Book contents
Preface
Acknowledgements
Website Materials
PART A: INTRODUCTION AND MEASUREMENT
1 Introduction 2
1.1 What is Economics? Two Views 2
Orthodox, neoclassical approach 3
Heterodox approach – Keynesian/Institutionalist/Marxist 5
What do economists do? 8
Implications for research and policy 8
1.2 Economics and the Public Purpose 9
1.3 What is Macroeconomics? 12
The macro model 12
The MMT approach to macroeconomics 13
Fiscal and monetary policy 15
Policy implications of MMT for sovereign nations 16
Conclusion 17
References 17
2 How to Think and Do Macroeconomics 18
2.1 Introduction 18
2.2 Thinking in a Macroeconomic Way 19
2.3 What Should a Macroeconomic Theory be Able to Explain? 22
Real GDP growth 22
Unemployment 23
Real wages and productivity 25
Private sector indebtedness 26
Central bank balance sheets 26
Japan’s persistent fiscal deficits: the glaring counterfactual case 27
2.4 Why is it so Difficult to Come to an Agreement on Po licy? The Minimum Wage Debate
2.5 The Structure of Scient ific Revolutions
Conclusion
References
Chapter 2 Appendix: The Buckaroos model
Implications of the Buckaroos model
3 A Brief Overview of Economic History and the Rise of Capitalism
3.1 Introduction
3.2 An Introduction to Monetary Capitalism
3.3 Tribal Society
3.4 Slavery
3.5 Feudalism
3.6 Revolts and the Transition to Capitalism
3.7 Capitalism
3.8 Monetary Capitalism
3.9 Global Capitalism
3.10 Economic Systems of the Future?
Conclusion
References
4 The System of National Income and Product Accounts
4.1 Measuring National Output
4.2 Components of GDP
Consumption (C)
Investment (I)
Government spending (G)
Exports (X) minus imports (M) or net exports (NX)
4.3 Equivalence of Three Measures of GDP
Expenditure approach
Production approach
Income approach
4.4 GDP versus GNP
4.5 Measuring Gross and Net National Income
Measuring net national income
4.6 GDP Growth and the Price Deflator
4.7 Measuring Chain Weighted Real GDP
4.8 Measuring CPI Inflation
The CPI Index
Rate of growth of the CPI index
Difficulties in using the CPI to accurately measure inflation
4.9 Measuring National Inequality
Conclusion
References
5 Labour Market Concepts and Measurement
5.1 Introduction
5.2 Measurement
Labour force framework
Impact of the business cycle on the labour force participation rate
5.3 Categories of Unemployment
5.4 Broader Measures of Labour Underutilisation
5.5 Flow Measures of Unemployment
Labour market stocks and flows
5.6 Duration of Unemployment
5.7 Hysteresis
Conclusion
References
Contents
6 Sectoral Accounting and the Flow of Funds
6.1 Introduction
6.2 The Sectoral Balances View of the National Accounts
Introduction
How can we use the sectoral balances framework?
