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l this blogthis share to x share to facebook share to pinterest labels europe greece reading the ft the money view sunday april 19 2015 the imf on investment since 2008 vox today has a useful piece by five imf economists on the behavior of business investment during and since the great recession 1 from my point of view there are three important points here 1 the most important difference between this cycle and previous ones is the larger fall and slower recovery of private investment this has always been my view and i think it s an especially important point for heterodox folks to take on board because there has been such excessive in my opinion emphasis on the inequality consumption link in explaining persistent demand weakness this relationship between output and investment is consistent with previous recessions business investment has deviated little from what could be expected given the weakness in economic activity in other words firms have reacted to weak sales both current and prospective by reducing capital spending indeed in surveys businesses typically report lack of customer demand as the dominant challenge they face in other words the old keynesian accelerator story explains the bulk of the shortfall in investment since 2008 2 historically deviations in output and investment has been persistent there is no tendency for recessions to be followed by a return to the previous trend the blue line shows the behavior of output and investment in recessions historically relative to the pre recession trend note that is no tendency for the gap to close as much as six years after the previous peak the authors don t emphasize this point but it is important if we look at recessions across a range of industrialized countries on average the output losses are permanent there is no tendency for output to return to the pre trend if this is true there s no basis for the conventional distinction between a demand determined short run and a supply determined long run there is just one dynamic process steve fazzari has reached this same conclusion as i ve written about here roger farmer has just posted an econometric demonstration that in the postwar us output changes are persistent there is no tendency to return to a trend 3 there s no reason to think that the investment deficit is explained by financial constraints i should say frankly that the paper didn t move my priors much at all on this point but it s still interesting that that s what it says by their estimates firms in more financially dependent sectors this is a standard technique but whatever initially reduced investment more than firms in less financially dependent sectors but as of 2013 investment in both groups of firms were the same 40 percent below the pre crisis trend if you believe these results and again i don t put much weight on them except as an indicator of the imf flavor of received opinion then while tighter credit may have helped trigger the crisis it cannot explain the persistent weakness of demand or from a policy perspective and the authors do say this measures to improve access to credit are unlikely to achieve much at least relative to measures to boost demand investment by sector so these are features it might be nice to incorporate into a macro model investment determined mainly by changes in current output a single system of demand based dynamics as opposed to a short run demand story and a long run supply based steady state growth path a possibility of multiple equilibria such that let s say a temporary interruption of credit flows can produce a persistent reduction in output on one level i don t especially trust these results but on another level i think they provide a good set of stylized facts that macro models should aspire to parsimoniously explain 1 the european vox not the klein yglesias one update krugman today points to the same work and also interprets it as support for an accelerator story posted by jw mason 97 comments email this blogthis share to x share to facebook share to pinterest labels macroeconomics the continuing crisis thursday april 16 2015 new old paper on the balance of payments four or five years ago i wrote a paper arguing that the us current account deficit far from being a cause of the crisis of 2008 was a stabilizing force in the world economy i presented it at a conference and then set it aside i recently reread it and i think the arguments hold up well if anything the case that the us as the center of the world financial system ought to run large current account deficits indefinitely looks even stronger now given the contrasting example of germany s behavior in the european system i ve put the paper up as a working paper at john jay economics department site here s the abstract persistent current account imbalances need not contribute to macroe conomic instability despite widespread claims to the contrary by both mainstream and post keynesian economists on the contrary in a world of large capital inflows a high and stable level of world output is most likely when the countries with the least capacity to generate capital inflows normally run current account surpluses while the countries with the greatest capacity to generate capital inflows the us in particular normally run current account deficits an emphasis on varying balance of payments constraints is consistent with the larger post keynesian vision which emphasizes money flows and claims are not simply passive reflections of real economic developments but exercise an important influence in their own right it is also consistent with keynes own views this perspective helps explain why the crisis of 2008 did not take the form of a fall in the dollar and why reserve accumulation in east asia successfully protected those countries from a repeat of the crisis of 1997 given the weakness of the automatic mechanisms that are supposed to balance trade income and financial flows a reduction of the us current account deficit is likely to exacerbate rather than ameliorate global macroeconomic instability you can read the whole thing here posted by jw mason 218 comments email this blogthis share to x share to facebook share to pinterest labels balance of payments constraints international finance and trade keynes macroeconomics the continuing crisis work in progress sunday april 12 2015 the greek crisis and monetary sovereignty note this post only really makes sense as a continuation of the argument in this one it s a general rule that the internal logic of a system only becomes visible when it breaks down a system that is smoothly reproducing itself provides no variation to show what forces it responds to constraints are invisible if they don t bind you don t know where power lies until a decision is actively contested in that sense the crises of the past seven years and the responses to them should have been very illuminating at least if we can figure out what to learn from them the current crisis in greece is an ideal opportunity to learn where power is exercised in the union and how tightly the single currency really binds national governments of course we will learn more about the contours of the constraints if the syriza government is more willing to push against them the particular case i m thinking of right now is our conventional language about central banks printing money and the related concept of monetary sovereignty in periods of smooth reproduction we can think of this as a convenient metaphor