This paper offers a constructive critique of ‘The Chicago Plan revisited’ published by as an IMF working paper. On the one hand, there are reasons to query the exact details of the proposed reform, including claims of large steady-state output gains. On the other hand, the authors deserve kudos for bringing into the foreground issues which are typically ignored or inferred otherwise by neoliberal academics and those who oversee the monetary system, including the empirical validity of the endogenous money approach and the insight that ‘money’ is a societal construct. The paper concludes that there is merit in revisiting ‘100% Reserves’ as part of the theoretical rationale to expand policymaking space in debt-constrained economies.
The Great Recession has exposed several failings in the mainstream economics profession, including a generalised neglect of the macro role of debt and of banking. Steve Keen has proposed an alternative approach to macroeconomics which he sometimes labels as the ‘Walras–Schumpeter–Minsky Law’. His key claim seems to be that – as a consequence of endogenous money – the concepts of effective demand and aggregate supply should be redefined to include the ‘change in [private] debt’ as well as financial asset transactions. This paper cautions that doing so may generate more confusion than what the redefinitions seek to clarify. Further, while endogenous money is a fact, it is important to recognise the roles of financial intermediation and adverse trends in income distribution in shaping the macro patterns and financing relations that preceded the Great Recession in the United States.
After the global financial crisis, the Bank for International Settlements emerged as an influential voice in policy debates. Under the rubric of preventing ‘financial imbalances’, and concerned with the ‘illusory’ nature of demand management, the Bank has proposed a macro policy framework based on ‘finance-neutral’ output gaps. This paper critiques the analysis of the New Austrian School, that is, the Bank for International Settlements. The Bank is seeking an operational anchor for a Hayekian version of the Wicksellian ‘natural rate of interest’ that would obtain a ‘sustainable’ output level consistent with a long-run ‘financial equilibrium’ for the private non-financial sector. The fuzzy concept of ‘financial imbalances’ plays a similar role to that of ‘forced saving’ in the Old Austrian School framework. Incredibly, the institutional flaws in the eurozone that made sovereigns vulnerable to debt crises, large current-account surpluses, high rates of unemployment and rising inequality are not deemed as ‘imbalances’ worthy of a public policy response.
Brett Fiebiger and Marc Lavoie
In late 2008 a consensus was reached amongst global policymakers that fiscal stimulus was required to counteract the effects of the Great Recession, a view dubbed as the New Fiscalism. Pragmatism triumphed over the stipulations of the New Consensus Macroeconomics, which viewed discretionary fiscal actions as an irrelevant tool of counter-cyclical macroeconomic policy (if not altogether detrimental). The partial re-embrace of Keynes was however relatively short-lived, lasting only until early 2010 when fiscal consolidation came to the forefront again, although the merits of fiscal austerity were questioned when economic recovery did not really materialize in 2012. This paper traces the ups and downs of the debate over the New Fiscalism, especially at the International Monetary Fund, by analysing IMF documents and G20 communiqués. Using fiscal policy as a means to exit the crisis remains contentious even amidst recognition of secular stagnation.
Marc Lavoie and Brett Fiebiger
This article distinguishes between credit easing policies and quantitative easing (QE) policies. The authors argue that there are two broad transmission mechanisms associated with quantitative easing: the Friedmanian mechanism, which is based on the theory of the money multiplier and the fractional-reserve banking system; and the Keynesian mechanism, advocated by Keynes in 1930, which relies on its impact on interest rates. The article also deals with the likely consequences of various incarnations of QE policies: QE done with banks, QE done with non-banks, QE for the people, Corbyn's people's QE and green QE. This is done by looking at the impact of these policies on the balance sheets of banks, private agents, the central bank and the government, and on their consequences for the fiscal balance of the government when taking into account the profits that are distributed by the central bank to the government. It is concluded that accounting tricks cannot modify reality.