Greg Mankiw gave a presidential address at the Eastern Economic Association meetings in Philadelphia over the weekend on distribution effects of tax policy, pushing his height story. But that was less interesting than another session chaired by Mark Setterfield of Trinity College where Mankiw, author of the most widely used textbooks in undergrad macroeconomics, was in the audience for "Macroeconomic Theory and Macroeconomic Pedagogy: Rethinking Undergraduate Macroeconomics Instruction." Mark has coedited a volume with Giuseppe Fontana of the same title as the opening part of the session title, recently out from Routledge. While not everybody in the book is of the persuasion, most of the presenters were Post Keynesians, including Malcolm Sawyer of Leeds University and John Smithin of York University in Ontario, as well as several in the audience such as Tom Palley, who engaged in vigorous discussion.
Much of the book and the discussion focused on the so-called "new concensus" three equation model, which are an IS curve giving aggregate demand, a Phillips curve, and than a policy curve essentially implying a Taylor rule with the central bank setting nominal interest rates. This implies endogenous money, a concept much liked by many Post Keynesian economists, although many argue it holds more broadly than just when central banks exogenously set interest rates. Sawyer pursued the endogenous money argument further, and Smithin offered an alternative three equation model with the Phillips curve and the Taylor rule replaced by short and long run supplies of inflation equations. It was over whether the Post Keynesians had any alternatives to the new consensus model and also could explain hyperinflation where Mankiw stepped in to question. Smithin replied with his three equation model, although the equivalent of the IS curve seemed much more complicated than the usual variety, too much so for a Principles text anyway, if not perhaps a higher level one. Mankiw did not seem convinced.
A sub-text was that it is unclear if these Post Keynesian models did much better in explaining recent events than the now silly looking standard model. Most observers would say that the big winner in all this has been Hyman Minsky, generally labeled a Post Keynesian, although he did not particularly like the label (and Paul Davidson claims he was not one, or a proper one). A couple of the chapters in the book, if not the session, attempt to bring Minsky in, but it is unclear that all this has been resolved clearly. In another session at the conference, another author from the book, Marc Lavoie, agreed that in a world where central banks lose control of actual interest rates as they fall below corridor levels, the standard endogenous money model may be out the window along with the more conventional model. It is too bad that Minsky is no longer with us when we need him (and he used to be a regular attender of the EEA meetings, sigh... ).
28 comments:
"This implies endogenous money, a concept much liked by many Post Keynesian economists, although many argue it holds more broadly than just when central banks exogenously set interest rates."
Is it possible to express this is a way that is more descriptive of who is in control of the money????
For me it is "monetary" (open market ops and interest rates) and fiscal (taxes and spending) and that is the way my "real" world is.
I can't tell what your post is saying and I wish I could. I do understand this thing about the central bank losing control of interest rates and it tells me that the bank and the elected government had better be in step. The notion of the central bank as the actual controller of a fiat currency seems rather unreal to me. Is that what "endogenous money" is?
To help others try to help me (I hope) I look at the euro and believe that to be a case of endogenous money because the value of the euro is absolutely based on the interest rates and open market ops of the euro bank (I guess it is called the euro bank). It's like a gold standard with fake gold.
"in a world where central banks lose control of actual interest rates as they fall below corridor levels"
I gather what you're saying, Barkley, is that the central banks around the world have together decided on an optimum range for interest rates in nations around the world?? That they, the CBs, find that they have printed so much money that the quantity of it is now out of balance with the now restricted avenues for making profit. (given that everyone is trying to pay off their debt and/or real incomes are too low to sustain previous levels of environmentally and socially unsustainable levels and means of consumption.) That is, the quantity of money exceeds the real wealth on the planet; by a lot.
When Noam Chomsky was asked what were his qualifications to speak on world affairs, Chomsky replied: ‘None whatsoever. I mean the qualifications that I have to speak on world affairs are exactly the same ones Henry Kissinger has, and Walt Rostow has, or anybody in the Political Science department, professional historians – none, none that you don’t have.’
"We're all free to put in our two pennies worth!" as my ideal mother would say.
Barkley: "A sub-text was that it is unclear if these Post Keynesian models did much better in explaining recent events than the now silly looking standard model. Most observers would say that the big winner in all this has been Hyman Minsky..."
