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Policy Notes No.1
01 April 2004
Inflation Targeting and the Natural Rate of Unemployment
AbstractInflation targeting has become an increasingly popular strategy for setting monetary policy during the last decade. While no countries had formal inflation targets before 1990, currently 22 countries use inflation targeting. One notable exception is the United States, where the Federal Reserve has a dual mandate to pursue both price stability and full employment. Some economists advocate inflation targeting for the United States, partly because they fear that otherwise the Fed will try to push unemployment below its “natural rate”—its lowest sustainable level—and trigger accelerating inflation. However, the natural rate theory has proven to be a poor guide for policy making over the last 10 years. Unemployment in 2000 fell two percentage points below estimates of the natural rate without spurring inflation. Since inflation targeting derives its justification largely from the theory of the natural rate, it is questionable whether the United States should switch to an inflation-targeting regime. These doubts are reinforced by the manifest success of monetary policy under the dual mandate.
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Public Policy Brief No.76
01 April 2004
Asset Poverty in the United States
AbstractEconomic growth and a rising stock market in the 1990s gave the impression that everyone was accumulating wealth and asset poverty rates were declining. The impression was supported by the official, income-based poverty measure, which exhibited a sharp decline. According to Senior Scholar Edward N. Wolff and Research Scholar Asena Caner, poverty measures should include wealth as well as income. Their study of asset poverty in the United States between 1984 and 1999 focuses on the lower end of the wealth distribution and shows that asset poverty rates did not decline during the period studied, and that the severity of poverty increased. It also shows that asset poverty is much more persistent than income poverty.
Download Public Policy Brief No. 76, 2004 PDF (284.58 KB) -
Working Paper No.403
25 February 2004
A Stock-flow Consistent General Framework for Formal Minskyan Analyses of Closed Economies
AbstractThis paper reviews the general tenets of "stock-flow consistent" and the "formal Minskyan" literatures and argues that the advantages and weaknesses of the latter become clearer when analyzed with the tools of the former. It also analyzes a small but representative and influential sample of seminal "formal Minskyan" models, particularly the Taylor-O’Connel model, in light of a fully consistent "Minskyan artificial economy." The paper also shows these models often assume oversimplified hypotheses (that don’t do justice to the richness of Minskyan analyses) and, more seriously, often ignore the logical implications of these hypotheses. Finally, the authors arugue that most of these problems can be tackled when "formal Minskyan" models are phrased as "closures" of the "general Minskyan" accounting framework described in the paper.
Download Working Paper No. 403 PDF (400.93 KB) -
Research Project Report
12 February 2004
Levy Institute Measure of Economic Well-Being
AbstractThe Levy Economics Institute has, since its inception, maintained an active research program on the distribution of earnings, income, and wealth. Experience from the 1990s suggests that economic growth alone cannot dramatically reduce economic inequality. Because we are concerned with the improvement of well being, we have initiated a research project, the Levy Institute Measure of Economic Well-Being (LIMEW), within the program on distribution of income and wealth. This project seeks to assess policy options and to provide guidance toward improving the distribution of economic well-being in the United States, and it gives us the opportunity to track the progress of economic well-being using a comprehensive measure. Our expectation is that the LIMEW will become a useful tool for policymakers to assess programs and to design policies that will ensure improvement in economic well-being.
Download LIMEW Report, February 2004 PDF (640.75 KB)
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Working Paper No.402
01 February 2004
A Post-Keynesian Stock-flow Consistent Macroeconomic Growth Model
AbstractStock-flow consistent models may be considered the rallying point for heterodox authors interested in modeling macroeconomic relations, since these models incorporate real and financial relations in an entirely consistent way, therefore providing macroeconomic constraints to individual behavior. The present model expands on the Godley-Lavoie model of growth, which was based on a two-asset world, with only bank deposits and the shares issued by private corporations. The present model incorporates the financial relations among the central bank, private banks, and the fiscal policy of government, showing the endogeneity of money under different assumptions on banks’ behavior. The model is used to analyze the relationship between the distribution of income and growth, and to study the impact of monetary policy.
