Low Interest Rates and Business Investments : Update August 2017

Low Interest Rates and Business Investments : Update August 2017

 

From  Explaining Low Investment Spending

USINVEST

globalinvest

 

Please see my earlier posts.

Business Investments and Low Interest Rates

Mergers and Acquisitions – Long Term Trends and Waves

The Decline in Long Term Real Interest Rates

Short term Thinking in Investment Decisions of Businesses and Financial Markets

Low Interest Rates and Monetary Policy Effectiveness

Low Interest Rates and Banks’ Profitability : Update July 2017

Low Interest Rates and Banks Profitability: Update – December 2016

 

Since my earlier posts on this subject there has been several new studies published highlighting weakness in business investments as one of the cause of slower economic growth and lower interest rates.

Other significant factors impacting interest rates are demographic changes, and slower economic growth.

I argue that there is mutual (circular) causality in weak business investment, slower economic growth, and lower interest rates which reinforce each other.

 

Decreased competition, increased concentration, corporate savings glut, share buybacks, paying dividends are also identified as factors.

Number of public companies have decreased significantly in USA since 1996 due to M&A activity.   See the data below.

Increased Mergers/Acquisitions, Increased Concentration, Decreased Competition, Decreased Number of Public Companies, Share buybacks, and Dividend Payouts are multiple perspectives of same problem.

 

From The Incredible Shrinking Universe of Stocks

The Causes and Consequences of Fewer U.S. Equities

USNUMUSSTAT

 

Key sources of Research:

The Low Level of Global Real Interest Rates

Remarks by
Stanley Fischer
Vice Chairman
Board of Governors of the Federal Reserve System

at the
Conference to Celebrate Arminio Fraga’s 60 Years
Casa das Garcas, Rio de Janeiro, Brazil

July 31, 2017

The Low Level of Global Real Interest Rates

 

 

INVESTMENT-LESS GROWTH: AN EMPIRICAL INVESTIGATION

German Gutierrez Thomas Philippon

Working Paper 22897

NATIONAL BUREAU OF ECONOMIC RESEARCH

1050 Massachusetts Avenue
Cambridge, MA 02138

December 2016

 

INVESTMENT-LESS GROWTH: AN EMPIRICAL INVESTIGATION

 

 

Explaining Low Investment Spending

The NBER Digest
NATIONAL BUREAU OF ECONOMIC RESEARCH

February 2017

Explaining Low Investment Spending

 

 

The Secular Stagnation of Investment?

Callum Jones and Thomas Philippon

December 2016

 

The Secular Stagnation of Investment?

 

 

Is there an investment gap in advanced economies? If so, why?

By Robin Dottling, German Gutierrez and Thomas Philippon

 

Is there an investment gap in advanced economies? If so, why?

 

 

The Disappointing Recovery of Output after 2009

JOHN G. FERNALD ROBERT E. HALL

JAMES H. STOCK MARK W. WATSON

May 2, 2017

The Disappointing Recovery of Output after 2009

 

 

Declining Competition and Investment in the U.S.

German Gutierrez and Thomas Philippon

NATIONAL BUREAU OF ECONOMIC RESEARCH

July 2017

 

Declining Competition and Investment in the U.S

 

 

Real Interest Rates Over the Long Run : Decline and convergence since the 1980s

Kei-Mu Yi   Jing Zhang

ECONOMIC POLICY PAPER 16-10 SEPTEMBER 2016

FEDERAL RESERVE BANK of MINNEAPOLIS

Real Interest Rates over the Long Run Decline and convergence since the 1980s, due significantly to factors causing lower investment demand

 

 

Understanding global trends in long-run real interest rates

Kei-Mu Yi and Jing Zhang

Economic Perspectives, Vol. 41, No. 2, 2017
Chicago Fed Reserve Bank

 

Understanding Global Trends in Long-run Real Interest Rates

 

 

Weakness in Investment Growth: Causes, Implications and Policy Responses

CAMA Working Paper 19/2017 March 2017

M. Ayhan Kose

Franziska Ohnsorge

Lei Sandy Ye

Ergys Islamaj

 

Weakness in Investment Growth: Causes, Implications and Policy Responses

 

 

Are US Industries Becoming More Concentrated?

Gustavo Grullon, Yelena Larkin and Roni Michaely

October 2016

 

Are US Industries Becoming More Concentrated?

