Macro Dynamics with a Job Guarantee–Part 4: Dynamic Stability — Peter Cooper

The model, in its present form, is short run in nature. It concerns an economy for which total employment, within-sector productivity and productive capacity are all taken as given. Variations in total output are achieved by workers transferring between two broad sectors that have differing productivity. In considering this economy, discussion has touched on aspects of a steady state and system behavior outside the steady state. It has been supposed, in the event of exogenous shocks, that the broader economy (sector b) drives the adjustment process through its reactions to excess demand or excess supply, with the job-guarantee program (sector j) absorbing or releasing workers as appropriate to maintain total employment at its given level. A tendency for the economy to move toward the steady state has been illustrated with reference to a Keynesian cross diagram (part 2) and a description of the growth behavior of actual output and demand whenever the system is outside the steady state (part 3). Attention now turns to the conditions under which this tendency to a steady state is operative, or, in other words, to the question of dynamic stability....

heteconomist
Macro Dynamics with a Job Guarantee – Part 4: Dynamic Stability
Peter Cooper

Dirk Ehnts — A simple macroeconomic model based on Modern Monetary Theory (and published in 2014 in a peer-reviewed journal

There is a lot of talk about how MMT would lack a “model”. Some commentators on Twitter even claim that MMT would have “no model” and that they just created one themselves. Others believe that stock-flow consistent (SFC) models are basically SFC models. All of that is not quite right!

I think that the only model that can really claim to be a “MMT model” is the one I published in a peer-reviewed journal in 2014. The article in the International Journal of Pluralism and Economics Education (IJPEE) was named “A simple macroeconomic model of a currency union with endogenous money and saving-investment imbalances” (link). With hindsight, it was not a good title, since there is nothing specific about “currency union” or (private!) “saving-investment imbalances” in the model. It is really a replacement of the IS/LM-model and nothing else. The working paper version is accessible freely and was written in 2012 (link). During that year, I was at the Hyman-Minsky summer school at the Levy Institute of Bard College, NY. I showed the model to Randy Wray and Scott Fullwiler and some other people and they all liked it. Given that my model has the sectoral balances at its core that did not surprise me.

Since the model has not gotten a lot of attention so far – I presented it at University of Cassino in Italy after being invited there to spend a week with SFC modeler Gennaro Zezza and in some other place – I would like to use this blog post to explain the model briefly. Of course, the IJPEE paper is the long version. (The working paper contains some minor flaws that had been fixed in the journal version.) For those who can’t wait to see it, you can download a spreadsheet file of the ISMY model here. It has all the equations and is solvable by toying around with it....

econoblog 101

A simple macroeconomic model based on Modern Monetary Theory (and published in 2014 in a peer-reviewed journal
Dirk Ehnts | Lecturer at Bard College Berlin

Jason Smith — Does saving make sense?

Jason Smith jumps in on "saving."

Information Transfer Economics
Does saving make sense?
Jason Smith

Zoltan Jakab & Michael Kumhof — Banks are not intermediaries of loanable funds – and why this matters

Problems in the banking sector played a critical role in triggering and prolonging the Great Recession. Unfortunately, standard macroeconomic models were initially not ready to provide much support in thinking about the role of banks. This has now changed, with many new papers that study the interaction of banks with the macroeconomy. However, as emphasized by Adrian, Colla and Shin (2013), there are many unresolved issues. In our new paper “Banks Are Not Intermediaries of Loanable Funds – And Why This Matters” (Jakab and Kumhof (2015)), we argue that many of them can be traced to the fact that virtually all of the newly developed models are based on the intermediation of loanable funds (ILF) theory of banking. 

In the simple ILF model, bank loans represent the intermediation of real savings, or loanable funds, between non-bank savers and non-bank borrowers. Lending starts with banks collecting deposits of real resources from one agent, and ends with the lending of those resources to another agent. In the real world, however, banks never intermediate real loanable funds, an activity that, correctly understood, can only amount to barter. 

Rather, the key function of banks is the provision of financing, meaning the creation of new monetary purchasing power through loans, for a single agent that is both borrower and depositor. Specifically, whenever a bank makes a new loan to a non-bank customer X, it creates a new loan entry in the name of customer X on the asset side of its balance sheet, and it simultaneously creates a new and equal-sized deposit entry, also in the name of customer X, on the liability side of its balance sheet. The bank therefore creates its own funding, deposits, through lending. It does so through a pure bookkeeping transaction that involves no real resources, and that acquires its economic significance through the fact that bank deposits are any modern economy’s generally accepted medium of exchange. 

