Crédito, moneda y bancos centrales

Part 1: Introduction to post-Keynesian monetary

economics

Marc LavoieUniversity of Ottawa

Where has economics been going?• “Indeed, the typical graduate

macroeconomics and monetary economics training received at Anglo-American universities during the past 30 years or so, may have set back by decades serious investigations of aggregate economic behaviour and economic policy-relevant understanding.”– Willem Buiter, 2009 (former member of the

Monetary Policy Committee of the Bank of England) 

UNAM 2014

General outline of all lectures1. General introduction to post-Keynesian

monetary economics2. Central banks and the government3. Financial balances and PK stock-flow

consistent models

UNAM 2014

Outline of first lecture

• Orthodox vs Heterodox Economics• Post-Keynesian Economics• Introduction to post-Keynesian monetary economics• Monetary creation• The liquidity preference of banks

UNAM 2014

SECTION I

Heterodox economics versus orthodox economics

Heterodox vs Orthodox economics• HETERODOX ECONOMICS

• NON-ORTHODOX ECONOMICS

• POST-CLASSICAL ECONOMICS

• RADICAL POLITICAL ECONOMY

• REAL-WORLD ECONOMICS

• NEW PARADIGM ECONOMICS

• ORTHODOX ECONOMICS

• DOMINANT PARADIGM

• NEOCLASSICAL ECONOMICS

• THE MAINSTREAM

• MARGINALISM

• OLD PARADIGM ECONOMICS

UNAM 2014

Heterodox schools in economics• Post-Keynesians• Sraffians (Neo-Ricardians)• Old Institutionalists• Marxists, Radicals• Development Structuralists (Latin-American school, Furtado,

Prebisch)• French Regulation School, Social Structure of Accumulation (SSA)• Neo-Schumpeterians• French-Italian Monetary Circuit school• Social economics and Humanistic economics• Anti-Utilitarism (MAUSS)• Economists of « conventions »• Feminist economics• Green economics (Ecological Economics)• Old behavioural economics• And no doubt many others (Ghandi economics, Henry George,

Gesell, Polanyi, system dynamics, agent-based, Neo-Austrians(?)...

UNAM 2014

Macro-economics

Heterodox authors

Marxists

RadicalsFrench

RegulationSchool

CambridgeKeynesians

Post-Keynesians

Neoclassical school

OldKeynesians

New Keynesians

Monetarists

New Classicals

New Consensus

KEYNES

UNAM 2014

Dissenters in economicsHeterodoxy Orthodoxy

Dissenters Mainstream

UNAM 2014

Paradigm

Presupposition Heterodox schools Orthodox schools

Epistemology/Ontology Realism Instrumentalism

Method Holism, organicism Individualism, atomicismRationality Reasonable rationality Hyper rationality

Optimizing agent

Economic core Production, growth, income effects

Exchange, scarcity, substitution effect

Political core Regulated, tamed, markets

Unfettered market optimism

Presuppositions of the heterodox programme vs those of the mainstream

UNAM 2014

Holism: Some crisis-related macro paradoxesParadox of thrift (Keynes 1936) Higher saving rates lead to reduced

output,

Paradox of costs (Kalecki 1969, Rowthorn 1981)

Higher real wages lead to higher profit rates

Paradox of public deficits (Kalecki 1971)

Government deficits raise private profits

Paradox of tranquility (Minsky 1975) Stability is destabilizing

Paradox of debt (I. Fisher 1933, Steindl 1952)

Efforts to de-leverage might lead to higher leverage ratios

Paradox of liquidity (Dow 1987, Nesvetailova 2007)

Efforts to become more liquid transform liquid assets into illiquid ones

Paradox of risk (Wojnilower 1980) The possibility of individual risk cover leads to more risk overall

Paradox of profit-led demand (Blecker 1989)

Lower wages lead to slower growth despite all countries being profit-led

UNAM 2014

Summing up this part….

• Heterodox economics is distinct from orthodox economics.

• The various heterodox schools of thought have a lot in common, especially on the methodology side.

• Different schools of thought often focus on different fields, so that their similarities are not always obvious.

• But just as there are battles between New Classical and New Keynesian economics, there are disagreements between various heterodox schools.