Good ole Hyman Minsky!
"“Minskyan supercycle” - a crisis of underconsumption and overproduction occasioned on one side by a vast overhang of private debts, which households would like to get rid of but largely cannot, and on the other by the unwillingness of governments to allow major corporations and (especially) banks to disappear – a step that would be necessary to adjust supply and therefore profitability to demand. Not incidental to this, there is an undoing of globalization, caused by the collapse of trade finance, revealing the fragility of the previous world economic structures and the weakness of existing economic institutions – global, regional and national."
Memorandum
From: James K. Galbraith
To: All Interested Parties
Subject: Financial and Monetary Issues as the Crisis Unfolds
Date: July 31, 2009
http://www.epsusa.org/projects/crisisworkinggroups/financewhitepaper09.pdf
Trucker, if it's any help at all, I don't know what endogenous and exogenous money is.
I could guess, but would rather not. I might come up with a notion that there's only two types of money. Money that's inside our bodies versus outside our bodies. And that leads to a discussion on how to get drugs through airport terminals and all sorts of unhelpful talk.
Money is fungible, whether endogenous or exogenous, isn't it, or is this all "fun-gibber"? (Pluperfect of fungible.)
"Post Keynesian economists believe that supply of money is credit-driven and determined endogenously by the demand for bank loans, rather than exogenously by monetary authorities."
And
"Minsky’s “financial instability hypothesis”.....starts with the high level of investment due to the high return of profits, as profits provides cash flows to service debts in turns yields more profits and leading to a booming condition in the equity market. The rapid pace of output growth forces firms to take on more debt to expand production fueled by the optimistic expectations and competitive pressures. Given that risks are underestimated during the boom, the increasing demand leads to the surge of interest rate, which turns the financial structure of an economy into the most resembling a ponzi structure."
From here.
I would have to say that all three theories are both right and wrong. The real world covers a a wider range of assorted situations.
Petrodollar recycling in the 1970s involved active pushing of debt onto the leaders of nations by Wall Street bankers. This involved bribery, corruption, assassinations etc. It didn't involve a natural 'demand' for credit but rather a very active 'creation' of 'demand'.
Where does real human behaviour come into economic theory here?
Also, William Greider describes how the Wall Street banks 'managed their liabilities'. They actively sold loans to businesses and then created the credit to carry them out. Another example of demand creation.
Large corporations can surely raise lots of their own money by their capital-raising activities. This can drum up hundreds of millions of dollars.
The global command economy created by the Wall Street Dollar Regime, big business, mass communication, mass culture etc. Example, in China many export goods are produced, not to create a profit, but in order to simply employ people.
Here is an accessible paper by David Romer on the consensus 3-eq NK model(IS-MPR-PC):
Keynesian Macroeconomics Without The LM Curve
Any links to the Smithin PKE 3-eq model referred above?
Prof. Setterfield appears to be at Wesleyan's CT neighbor Trinity and not at Wes.
Brenda:
I looked at http://www.epsusa.org/projects/crisisworkinggroups/financewhitepaper09.pdf and found intelligent life that I did not know existed in the economics world. This Galbraith fellow seems rational. But he needs to fix a small hicky in the manuscript. There is a place where "Calame" is describing a classification of goods for the purpose of deriving economic objectives/measurements and the first two of these is reversed in regard to their definitions. The first classification -- goods "that are destroyed when shared" -- is actually what is posited for the second class of goods. i.e. stuff that is consumed like oil would be "destroyed when shared". And then the second classification, -- goods "that are divided, when shared, in fixed quantities" are water, air, and land (the hard dry stuff under the feet). These are the things that fall victim to "tragedy of the commons". Since I got it from you, perhaps you can tell me how to get it fixed before it totally confuses the neoclassical tap dancers.
The big problem with which neoclassical economics refuses to deal with is the difference between these first two classifications (natural resources) and the second two classifications (human production). The first two are both NON_PRODUCED natural resource that _MUST_ be allocated based on fairness and preservation (some form of social democracy) while the latter two are the product of human effort that can be managed by market forces (inferring private ownership).
