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Working Paper No.486
21 December 2006
Global Imbalances, Bretton Woods II, and Euroland’s Role in All This
AbstractApproaching the issue of mounting global imbalances from the perspective of the "Bretton Woods II hypothesis," this paper argues that the popular preoccupation with China’s supposed export-led development strategy is misplaced. It also suggests, similar to Japan’s depression, subdued growth in Euroland for most of the time since the Maastricht Treaty has been of first-order importance in these developments. Germany is identified as being at the heart of the European trouble. Globally, there is an ongoing clash between two approches to macroeconomic policy making: a highly dogmatic German approach, and a very pragmatic Anglo-Saxon one. The low levels of interest at which global demand imbalances have been smoothed out financially reflect deficient global demand in an environment of vast supply-side opportunities. After contributing greatly to the build-up of imbalances, Euroland is unlikely to play any constructive part in their unwinding. Hampered by an exchange-rate policy vacuum, a small-country mindset, and soaring intra-area imbalances, Euroland is also illpositioned to cope with fading external growth stimuli.
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Working Paper No.485
14 December 2006
The Balance Sheet Approach to Financial Crises in Emerging Markets
AbstractThis paper contrasts the conventional balance sheet approach to the analysis of economic
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disturbances in emerging markets with the alternative balance sheet approach that applies and
extends Minsky’s Financial Instability Hypothesis to (open) emerging market economies.
Earlier balance sheet studies are found to be flawed because of a failure to disaggregate
firms’ balance sheets. Examination of such balance sheets in Thailand, Malaysia, Indonesia,
Singapore, and Hong Kong suggests that firms in the three crisis countries did share common
causes of financial fragility, but that the level of financial development and the particular
domestic economic and political situation also affected their situation. -
Working Paper No.484
12 December 2006
Expensive Living
AbstractApart from its widely accepted direct advantages, the introduction of the euro has been accompanied by a surge of inflation in most of the EU member states. At the same time, wages–in part, wages of the unskilled–are relatively losing ground, while the purchasing power of the average European seems also to have weakened since the introduction of the single currency. In this paper we deal with five relevant central issues to interpret “expensiveness” in Greece. First, we examine to what extent recent inflation trends are attributable to the constraints imposed by the monetary union–namely negative demand disturbances in certain Greek regions. Second, we investigate to what extent these patterns are also due to the adoption of the euro–including conversion period effects–over product market and other domestic rigidities. Third, we investigate the impact of seasonal effects on inflation, in the context of the Greek so-called traditional “petit-bourgeois capitalism.” Fourth, we explore the extent to which unemployment is another factor that drives wages and purchasing power down. Fifth, we apply the Balassa-Samuelson effect to see whether it constitutes the culprit for price hikes in nontradable products in particular. We find that all the aforementioned factors contribute to the Greek expensiveness.
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Research Project Report
04 December 2006
Wealth and Economic Inequality
AbstractThis report argues that wealth is an integral aspect of economic well-being. The authors combine income and net worth to demonstrate the importance of wealth inequalities in shaping overall economic inequality and defining the disparities among population subgroups.
Conventional measures of household economic well-being do not adequately
Download LIMEW Report, December 2006 PDF (336.92 KB)
reflect the advantages of asset ownership or the disadvantages of financial
liabilities. The authors find that the picture of economic well-being in the
United States is quite different if the yardstick is their wealth-adjusted income
measure (WI) rather than the standard income measure. -
Public Policy Brief No.88
30 November 2006
US Household Deficit Spending
AbstractOver the past decade, deficit spending by consumers has supported the United States economy. Research Associate Robert Parenteau analyzes the financial balance of American households and finds that the pace of deficit spending is likely to stall and, possibly, reverse course. This reversion will jeopardize US profit and economic growth, as well as the growth of countries dependent on export-led development strategies. His research supports the position of other Levy Institute scholars who have urged policymakers to recognize the consequences of current imbalances in the US economy.