A graphical framework for understanding the sectoral balances
6.3 Revisiting Stocks and Flows
Flows
Stocks
Inside wealth versus outside wealth
Nonjinancial wealth (real assets)
6.4 Integrating NIPA, Stocks, Flows and the Flow of Funds Accounts
Causal relationships
Deficits create financial wealth
6.5 Balance Sheets
6.6 The Flow of Funds Matrix
Flow of funds accounts and the national accounts
Conclusion
References
7 Methods, Tools and Techniques
7.1 Overview
7.2 Basic Rules of Algebra
Model solutions
7.3 A Simple Macroeconomic Model
7.4 Graphical Depiction of a Macroeconomic Model
7.5 Power Series Algebra and the Expenditure Multiplier
7.6 Index Numbers
7.7 Annual Average Growth Rates
7.8 Textbook Policy Regarding Formalism
Conclusion
8 The Use of Framing and Language in Macroeconomics
8.1 Introduction
8.2 MMT and Public Discourse
8.3 Two Visions of the Economy 121
8.4 Cognitive Frames and Economic Commentary 123
8.5 Dominant Metaphors in Economic Commentary 123
8.6 Face to Face: Mainstream Macro and MMT 123
Mainstream Fallacy 1: The government faces the same ‘budget’ constraint as a household 124
Mainstream Fallacy 2: Fiscal deficits(surpluses) are bad(good) 124
Mainstream Fallacy 3: Fiscal surpluses contribute to national saving 125
Mainstream Fallacy 4: The fiscal outcome should be balanced over the economic cycle 125
Mainstream Fallacy 5: Fiscal deficits drive up interest rates and crowd out private investment because they compete for scarce private saving 126
Mainstream Fallacy 6: Fiscal deficits mean higher taxes in the future
Mainstream Fallacy 7: The government will run out of fiscal space ( or money) if it overspends
Mainstream Fallacy 8: Government spending is inflationary
Mainstream Fallacy 9: Fiscal deficits lead to big government
8.7 Framing a Macroeconomics Narrative
Language and metaphor examples
Fiscal space
Costs of a public programme
The MMT alternative framing
Conclusion
References
PART B: CURRENCY, MONEY AND BANKING
9 Introduction to Sovereign Currency: The Government and its Money
9.1 Introduction
9.2 The National Currency (Unit of Account)
One nation, one currency
Sovereignty and the currency
What ‘backs up’ the currency?
Legal tender laws
Fiat currency
Taxes drive the demand for money
Financial stocks and flows are denominated in the national money of account
The financial system as an electronic scoreboard
9.3 Floating versus Fixed Exchange Rate Regimes
The gold standard and fixed exchange rates
Floating exchange rates
9.4 IOUs Denominated in National Currency: Government and Non-Government
Leveraging
Clearing accounts extinguish IOUs
Pyramiding currency
9.5 Use of the Term ‘Money’: Confusion and Precision
Conclusion
References
10 Money and Banking
10.1 Introduction
10.2 Some Definitions
Monetary aggregates
10.3 Financial Assets
Yield concepts in fixed income investments
10.4 What Do Banks Do?
The neoclassical view: the money multiplier
MMT representation of the credit creation process
Loans create deposits
Banks do not loan out reserves
Endogenous money
Summary
An example of a bank’s credit creation: a balance sheet analysis
Conclusion
References
Contents
PART C: NATIONAL INCOME, OUTPUT AND EMPLOYMENT DETERMINATION
11 The Classical System
11 .1 Introduction
11.2 The Classical Theory of Employment
Why is the labour demand function downward sloping?
Why is the labour supply function upward sloping?