I can see the nutters using the mistake concerning the first two definitions as a means to obfuscate the difference between natural and produced "goods". I typically only use the word "goods" to describe the produced stuff.
But I don't like the socialistic, one world government overtones of this paper and feel that there are more practical (politically workable) methods of resolving the problems. The "conservative right" will riot in the streets over the proposition "The solution to this problem can only be to plan and to invest in the creation of appropriate design, engineering and
technological solutions to the greenhouse gas problem, and to do so in a way that is independent of the short-term profit motive. Such planning and investment are necessarily public functions, that will not be provided optimally by any market mechanism."
Brenda:
The Galbraith paper was quite helpful. But Also appreciated is the link to wikipedia concerning "endogenous money". I had Googled this a long time ago and found little of nothing. That Wiki article was created in October of last year (I love wikipedia). It tells me that post Keynesians subscribe to this erroneous definition of money while claiming to be more socially oriented than the neoclassicals. WOW!!!
Mr. Minski appears to have nailed the financial bubble very well indeed. And we might hope for a more rational synthesis between the various "schools" of economics concerning money. The idea that "money" = "capital" is an outrage. And it reveals the extent to which "financiers" have destroyed the language and perverted the science of political economy.
Anonymous,
Thank you for pointing out my error, and I have now corrected it in the text. I should have known better as I know Mark Setterfield quite well.
Max, jr.
Thanks for the link.
Trucker and Brenda,
Looks like you all have been doing some checking on the matter. The argument is that the supply of money is not controlled by the central bank ("exogenous," with most economists viewing policy as "exogenous," even when it is driven by events in the economy), and is directly a product of demands arising from the economy itself and operating through the banks, who create the money. There is a bit of a complication here in that the argument is usually that this is done by banks responding to requests for loans, although loans do not become "money" technically speaking until they are redeposited. If the banks somehow are lacking the assets to make the loans, they just borrow them from other banks or the central bank.
Now, where the argument comes in is that some Post Keynesian economists argue that money is inherently endogenous, all the time, no matter what the policy of the central bank is. Many dispute this. However, even conventional economists accept that if monetary policy consists of simply setting target nominal interest rates, then that means the banks can borrow from the central bank whatever they want, and money thus becomes endogenous as long as such a policy is in place. As this is currently the practice at most central banks (although things have been very weird recently), this means that effectively money has been endogenous for some time, and much of the discussion has been about making this standard in the textbooks used to teach undergrand students.
It has nothing to do with whether or not the central banks are coordinating on what interest rates to set, nor does it necessarily connect to whether or not the central banks are following some rule about setting interest rates, with the Taylor Rule the usual suspect, although that does not appear to be being followed at the current time pretty much anywhere. There almost certainly is some coordination between the leading central banks, but the extent and nature of that is generally kept from public eyes.
rosserjb@jmu.edu :
I am currently at odds with the rather undefined nature of the word "endogenous" in that it seems to allow all the different "schools" of economics to move the goal posts around in order to avoid any contact with reality or disagreement between the theorists. (PDF WARNING ) see http://www.thomaspalley.com/docs/articles/macro_theory/endogenous_money.pdf
In examining the recent and still active mess concerning the financial systems of the planet it is clear that securitization and credit default swaps (insurance on high stakes wagering) were employed to circumvent any "control" of the central banks and therefore any control by governments representative of the people.
I see that the word "endogenous" is being employed to to bring academic legitimacy to this outright theft by the financial monkeys otherwise disguised as "efficient market hypothesis" mavens. For that is what we have when the Federal Reserve is forced to pump about 10 trillion into the private money center banks to "cover" the markers of the thieves that created credit outside the system. Attempts to "paper over" this thievery with claims that money (actually credit) is "endogenous"LY responding to market forces at all times is not just pushing the envelope of legitimate debate, but exploding it beyond all reason or recognition.
The problem with this "newspaek definition" is that it sets up the financial thieves as the legitimate controllers of the currency and totally robs any future control by or for the common people through their representative government. "We the people" have been reduced to being the slaves of the unelected owners and operators of the money center banks.
Welcome to Republican heaven.
Barkley Rosser:
Any links for any of the PKE models discussed in the post?
Barkley
Do PKEs define the 'demand' for bankloans as incorporating the ability to pay for the loans?