without worrying too much about what exactly it is a metaphor for but if greece refuses to accept the ecb s conditions for continued support for its banks the question will become unavoidable we talk about governments printing money as if money always meant physical currency and banks were just safe deposit boxes even post keynesian and mmt people use this language even as they insist in the next breath that money is endogenously created by the banking system but to understand concretely what power the ecb does or does not have over greece we need to take the idea of credit money seriously money in modern economies means bank liabilities 1 bank liabilities constitute money insofar as a claim against one bank can be freely transferred to other units and freely converted to a claim against another bank and insofar as final settlement of claims between nonfinancial units normally takes the form of a transfer of bank liabilities money is created by loan transactions which create two pairs of balance sheet entries an asset for the borrowing unit and a liability for the bank the deposit and a liability for the borrowing unit and an asset for the bank the loan money is destroyed by loan repayment and also when the liabilities of a bank cease to be usable to settle claims between third parties in familiar modern settings this lack of acceptability will be simultaneous with the bank being closed down by a regulatory authority but historically things are not always so black and white in the 19th century it was common for a bank that ran out of reserves to suspend convertibility but continue operating deposits in such banks could not be withdrawn in the form of gold or equivalent but could still be used to make payments albeit not to all counterparties and usually at a discount to other means of payment 2 to say therefore that a government controls the money supply or prints money is simply to say that it can control the pace of credit creation by banks and that it can can maintain the acceptability of bank liabilities by third parties which in practice means by other banks it follows that our conventional division of central bank functions between monetary policy proper or setting the money supply on the one hand and bank regulation operation of the interbank payments system and lender of last resort operations on the other is meaningless there is no distinct function of monetary policy of setting the interest rate or the money supply monetary policy simply describes one of the objectives toward which the central bank s supervisory and lender of last resort functions can be exercised it appears as a distinct function only when over an extended period the central bank is able to achieve its goals for macroeconomic aggregates using only a narrow subset of the regulatory tools available to it in short the ability to conduct monetary policy means the ability to set the pace of new bank lending ex ante and to guarantee the transferability of the balances thus created ex post it follows that no country with a private banking system has full monetary sovereignty the central bank will never be able to exactly control the pace of private credit creation and to do so even approximately except by committing regulatory tools which then are unavailable to meet other objectives in particular it is impossible to shift the overall yield structure without affecting yield spreads between different assets and it is impossible to change the overall pace of credit creation without also influencing the disposition of credit between different borrowers in a system of credit money full monetary sovereignty requires the monetary authority to act as the monopoly lender with banks in effect serving as just its retail outlets 3 now some capitalist economies actually approximate to this pretty closely for example the postwar japanese system of window guidance or similar systems in other asian developmental states 4 something along the same lines is possible with binding reserve requirements where the central bank has tight operational control over lending volumes but this requires strict limits on all kinds of credit transactions or else financial innovation will soon bypass the requirements short of this central banks have only indirect limited influence over the pace of money and credit creation such control as they do have is necessarily exercised through specific regulatory authority and involves choices about the direction as well as the volume of lending and it is further limited by the existence of quasi bank substitutes that allow payments to be made outside of the formal banking system and by capital mobility which allows loans to be incurred and payments made from foreign banks on the other hand a country that does not have its own currency still will have some tools to influence the pace of credit creation and to guarantee interbank payments as long as there is some set of banks over which it has regulatory authority my conclusion is that the question of whether a country does or does not have its own currency is not a binary one as it s almost always imagined to be wealth takes to form of a variety of assets whose prospective exchange value can be more or less reliably stated in terms of some standard unit transactions can be settled with a variety of balance sheet changes which interchange more or closely to par and which are more or less responsive to the decisions of various authorities we all know that there are some payments you can make using physical currency but not a credit or debit card and other payments you can make with the card but not with currency and we all know that you cannot always convert 1 000 in a bank account to exactly 1 000 in cash or to a payment of exactly 1 000 the various fees within the payment system means that one unit of money is not actually always worth one unit 5 in normal times the various forms of payment used within one country are sufficiently close substitutes with each other exchange sufficiently close to par and are sufficiently responsive to the national monetary authority relative to forms of payment used elsewhere that for most purposes we can safely speak of a single imaginary asset money but in the greek case it seems to me this fiction obscures essential features of the situation in particular it makes the question of being in or out of the euro look like a hard binary when in my opinion there are many intermediate cases and no need for a sharp transiton between them 1 lance taylor for instance flatly defines money as bank liabilities in his superb discussion of the history of monetary thought in reconstructing macroeconomics 2 friedman and schwartz discuss this in their monetary history of the united states and suggest that if banks had been able to suspend withdrawals when their reserves ran out rather than closed down by the authorities that would have been an effective buffer against against the deflationary forces of the depression 3 woodford s interest and prices explicitly assumes this 4 window guidance is described by richard werner in masters of the yen the importance of centralized credit allocation in korea is discussed by the late alice amsden in asia s next giant 5 goodhart s fascinating but idiosyncratic history of central banking ends with a proposal for money that does not seek to maintain a constant unit value in effect using something like mutual fund shares for payment posted by jw mason 1467 comments email 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