Equilibrium in the labour market
11.3 Unemployment in the Classical Labour Market
11.4 What is the Equilibrium Output Level in the Classical Model?
11.5 The Loanable Funds Market, Classical Interest Rate Determination
11.6 Classical Price Level Determination
11.7 Summary of the Classical System
11 .8 Pre-Keynesian Criticisms of the Classical Denial of Involuntary Unemployment
Conclusion
References
12 Mr. Keynes and the ‘Classics’
12.1 Introduction
12.2 The Existence of Mass Unemployment as an Equilibrium Phenomenon
12.3 Keynes’ Critique of Classical Employment Theory
12.4 Involuntary Unemployment
12.5 Keynes’ Rejection of Say’s Law: The Possibility of General Overproduction
Refresher: the loanable funds market
Keynes’ critique of the loanable funds doctrine
Liquidity preference and Keynes’ theory of interest
Conclusion
References
13 The Theory of Effective Demand
13.1 Introduction
13.2 The D-Z Approach to Effective Demand
13.3 Introducing Two Components of Aggregate Demand: 01 and 02
13.4 Advantages of the D-Z Framework
The macroeconomic demand for labour
13.5 The Role of Saving and Liquidity Preference
13.6 The Demand Gap Arguments and Policy Implications
Conclusion
Reference
14 The Macroeconomic Demand for Labour
14.1 Introduction
14.2 The Macroeconomic Demand for Labour Curve
The interdependency of aggregate supply and demand
Money wage changes and shifts in effective demand
14.3 The Determination of Employment and the Existence of Involuntary Unemployment
14.4 A Classical Resurgence Thwarted
Conclusion
References
15 The Aggregate Expenditure Model
15.1 Introduction
15.2 A Simple Aggregate Supply Depiction
15.3 Aggregate Demand
15.4 Private Consumption Expenditure
15.5 Private Investment
15.6 Government Spending
15.7 Net Exports
15.8 Total Aggregate Expenditure
15.9 Equilibrium National Income
15.10 The Expenditure Multiplier
An algebraic treatment
A graphical treatment
Numerical example of the expenditure multiplier at work
Changes in the magnitude of the expenditure multiplier
A final point about the multiplier
Conclusion
References
16 Aggregate Supply
16.1 Introduction
16.2 Some Important Concepts
Schedules and Junctions
The employment-output function
Money wages
16.3 Price Determination
16.4 The Aggregate Supply Function (AS)
The theory of production
Some properties of the aggregate supply function
16.5 What Determines the Level of Employment?
16.6 Factors Affecting Aggregate Output per Hour
The choice of production technology
Procyclical movements in labour productivity
Conclusion
Reference
PART D: UNEMPLOYMENT AND INFLATION: THEORY AND POLICY
17 Unemployment and Inflation
17.1 Introduction
17.2 What is Inflation?
17.3 Inflation as a Conflictual Process
Cost push inflation
Raw material price increases
Conflict theory of inflation and inflationary biases
Demand pull inflation
Cost push and demand pull inflation: a summary
17.4 The Quantity Theory of Money
17.5 Incomes Policies
Conclusion
References
18 The Phillips Curve and Beyond
18.1 Introduction
18.2 The Phill ips Curve
Phillips curve algebra
The instability of the Phillips curve
Contents
Econometric misspecification
18.3 The Accelerationist Hypothesis and the Expectations Augmented Phillips Curve
Introduction
Expectations of inflation
The algebra of the expectations augmented Phillips curve
Specification of inflationary expectations
18.4 Hysteresis and the Phillips Curve Trade-off
The algebra of hysteresis
18.5 Underemployment and the Phillips Curve
Conclusion
References
19 Full Employment Policy
19.1 Introduction
19.2 Full Employment as the Policy Goal
19.3 Policies for the Promotion of Employment
Behaviouralist, structuralist, and Keynesian approaches
Private sector incentives
Direct job creation by government
19.4 Unemployment Buffer Stocks and Price Stability
Measuring the costs of unemployment buffer stocks
19.5 Employment Buffer Stocks and Price Stability
The JG wage
The JG as an automatic stabiliser
Inflation control and the JG
Open economy impacts
Would the NA/BER be higher than the NA/RU?
Employment buffer stocks and responsible fiscal design
A plausible adjustment path
19.6 Impact on the Phillips Curve
Conclusion
References
PART E: ECONOMIC POLICY IN AN OPEN ECONOMY
20 Introduction to Monetary and Fiscal Policy Operations
20.1 Introduction
20.2 The Central Bank
The payments system, reserves and the interbank market
20.3 The Treasury
Government and private financial accounting
Sectoral balances
20.4 Coordination of Monetary and Fiscal Operations
Duties of the central bank
Duties of the treasury
A numerical example using balance sheets
Is there a sufficient demand for treasury debt?
20.5 Taxes and Sovereign Spending
20.6 Currency Sovereignty and Policy Independence
Conclusion
References
Chapter 20 Appendix: Advanced Material
Monetary policy in the open economy, causes and consequences of capital flows
21 Fiscal Policy in Sovereign Nations
21.1 Introduction
Contents
21 .2 Functional Finance versus Sound Finance
The fiscal constraint and the views of deficit hawks, doves, and owls
Why is the deficit owl the only perspective that is consistent with MMT?