Download Public Policy Brief No. 88, 2006 PDF (957.62 KB) -
Working Paper No.483
30 November 2006
Fisher’s Theory of Interest Rates and the Notion of “Real”
AbstractBy providing five different criticisms of the notion of real rate, the paper argues that this concept, as Fisher defined it or as a definition, is not relevant to economic analysis. Following Keynes and other post-Keynesians, the article shows that the notion of real rate is microeconomically and macroeconomically unfounded. Adjusting interest rates for inflation does not protect the purchasing power of wealth, and it is impossible to do so at the macroeconomic level. In addition, an empirical interpretation of the break in the correlation between interest rates and inflation since 1953 is provided.
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Public Policy Brief No.87
29 November 2006
Maastricht 2042 and the Fate of Europe
AbstractUnemployment in the European Union (EU) is a serious problem that threatens to disrupt the integration of accession countries, the character of individual countries, and the continued existence of the EU. European integration poses a huge conundrum for European employment because the conventional theory explaining unemployment in Europe—labor market rigidities—is wrong. According to Senior Scholar James K. Galbraith, the application of this policy will not cure European unemployment, but it could destroy the economic promise of the EU for its poorer regions and the accession countries.
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Working Paper No.482
29 November 2006
Net Intergenerational Transfers from an Increase in Social Security Benefits
AbstractWhen the age of death is uncertain, individuals will leave bequests–even if they have no desired bequests–simply because they will hold wealth against the possibility of living longer. Bequests are accidental. Starting from a baseline level of Social Security benefits, an increase in benefits will cause consumption to increase. However, consumption may not increase by as much as the increase in Social Security, which would cause wealth to be greater than under the baseline scenario. The higher wealth levels would translate into greater bequests. Therefore, an increase in Social Security benefits may not be a complete transfer from the younger generation to the older generation: some of the increase in benefits may be bequeathed back to the younger generation. Whether this happens depends on the form of the utility function, the amount of bequeathable wealth, and whether there is a bequest motive. The objective of this paper is to quantify for single persons how much of an increase in Social Security benefits would be bequeathed back to the younger generation. We find that, at least for singles, increases in Social Security benefits are unlikely to be offset by bequests.
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Working Paper No.481
28 November 2006
An Inquiry into the Nature of Money
AbstractThe paper argues that the functional approach of money does not provide a good method to study monetary history and monetary mechanisms. An alternative approach is developed and illustrated by analyzing the role of tobacco and cowry shells in past monetary systems. It is shown that any monetary system has specific properties that most students of money do not take into account when theorizing about money or analyzing its history. This leads them to miss some important points, and to see monetary systems where none exist. Hence, one can doubt some of the past research on the subject, at least until further investigation is conducted that is based, not on what we think "money" is, but on what its essential properties are. By comprehending what the main characteristics of a monetary system are, one is able to improve regulation of the system and get some insights into the financial mechanisms of sovereign governments.
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Working Paper No.480
27 November 2006
Methodology and Microeconomics in the Early Work of Hyman P. Minsky
AbstractThis paper reviews the recently published doctoral thesis of Hyman P. Minsky, summarizing its main contributions to methodology and microeconomics. These were aspects of economics with which Minsky is not usually associated, but which lie at the foundation of his later work. They include critical remarks on Cambridge economics. The paper then draws out some antecedents of Minsky’s ideas in the work of Henry Simons, and highlights the Marshallian monetary analysis that he adopted.
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Working Paper No.479
22 November 2006
European Welfare State Regimes and Their Generosity toward the Elderly
AbstractThis paper examines the generosity of the European welfare state toward the elderly. It shows how various dimensions of the welfare regimes have changed during the past 10 to 15 years and how this evolution is related to the process of economic integration. Dimensions include general generosity toward the elderly and, more specifically, generosity toward early retirement and generosity toward the poor. Using aggregate data (EUROSTAT, OECD) as well as individual data (SHARE, the new Survey of Health, Ageing, and Retirement in Europe), the paper looks at the statistical correlations among those types of system generosity and actual policy outcomes, such as unemployment and poverty rates among the young and the elderly, and the inequality in wealth, income and consumption. While the paper is largely descriptive, it also tries to explain which economic and political forces drive social expenditures for the elderly in the European Union and whether spending for the elderly crowds out spending for the young.
