matters, rather than on abandoning the old exchange system as such. It all depends on how a country stays in the eurozone, or on how it leaves if need be.

Monetary policy rules and directions of causality: A test for the euro area

Abstract Using a VAR model in first differences with quarterly data for the euro zone, the study aims to ascertain whether decisions on monetary policy can be interpreted in terms of a “monetary policy rule” with specific reference to the so-called nominal GDP targeting rule (Hall and Mankiw, 1994; McCallum, 1988; Woodford, 2012). The results obtained indicate a causal relation proceeding from deviation between the growth rates of nominal gross domestic product (GDP) and target GDP to variation in the three-month market interest rate. The same analyses do not, however, appear to confirm the existence of a significant inverse causal relation from variation in the market interest rate to deviation between the nominal and target GDP growth rates. Similar results were obtained on replacing the market interest rate with the European Central Bank refinancing interest rate. This confirmation of only one of the two directions of causality does not support an interpretation of monetary policy based on the nominal GDP targeting rule and gives rise to doubt in more general terms as to the applicability of the Taylor rule and all the conventional rules of monetary policy to the case in question. The results appear instead to be more in line with other possible approaches, such as those based on post Keynesian analyses of monetary theory and policy and more specifically the so-called solvency rule (Brancaccio and Fontana, 2013, 2015). These lines of research challenge the simplistic argument that the scope of monetary policy consists in the stabilization of inflation, real GDP, or nominal income around a “natural equilibrium” level. Rather, they suggest that central banks actually follow a more complex purpose, which is the political regulation of the financial system with particular reference to the relations between creditors and debtors and the related solvency of economic units.