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Daniela Prates

This paper provides an alternative view of monetary sovereignty (MS) from the Neo-Chartalist approach found in the Modern Money Theory literature. The differences between the author's approach to MS and Neo-Chartalism cover the following aspects: the nature of money, the acceptability of money, and the relationship between the central bank and the Treasury. The paper then analyses the relationship between MS, the currency hierarchy (CH), and policy space. The focus is placed on emerging-market economies. It is argued that emerging-market economies' policy space is determined by the interplay of two factors: the degree of MS and the position of national money (that encompasses the state and bank monies) within the CH.

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Víctor Manuel Isidro Luna and Francisco Antonio Martínez Hernández

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Ryan Woodgate

Corporate tax rates have been consistently falling around the world for decades now. This paper aims to explain the causes and consequences of this ‘global race to the bottom’. In particular, the author wishes to test the hypothesis that this race to the bottom is driven by demand-boosting corporate tax competition, where, contrary to traditional Kaleckian theory, lower corporate taxes may positively affect demand through increased investment due to multinational enterprises (MNEs) that seek higher net profits through (re)locating in low-tax jurisdictions. In order to do so, the author builds a general theory of the effect of average effective corporate tax rates (AECTRs) on MNE location. This theory is used to justify the addition of a tax-sensitive foreign direct investment channel in the investment function of a canonical Kaleckian model. As a result, this paper determines the conditions under which a country may be ‘tax-competition-led’, where lowering AECTRs increases demand through increased MNE investment and in spite of the negative effect on government expenditure given a balanced budget. The findings of this paper are that it is possible for an economy to be tax-competition-led, though it is unlikely in many cases given the existence of a coordination problem that lessens or nullifies the effect of lowering AECTRs when many countries do so simultaneously. The author refers to this problem as the ‘paradox of tax competition’, since, like other fallacies of composition commonly identified in Post-Keynesian thought, this is a phenomenon where the benefits of one country acting alone are reduced or eliminated if other countries act the same way at the same time. Based on this model, crude but nonetheless informative estimates are given that indicate that the race to the bottom has had a negative effect on demand in the vast majority of OECD countries. In this sense, the author finds that the persistence of policymakers to continue to compete on corporate taxes ‘imprudent’. Model-consistent policy recommendations are offered, chief among which are tax coordination or, failing that, technical changes in how individual countries collect corporation tax.

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Paulo R. Mota, Abel L.C. Fernandes and Paulo B. Vasconcelos

The austerity policies applied by the eurozone peripheral governments under the Troika financial assistance programmes have contributed to a sharp reduction in aggregate demand, regardless of the unconventional measures undertaken by the European Central Bank (ECB). The ECB decreased the interest rate on the main refinancing operations to zero and has been buying assets from banks on a massive scale under the Expanded Asset Purchase Programme. The fact that these extraordinary measures have not been enough to promote a strong recovery shifts the focus back onto fiscal policy. The value of impact fiscal multipliers and the size of hysteretic effects are key factors for assessing the effects of fiscal policy. There is widespread evidence that public expenditure multipliers are greater than one, especially when the economy is depressed. However, less is known about the importance of hysteresis effects. Using the linear play hysteresis operator, we find that hysteresis effects are important in the eurozone peripheral countries. Large fiscal impact multipliers combined with the presence of hysteresis implies that front-loaded austerity depresses the economy in the short run, and these effects may persist in the long run.

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Robert Rowthorn

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Gerardo Fujii-Gambero, Juan Carlos Moreno-Brid, Carlo Panico and Martín Puchet Anyul

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Gilberto Tadeu Lima and Jaylson Jair da Silveira

This paper investigates the impact on capacity utilization and economic growth as variables driven by effective demand of income distribution featuring the possibility of profit-sharing with workers. Firms choose to compensate workers with either a base wage or a share of profits on top of this base wage. In accordance with robust empirical evidence, workers in sharing firms have higher productivity than workers in non-sharing firms. The distribution of employee compensation strategies and labor productivity across firms is evolutionarily time-varying. Two major results carrying relevant theoretical and policy implications are obtained. First, heterogeneity in employee compensation strategies across firms (and therefore earnings inequality across workers) may emerge as a long-run equilibrium outcome. Second, beyond the short run, a higher fraction of profit-sharing firms may result in either higher or lower rates of capacity utilization and economic growth.

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Luis Cárdenas, Paloma Villanueva, Ignacio Álvarez and Jorge Uxó

Since 2014 the Spanish economy has recovered positive GDP growth, and the country has been growing well above the eurozone average. This recovery has sparked an academic and political debate concerning the role that structural reforms, prescribed by the ‘Troika,’ have played in peripheral Europe. For certain scholars and institutions, these structural reforms have allowed the market, through greater wage flexibility, to make the necessary adjustments to restore economic growth, resulting in a ‘healthy’ economic recovery. But to what extent is this mainstream narrative solidly backed up by the empirical evidence? Can Spain be held up as an international example of the ‘success’ of these reforms? The aim of this paper is to shed light on this debate. We consider that labor market reforms and wage devaluation policy are not the drivers of economic recovery. Instead, we offer an alternative explanation for recovery based on the theory of demand-led growth.

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Thomas Palley

The essential claim of Modern Money Theory (MMT) is sovereign currency issuing governments, with flexible exchange rates and without foreign currency debt, are financially unconstrained. This paper analyses the macroeconomic arguments behind that claim and shows they are suspect. MMT underestimates the economic costs and exaggerates the capabilities of deficit-financed fiscal policy. Those analytic shortcomings render it poor economics. However, MMT's claim that sovereign governments are financially unconstrained is proving a popular political polemic. That is because current distressed economic conditions have generated political resistance to fiscal austerity, and MMT fits the moment by countering the neoliberal polemic that government lacks fiscal space because it is akin to a household.