This understanding of the function of banks, which we will refer to as the financing and money creation (FMC) model, has been repeatedly described in publications of the world’s leading central banks—see McLeay, Radia and Thomas (2014a,b) for an excellent summary. What has been challenging is the incorporation of these insights into macroeconomic models....

To summarize, banks are not intermediaries of real loanable funds, they do not collect new deposits from non-bank savers. Instead they provide financing, they create new deposits for their borrowers. This involves the expansion or contraction of gross bookkeeping positions on bank balance sheets, rather than the channelling of real resources through banks. Replacing intermediation of loanable funds models with financing and money creation models is therefore necessary simply in order to correctly represent the role of banks in the macroeconomy. But it also addresses several of the empirical problems of existing banking models.

Bank of England | Bank Underground
Banks are not intermediaries of loanable funds – and why this matters
Zoltan Jakab & Michael Kumhof

Jason Smith — Expectations

A physicist looks at expectations in macroeconomics.

Information Transfer Economics
Expectations

Jason Smith

Noah Smith — Economics Gets Sucked Into Dark Corners

About the use of economics in policy formulation. Science or art?

Bloomberg View
Economics Gets Sucked Into Dark CornersNoah Smith | Assistant Professor of Finance, Stony Brook University

Lars P. Syll — Wren-Lewis’s confusing view of macroeconomic forecasting

The empirical and theoretical evidence is clear. Predictions and forecasts are inherently difficult to make in a socio-economic domain where genuine uncertainty and unknown unknowns often rule the roost. The real processes that underly the time series that economists use to make their predictions and forecasts do not confirm with the assumptions made in the applied statistical and econometric models. 

Much less is a fortiori predictable than standardly — and uncritically — assumed. The forecasting models fail to a large extent because the kind of uncertainty that faces humans and societies actually makes the models strictly seen inapplicable. The future is inherently unknowable — and using statistics, econometrics, decision theory or game theory, does not in the least overcome this ontological fact. The economic future is not something that we normally can predict in advance. Better then to accept that as a rule “we simply do not know.”

Like Maynard said.

Lars P. Syll’s Blog
Wren-Lewis’s confusing view of macroeconomic forecasting
Lars P. Syll | Professor, Malmo University

Mark Buchanan — Macro muddles

Some nice Peter Dorman quotes about macro assumptions. Mostly boils down to methodological convenience, ideology and investment protection trumping scientific curiosity and admission of failures and attempts to correct them. A useless bunch that should have been fired long ago, as Bill Mitchell has been saying for some time.

The Physics of Finance
Macro muddles
Mark Buchanan

Noah Smith — The equation at the core of modern macro

The Euler equation, and it doesn't fit the data. Why. Consumer's aren't rational in the sense that saving desire increases with the interest rate.

Noahpinion
The equation at the core of modern macro
Noah Smith | Assistant Professor of Finance, Stony Brook University

Merijn Knibbe — Bill Mitchell and Joan Muysken on underemployment, macro-modelling and policy

Yesterday, I posted some graphs about underemployment in the EU, mainly to draw people’s attention to this important subject. The main takeaway:
Underemployment is high as well as cyclically sensitive.
And I stated that we should start to incorporate it in macro models. Well, Bill Mitchell and Joan Muysken are already doing this, I discovered. And incorporating underemployment in models turns out to make a large difference....

Real-World Economics Review Blog
Bill Mitchell and Joan Muysken on underemployment, macro-modelling and policy
Merijn Knibbe

Lars P. Syll — Mainstream macroeconomics — a massive intellectual mistake [GIGO]

...the root of our problem goes much deeper. It ultimately goes back to how we look upon the data we are handling. In “modern” macroeconomics – dynamic stochastic general equilibrium, new synthesis, new-classical and new-Keynesian – variables are treated as if drawn from a known “data-generating process” that unfolds over time and on which we therefore have access to heaps of historical time-series. If we do not assume that we know the “data-generating process” – if we do not have the “true” model – the whole edifice collapses. And of course it has to. I mean, who really honestly believes that we should have access to this mythical Holy Grail, the data-generating process?...

...as Keynes convincingly argued in his monumental Treatise on Probability (1921), this is not always possible. Often we simply do not know. We cannot always put exact numbers on the assessments we make. There are no given probability distributions we can appeal to.

In the end this is what it all boils down to. We all know that many activities, relations, processes and events are genuinely uncertain. The data do not unequivocally single out one decision as the only “rational” one. Neither the economist, nor the deciding individual, can fully pre-specify how people will decide when facing uncertainties and ambiguities that are ontological facts of the way the world works.