 

 

Why Is Global Business Investment So Weak? Some Insights from Advanced Economies

 

Robert Fay, Justin-Damien Guénette, Martin Leduc and Louis Morel,

International Economic Analysis Department

Bank of Canada Review Spring 2017

 

Why Is Global Business Investment So Weak? Some Insights from Advanced Economies

 

 

What Is Behind the Weakness in Global Investment?

by Maxime Leboeuf and Bob Fay

2016

Bank of Canada

 

What Is Behind the Weakness in Global Investment?

 A Structural Interpretation of the Recent Weakness in Business Investment

by Russell Barnett and Rhys Mendes

 The Corporate Saving Glut in the Aftermath of the Global Financial Crisis

 

Gruber, Joseph W., and Steven B. Kamin

International Finance Discussion Papers
Board of Governors of the Federal Reserve System
Number 1150 October 2015

 

The Corporate Saving Glut in the Aftermath of the Global Financial Crisis

 

 

The Incredible Shrinking Universe of Stocks

The Causes and Consequences of Fewer U.S. Equities

March 22, 2017

GLOBAL FINANCIAL STRATEGIES

http://www.credit-suisse.com

 

The Incredible Shrinking Universe of Stocks The Causes and Consequences of Fewer U.S. Equities

 

 

They Just Get Bigger: How Corporate Mergers Strangle the Economy

Jordan Brennan

2017 February 19

They Just Get Bigger: How Corporate Mergers Strangle the Economy

 

 

Rising Corporate Concentration, Declining Trade Union Power, and the Growing Income Gap: American Prosperity in Historical Perspective

Jordan Brennan

March 2016

 

Rising Corporate Concentration, Declining Trade Union Power, and the Growing Income Gap: American Prosperity in Historical Perspective

Low Interest Rates and Monetary Policy Effectiveness

Low Interest Rates and Monetary Policy Effectiveness

 

World economy is stuck in low interest rates environment.   Euro area, japan have even negative interest rates.  US Fed Reserve since December 2016 has started raising interest rates.

Attempts by Central Banks have not been effective in increasing economic growth.  Many Economists now are presenting counter intuitive reasons for low growth.

 

Please see my earlier related posts.

Business Investments and Low Interest Rates

Mergers and Acquisitions – Long Term Trends and Waves

 

Since 2016, there are several new studies published exploring effectiveness of monetary policy in low interest rates environment.

 

Is monetary policy less effective when interest rates are persistently low?

by Claudio Borio and Boris Hofmann

April 2017

Is Monetary Policy Less Effective When Interest Rates are Persistently Low?

 

In March 2017, Brookings Institution published the following study by the economists of the US Federal Reserve.

Monetary policy in a low interest rate world

 

Fed Reserve of Chicago published speech given by Charles Evans in 2016.

Monetary Policy in a Lower Interest Rate Environment

 

Lecture by Vítor Constâncio, Vice-President of the ECB, Macroeconomics Symposium at Utrecht School of Economics, 15 June 2016

The challenge of low real interest rates for monetary policy

 

Journal of Policy Modeling published a paper by Ken Rogoff.  Paper was presented at American Economic Association, 2017.

Monetary policy in a low interest rate world

 

Eight BIS CCA Research Conference on “Low interest rates, monetary policy and international spillovers”, hosted by the Board of Governors of the Federal Reserve System, Washington DC, 25-26 May 2017

Low interest rates, monetary policy and international spillovers

 

Economist Magazine published an article on views of Bill Gross and others.

November 2015

Do ultra-low interest rates really damage growth?

 

Bloomberg Business Week published an article describing views of Charles Calomiris and others.

June 2017

Is the World Overdoing Low Interest Rates?

 

Claudio Borio and Boris Hofmann

The Paper was prepared for the Reserve Bank of Australia conference
“Monetary Policy and Financial Stability in a World of Low Interest Rates”,

16-17 March 2017, Sydney

Is monetary policy less effective when interest rates are persistently low?

 

Monetary policy and bank lending in a low interest rate environment: diminishing effectiveness?

Claudio Borio and Leonardo Gambacorta

February 2017

Monetary policy and bank lending in a low interest rate environment: diminishing effectiveness?