UNAM 2014

SECTION II

Post-Keynesian economics

PKE adopt the five general heterodox presuppositions

UNAM 2014

Specific post-Keynesian presuppostions • The relevance of the principle of effective demand

(demand-led economies)– Both in the short and the long run– The supply adjusts to demand (inversed Say’s law), but

see Kalecki and Robinson on capacity constraints– The autonomy of investment from inter-temporal decisions

of households (investment causes saving)• The importance and irreversibility of time

– Historical time– Dynamics, the traverse– The long run is a consequence of a series of short runs,

there is no independent long run trend– Path dependence, multiple equilibria– Tracking financial stocks through time

UNAM 2014

Auxiliary post-Keynesian features • A monetary production economy• Fundamental or radical uncertainty• Alternative microeconomics (little reliance on

substitution effects; constant marginal cost)• Diversity of methods and theories• Institutions make a difference (Monetary and fiscal

policies do have an impact on real quantities)• Importance of income distribution effects

UNAM 2014

The various PK strands: 5-way typology• Fundamentalist or Financial Keynesians:

– Money, finance, liquidity preference, uncertainty, methodology– Davidson, Minsky, Kregel, Chick, Dow, Fontana

• Kaleckians: – Pricing, growth, cycles, employment, income distribution– Sawyer, Bhaduri, Dutt, Blecker, Fazzari

• Sraffians: – Relative prices, technical choice, input-output models, capital theory – Garegnani, Kurz, Pasinetti, Steedman

• Institutionalists: – Institutions (firms, banks), pricing, behavioural economics– Fred Lee, Peter Earl, Galbraith 2x, MMT (Wray)

• Kaldorians: – Growth, money, international trade, productivity growth– Godley, Thirlwall, McCombie, Palley

– Some authors go across the strands: Arestis, Nell….

UNAM 2014

SECTION III

Introduction to post-Keynesian monetary economics

Cambridge proverbs • « Highbrow opinion is like a hunted hare; if you stand in the

same place or nearly in the same place it can be relied upon to come round to you in circle. » (D.H. Robertson 1956)

• « Economic ideas move in circles: stand in one place long enough, and you will see discarded ideas come round again. » (A.B. Cramp 1970)

UNAM 2014

1844 Currency school vs Banking school• Ricardo and Currency school• Only coins and Bank of England notes are money • The stock of money determines aggregate demand• Aggregate demand determines prices

• Tooke and the Banking School• The definition of money is more complicated• Aggregate demand determines the stock of money• If controls are needed to influence prices, control

credit

UNAM 2014

UNAM 2014

Post-Keynesian monetary sub-schoolsPost-

KeynesianMonetary

Economics

Structuralists HorizontalistsAccommodationists

Circuit theory

Paris and Naples

Emissions theoryDijon

Free University of

Berlin School

Neo-ChartalistsModern Monetary

Theory (MMT)

UNAM 2014

Neoclassical monetary sub-schools

Neoclassical monetary schools

Monetarists IS/LM

New ParadigmKeynesian

(StiglitzGreenwald)

WicksellianNew Consensus

UNAM 2014

Main features, money and creditFeatures PK school Neoclassical

Money Has counterpart entries Falls from an helicopter

Money is seen As a flow and as a stock A stock

Banks are Creators of credit flows Financial intermediaries

The supply of money is Endogenous and demand-led

Exogenous

Main concern with Debts, credits Assets, money

Causality Reversed: credits make deposits (divisor)

Reserves allow deposits(multiplier)

Credit rationing due to Lack of confidence Asymetric information

M

i

Horizontalists(New Consensus)

MonetaristsIS/LMVerticalists

Structuralists(New Paradigm)

Ms

Ms Ms

A simplified overviewof endogenous money

UNAM 2014

Endogenous money supply: A PK claim now accepted by many schools• Post-Keynesians• Neo-Austrians• New Keynesians

– (New consensus authors), Woodford, Taylor, Roemer, Meyer

– (New Paradigm Keynesians, focus on credit) Stiglitz, Greenwald, Bernanke

• Real business cycle theorists– Barro, McCallum

• Goodhart

UNAM 2014

UNAM 2014

Main features, interest rates

Features PK School Neoclassical

Interest rates Are distribution variables

Arise from market laws

Liquidity preference Determines the differential relative to base rate

Determines the interest rate

Base rates Are set by the central bank

Are influenced by market forces

The natural rate Takes multiple values or does not exist

Is unique, based on thrift and productivity

A rejection of the natural rate• Thus, as Mario Seccareccia (1994, p. 70) points out, we cannot

just assert that ‘it is money-supply endogeneity which fundamentally distinguishes the neoclassical from the post-Keynesian conception of money, one would like to think that there is substantially more than the endogeneity/exogeneity issue that separates them’.