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Strategic Analysis
14 November 2006
Can Global Imbalances Continue?
AbstractIn this new Strategic Analysis, we review what we believe is the most important economic policy issue facing policymakers in the United States and abroad: the prospect of a growth recession in the United States. The possibility of recession is linked to the imbalances in the current account, government, and private sector deficits. The current account balance, which is a negative addition to US aggregate demand, is now likely to be above 6.5 percent of GDP and has been rising steadily for some time. The government balance has improved, again giving no stimulus to demand, which has therefore relied entirely on a large and growing private sector deficit. A rapidly cooling housing market is one of the signs showing that this growth path is likely to break down.
We focus first on the current account deficit. Our analysis suggests that a necessary and sufficient condition to address this problem, without dire consequences for unemployment and growth, is that net export demand grow by a sufficient amount. For this to happen, three conditions need to be satisfied: foreign saving has to fall, especially in Europe and East Asia; US saving has to rise; and some mechanism, such as a change in relative prices, should be put in place to help the previous two phenomena translate into an improvement in the US balance of trade.
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Working Paper No.478
03 November 2006
On Lower-bound Traps
AbstractWe present a simple theoretical framework that integrates the notion of the natural or neutral interest rate, liquidity preference theory, and the monetary policy practice by modern central banks. We claim that this theory explains the conditions under which an economy will experience an aggregate demand deficiency problem within a modern institutional setting. Contrary to the predictions of the “new consensus” view in macroeconomics, the model suggests that “structural” factors such as a high saving rate and, especially, a low “natural” rate of growth increase the chances that an economy experiences an aggregate demand deficiency. Contrary to conventional wisdom, the model predicts that a fall in the NAIRU may lead to a rise in the natural interest rate, and vice versa.
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Working Paper No.477
27 October 2006
When Knowledge Is an Asset
AbstractWe study the economics of employment relationships through theoretical and empirical analyses
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of an unusual set of firms, large law firms. Our point of departure is the “property rights”
approach that emphasizes the centrality of ownership’s legal rights to control important,
nonhuman assets of the enterprise. From this perspective, large law firms are an interesting and
potentially important object of study, because the most valuable assets of these firms take the
form of knowledge—particularly knowledge of the needs and interests of clients. We argue that
the two most distinctive organizational features of large law firms, the use of “up or out”
promotion contests and the practice of having winners become residual claimants in the firm,
emerge naturally in this setting. In addition to explaining otherwise anomalous features of the
up-or-out partnership system, this paper suggests a general framework for analyzing
organizations where assets reside in the brains of employees. -
Working Paper No.476
19 October 2006
The “New Consensus” View of Monetary Policy
AbstractOne of the greatest achievements of the modern “new consensus” view in macroeconomics is the assertion of a nonquantity theoretic approach to monetary policy. Leading theorists and practitioners of this view have indeed rejected the quantity theory of money, and defended a return to the old Wicksellian idea of eliminating high levels of inflation by adjusting nominal interest rates to changes in the price level. This paper evaluates these recent developments in the theory and practice of monetary policy in terms of two basic questions: 1) What is the monetary policy instrument controlled by the central bank? and 2) Which macroeconomic variables are affected in the short and long run by monetary policy?
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Public Policy Brief No.86
18 October 2006
Rethinking Trade and Trade Policy
AbstractThe theory of comparative advantage says that there are gains from trade for the global economy as a whole. In this second brief of a three-part study of the international economy, Research Associate Thomas Palley observes that comparative advantage is driven by technology, which can be influenced by human action and policy. These associations have huge implications for the distribution of gains from trade and raise concerns about the future impact of international trade on the US economy. Palley calls for strategically designed US trade policy that can influence the nature of the global equilibrium and change the distribution of gains from trade.
Recent works by Ralph Gomory and William Baumol and Paul Samuelson use pure trade theory to question the distribution of trade gains across countries over time and to challenge commonly held beliefs. These microeconomic and trade theorists identify a new issue: the dynamic evolution of comparative advantage and its impact on the distribution of gains from trade, which depends on changing global demand and supply conditions. (See also, Public Policy Brief No. 85.)
