Working Paper Roundup 12/15/2014

Michael Stephens | December 15, 2014

Outside Money: The Advantages of Owning the Magic Porridge Pot
L. Randall Wray
“Money is always introduced into economic models through very simple ways—whether by ‘helicopter drops,’ ‘inheritance from the past,’ or ‘deposit multipliers.’ Once introduced, money is largely irrelevant—neutral in the long run and non-neutral in the short run only because of ad hoc assumptions. This casual and misleading treatment of money contributed to the two greatest economic disasters since the Great Depression: the Global Financial Crisis and the Euro Crisis. In both cases, economists ‘could not see it coming’ because their understanding of money was deeply flawed. In the first instance, they misunderstood ‘inside’ money and led the rush toward the financial excesses that inevitably led to the 2008 crash. In the second, they designed a currency system based on a fundamentally flawed understanding of sovereign currency, creating a union that would inevitably fail. The alternative framework offered by the state money tradition—broadly defined—provides the understanding that would have prevented both disasters.”

Minsky, Monetary Policy, and Mint Street: Challenges for the Art of Monetary Policymaking in Emerging Economies
Srinivas Yanamandra
“This paper examines the emerging challenges to the art of monetary policymaking using the case study of the Reserve Bank of India (RBI) in light of developments in the Indian economy during the last decade (2003–04 to 2013–14). The paper uses Hyman P. Minsky’s financial instability hypothesis as the conceptual framework for evaluating the endogenous nature of financial instability and its potential impact on monetary policymaking, and addresses the need to pursue regulatory policy as a tool that is complementary to monetary policy in light of the agenda of reforms put forward by Minsky.”

An Outline of a Progressive Resolution to the Euro-area Sovereign Debt Overhang: How a Five-year Suspension of the Debt Burden Could Overthrow Austerity
Dimitris P. Sotiropoulos, John Milios, and Spyros Lapatsioras
“This paper sketches a political proposal to the problem at the level of the euro area (EA) from a progressive viewpoint. Dealing with the debt overhang in an increasing number of EA economies is primarily a political issue. The related technical details are not politically neutral: they are integral parts of political strategies attempting to influence the outcome of the ongoing social and political struggles all over Europe.”

“Our main strategy is for the European Central Bank (ECB) to acquire a significant part of the outstanding sovereign debt (at market prices) of the countries in the EA and convert it to zero-coupon bonds. No transfers will take place between individual states; taxpayers in any EA country will not be involved in the debt restructuring of any foreign eurozone country. Debt will not be forgiven: individual states will agree to buy it back from the ECB in the future when the ratio of sovereign debt to GDP has fallen to 20 percent. The sterilization costs for the ECB are manageable. This model of an unconventional monetary intervention would give progressive governments in the EA the necessary basis for developing social and welfare policies to the benefit of the working classes. It would reverse present-day policy priorities and replace the neoliberal agenda with a program of social and economic reconstruction, with the elites paying for the crisis.”

The Determinants of Long-Term Japanese Government Bonds’ Low Nominal Yields
Tanweer Akram and Anupam Das
“Japanese government bonds’ (JGBs) nominal yields have stayed exceptionally low since the mid 1990s, even though the country experienced chronic fiscal deficits, the government’s net and gross debt ratios rose sharply and remained elevated, and international credit rating agencies have downgraded its yen-denominated sovereign debt several times. This is contrary to the conventional wisdom, which holds that higher government deficits and indebtedness lead to upward pressures on government bonds’ nominal yield.”

“The theoretical reasons for long-term JGBs’ low nominal yields are simple: (1) The government of Japan exercises monetary sovereignty and Japan’s government debt is issued in its own currency, (2) the BOJ largely controls short-term interest rates by setting the policy rate, and it also influences JGBs’ nominal yields though asset purchases, forward guidance, and communication tools, (3) low inflation and deflationary pressures have also contributed to keeping JGBs’ nominal yields low in Japan, and (4) the demand for government debt remains strong, as the country’s domestic financial institutions hold the bulk of it.”

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