Post Keynesian Economics: Debt, Distribution and the Macro Economy

255 Pages·1996·12.42 MB·English

by  Thomas Palley

POST KEYNESIAN ECONOMICS
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10.1057/9780230374126 - Post Keynesian Economics, Thomas I. Palley
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10.1057/9780230374126 - Post Keynesian Economics, Thomas I. Palley
Post Keynesian
Economics
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Debt, Distribution and the ne
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Macro Economy e
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Thomas I. Palley A
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Assislani Professor of Economics astl
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New School for Social Research ew
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New York of
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10.1057/9780230374126 - Post Keynesian Economics, Thomas I. Palley
First published in Great Britain 1996 by
MACMILLAN PRESS LTD
Houndmills, Basingstoke, Hampshire RG21 6XS
and London
Companies and representatives 15
throughout the world 03-
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Afro cmat athloeg Bueri triescho Lrdi bfroarr yth.is book is available ct - 2
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ISBN 0-333-63059-9 hardcover on
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ISBN O-333-63O6O-2 paperback e
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First published in the United States of America 1996 by a -
ST. MARTIN'S PRESS, INC., ali
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Scholarly and Reference Division, u
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175 Fifth Avenue, e,
New York, N.Y. 10010 stl
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ISBN0-312-16064-X ew
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Library of Congress Cataloging-in-Publication Data applied for of
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©Thomas I. Palley 1996 Uni
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All rights reserved. No reproduction, copy or transmission of d t
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this publication may be made without written permission. ns
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Ntraon psmariatgterdap sha voef wthiitsh pwubriltitceant ipoenr mmiasysi obne roerp irno dauccceodrd, acnocpei ewd iothr m - li
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issued by the Copyright Licensing Agency, 90 Tottenham Court on
Road, London W1P9HE. ec
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Any person who does any unauthorised act in relation to this gr
al
publication may be liable to criminal prosecution and civil w.p
claims for damages. w
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Printed and bound in Great Britain by eri
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Antony Rowe Ltd, Chippenham, Wiltshire m
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To my mother and the memory of my father op
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10.1057/9780230374126 - Post Keynesian Economics, Thomas I. Palley
Contents
List of Figures and Tables viii 5
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Preface xi 4-
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2
Acknowledgements xiv ct -
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n
n
1 Introduction 1 Co
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v
a
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2 The Emergence of Theoretical and Institutional Pal
Coherence in Post Keynesian Economics 8 a -
ali
str
2.1 Introduction 8 Au
2.2 Theoretical coherence 9 stle,
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2.3 Institutional coherence 17 c
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2.4 Epistemological coherence 21 N
of
y
sit
3 The Principle of Effective Demand and the Keynesian er
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Revolution in Equilibrium Economics 25 Uni
o
d t
3.1 Introduction 25 e
s
n
3.2 Demand determined equilibrium versus supply ce
constrained equilibrium 26 m - li
o
3.3 General equilibrium, the Keynesian revolution, ct.c
and the revival of "supply constraint" economics 33 ne
n
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3.4 Conclusion 39 c
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a
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4 Aggregate Demand and Price Adjustment: pal
w.
Pigou versus Fisher 41 w
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4.1 Introduction 41 al fro
4.2 A digression on money and macroeconomic theory 42 eri
at
4.3 Price level adjustment and the Fisher debt effect 44 m
4.4 Stability analysis with fixed nominal wages 55 ght
yri
4.5 Stability analysis with flexible nominal wages 56 p
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4.6 Conclusion 64
Appendix 1 65
Appendix 2 67
10.1057/9780230374126 - Post Keynesian Economics, Thomas I. Palley
vi Contents
5 Expected Aggregate Demand, the Production Period,
and the Keynesian Theory of Aggregate Supply 71
5.1 Introduction 71
5.2 A brief retrospective on aggregate supply in 5
1
The General Theory 72 03-
4-
5.3 Time and the production process: a simple model 73 01
2
5.4 A full macro model 75 ct -
e
5.5 The model with exogenous price expectations 76 n
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5.6 The model with endogenous price expectations 78 eC
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5.7 Conclusion 83 gra
al
Appendix 84 P
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6 Uncertainty and Expectations 87 ustr
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6.1 Introduction 87 stl
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6.2 Representations of uncertainty 88 wc
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6.3 Constructivism and economists' constructions of of N
decision making in the presence of uncertainty 90 sity
6.4 Expectations and the rational expectations revolution 92 ver
ni
6.5 Knowledge, constructivism, and expectations: U
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a theory of reflexive rational expectations 96 d t
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6.6 Conclusion 101 n
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m - li
7 The Endogenous Money Supply: Theory and Evidence 103 o
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ct.
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7.1 Introduction 103 nn
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7.2 Three competing models of the money supply 104 ec
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7.3 Evaluating the competing models: some empirical gr
al
evidence 117 w.p
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7.4 Conclusion 120 w
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Appendix 1 121 o
Appendix 2 121 al fr
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Appendix 3 122 at
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8 Endogenous Finance 126 yri
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8.1 Introduction 126