• As Smithin (1996, p. 93) puts it, ‘in the absence of a natural rate of interest, it can be argued that central bank control over short real rates will ultimately influence the entire structure of interest rates in the economy, including long rates….Eventually, the real economy must adjust to the policy-determined interest rate, rather than vice-versa. This is therefore the precise opposite to the natural rate doctrine’.

UNAM 2014

UNAM 2014

Main features, macro implicationsFeatures PK School Neoclassical

Schumpeter’s distinction

Monetary analysis(monetized production economy)

Real analysis (money neutrality,inessential veil)

Financial disturbances have

negative effects both in short and long run

Have effects only in the short run

Macro causality Investment determines saving

Saving determines investment

Inflation The growth in money stock aggregates is caused by the growth in output and prices

Price inflation is caused by an excess supply of money (or natural interest rate)

SECTION IV

Money creation

Loans are created ex nihilo• Loans are created ex nihilo, at the stroke of a pen, or by

punching a key on the computer, as long as the borrower is credit-worthy, that is, as long as the borrower can show some collateral.

• The main limit to this process is given by the amounts of loans which can be granted to credit-worthy borrowers. This depends on the willingness of borrowers to borrow, on the amount of collateral they can show, and on the willingness of banks to grant credit-worthy status to their customers.

• In a sense, loans are not truly created ex nihilo, since they generally require collateral.

UNAM 2014

Loans make deposits

Assets Liabilities

Loans B Deposits D

Balance sheet of bank in a pure credit economy

UNAM 2014

Banknotes issued by banks

Assets Liabilities

Loans B Deposits D’ = D − H Banknotes H

Balance sheet of unique bank

UNAM 2014

Loan defaults

Assets Liabilities

Loans B Deposits D 

Own funds OF

Loans B’ = B − BLWO  

Deposits D 

Own funds OF’ = OF – BLWO

Banks with own funds and bank loans written off

Capital adequacy ratio: OF/B

UNAM 2014

Two banks in a pure credit economy (short-term arrangement)

Bank B (business bank) Bank D (Deposit bank)

Assets Liabilities Assets Liabilities

Loans to non-

financial agents

100

Deposits50 

 Funds owed to

Bank D 40 

Own Funds10

Loans to non-

financial agents 60

 Advances made to Bank B

40

Deposits90    

Own Funds10

UNAM 2014

Two banks in a pure credit economy(certificates of deposits)

Bank B Bank D

Assets Liabilities Assets Liabilities

Loans to non-

financial agents

100

Deposits50  

Sold CDs40 

Own Funds10

Loans to non-

financial agents 60

 Purchased

CDs40

Deposits90    

Own Funds10

UNAM 2014

Two banks in a pure credit economy(securitization)

Bank B Financial intermediary FI

Assets Liabilities Assets Liabilities

Loans to non-financial

agents 100

Deposits 30  

Funds owed to FI 70

  

   

Advances made to Bank

B 70

Deposits 70     

Loans to non-financial

agents 30

Deposits 30 Securitized loans (basic paper) 70

Asset-based commercial

paper (derivative paper) 70

UNAM 2014

Banks without the government: a closed system and the clearinghouse

Owed to → Owed by

Bank A Bank B Bank C Bank D Σ amounts owed by (debits)

Σ amounts owed to (credits)

Clearing balances

Bank A   15 20 20 55 60 +5

Bank B 30   40 35 105 90 −15

Bank C 20 50   10 80 85 +5

Bank D 10 25 25   60 65 +5

Σ Amounts owed to

60 90 85 65 300 300 0

UNAM 2014

Liquidity-creating shadow banksCitybank Goldman Sachs

(GS)IBM PIMCO hedge fund

Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities

  IBM deposit −100

GS deposit +100

Deposit +100

Repos +100

Deposit −100

Repos +100

     

