Working Paper Roundup 5/15/2015

Financing the Capital Development of the Economy: A Keynes-Schumpeter-Minsky Synthesis
Mariana Mazzucato and L. Randall Wray
“Over [the postwar] period, the financial system grew rapidly relative to the nonfinancial sector … To a large degree, this was because finance, instead of financing the capital development of the economy, was financing itself. At the same time, the capital development of the economy suffered perceptibly. If we apply a broad definition—to include technological advances, rising labor productivity, public and private infrastructure, innovations, and the advance of human knowledge—the rate of growth of capacity has slowed. …

The key goal of this paper is to reconsider and discuss the role of finance … that is, how to restructure it to serve the ‘real’ economy, rather than itself, in order to produce both innovation-led growth and full employment. This requires bringing together the thinking of Keynes, Minsky, and Schumpeter, as well as understanding the role of the public sector as doing much more than fixing static market failures.”

Direct Estimates of Food and Eating Production Function Parameters for 2004–12 Using an ATUS/CEX Synthetic Dataset
Tamar Khitarishvili, Fernando Rios-Avila, and Kijong Kim
“This paper evaluates the presence of heterogeneity, by household type, in the elasticity of substitution between food expenditures and time and in the goods intensity parameter in the household food and eating production functions. We use a synthetic dataset constructed by statistically matching the American Time Use Survey and the Consumer Expenditure Survey. We establish the presence of heterogeneity in the elasticity of substitution and in the intensity parameter. […]

Our results suggest that the effectiveness of economic policies aimed at encouraging healthful cooking and eating habits is likely to vary by household type. Despite this variation, the elasticity of substitution is low for all household types, underscoring the challenges that monetary compensation-based policies may face in effecting a change in food production and eating behavior. Although we apply our dataset to food and the eating production process, the applicability of the dataset extends to the examination of the substitutability in other household production processes.”

On the Determinants of Changes in Wage Inequality in Bolivia
Gustavo Canavire-Bacarreza and Fernando Rios-Avila
“Contrary to the trend in the developed world, Latin American countries have shown a sharp decline in wage inequality during the past decade (2000–12). Bolivia has also experienced this decline, especially in the second part of the past decade. Using the methodology of RIF regression decomposition, we found that after 2006, wages increased across the wage distribution, with the largest changes observable at lower quintiles. … Among other factors, we find that there has been a sharp reduction in returns on higher education at the top of the distribution, as well as increases for returns for low educated workers, which has contributed to the decline of wage inequality. Similarly, wages in occupations with traditionally highly paid jobs have consistently decreased, further contributing to the wage inequality decline. It is possible that the observed changes in inequality are related to increases of the minimum wage, which have multiplicative effects on public-sector wage rates due to salary structures. …

It remains to be seen, however, if these improvements are long lasting, since the reduction in labor income inequality has not been accompanied by improvements in workers’ characteristics (education, experience, and skill). Although improvements in the working conditions (wages) of the most vulnerable populations is an important step toward reducing income inequality, to the extent that these changes are not accompanied by equal gains in workers’ productivity, the reductions in inequality might not be sustainable in the long run.”

Does Keynesian Theory Explain Indian Government Bond Yields?
Tanweer Akram and Anupam Das
“This paper empirically investigates the determinants of changes in Indian government bonds’ nominal yields. Changes in short-term interest rates, after controlling for other crucial variables such as changes in the rates of inflation and economic activity, take a lead role in driving changes in the nominal yields of Indian government bonds. This vindicates Keynes’s theories, and suggests that his views on long-term interest rates are also applicable to emerging markets. Higher fiscal deficits do not appear to raise government bond yields in India.”

Emerging Markets and the International Financial Architecture: A Blueprint for Reform
Jan Kregel
“If emerging markets are to achieve their objective of joining the ranks of industrialized, developed countries, they must use their economic and political influence to support radical change in the international financial system. This working paper recommends John Maynard Keynes’s ‘clearing union’ as a blueprint for reform of the international financial architecture that could address emerging market grievances more effectively than current approaches. […]

From the point of view of the current difficulties facing emerging market economies, the basic advantage of the clearing union schemes is that there is no need for an international reserve currency, no market exchange rates or exchange rate volatility, and no parity to be defended. Notional exchange rates can be adjusted to support development policy, and there is no need to restrict domestic activity to meet foreign claims. Indeed, there is no need for an international lender or bank, since debt balances can be managed within the clearing union. The external adjustment occurs by creating an incentive for export surplus countries to find outlets to spend their credits, which may be in support of developing countries. The system thus supports global demand. Since all payments and debts are expressed in national currency, independence in national policy actions and policy space are preserved. In modern terminology, countries retain monetary sovereignty within the constraint of external balance, which should correspond to full utilization of domestic resources.”