Functional finance
21.3 Fiscal Policy Debates: Crowding Out and (Hyper) Inflation
Crowding out?
Voluntary constraints
Inflation and sovereign fiscal policy
Hyperinflation
Real world hyperinflations
Summing up on hyperinflation
Conclusion
References
22 Fiscal Space and Fiscal Sustainability
22.1 Introduction
22.2 The Full Employment Fiscal Deficit Condition
22.3 Fiscal Space and Fiscal Sustainability
Advancement of public purpose
Understanding the monetary environment
Understanding what a sovereign government is
Understanding why governments tax
Understanding why governments issue debt
Setting fiscal targets
Foreign exposure
Understanding what a cost is
22.4 The Debt Sustainability Debate
Conclusion
References
23 Monetary Policy in Sovereign Nations
23.1 Introduction
23.2 Modern Banking Operations
23.3 Interest Rate Targets versus Monetary Targets
Lender of last resort and financial stability
23.4 Liquidity Management
Introduction
Different interest rate setting arrangements
23.5 Implementation of Monetary Policy
Transmission mechanism
23.6 Unconventional Forms of Monetary Policy
Introduction
Quantitative easing (QE)
Negative interest rates
Conclusion
23.7 Monetary Policy in Practice
23.8 The Advantages and Disadvantages of Monetary Policy
23.9 Central Bank Independence
Introduction
Rationale for independence
Contents
23.10 Horizontal and Vertical Operations: An Integration
Conclusion
References
24 Policy in an Open Economy: Exchange Rates, Balance of Payments and Competitiveness
24.1 Introduction
24.2 The Balance of Payments
Balance of payment examples
The current account
The capital account and financial account
24.3 Essential Concepts
Nominal exchange rate (e)
Change in the nominal exchange rate, appreciation and depreciation
What determines the exchange rate?
International competitiveness
The real exchange rate
24.4 Aggregate Demand and the External Sector Revisited
24.S Trade in Goods and Services, Product Market Equilibrium and the Trade Balance
National income equilibrium with trade
The net exports Junction
The impact on national income and net exports of a change in world income
An increase in world income leads to a rise in net exports
24.6 Capital Controls
Conclusion
References
PART F: ECONOMIC INSTABILITY
25 The Role of Investment in Profit Generation
25.1 Investment in a Capitalist Monetary Economy
The volatility of investment
Gross and net investment
25.2 The Accelerator Model of Investment
The simple accelerator model
Limitations of the simple accelerator model
25.3 The Flexible Accelerator Model
Rate of adjustment in the flexible accelerator model
Implications of incomplete adjustment
25.4 Expectations and Interest Rate Impacts on Investment Demand
25.S Introduction to Cash Flow Discounting and Present Value
25.6 Keynes and the Marginal Efficiency of Investment
25.7 Minsky’s Model of the Investment Decision
The two price system
Determination of investment
25.8 Investment and Profits
Kalecki’s simplified model
Kalecki’s generalised model
25.9 Business Cycles: Fluctuations in Economic Activity
Terminology and patterns
The interaction of the expenditure multiplier and the investment accelerator
Contents
Conclusion
References
26 Stabilising the Unstable Economy
26.1 Introduction
26.2 Economic Cycles and Crises
26.3 Marxist Theory of Crisis
26.4 Keynesian a nd Post-Keynesian Theories of Crisis
26.5 Minsky’s Financial Instability Hypothesis
Conclusion
References
PART G: HISTORY OF MACROECONOMIC THOUGHT
27 Overview of the History of Economic Thought
27.1 Introduction
27.2 History of Neoclassical Theory
27.3 History of Heterodox Thought
27.4 Institutional Economics