Or does the theory include 'demand' for 'non-recourse loans' (bailouts)?
max. jr.
No links. I suggest that you get the edited volume by Setterfield. The papers are in there.
Brenda,
Generally people who take out loans do so only if they think that they will be able to pay them back. Now, this is individuals and businesses, not necessarily banks themselves or government agencies. Obviously if somebody thinks they will get bailed out by somebody else, they will be less careful about this.
Of course, the collapse of animal spirits described by Keynes shows up among other things as an unwillingness to borrow by businesses as they are worried about being able to pay back their loans and do not see successful uses for them, depressed by bad economic conditions.
Trucker,
I would not make too much of any special meaning of "exogenous" or "endogenous." They are originally mathematical terms referring to whether a variable in a mathematical system is determined outside of the system or within the system by it. Ultimately that become arbitrary, and what is exogenous to a smaller system is endogenous to a larger system containing the smaller one. One economist I know claimes that the only truly exogenous variable in the economy is the sun.
That said, the old political-economic freight had to do with arguments over monetarism and the arguments of Milton Friedman that central banks should have the money supply grow at a fixed rate. This assumed that central banks strictly control the money supply in this exogenous policy manner. The harder line older Post Keynesian views in effect denied the relevance of this with the argument that money is inherently endogenous.
The current situation has become very compliczated, as it does seem that money is more out of the control of central banks than usual. In the current situation, the sorts of concerns you raise are indeed important and relevant, but they are related to the particular form this endogeneity is currently taking rather than to the concept of endogenous money more generally.
Money supply is endogenous because CB targets a base rate, liquidity preference of financial sector sets differential, and agg demand for that credit determines supply of money. Supply is infinitely elastic at any rate, for given collateral and regulatory requirements.
The theory that MS is exogenous is basically monetarism.
PKE scholars at Levy Institute working with SFC sectoral balance models did very well at predicting the crisis. See, e.g., Wynne Godley's 1999 paper "Seven Unsustainable Processes". Obviously, they're all followers of Minsky too. So I don't see any big distinction between this particular strand of PKE and Minsky.
rosserjb said:
"The current situation has become very complicated, as it does seem that money is more out of the control of central banks than usual. In the current situation, the sorts of concerns you raise are indeed important and relevant, but they are related to the particular form this endogeneity is currently taking rather than to the concept of endogenous money more generally."
Vimothy said:
"Money supply is endogenous because CB targets a base rate, liquidity preference of financial sector sets differential, and agg demand for that credit determines supply of money. Supply is infinitely elastic at any rate, for given collateral and regulatory requirements. The theory that MS is exogenous is basically monetarism."
So what you are both doing is exactly what I have said. You are making claims about Keynesianism that are bogus because you are changing the definition of the term "endogenous" to play both sides of the fence.
When new money is created outside the purview of the CB as it was in this case, then such money is _NOT_ endogenous in any way. The money we are discussing was based on colateralization and backed with fake insurance. It was not in any way linked to or controlled by or regulated by nor supported by the standard commercial banking system as that system was defined between 1936 and 1999.
I do not accept this sort of tap dancing and you, rosserjb@jmu.edu, shouldn't accept it either.
Money being created outside the purview of the CB is what people mean by endogeneity.
Trucker,
What vimothy just said.
OK, OK, OK....
So ya'll are telling me that you will expand your monetary universe to encompass any source of "credit" that might be "whipped up" by a snake oil salesman. Or even by "the sun".
And I suppose you believe yourselves proved right by actual events: The Fed did, indeed, expand the base money supply (reserves) to accommodate the additional credit created by "the economy". And this is the exact opposite of the money multiplier silliness in which the Fed/Government supposedly drives the economy by controlling the supply of base money.
Yet I cannot credit this as "endogeneousness", because the impetus to expand came from outside the normal system of credit in which the CB (spelled GOVERNMENT) had firm control (based on discount rates and open market operations) over the amount and value of what was defined as _money_ . To me "exogeniety" does not differentiate which outside entity caused the expansion of base money. The base was expanded, not as the normal course of needed credit in a functioning economy, but by a force outside the functioning system. Instead of an exogenous agent named "government" driving an increase in base money, we have the "Wall Street Gamblers Association" driving an increase in base money; financial weenies motivated by greed alone with no concerned for the general welfare. But either variety of forced increase is exogenous to the normally functioning monetary system. The word "XXgeneous" is obviously quite useless when applied as ya'll have applied it.