 

Negative Interest Rate Policy (NIRP):
Implications for Monetary Transmission and Bank Profitability in the Euro Area

Prepared by Andreas (Andy) Jobst and Huidan Lin

IMF

August 2016

Negative Interest Rate Policy (NIRP): Implications for Monetary Transmission and Bank Profitability in the Euro Area

 

James Bullard, President and CEO of Federal Reserve Bank of St. Louis

March 24, 2009

The Henry Thornton Lecture, Cass Business School, London

Effective Monetary Policy in a Low Interest Rate Environment

 

Federal Reserve Bank of New York

Monetary Policy, Financial Conditions, and Financial Stability

Tobias Adrian
Nellie Liang

Monetary Policy, Financial Conditions, and Financial Stability

 

Monetary policy, the financial cycle and ultra-low interest rates

Mikael Juselius of Bank of Finland

DNB Workshop on “Estimating and Interpreting Financial Cycles”

Amsterdam, 2 September 2016

Monetary policy, the financial cycle and ultra-low interest rates

BIS Paper

Monetary policy, the financial cycle and ultra-low interest rates

 

The dynamics of real interest rates, monetary policy and its limits

Philippe d’Arvisenet

May 2016

The dynamics of real interest rates, monetary policy and its limits

 

Output Gaps and Monetary Policy at Low Interest Rates

By Roberto M. Billi

Output Gaps and Monetary Policy at Low Interest Rates

 

The insensitivity of investment to interest rates: Evidence from a survey of CFOs

Steve A. Sharpe and Gustavo A. Suarez

2014-02

The insensitivity of investment to interest rates: Evidence from a survey of CFOs

 

Does Prolonged Monetary Policy Easing Increase Financial Vulnerability?

Prepared by Stephen Cecchetti, Tommaso Mancini-Griffoli, and Machiko Narita

February 2017

Does Prolonged Monetary Policy Easing Increase Financial Vulnerability?

 

The Microeconomic Perils of Monetary Policy Experiments

Charles W. Calomiris

Cato Institute

The Microeconomic Perils of Monetary Policy Experiments

 

Why Have the Fed’s Policies Failed to Stimulate the Economy?

Mickey D. Levy

Cato Institute

Why Have the Fed’s Policies Failed to Stimulate the Economy?

Low Interest Rates and Banks’ Profitability : Update July 2017

Low Interest Rates and Banks’ Profitability : Update July 2017

 

Please see my previous posts.

Impact of Low Interest Rates on Bank’s Profitability

Low Interest Rates and Banks Profitability: Update – December 2016

 

Since December 2016, there are several new studies published which study low interest rates and Banks profitability.

 

 

Liberty State economics – a Blog of New York Federal Reserve has published a new column in June 2017.

Low Interest Rates and Bank Profits

 

 

Reduced Viability? Banks, Insurance Companies, and Low Interest Rates

CFA Institute

2016

CFA Institute Blog: Low Interest Rates and Banks

 

 

Changes in Profitability for Primary Dealers since the Financial Crisis

Benjamin Allen

Skidmore College

2017

Changes in Profitability for Primary Dealers since the Financial Crisis

 

 

Deloitte Consulting has published a new report in 2017 on Bank Models viability in environment of low interest rates.

Business model analysis European banking sector model in question

 

THE EFFECT OF NEGATIVE INTEREST RATES ON EUROPEAN BANKING
July 7, 2016
International banker

 

https://internationalbanker.com/banking/effect-negative-interest-rates-european-banking/

 

 

Low interest rates place a strain on the banks

bank of Finland

2016

https://www.bofbulletin.fi/en/2016/2/low-interest-rates-place-a-strain-on-the-banks/

 

 

The profitability of EU banks: Hard work or a lost cause?

KPMG

October 2016

 

https://assets.kpmg.com/content/dam/kpmg/xx/pdf/2016/10/the-profitability-of-eu-banks.pdf

 

 

The influence of monetary policy on bank profitability

Claudio Borio

2017

http://onlinelibrary.wiley.com/doi/10.1111/infi.12104/abstract

 

 

Can Low Interest Rates be Harmful: An Assessment of the Bank Risk-Taking Channel in Asia

2014

Asian Development Bank

 

https://www.adb.org/sites/default/files/publication/31204/reiwp-123-can-low-interest-rates-harmful.pdf

 

 

Determinants of bank’s interest margin in the aftermath of the crisis: the effect of interest rates and the yield curve slope

Paula Cruz-García, Juan Fernández de Guevara and Joaquín Maudos

 

http://www.uv.es/inteco/jornadas/jornadas13/Cruz-Garcia,%20Fernandez%20and%20Maudos_XIII%20Inteco%20Workshop.pdf

 

 

Dutch Central Bank has published a new study in November of 2016 on Banks’ Profitability and risk taking in a prolonged environment of Low Interest Rates.