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Working Paper No.401
01 January 2004
Borrowing Alone
AbstractOver the past 20 years, finance has become commodified. Firms increasingly obtain finance from securities markets, instead of borrowing from commercial banks with which they have long-term relationships, while Fannie Mae and Freddie Mac package a growing number of mortgages into bonds. When loans are priced by impersonal markets rather than by individual bankers, they become more like commodities. As in many cases when goods are commodified, this trend has important policy implications. This paper describes new Keynesian and social economics perspectives on the difference between traditional and securitized loans, and points out weaknesses in their account of the significance of banking relationships. A social theory of banking, and, particularly, of risk perception, is then developed. Finally, the policy implications of the commodification of finance are examined in light of the social theory.
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Working Paper No.400
01 January 2004
Fiscal Consolidation
AbstractThis paper analyzes the issues of public finance sustainability and suitability of strategies aimed at fiscal consolidation. Contrasting growth-based versus thrift-based consolidation strategies, it is argued that in the light of theory only the former promises success in large economies. Empirically, this study investigates the experiences with consolidation over the 1990s in the US, Japan, and the eurozone while scrutinizing disparities in economic performance and consolidation within Europe. It is argued that experiences of individual European Union (EU) member states may not be applicable to the eurozone as a whole and that the US may provide the only relevant example for guiding policymaking in the EMU. The US example features cooperative macroeconomic policies geared at steering domestic demand growth, with sustainable public finances as a consequence of their success. By contrast, the Maastricht regime features a counterproductive mix of thrift-based consolidation and inflation-obsessed monetary policy–ultimately a recipe for disaster. Reforms should focus on securing cooperation and proper growth orientation in macroeconomic policymaking, with discipline being imposed in a more balanced way on both finance ministers and central bankers.
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Working Paper No.399
01 January 2004
Does Financial Structure Matter?
AbstractWe address the issue of whether financial structure influences economic growth. Three competing views of financial structure exist in the literature: the bank-based, the market-based and the financial services view. Recent empirical studies examine their relevance by utilizing panel and cross-section approaches. This paper, for the first time ever, utilizes time series data and methods, along with the Dynamic Heterogeneous Panel approach, on developing countries. We find significant cross-country heterogeneity in the dynamics of financial structure and economic growth, and conclude that it is invalid to pool data across our sample countries. We find significant effects of financial structure on real per capita output, which is in sharp contrast to some recent findings. Panel estimates, in most cases, do not correspond to country-specific estimates, and hence may proffer incorrect inferences for several countries of the panel.
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Working Paper No.398
01 January 2004
Inequality of the Distribution of Personal Wealth in Germany, 1973–1998
AbstractThis paper reports on trends in inequality of the distribution of household disposable wealth in West Germany from 1973 to 1998, and compares the changes in the size distribution of household disposable wealth in West and East Germany between 1993 and 1998. The empirical findings are based on several cross sections of the Income and Consumption Survey (ICS), which is conducted every five years by the German Federal Statistical Office. Since these surveys are large quota samples that exclude the very rich, the institutionalized population, and — until 1993 — foreign households, as well as equity in private businesses, the inequality measures derived can be considered the lower bounds of the estimates of their true values.
The Gini coefficients for disposable household wealth are about double the coefficients for household disposable income and about three times the coefficients for equivalent disposable income of persons. Except for 1998, net financial assets are less unequally distributed than total disposable wealth but net housing wealth is distributed more unequally. We find a slight decrease in the inequality of disposable household wealth between 1973 and 1993, followed by a slight increase until 1998.
We also find the well-known hump shape of relative average wealth holdings of age groups, but by looking at the same birth cohorts in the consecutive cross-section samples we can show that the relative position of the two oldest birth cohorts deteriorates only slightly in old age. If one changes the perspective to disposable wealth per household member, one finds that there is only a slight decrease of the relative wealth position but no reduction in the absolute levels of disposable wealth. This is contrary to the predictions of the life cycle model. Bequests between spouses and composition effects can be reasons for this surprising result.