8.2 Endogenous money: a recapitulation 127
8.3 Endogenous finance 128
8.4 Empirical evidence on endogenous finance 135
8.5 Conclusion 141
Appendix 141
10.1057/9780230374126 - Post Keynesian Economics, Thomas I. Palley
Contents vii
9 Aggregate Demand and Finance: A Post Keynesian
Short Period Macro Model 144
9.1 Introduction 144
9.2 A Post Keynesian short period model 144 5
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9.3 Model specification issues 150 03-
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9.4 Comparative static analysis 156 01
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9.5 Conclusion 163 ct -
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10 The Phillips Curve and Demand-Pull Inflation 166 eC
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10.1 Introduction 166 al
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10.2 Unemployment and the problem of sectoral a -
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demand shocks: a static model 167 str
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10.3 Nominal demand growth with sectoral demand A
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shifts: foundations of the Phillips relation 170 stl
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10.4 Further issues: inflation expectations and supply w
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side shocks 176 of
10.5 Conclusion 180 sity
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11 Cost-Push and Conflict Inflation 182 o U
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11.1 Introduction 182 se
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1111..23 CAo mnfaliccrto amndo dtehl e dynamics of inflation 118835 m - lic
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11.4 The conflict model with endogenous targets 191 ct.
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11.5 The monetary sector reconsidered 197 nn
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11.6 Conclusion 199 ec
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12 Debt, Aggregate Demand, and the Business Cycle 201 w.p
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12.1 Introduction 201 m
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12.2 Debt and the business cycle: three simple models 203 al fr
12.3 Conclusion 213 eri
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13 Competing Visions: A Post Keynesian Summing Up 216 yrig
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References 111
Name Index 232
Subject Index 234
10.1057/9780230374126 - Post Keynesian Economics, Thomas I. Palley
List of Figures and Tables
5
Figures 3-1
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2.1 EKfefyecnteivsiea nd eemcoannodm aics st he organizing principle for Post 17 ect - 2
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3.1 The classical model 28 o
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3.2 The GT, Chapter 3 model 29 av
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3.3 A taxonomy of modern macroeconomics 38 al
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4.1 Determination of the market period price level in a -
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a Post Keynesian AS/AD model with sluggish str
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employment and nominal wages, and flexible A
e,
product market prices 51 stl
a
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4.2 Evolution of the price level, employment, and the w
e
N
real wage in response to a positive demand shock of
at time t0 57 sity
4.3 The case of a saddle path equilibrium in an economy ver
ni
with demand-led nominal wage adjustment and a o U
dominant Pigou effect 60 d t
e
s
4.4 The case of a cyclically stable equilibrium in en
c
an economy with demand-led nominal wage m - li
adjustment and a dominant Pigou effect 60 co
ct.
4.5 The potentially convergent or divergent nature of the e
n
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equilibrium in an economy with demand-led nominal co
e
wage adjustment and a dominant Fisher debt effect 61 av
gr
6.1 Taxonomy of different positions taken on the nature of al
p
w.
probability and the nature of uncertainty 89 w
w
7.1 Determination of the equilibrium level of nominal m
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interest rates, monetary base, and money supply in al fr
the portfolio choice money multiplier model 107 eri
at
m
7.2 Determination of bank loan rates, bank lending, ht
demand deposits, and the monetary base in the Moore yrig
p
(1989) model 110 o
C
7.3 Determination of bank loan rates, bank lending,
demand deposits, and the monetary base in the Moore
(1989) model with partially accommodative monetary
policy 111
Vlll
10.1057/9780230374126 - Post Keynesian Economics, Thomas I. Palley
List of Figures and Tables ix
8.1 Velocity of base 136
8.2 Velocity of demand deposits 136
8.3 Bank loan multiplier 138
8.4 Inside debt multiplier 138
5
8.5 Ratio of bank loans and leases: demand deposits 140 3-1
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8.6 Ratio of inside debt: demand deposits 140 4-
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9.1 mDeamrkaent df oarn dlo asunp pfilnya nscceh edules associated with the 153 ect - 2
n
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9.2 Diagramatic representation of the full Post Keynesian o
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macro model in employment-interest rate space 158 av
gr
10.1 Product market demand and supply schedules for al
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the ith sector 171 a -
ali
11.1 Derivation of a negatively sloped Phillips relation in str
u
a regime where workers have market power, and A
e,
target real wages and mark-ups are exogenously stl
a
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determined 188 w
e
N
11.2 Derivation of a vertical Phillips relation in a regime of
where workers have market power, and target real sity
wages and mark-ups are exogenously determined 189 ver
ni
11.3 Derivation of a positively sloped Phillips relation in o U
a regime where firms have market power, and target d t
e
s
real wages and mark-ups are exogenously determined 190 en
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11.4 Stable case for a regime where workers have market m - li
power, and target real wages are endogenously co
determined 193 ect.
n
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11.5 Unstable case for a regime where workers have co
e
market power, and target real wages are endogenously av
gr
determined 193 al
p
w.
11.6 Stable case for a regime where firms have market w
w
power, and target mark-ups are endogenously m
o
determined 196 al fr
11.7 Unstable case for a regime where firms have market eri
at
power, and target mark-ups are endogenously ht m
determined 196 yrig
p
12.1 Stability conditions for model 1 drawn in [b , r] spade 208 o
3 C
12.2 Stability conditions for model 3 drawn in [b , r] space 212
3
Tables
3.1 Variables used in Chapter 3 29
4.1 Variables and symbols used in the model 47
10.1057/9780230374126 - Post Keynesian Economics, Thomas I. Palley