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Working Paper No.475
22 August 2006
Capital Stock and Unemployment
AbstractThis paper examines the proposition that capital stock relative to aggregate output has been an important variable in the determination of the Non-Accelerating Inflation Rate of Unemployment (NAIRU) over the last four decades. The authors present new empirical evidence that lends strong support to the claim that the aggregate capital-output ratio, the real price of imports, and aggregate capacity utilization were determinants of the NAIRU during the period. The same evidence also shows that technical progress and changes in long-term unemployment did not affect the NAIRU. We believe this evidence suggests that, insofar as the aggregate capital-output ratio is affected by changes in real interest rates, the stance of monetary policy is one determinant of the NAIRU.
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Working Paper No.474
21 August 2006
On the Minskyan Business Cycle
AbstractThe essential insight Minsky drew from Keynes was that optimistic expectations about the future create a margin, reflected in higher asset prices, which makes it possible for borrowers to access finance in the present. In other words, the capitalized expected future earnings work as the collateral against which firms can borrow in financial markets or from banks. But, then, the value of long-lived assets cannot be assessed on any firm basis, as they are highly sensitive to the degree of confidence that markets have about certain events and circumstances that will unfold in the future. This means that any sustained shortfall in economic performance in relation to the level of expectations that are already capitalized in asset prices may promote the view that asset prices are excessive. Once the view that asset prices are excessive takes hold in financial markets, higher asset prices cease to be a stimulant. Initially debt-led, the economy becomes debt-burdened. In this article, it is argued that Keynes’s views on the alternation of the “bull” and “bear” sentiment and asset price speculation over the business cycle can explain two of Minsky’s central propositions relative to business cycle turning points that have often been found less than fully persuasive: (1) that financial fragility increases gradually over the expansion, and, (2) that the interest rate sooner or later, increases setting off a downward spiral bringing the expansion to an end.
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Working Paper No.472
19 August 2006
The Adequacy of Retirement Resources among the Soon-to-Retire, 1983–2001
AbstractA central issue confronting soon-to-retire workers (those aged 47–64) is whether they will have command over enough resources (both private and public) to maintain a decent standard of living in retirement. Typically, the adequacy of projected retirement income is judged in relation to some absolute standard (for example, the poverty threshold) and preretirement income (“replacement rate”). Using data from the Federal Reserve Board’s Survey of Consumer Finances for 1983, 1989, and 2001, I find that expected retirement income grew robustly from 1989 to 2001 (by 38 percent in real terms) and the share with expected retirement income less than twice the poverty line fell by 5 percentage points. The percentage-point decline was even greater for minority households (11.6) and single females (5.7). The change in the share with replacement rates over 50 percent was 4.5 percentage points, though in this case much lower for minorities (0.9 percentage points) and single females (1.8 percentage points). However, percentage point changes for minorities and single females were much smaller, at 75 percent and a 100 percent replacement rates, respectively. Moreover, retirement wealth is very unevenly distributed. Whites and married couples had substantially larger wealth accumulations than their respective counterparts.
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Working Paper No.471
17 August 2006
Population Forecasts, Fiscal Policy, and Risk
AbstractThis paper describes how stochastic population forecasts are used to inform and analyze policies related to government spending on the elderly, mainly in the context of the industrialized nations. The paper first presents methods for making probabilistic forecasts of demographic rates, mortality, fertility, and immigration, and shows how these are combined to make stochastic forecasts of population number and composition, using forecasts of the US population by way of illustration. Next, the paper discusses how demographic models and economic models can be combined into an integrated projection model of transfer systems such as social security. Finally, the paper shows how these integrated models describe various dimensions of policy-relevant risk, and discusses the nature and implications of risk in evaluating policy alternatives.