Bank profitability and risk taking in a prolonged environment of low interest rates: a study of interest rate risk in the banking book of Dutch banks

 

 

Net interest margin in a low interest rate environment: Evidence for Slovenia

Net interest margin in a low interest rate environment: Evidence for Slovenia

 

Global Financial Stability Report, April 2017: Getting the Policy Mix Right

IMF

2017

IMF Global Financial Stability Report April 2017

 

 

Negative Interest Rates: Forecasting Banks’ Profitability in a New Environment

Stefan Kerbl, Michael Sigmund

Bank of Finland

Negative Interest Rates: Forecasting Banks’ Profitability in a New Environment

 

 

Low Interest Rates and the Financial System

Remarks by Jerome H. Powell
Member Board of Governors of the Federal Reserve System
at the 77th Annual Meeting of the American Finance Association
Chicago, Illinois
January 7, 2017

https://www.federalreserve.gov/newsevents/speech/powell20170107a.pdf

 

 

Bad zero: Financial Stability in a Low Interest Rate Environment

Elena Carletti  Giuseppe Ferrero

18 June 2017

https://www.dnb.nl/en/binaries/paper%20Carletti_Ferrero_18June2017_tcm47-360758.pdf

A Brief History of Macro-Economic Modeling, Forecasting, and Policy Analysis

A Brief History of Macro-Economic Modeling, Forecasting, and Policy Analysis

 

From A History of Macroeconomics from Keynes to Lucas and Beyond

history-of-macro

 

From Modern Macroeconomic Models as Tools for Economic Policy

I believe that during the last financial crisis, macroeconomists (and I include myself among them) failed the country, and indeed the world. In September 2008, central bankers were in desperate need of a playbook that offered a systematic plan of attack to deal with fast- evolving circumstances. Macroeconomics should have been able to provide that playbook. It could not. Of course, from a longer view, macroeconomists let policymakers down much earlier, because they did not provide policymakers with rules to avoid the circumstances that led to the global financial meltdown.

Because of this failure, macroeconomics and its practitioners have received a great deal of pointed criticism both during and after the crisis. Some of this criticism has come from policymakers and the media, but much has come from other economists. Of course, macroeconomists have responded with considerable vigor, but the overall debate inevitably leads the general public to wonder: What is the value and applicability of macroeconomics as currently practiced?

 

There have been several criticisms of Main stream Economic Modeling from economists such as

  • Paul Romer
  • Willem H Buiter
  • Paul Krugman
  • R Cabellero
  • William White
  • Dirk Bezemer
  • Steve Keen
  • Jay Forrester
  • Lavoie and Godley

 

Issues with Neo Classical Models

  • No role of Money, Credit  and Finance
  • Lack of Interaction between Real and Financial sectors
  • Lack of Aggregate Demand
  • Rational Expectations and others.

 

Orthodox and Heterodox Modeling

  • Input Output Equations Models – Inter Industry Analysis
  • Structural Models
  • CGE and DSGE Models
  • VAR ( Vector Auto Regression ) Models
  • Stock flow Consistent Models
  • System Dynamics models

 

Neoclassical Models

  • Structural
  • VAR after Lucas Critique
  • DSGE (Dynamic Stochastic General Equilibrium Models)
  • DSGE – VAR

 

From HISTORY OF MACROECONOMETRIC MODELLING: LESSONS FROM PAST EXPERIENCE

The origin of macroeconometric modelling dates back to after World War II when Marschak organised a special team at the Cowles Commission by inviting luminaries such as Tjalling Koopmans, Kenneth Arrow, Trygve Haavelmo, T.W. Anderson, Lawrence Klein, G. Debreu, Leonid Hurwitz, Harry Markowitz, and Franco Modigliani (Diebold, 1998).