27.5 Modern Orthodox Schools of Thought
27.6 Post-War Economic History and History of Thought
Conclusion
References
28 The IS-LM Framework
28.1 Introduction and the Concept of General Equilibrium
28.2 The Money Market: Demand, Supply and Equilibrium
28.3 Derivation of the LM Curve
28.4 The Product (Goods) Market: Equilibrium Output
28.5 Derivation of the IS Curve
28.6 Equilibrium and Policy Analysis in the IS-LM Framework
28.7 Introducing t he Price Level: The Keynes and Pigou Effects
28.8 Limitations of the IS-LM Framework
The endogeneity of the money supply
Expectations and time
Conclusion
References
Chapter 28 Appendix: The IS-LM Algebra
Simplified open economy
Product market equilibrium
Money market equilibrium
General equilibrium
29 Modern Schools of Economic Thought
29.1 Introduction
29.2 The Rise of New Classical Economics
Roots in Friedman’s Monetarism
New Classical Economics
29.3 Real Business Cycle Theory
Advanced treatment of the RBC model
29.4 New Keynesian Economics
Introduction
Examples of price and wage inflexibility
The role of policy
Contents
29.S Modern Heterodox Schools of Thought
Introduction
Method: the notion of equilibrium and locus of analysis
Alternative approaches to distribution
Say’s Law
Loanable funds versus liquidity preference
Imperfect competition
Treatment of money, time and expectations
Conclusion
References
30 The New Monetary Consensus in Macroeconomics
30.1 Introduction
30.2 Components of the NMC theory
30.3 Weaknesses of the NMC
Conclusion
References
Chapter 30 Appendix:The New Monetary Consensus model
PART H: CONTEMPORARY DEBATES
31 Recent Policy Debates
31 .1 Introduction
31.2 Ageing, Social Security, and the Intergenerational Debate
Dependency ratios
Do dependency ratios matter?
31.3 The Twin Deficits Hypothesis
Introduction
The link between the deficits
31.4 Balance of Payments Constraints and Currency Crises
Currency crises 508
31.S Fixed versus Flexible rates: Optimal Currency Areas, the Bancor, or Floating Rates? 513
Introduction 513
Optimal currency areas 513
The demise of the gold standard: the Great Depression and the Second World War 514
Keynes’ Bancor plan and the end of Bretton Woods 515
An alternative (MMT) approach to international money:floating rates and sovereign currency 516
The euro and optimal currency areas 518
Conclusion 519
31.6 Environmental Sustainability and Economic Growth 520
References 522
Chapter 31 Appendix 1: Case Study 1 – Economic Growth: Demand or Supply Constrained?
The US, 1975 to 2007 524
Introduction 524
Did the US economy suffer from secular stagnation from 1970 to 7 995? 525
The ‘New Economy’ and the productivity miracle, 1995 to 2007 527
Chapter 31 Appendix 2: Case Study 2 – The Return of Secular Stagnation? US Labour Markets
after the Global Financial Crisis 529
Conclusion 532
Chapter 31 Appendix 3: The US Social Security and Medicare Systems 533
Contents
32 Macroeconomics in the Light of the Global Financial Crisis
32.1 Introduction
32.2 Why Didn’t Mainstream Macroeconomics Foresee the GFC?
32.3 Who Did Foresee the GFC and Why?
Introduction
Minsky’s financial instability hypothesis
The rise in inequality
32.4 Lessons That Can be Learned About Sovereign Currency From the
Eurozone Crisis
Conclusion
References
33 Macroeconomics for the Future
33.1 Introduction
Index
33.2 Modelling Framework
33.3 Government and the Monetary System
A sovereign currency
Fiscal policy
Persistent fiscal deficits
33.4 Monetary Policy
Reserves and bond sales
33.S Private Banks
Finance
Inside wealth versus outside wealth
Credit creation and the money supply
33.6 Trade and Exchange Rates
Exchange rate regime
Conclusion
Further Reading