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Working Paper No.470
16 August 2006
Retiree Health Benefit Coverage and Retirement
AbstractEmployer-provided health benefits for workers who retire before age 65 has fallen over the last decade. We examine a cohort of male workers from the Health and Retirement Survey to explore the dynamics of retiree health benefits and the relationship between retiree health benefits and retirement behavior. A better understanding of this relationship is important to the policy debate over the best way to increase health coverage for older Americans without reducing work incentives. Concerning the dynamics at work, we find that, between 1992 and 1996, 24 percent of full-time workers who had retiree health benefits lost their coverage, while 15 percent of full-time workers who lacked coverage gained it. Also, of the full-time employed men who were covered by retiree health benefits in 1992 and had retired by 1996, 3 percent were uninsured, and 15 percent were covered by health insurance other than employer-provided insurance. On the relationship between retiree health benefits and retirement, we find that workers with retiree benefits were 29 to 55 percent more likely to retire than those without. We also find that workers who are eligible for retiree health benefits tend to take advantage of them when they are relatively young
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Working Paper No.469
11 August 2006
The Changing Role of Employer Pensions
AbstractBy any measure, pension coverage should be at an all-time high: the nation is richer and workers are older. However, the pension world is a paradox, as pension security falls for middle-class workers and pension spending increases. The United States government directly and indirectly spends more than half a trillion dollars on the elderly each year. Direct spending is mainly through Social Security and indirect spending through the tax code’s special treatment of employer and personal retirement plans. The tax favoritism is an astonishing one fourth of the direct spending. But the nature of the tax subsidy is changing. The tax subsidy for 401(k) plans, which are beneficial to employers and higher-income workers, is overtaking that for traditional pensions, which cover lower-income workers and help expand pension coverage. Since tax policy is designed to meet a public purpose, perhaps the more than $100 billion dollars per year spent indirectly on pensions could be better spent? Using tax expenditure data from the federal budget and data from both employers’ surveys (the Chamber of Commerce and the National Compensation Survey) and workers’ surveys (the Bureau of the Census’s Current Population Survey), this study reflects on alternative pension polices that transform the tax subsidy and expand Social Security and traditional pensions. Such a sharp change in federal policy may stem the loss of pension security of middle-class workers and expand it for lower-income workers.
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Working Paper No.468
10 August 2006
Global Demographic Trends and Provisioning for the Future
AbstractThe world’s population is aging. Virtually no nation is immune to this demographic trend and the challenges it brings for future generations. Relative growth of the elderly population is fueling debate about reform of social security programs in the United States and other developed nations. In the United States, the total discounted shortfall of Social Security revenues has been estimated at about $11 trillion, nearly two-thirds of that comes after 2050. However, this paper argues that those calling for reform have overstated the demographic challenges ahead. Reformers conclude that aging poses such a serious challenge because they focus on financial shortfalls. If we focus on demographics and on the ability to produce real goods and services today and in the future, the likelihood of a real crisis in social security in the United States and developed nations is highly improbable. Demographic changes are too small relative to the growth of output that will be achieved even with low productivity increases. This paper concludes with policy recommendations that will enhance our ability to care for an aging population in a progressive manner that will not put undue burdens on future workers. Policy formation must distinguish between financial provisioning and real provisioning for the future; only the latter can prepare society as a whole for coming challenges. While individuals can, and should, save financial assets for their individual retirements, society cannot prepare for waves of future retirees by accumulating financial trust funds. Rather, society prepares for aging by investing to increase future real productivity.
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Working Paper No.467
09 August 2006
The Financial Requirements of Achieving Gender Equality and Women’s Empowerment
AbstractAlthough the Millennium Development Goals (MDGs) have been ratified in global and national forums, they have not yet been incorporated into operational planning within governments or international organizations. The weak link between the policies and the investments needed for their implementation is one barrier to progress. An assessment of the resources required is a critical first step in formulating and implementing strategies to achieve the MDGs.
This is especially true for policies to promote gender equality and empower women. Although enough is known about such policies to implement them successfully, the costs of such interventions are not systematically calculated and integrated into country-level budgeting processes. Using country-level data, the paper estimates the costs of interventions aimed at promoting gender equality and women’s empowerment in Bangladesh, Cambodia, Ghana, Tanzania, and Uganda. It then uses these estimates to calculate the costs of such interventions in other low-income countries. Finally, the paper projects the financing gap for interventions that aim directly at achieving gender equality, first for the five countries, and subsequently for all low-income countries
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