Looking at inequality within household age groups, we see a consistent pattern of highest inequality among the youngest age group that decreases until retirement age, and then increases again. This points to inheritances and gifts inter vivo even at young age.
Comparing West to East Germany, we find greater inequality of the wealth distribution in East Germany but lower inequality of the distribution of disposable income of households and of equivalent income of persons. We also see a strong tendency to a convergence in the distributions of wealth and income between West and East Germany. Closing the gap in GDP per capita between West and East Germany leads to increasing inequality of income but decreasing inequality of wealth in East Germany.
Download Working Paper No. 398 PDF (542.36 KB) -
Research Project Report
09 December 2003
Levy Institute Measure of Economic Well-Being
AbstractThe Levy Economics Institute has, since its inception, maintained an active research program on the distribution of earnings, income, and wealth. Experience from the 1990s suggests that economic growth alone cannot dramatically reduce economic inequality. Because we are concerned with the improvement of well being, we have initiated a research project, the Levy Institute Measure of Economic Well-Being (LIMEW), within the program on distribution of income and wealth. This project seeks to assess policy options and to provide guidance toward improving the distribution of economic well-being in the United States, and it gives us the opportunity to track the progress of economic well-being using a comprehensive measure. Our expectation is that the LIMEW will become a useful tool for policymakers to assess programs and to design policies that will ensure improvement in economic well-being.
Download LIMEW Report, December 2003 PDF (609.84 KB) -
Policy Notes No.7
01 December 2003
The Future of the Dollar
AbstractThe big question is whether the dollar—the world’s reserve currency—can survive a steep fall in its value without the active support of the major central banks. Can the United States broker another Plaza Accord, as it did in 1985 when the dollar lost half of its value against the yen and the mark within two years, without jeopardizing its unique international role? Is an orderly retreat for the dollar possible today?
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Public Policy Brief No.75
01 December 2003
Is Financial Globalization Truly Global?
AbstractIn 2002 more than $1 trillion worth of new bonds was sold across international boundaries. The total stock of cross-border bond holdings was more than $9 trillion. Such lending, together with sales of equities, is regarded as one of the chief benefits of globalization. But financial investment does not always flow where it is needed most. While it appears that the world cannot be satiated with US securities, issues of emerging economies account for less than 6 percent of total international holdings of debt securities (D’Arista 2003). And, as Argentina discovered recently, international lenders can be fickle, selling enough foreign currency and securities to cause a currency crisis.
Download Public Policy Brief No. 75, 2003 PDF (121.50 KB) -
Working Paper No.397
01 December 2003
Financial Globalization and Regulation
AbstractThis paper attempts to define financial globalization as a process whereby financial markets internationally are integrated so closely that they can be considered as a single market. The process, viewed as a by-product of financial liberalization, is only a necessary condition for financial globalization, however. The sufficient condition is the creation of world-wide single currency, managed and regulated by a single international monetary authority. The system itself needs to be managed carefully to avoid the kind of crises countries have experienced over the last 30 years or so. This sufficient condition has not yet been met.
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Working Paper No.394
01 November 2003
Wealth Transfer Taxation
AbstractThe purpose of this paper is to survey the theoretical literature on wealth transfer taxation. The focus is normative: we are looking at the design of an optimal tax structure from the standpoint of both equity and efficiency. The gist of this survey is that the optimal design closely depends on the assumed bequest motives. Alternative bequest motives are thus analyzed either in isolation or combined.