Securitized loans −100

IBM deposit −100

 

MBS +100

Repos +100

Deposit −100

Repos +100

     

Securitized loans −100

New loan to PIMCO

+100

IBM deposit −100

PIMCO deposit +100

 

MBS +100

Repos +100

Deposit −100

Repos +100

  Deposit at Citybank

+100

Loan from Citybank

+100

UNAM 2014

SECTION V

The liquidity preference of banks

Structuralism vs Horizontalism• The first exponents of money endogeneity were mainly

“horizontalists”: Robinson, Kahn, Le Bourva, Kaldor, Moore, and the French “circuitists”.

• The main “structuralist” critics were Le Héron, Dow, Wray, Howells, Pollin, and Palley, many of which got their inspiration from Minsky.

• As Fontana (2003) puts it, “structuralists took over where the accommodationists had stopped”.They brought some clarifications and provided new details. Sometimes, however, they constructed a “horizontal strawman” in an effort to highlight the originality of their contributions.

• To a large extent, the controversy has petered out (although Rochon has rekinkled some excitement by editing a forthcoming book on the topic!).

UNAM 2014

The horizontalist claims• 1. The supply curve of money (or high powered

money) can best be represented as a flat curve, at a given interest rate. The short-term interest rate can be viewed as exogenous, under the control of the central bank, within a reasonable range.

• 2. The supply curve curve of credit can best be represented as flat curves, at a given interest rate (or set of interest rates).

• 3. There can never be an excess supply of money.• 4. Central banks cannot exert quantity constraints on

the reserves of banks.

UNAM 2014

The structuralist points• 1a. What about the reaction function of the central bank? [Chick

1977, Rousseas 1986, Palley 1991, Musella and Panico 1995] • 1b. Long-term and other market-determined rates “cause” the

overnight rate [Pollin 1991]• 2. If loans create deposits, how do we know that households wish to

hold these deposits? [Howells 1995]• 3a. What about credit rationing (shape of credit supply curve)?

[Dow2 1989]• 3b. What about borrower’s risk? [Minsky 1975, Dow and Earl

1982]• 3c. and lender’s risk (liquidity preference of banks)? [Dow2,

Wray 1989, Chick and Dow]• 4a. Surely the central bank does not always “accommodate” and

hence exerts quantity constraints on bank reserves. [Pollin 1991]• 4b. What about changes in the velocity of money and liability

management, which are the main sources of money endogeneity [Pollin 1991, Palley 1994]

UNAM 2014

Horizontalist answers III

• 3. On the horizontal supply of credit:– It has been shown by Wolfson (1996) that there is no

incompatibility between credit rationing and horizontalism.– It is now clearly established that higher economic activity does

not necessarily entail higher debt ratio for firms (contradicting the essence of Minsky’s financial fragility hypothesis). This is now recognized by Wray, a student of Minsky.

– But of course, as firms move from one risk class to another, they will trigger higher interest rates.

– The remaining issue is lender’s risk: recent events have shown that banks have no clue what their lender’s risk is, and so it cannot be ascertained that banks will raise interest rates if their balance sheet expands.

UNAM 2014

Debt-to-equity ratio of the borrower

Lending rate iB

Central bank target rate iCB

Risk premium of prime borrower

4.5 Firms move from one class risk to another

UNAM 2014

Loans

Lending rate

Notional demand

Effective demand

A B iB1 = iCB1 + σB1

4.6 Wolfson’s 1996 credit rationing

iB2 = iCB2 + σB1

iB3 = iCB2 + σB3

C D

E F

UNAM 2014

Conclusion

• The original horizontalist depiction, that of Kaldor and Moore, is the most appropriate. Structuralists have helped to fill in some details. As Wray (2006) concludes:

• • “There cannot be any automatic and necessary

impact of spending on interest rates because loans and deposits can and normally do increase as spending rises. The overnight rate will change only if and when the central bank decides to allow it to do so. Short-term loan and deposit retail rates can be taken as a somewhat variable mark-up and mark-down from the overnight rate”.

UNAM 2014

4.7

iCB

iB

σB {

Bank deposits D

Bank credits BReserves H

Effective demand for creditInterest rates

BD

UNAM 2014