GIGO.

This is a key problem with formalism. According to the scientific method, an explanation is true if and only if it fits all the facts it purports to explain. In magical thinking, an explanation is presumed true if it fits selected facts that are chosen based on methodological convenience or ideological assumptions. That is to say, the assumptions serve to prove the explanation, which is the fallacy of circular reasoning.

Mainstream macroeconomics — a massive intellectual mistake
Lars P. Syll | Professor of Civics, Faculty of Education and Society, Malmö University

Unlearning Economics — A Question for Economists

Sincerely: do you believe your discipline has earned a status as a decider of policy? Which successes would you point to in order to highlight this? And how have non-economists fared in the policy arena compared to you?

A look at the record.

Unlearning Economics
A Question for Economists

An interesting throw-off: "And, as Ha-Joon Chang has pointed out, recently industrialised/industrialising countries such as South Korea, Japan and China have largely relied on bureaucrats and lawyers to form policy (and my sources tell me that the economists in China are inclined towards Sraffian economics)."

Also of interest from Unlearning recently:

Peiria

Introducing Post-Keynesian Economics

Unlearning Economics

Lars Syll — William Buiter on useless macroeconomic theories

Both the New Classical and New Keynesian complete markets macroeconomic theories not only did not allow questions about insolvency and illiquidity to be answered. They did not allow such questions to be asked....

Lars P. Syll's Blog
On useless macroeconomic theories
Quoting William Buiter

Steve Keen — The Neoclassical conspiracy against Post Keynesian Economics (1)

Paul Krugman recently posted on predictions of the crisis before it happened, in a piece entitled “Non-prophet Economics”. It had a set of propositions about how one should evaluate such claims with which I completely and utterly agree. I’ll quote it in its entirety, because it’s an eminently suitable starting point for evaluating whether a prediction was in fact made:

Real-World Economics Review Blog
The Neoclassical conspiracy against Post Keynesian Economics (1)
Steve Keen

Links: Surplus and Modeling

Came across two interesting posts in surfing the blogs (hat tip "everybody").

One is at NEP by Mitch Green on the Economic Surplus here.

Through the ages we have erected monuments in honor of our ability to generate an economic surplus. That we perennially produce more than we consume, which of course varies in degree and kind depending on the age and place, means that we simply do not live in a world of scarcity. The materials we use to shelter and feed ourselves, and even pay homage to our cultural heritage are themselves the product of human labor and ingenuity. That is to say, how we get our daily bread depends not so much upon gifts from Mother Nature, but in our ability to coordinate social labor. Homo sapiens is a clever species.

I think Mitch is on to something very important wrt pointing out "the surplus", and our current mis-management of the distribution of it.

But would add that yes although some human input is required, from a secular/pagan perspective, "Mother Nature" is involved to a greater extent than humans are in the deliverance of the current surplus.  For feedstocks from which we indeed obtain 'our daily bread', we may plant the seeds and perhaps water them a bit, but who among us can take it from there?

This writing is a bit vain in this regard especially when we are trying to make the case that our species is "clever" when at the same time our current crop of "leaders", our "elites" so-called, are all running around saying "We're out of money!" and that we are "Borrowing from the future!".

Spare me the accolades for the human at this particular moment, but Mitch's eyeballs are indeed focused on what should be getting much more attention, our great surpluses in real terms.

Another interesting link via Matias V. here to a recent paper of a Fair Model of the U.S. macro system, that includes some interesting perspectives on macro modeling generally.

A macroeconometric model like the US model is a set of equations designed to explain the economy or some part of the economy.  There are two types of equations: stochastic, or behavioral, and identities. Stochastic equations are estimated from the historical data. Identities are equations that hold by definition; they are always true.  

There are two types of variables in macroeconometric models: endogenous and exogenous. Endogenous variables are explained by the equations, either the stochastic equations or the identities. Exogenous variables are not explained within the model. They are taken as given from the point of view of the model. For example, suppose you are trying to explain consumption of individuals in the United States. Consumption would be an endogenous variable-a variable you are trying to explain. One possible exogenous variable is the income tax rate. The income tax rate is set by the government, and if you are not interested in explaining government behavior, you would take the tax rate as exogenous.

Goes on from there and includes both government Monetary and Fiscal Policy inputs.  Looks very interesting.

To me, these two posts are related in that our economy should be "modeled" to deliver what we collectively determine via the authority of our government institutions,  a (at least minimally) just and guaranteed  distribution of the "surplus".

A "surplus" that, to stay in the pagan vernacular, is ultimately provided by "Mother Nature", not the human.