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Working Paper No.393
01 November 2003
A Rolling Tide
AbstractFrom 1989 to 2001, wealth in real terms increased overall among families in the United States. But characterizing distributional changes is much more complex; it depends on the specific questions asked. For example, there is evidence both from Forbes data on the 400 wealthiest Americans and from the SCF, which explicitly excludes families in the Forbes list, that wealth grew relatively strongly at the very top of the distribution. At the same time, the share of total household wealth held by the Forbes group rose. However, while the point estimate of the share of total wealth held by the wealthiest 1 percent of families, as measured by the SCF, also rose, the change is not statistically significant. In 2001, the division of wealth observed in the SCF attributed about a third each to the wealthiest one percent, the next wealthiest nine percent, and the remaining 90 percent of the population. The paper decomposes wealth holdings and distributional shifts in a variety of other ways. Particular attention is given to families with negative net worth, families of older baby boomers, and African American families.
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Public Policy Brief No.74
01 November 2003
Understanding Deflation
AbstractMost recent discussions of deflation seem to overlook the main dangers posed by a deflationary economy and appear to offer superficial solutions. In this brief, the authors argue that, barring drastic changes in asset and output prices, deflation itself is not the main problem, but rather the recessionary conditions that sometimes give rise to deflation. Whether or not prices are falling, the proper remedy for a recession is the Keynesian one: government deficit spending, used to finance useful programs and tax cuts. These measures will reduce unemployment, increase growth, and relieve deflationary pressures.
Download Public Policy Brief No. 74, 2003 PDF (163.42 KB) -
Working Paper No.396
01 November 2003
The Evolution of Wealth Inequality in Canada
AbstractUsing data from the Assets and Debts Survey of 1984 and the Survey of Financial Security of 1999, the authors document the evolution of wealth inequality in Canada between 1984 and 1999. Among their principal findings: wealth inequality increased overall, and was associated with substantial declines in real average and median wealth for recent immigrants and young couples with children. Real median and average wealth fell among families whose major income recipient was aged 25–34, and increased among those whose major income recipient was aged 55 and over. Factors that may have contributed to the rise in wealth inequality (which cannot be quantified with existing data sets) include differences in the growth of inheritances, inter vivos transfers, rates of return on savings, and number of years worked full-time. In particular, rates of return on savings may have increased more for wealthy family units than for their poorer counterparts as a result of the booming stock market during the 1990s.
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Working Paper No.395
01 November 2003
On Household Wealth Trends in Sweden over the 1990s
AbstractInfluenced by major tax reform in the early 1990s and by the exceptional boom in the stock market at the end of that decade, overall wealth in Swedish households increased. So did wealth inequality. The large baby-boom cohorts of the 1940s have been successful in accumulating wealth and they also have large claims on the public pension system. The wealth implicit in the form of these claims dominates private wealth in most Swedish households, and in this paper it is argued that private life-cycle savings have been small in Sweden. Most household saving has been done though the public pension systems. However, concern about the future viability of the pension systems probably increased private life-cycle savings in the 1990s.
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Strategic Analysis
01 October 2003
Deficits, Debts, and Growth
AbstractThese are fast-moving times. Two years ago, the Congressional Budget Office (CBO, 2001) projected a federal budget surplus of $172 billion for fiscal year 2003. Within a year, the projected figure had changed to a deficit of $145 billion (CBO 2002). The actual figure, near the end of fiscal year 2003, turned out to be a deficit of about $390 billion. And just one month ago, President Bush submitted a request to Congress for an additional $87 billion appropriation for war expenditures, over and above the $166 billion tallied so far. It is widely anticipated that even this will have to be revised upward by the end of the coming year (Stevenson 2003; Firestone 2003).
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Working Paper No.392
01 October 2003
Understanding Deflation
AbstractDeflation can be defined as a falling general price level utilizing one of the common price indices.the consumer price index; the GDP deflator or other, narrower indices as the wholesale price index; or an index of manufactured goods prices. Falling indices of output prices can be the result of several mechanisms: productivity increases, quality increases and hedonic imputations of prices, competition from low-cost producers, government policy influences, or depressed aggregate demand. Falling output prices, in turn, can have strong effects, especially on the ability to service debts fixed in nominal terms; depending on the level of indebtedness of households and firms, they can set off a classic Minsky-Fisher debt deflation spiral. In this paper, we argue that deflation can and usually does generate large economic and social costs, but it is more important to understand that deflation itself is a symptom of severe and chronic economic problems. This distinction becomes important for the design and implementation of economic policy.
