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Transcript
Current Challenges & Research If something cannot go on forever, it will stop. -- Stein's Law (Herbert Stein) We have met the enemy and he is us. -- comic strip character Pogo Created: Jan 2013 by Jim Luke. Classical Theory Assumptions: Predictions: • Competitive markets • Quick adjustment to equilibrium • Say’s Law • Self-regulating economy • Short recessions / inflations • Inflation OR recession Rx: Problems: • Small govt, balanced budget • Laissez faire • Supply-side focus • • • • • Big business & big govt Public goods/externalities Expectations & AD Fiat money Poor Empirical track record Keynesian Theory Assumptions: • • • • Monopolistic markets Sticky prices/wages “Animal Spirits” Expectations Financial and asset markets especially prone to crises and boom-bust cycles without ‘real’ economic reasons Rx: Predictions: • Mild recessions / inflations if recommendations followed • Deep, long depressions if recommendations NOT followed • Inflation OR recession • Govt manages macroeconomic conditions • Counter-cyclical fiscal policy • Monetary policy to lower interest Problems: rates • Practicality: • Not effective in liquidity trap • Lag times on policy • Balanced budget over cycle • Size of response • Demand-side focus Monetarist Theory (QTM) Assumptions: Predictions: • Competitive markets • Can measure money & inflation • Velocity is stable • Central bank manages recessions / inflations • Excess money growth = inflation • Low interest rates = growth Rx: • Constant money growth • “Wise” central bank Problems: • • • • • Liquidity trap Bubbles Open economy Unstable velocity Bias toward inflation-fighting, tends to ignore unemployment • Limited “real” impact Heterodox Theories (Post-Keynesian, MMT) Similar to Keynesian Theory but with: • Industrial and financial capitalism tends to be unstable • Financial and banking crises are an inherent feature of capitalism • Government fiscal policy and strict financial regulation is needed • Fiat money systems as actually practiced Rx: • Aggressive fiscal policy to assure full employment • Increase deficits until full employment achieved • Monetary policy should accommodate fiscal policy • Strict financial and banking regulation to avoid crises Policy Challenges Today Austerity and deficit-cutting or fight unemployment? Limits or goals of monetary policy Regulation of banking to prevent crises Distribution of income