Debt cycles, instability and fiscal rules: a Godley-Minsky synthesis, Cambridge Journal of Economics, advance access: 27 December 2017
Wynne Godley and Hyman Minsky were two macroeconomists who ‘saw the crisis coming’. This paper develops a simple macrodynamic model that synthesises some key perspectives of their analytical frameworks. The model incorporates Godley’s financial balances approach and postulates that private sector’s propensity to spend is driven by a stock-flow norm (the target net private debt-to-income ratio) that changes endogenously via a Minsky mechanism. It also includes two fiscal rules: a Maastricht-type fiscal rule, according to which the fiscal authorities adjust the government expenditures based on a target net government debt ratio; and a Godley–Minsky fiscal rule, which links government expenditures with private indebtedness following a counter-cyclical logic. The analysis shows that (i) the interaction between the propensity to spend and net private indebtedness can generate cycles and instability; (ii) instability is more likely when the propensity to spend responds strongly to deviations from the stock-flow norm and when the expectations that determine the stock-flow norm are highly sensitive to the economic cycle; (iii) the Maastricht-type fiscal rule is destabilising while the Godley–Minsky fiscal rule is stabilising; and (iv) the paradox of debt can apply both to the private sector and the government sector.
A stock-flow-fund ecological macroeconomic model, Ecological Economics, 2017, 131, pp. 191-207 (with M. Nikolaidi and G. Galanis)
This paper develops a stock-flow-fund ecological macroeconomic model that combines the stock-flow consistent approach of Godley and Lavoie with the flow-fund model of Georgescu-Roegen. The model has the following key features. First, monetary and physical stocks and flows are explicitly formalised taking into account the accounting principles and the laws of thermodynamics. Second, Georgescu-Roegen’s distinction between stock-flow and fund-service resources is adopted. Third, output is demand-determined but supply constraints might arise either due to environmental damages or due to the exhaustion of natural resources. Fourth, climate change influences directly the components of aggregate demand. Fifth, finance affects macroeconomic activity and the materialisation of investment plans that determine ecological efficiency. The model is calibrated using global data. Simulations are conducted to investigate the trajectories of key environmental, macroeconomic and financial variables under (i) different assumptions about the sensitivity of economic activity to the leverage ratio of firms and (ii) different types of green finance policies.
Linking functional with personal income distribution: a stock-flow consistent approach International Review of Applied Economics, 2015, 29 (6), pp. 787-815 (with C. Papatheodorou).
This paper develops a benchmark stock-flow consistent model that links functional with personal income distribution. The model consists of various household groups that receive income from different sources or from the same sources in different proportions. The dynamic linkage between functional and personal income distribution is formulated as part of a complete macroeconomic system. Inequality decomposition techniques are employed to associate income sources with personal income distribution. Simulation exercises are conducted to reveal the various ways through which functional and personal income distribution interact. In the simulations, a rise in the exogenous component of low-skilled workers’ wage share reduces inequality in the short run; in the medium to long run inequality starts increasing due to certain macroeconomic developments, but remains lower than its initial level in almost all cases. A change in functional income distribution due to a rise in the dividend payout ratio of firms increases inequality both in the short run and the long run.
The ‘other half’ of the public debt-economic growth relationship: a note on Reinhart and Rogoff European Journal of Economics and Economic Policies: Intervention, 2015, 12 (1), pp. 20-28.
Reinhart/Rogoff (2010) and Reinhart et al. (2012) document a negative relationship between public debt and economic growth. However, by classifying the observations of their data set into public debt categories and identifying public debt overhang episodes, they focus only on ‘one half’ of the public debt–economic growth relationship: the growth-reducing effects of high public debt. This note classifies the observations of their data set into economic growth categories and identifies low-growth episodes. In so doing, it presents the ‘other half’ of the public debt–economic growth relationship: the debt-increasing effects of low growth. It is argued that the presentation of ‘both halves’ is essential for a more fruitful research agenda and policy debate.
Finance, monetary policy and the institutional foundations of the Phillips curve Review of Political Economy, 2013, 25 (4), pp. 607-623 (with G. Argitis).
The purpose of this paper is to examine the influence of financial commitments on the short-run Phillips curve, under different institutional structures of the labour and product market, degrees of euphoria and ratios of firms’ to workers’ outstanding debt. We develop a Post-Keynesian conflicting-claims model that explicitly incorporates the impact of workers’ and firms’ financial commitments on distribution conflict and inflation. We propose different versions of the short-run Phillips curve for a debt-financed economy. We explore the impact of monetary policy on the shape and the position of the Phillips curve. We show that the inflation effects of monetary policy cannot be identified without prior knowledge about the institutional and financial structures of the economy, as well as about borrowers’ desired margins of safety.
What drives inequality and poverty in the EU? Exploring the impact of macroeconomic and institutional factors International Review of Applied Economics, 2013, 27 (1), pp. 1-22 (with C. Papatheodorou).
Employing panel data techniques, we investigate the macroeconomic and institutional determinants of inequality and poverty in the EU over the period 1994–2008. We pay particular attention to the effects of macroeconomic environment, social protection and labour market institutions. The empirical analysis shows that the social transfers in cash, and principally the transfers that do not include pensions, exert a prominent impact on inequality and poverty. Also significant is the effect of the GDP per capita. The impact of employment on inequality and poverty is not empirically sound. The same holds for the labour market institutions; an exception is the union density, which appears conducive to a less dispersed personal income distribution. Importantly, the results support the view that the social protection system acts as a catalyst in determining the effectiveness of social spending and the distributive role of economic growth and employment.
Liquidity preference, uncertainty, and recession in a stock-flow consistent model Journal of Post Keynesian Economics, 2012, 34 (4), pp. 749-776.
This paper develops a stock-flow consistent model that explicitly integrates the role of liquidity preference and perceived uncertainty into the decision-making process of households, firms, and commercial banks. Emphasis is placed on (1) the link between the precautionary motive and the asset choice of the private sector, (2) the effect of perceived uncertainty on the desired margins of safety and borrowing, and (3) the impact of financial obligations on the liquidity preference of households and firms. Performing a simulation experiment, the paper illuminates the channels through which a rise in perceived uncertainty is likely to set off a recessionary process.
Working poor, labour market and social protection in the EU: a comparative perspective International Journal of Management Concepts and Philosophy, 2012, 6 (1-2), pp. 71-88 (with C. Papatheodorou).
This paper offers some crucial insights into the incidence and determinants of in–work poverty in the EU. It shows that in–work poverty plays a principal role in the determination of overall poverty, and it explores the impact of the social protection system and labour market conditions on the incidence of in–work poverty. The comparative analysis illustrates that higher flexibility in the labour market may have an unfavourable impact on in–work poverty. It also brings to the fore the prominent role of the social protection system in the alleviation of poverty among the working population.
Finance, inflation and employment: a post-Keynesian/Kaleckian analysis Cambridge Journal of Economics, 2011, 35 (6), pp. 1015-1033 (with G. Argitis).
The purpose of this paper is to contribute to the post-Keynesian/Kaleckian macroeconomic literature. We develop a macroeconomic model that explicitly integrates the role of borrowing and cash payment commitments on outstanding debt (interest plus principal repayment) into the consumption and investment expenditures, as well as into the inflation-generating process. We explore the way that finance influences the distribution effects of inflation in the demand-side of a money/credit-using economy; we suggest a new Phillips curve that encapsulates the impact of financial commitments on wage and profit claims. We argue that high debt and cash payment commitments are likely to be associated with a positive demand-side effect of inflation on the rate of employment; and that they might be conducive to a negative supply-side effect of employment on the inflation rate.