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Policy Notes No.6
03 September 2003
Is International Growth the Way Out of US Current Account Deficits?
AbstractThe current account deficit of the United States has been growing steadily as a share of GDP for more than a decade. It is now at an all-time high, over 5 percent of GDP. This steady deterioration has been greeted with an increasing amount of concern (U.S Trade Deficit Review Commission 2000; Brookings Papers 2001; Godley 2001; Mann 2002). At The Levy Economics Institute, we have long argued that this burgeoning deficit is unsustainable. A current account deficit implies a growing external debt, which in turn implies a continuing shift in net income received from abroad (net interest and dividend flows) in favor of foreigners. We have also noted that with the private sector headed toward balance, a growing current account deficit implies a corresponding growing “twin” deficit for the government sector (Papadimitriou et al. 2002; Godley 2003). This latter scenario has already come to pass: the latest figures show that the general government deficit rose to an annual rate of more than 4 percent of GDP in the first quarter of 2003 and will certainly rise even more in the near future, since the federal deficit alone is officially projected to reach 4 percent by the end of this fiscal year (CBO 2003).
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Policy Notes No.5
02 September 2003
Deflation Worries
AbstractFor the first time since the 1930s, many worry that the world’s economy faces the prospect of deflation—accompanied by massive job losses—on a global scale. In a rather hopeful sign, policymakers from Euroland to Japan to America all seem to recognize the threat that falling prices pose to markets. Given the singleminded pursuit of deflationary policies over the past decade, this does come as something of a surprise. But policymakers—especially central bankers—in Europe and the United States seem to have little inkling of how to stave off deflation, with the result that prices are already falling in much of the world. Contrary to widespread beliefs, the worst outcome will not be avoided if the only response is to balance budgets and introduce new monetary policy gimmicks. To the contrary, policymakers should increase deficits to at least 7 percent of GDP.
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Working Paper No.391
01 September 2003
Aggregate Demand, Conflict, and Capacity in the Inflationary Process
AbstractThe dominant view relating to unemployment and inflation is that inflation will be constant at a level of unemployment (the nonaccelerating inflation rate of unemployment, NAIRU) determined on the supply side of the economy (and in the labor market in particular). Further, the economy will tend to converge to (or oscillate around) that level of unemployment. Moreover, demand variables or economic policy changes are thought to have no influence whatsoever on NAIRU. An alternative perspective on inflation would indicate that there would be no automatic forces leading to a level of aggregate demand consistent with constant inflation. Inflationary pressures would arise from, inter alia, a role of conflict over income shares, and from cost elements, with the price of raw materials, especially oil, being the most important. Insofar as there are supply-side factors impinging on the inflationary process, these would arise from the level of productive capacity (relative to aggregate demand) and from conflict over income shares. This paper focuses on the arguments and the evidence that supply-side constraints should be viewed as arising from capacity constraints, rather than from the operation of the labor market.
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Working Paper No.390
01 September 2003
Savings of Entrepreneurs
AbstractPrevious work on entrepreneurship and wealth has documented that entrepreneurial households are wealthier and have higher wealth mobility. However, the literature has not paid attention to the components of wealth change. Furthermore, endogeneity problems in the measurement of the interaction between saving rates and entrepreneurship are not well addressed.
In this paper, by reexamining the relationship between entrepreneurship and household wealth more rigorously, I show that while entrepreneurial households save more out of their income, it is not true that they experience higher rates of wealth increase or capital gains. In my analyses, I control for the endogeneity between the decision to start a business and household savings. I find some evidence that the decision to become a business owner is endogenous to the rate of capital gains and to the rate of saving (out of income). My results also show that households do not save more in order to start a business. Therefore, the evidence suggests that business owners save more, but not that those who save more become business owners.
Download Working Paper No. 390 PDF (389.88 KB)