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Thomas R. Michl and Kayla M. Oliver

Hysteresis, path dependence, and multiple equilibria are characteristic features of post-Keynesian economics. This paper constructs an otherwise conventional three-equation model that includes a hysteresis-generating mechanism and an invariant output target. We use it to explore the implications for monetary policy of an output-targeting policy framework that seeks to reverse the damage caused by hysteresis. We restrict ourselves to negative aggregate demand shocks and positive inflation shocks that in most instances require a disinflationary response from the central bank. One important finding is that as long as inflation expectations are to some degree anchored, the central bank can achieve its output target after an aggregate demand shock by overshooting its inflation target temporarily and running a ‘high-pressure labor market.’ If expectations are unanchored, an aggregate demand shock will not have long-run hysteresis effects because the central bank is obliged to reflate aggressively, replacing on a cumulative basis all the demand that was lost through the shock. However, with unanchored expectations a pure inflation shock will create hysteresis effects since the central bank will need to disinflate and it does not have the option of running a high-pressure labor market. Anchoring gives the central bank this option, making inflation shocks manageable.

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Gerald A. Epstein

Many observers thought that the financial crisis of 2007–08 would be a watershed moment in global finance. They believed the crisis would demonstrate, once and for all, the instability and inefficiency of this hyper-speculative global financial system, and finally bring an end to the destructive “neoliberal moment” and its “Washington Consensus” dictates in domestic and global economic policy (see, for example, Blanchard, Dell’Ariccia and Mauro, 2010). But, something surprising happened to “neoliberal financialization” on the way to the “dustbin of history”: it escaped. Financial deregulation and “neoliberal” populism in finance are in the ascendant in the United States and elsewhere, and the bankers are laughing, well. . .all the way to the bank.1 To be sure, there are important cracks in the old free market consensus on international financial issues. These cracks are leading to what Ilene Grabel (Chapter 5, in this volume) calls “productive incoherence” in theory and practice, which is leading to important opportunities for policy change in some areas. But, in many other areas, the old theories and practices are being resurrected after near-death experiences in the period following the crisis.

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Edited by Gerald A. Epstein

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Fernando J. Cardim de Carvalho

Much of the criticism directed at austerity programs implemented after the 2007/2008 financial crisis, more forcefully in the eurozone, have relied on the same arguments Keynes and others raised against the (British) Treasury View developed in the 1920s and 1930s. Austerity, however, has been proposed most insistently in the 2010s by European authorities, led by the German Federal Ministry of Finance, the Bundesfinanzministerium (BMF). While the arguments for austerity then and now share some common elements, there are enough original arguments being presented by the BMF to make many of the criticisms ineffective. The paper reconstructs both views, the Treasury's and the BMF's, to show and evaluate their similarities and their differences.

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Robert J. Gordon

In the late 1960s the stable negatively sloped Phillips curve was overturned by the Friedman–Phelps natural rate model. Their Phillips curve was vertical in the long run at the natural unemployment rate, and their short-run curve shifted up whenever unemployment was pushed below the natural rate. This paper criticizes the underlying assumption of the Friedman–Phelps approach that the labor market continuously clears and that changes in unemployment down or up occur only in response to ‘fooling’ of workers, firms, or both. A preferable and resolutely Keynesian approach explains quantity rationing by inertia in price and wage setting. The positive correlation of inflation and unemployment in the 1970s and again in the 1990s is explained by joining the negatively sloped Phillips curve with a positively sloped dynamic demand curve. For any given growth of nominal GDP, higher inflation implies slower real GDP growth and higher unemployment. This ‘triangle’ model based on demand, supply, and inertia worked well to explain why inflation and unemployment were both positively and negatively correlated between the 1960s and 1990s, but in the past decade the slope of the short-run Phillips curve has flattened as inflation exhibited a muted response to high unemployment in 2009–2013 and low unemployment in 2016–2018.

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Thomas Palley and Matías Vernengo

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Robert Solow

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Marc Lavoie