So let us dispense with that useless word and ask ourselves what sort of control for the amount and value of money is conducive to a functioning economy. I am very uncomfortable with control by unelected slime ball, greedy, snake oil salesman. I prefer my slime balls to be the elected variety because transparency imposes a limitation to the degree of sliminess. You may argue that the transparency in politics is less than it should be and I would agree. Yet there is much more transparency than I have with the Wall Street weasels.
I have always felt that the major difference between Keynes and Hayek was their views on government (or lack thereof). Keynes seems to see a role for government in the economy and Hayek does not. Hayek, IMHO, has been proved dead wrong. As to the money thang, social dividend or public works are the proper mechanism for expanding the money supply.
You do seem to be missing the point somewhat spectacularly here. Nothing that I've said should be read as some kind of defence for Wall St's mendacious destructiveness. I am mystified as to where you find this in what I consider to be a technical proposition about money creation. This is certainly not an Austrian argument, nor is it an argument *for* anything, any more than Kapital is an argument for capitalism or Hamlet for mental illness.
Endogenous = controlled by CB
Exogenous = not controlled by CB
The Fed always expands the supply of reserves to accommodate money supply growth (new loans), because if it did not, it could not maintain its target rate. The Fed does not control quantity; it controls price. Banks create money ex nihilo when they make loans, and they do this without ever speaking to the Fed to find out what the aggregate reserve position of the banking sector is. If the banking sector requires reserves, the Fed must supply them or else abandon its mandate. Consequently, the Fed does not control the money supply.
Aaargh, obvious non-trivial typo above, should read:
Endogenous = not controlled by CB
Exogenous = controlled by CB
It shoube noted that in the current situation, the normal money multiplier has completely broken down. The Fed has massively expanded its balance sheet to prop up the financial system, but not much money has been created endogenously or otherwise.
I think the money multiplier is a fantasy anyway. Changes in the money supply determine changes in the monetary base, not the other way around, because the Fed must supply the quantity of reserves demanded by the financial sector or lose control of the price.
rosserjb@jmu.edu said...
"It should noted that in the current situation, the normal money multiplier has completely broken down. The Fed has massively expanded its balance sheet to prop up the financial system, but not much money has been created endogenously or otherwise."
Yet is this not about the very soul of Keynesianism? Is it not about no matter how much money there might be, and no matter how low the nominal interest rate might be, you cannot force people to borrow money and build a shoe factory.
If banks can come out ahead by not lending and not taking any risk at all then why would they bother to lend? If semi liquid money such as 1 year government backed securities pay better than 1/10th the discount rate then why not lend a lot of money to the government that is supplying the money and pay a lot of bonuses and dividends?
Hard to see how the banks and the rich people that own them can ever go broke.
Banks do not lend reserves! Banks do not subsitute risky assets (private sector loans) for risk free assets (reserves)! There is no "money multiplier"!
Reserves are used for settlement purposes. The reason excess reserves have not resulted in more loans is that the banks were not reserve constrained in the first place. As I noted above, banks make loans first regardless of their reserve position. If they are then short reserves, they borrow from other banks. If the banking sector is short on aggregate, the Fed *must* supply them or lose control of its target rate. That's what the Fed does--it controls price, so quantity must float.
There are no loans being made because there is no demand for credit at offered rates. The private sector is repairing its balance sheet, and this is a good thing. We don't want it to releverage. Agg demand support during this period should come from govt injections, i.e. the deficit.
Trucker,
A bunch of banks have gone broke. The bailouts that have many unhappy were done to keep more of them from doing so.
Barkley,
The fact that many banks went broke was because many banks were greedy and stupid. But in the here and now there is nothing that stop a bank from earning interest on no risk government backed securities and not lending at all. They can stay fat dumb and happy forever and laugh and have a party as the economy goes in the toilet. The worse it gets the better they like it. That is called "conservatism".
Inflation is what make those with money INVEST. No inflation, no investing.
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