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Reiner Franke

This paper derives firms’ desired rate of utilization from an explicit maximization of a conjectured rate of profit at the micro level. Invoking a strategic complementarity, desired utilization is thus an increasing function of not only the profit share but also the actual utilization. Drawing on recent empirical material and a straightforward functional specification, the model is subsequently numerically calibrated. In particular, this ensures a unique solution for a steady-state position in which the actual and the endogenous desired rates of utilization coincide. On the other hand, it turns out that the anticipated losses of firms by not producing at the desired level are rather small. Hence there may be only weak pressure on them to close a utilization gap in the ordinary way by suitable adjustments in fixed investment. It is indicated that this finding may serve Kaleckian economists as a more rigorous justification for viewing their equilibria as pertaining to the long run, even if they allow actual utilization to deviate persistently from desired utilization.

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Marc Lavoie

Geoffrey Hodgson has recently published a book where he wonders why heterodox economics seems to thrive while at the same time losing ground within the most prestigious universities. Although Hodgson considers himself to be a heterodox economist, he complains about the way heterodoxy has been defined by some of its most active thinkers, in particular Frederic Lee and Tony Lawson. Hodgson believes that heterodox economics should be defined neither by a left-leaning ideology nor by critical realism. He argues that too much energy has been devoted to the study of macroeconomics by the Marxist and post-Keynesian brands of heterodox economics, as they left aside what he believes to be the crucial issue of microeconomic behaviour which can be found in behavioural and evolutionary economics. Hodgson further argues that what he considers to be the decline in the impact of heterodox economics is partly due to a lack of quality control. The paper outlines and comments on these various assertions.

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Emiliano Libman and Gabriel Palazzo

This paper highlights the role of external indebtedness and the presence of inflationary inertia in order to assess the effectiveness and sustainability of inflation targeting during disinflation episodes. As the recent Argentinian experience illustrates, a sluggish inflation rate and a significant current-account deficit may make the stabilization process difficult. To illustrate the point, we build a model that shows that, when inflation adjusts fast, the target may be achieved without building too much external debt. But if inflation adjusts slowly, an excessive build-up of external debt could lead to an increase in the risk premium, a sudden shortage of foreign exchange, and the eventual collapse of the inflation-targeting regime.

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Dany Lang, Mark Setterfield and Ibrahim Shikaki

We address the question posed in the title of this paper by investigating recent developments in the literature that estimates the NAIRU. A necessary condition for the existence of a NAIRU is dynamic homogeneity: the Phillips curve should be homogeneous of degree one in lagged and/or expected inflation. But contemporary approaches to estimating the NAIRU typically assume rather than test for dynamic homogeneity, thus assuming (rather than testing for) the existence of a NAIRU. We argue that these developments remove the NAIRU from the domain of testable hypotheses and transform the concept into an article of faith. This does not constitute scientific progress.

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Evangelos Vasileiou and Themistoclis Pantos

In this paper, we examine how value at risk (VaR) contributes to the financial market's stability. We apply the Guidelines on Risk Measurement and the Calculation of Global Exposure and Counterparty Risk for UCITS of the Committee of European Securities Regulators (CESR 2010) to the main indices of the 12 stock markets of the countries that have used the euro as their official currency since its initial circulation. We show that gaps in the legislative framework give incentives to investment funds to adopt conventional models for the VaR estimation in order to avoid the increased costs that the advanced models involve. For this reason, we apply the commonly used historical simulation VaR (HVaR) model, which is: (i) taught at most finance classes; (ii) widely applied in the financial industry; and (iii) accepted by CESR (2010). The empirical evidence shows the HVaR does not really contribute to financial stability, and the legislative framework does not offer the appropriate guidance. The HVaR model is not representative of the real financial risk, and does not give any signal for trends in the near future. The HVaR is absolutely backward-looking and this increases the stock market's overreaction. The fact that the suggested confidence level in CESR (2010) is set at 99 percent leads to hidden pro-cyclicality. Scholars and researchers should focus on issues such as the abovementioned, otherwise the VaR estimations will become, sooner or later, just a formality, and such conventional statistical measures rarely contribute to financial stability.