An interesting feature of macro modelling in this group was that there were three divisions to undertake the modelling procedures: first, economic theory or model specification; second, statistical inference (including model estimation, diagnostic tests and applications); and third, model construction which was dealing with data preparation and computations. The use of a team approach in macroeconometric modelling has been regarded as both cause and effect of large scale macroeconometric modelling (Intriligator, Bodkin and Hsiao, 1996).

Klein joined this team and conducted his first attempt in the mid 1940s to build a MEM for the US economy. See Klein (1983), Bodkin, Klein and Marwah (1991) and Intriligator, Bodkin and Hsiao (1996) for discussions of the MEMs which have been constructed for developed countries such as

  • the Klein interwar model,
  • the Klein-Goldberger model,
  • the Wharton model,
  • the DRI (Data Resources. Inc.) model,
  • the CANDIDE model,
  • the Brooking model etc.

 

 

History of Early Models

A. Klein Interwar Model

  • MODEL I
  • MODEL II
  • MODEL III
  • Developed in late 1940s

B. Klein -Goldberger Model

  • Developed at University of Michigan in 1950s.  Annual forecasts

C. BEA Model

  • Developed by L Klein.  Quarterly.  Operational in 1961. Transferred to BEA.  Eventually became BEA model.

D. Wharton Model

  • WHAR – III, with Anticipations
  • WHAR – MARK III
  • WHAR -ANNUAL
  • WEFA,  Project LINK
  • Wharton models were constantly operated until 2001.  DRI and WEFA merged to form Global Insight, Inc.

E. DRI Model

  • Built in 1969.  by Data Resources inc.  by Eckstein, Fromm, and Duessenbury.

F. Brookings Model

  • Developed by L Klein and J.S. Duessenberry. .  Quarterly.

G. MPS Model

  • FRB-MIT Model

H. The Hickman – Coen Model

  • Developed by Hickman and Coen for long term forecasting

I. FAIR model

  • Developed by Ray Fair at Princeton.  Now at Yale.  Available for free.

J. The St. Louis Model

  • Developed by FRB/ST.Louis

K. Michigan MQEM Model

  • Quarterly. DHL III

L. The Liu-HWA Model

  • Developed in 1970s.  Monthly.

M. WEFA -DRI/ Global Insight Model

  • Developed after merger of WEFA and DRI in 2001

N. Michigan MQEM /RSQE Model

  • Developed and extended in 1990s.  Replaced by Hymans RSQE model.

O. Current Quarterly Model

  • L Klein and Global Insight collaboration. L Klein died in 2013.

P. CANDIDE Model

  • Model developed for Canada

 

 

From Economic Theory, Model Size, and Model Purpose

models-7

 

 

From HISTORY OF MACROECONOMETRIC MODELLING: LESSONS FROM PAST EXPERIENCE

A Macro Econometric Model (MEM) is a set of behavioural equations, as well as institutional and definitional relationships representing the main behaviours of economic agents and the operations of an economy. The equations, or behavioural relations, can be empirically validated to capture the structure of a macroeconomy, and can then be used to simulate the effects of policy changes.

Macroeconometric modelling is multi- dimensional and both a science and an art. Bautista (1988) and Capros, Karadeloglou and Mentzas (1990) have classified macroeconomic models into broad groups: MEMS and CGE (computable general equilibrium) models.

Further, according to Challen and Hagger (1983, pp.2-22) there are five varieties of MEMs in the literature:

  • the KK (Keynes- Klein) model,
  • the PB (Phillips-Bergstrom) model,
  • the WJ (Walras-Johansen) model,
  • the WL (Walras-Leontief) model,
  • the MS (Muth-Sargent) model.

The KK model is mainly used by model builders in developing countries to explain the Keynesian demand-oriented model of macroeconomic fluctuations. They deal with the problems of short-run instability of output and employment using mainly stabilisation policies. The basic Keynesian model has been criticised as it does not consider the supply side and the incorporation of production relations. Furthermore, this modelling approach does not adequately capture the role of the money market, relative prices and expectations. As a response to the shortcomings associated with the KK model, the St Louis model was constructed by the monetarist critics (Anderson and Carlson, 1970) in order to highlight the undeniable impacts of money on the real variables in the economy.

The second type of MEM, the PB, emerged in the literature when Phillips (1954, 1957) used both the Keynesian and the Neoclassical theories within a dynamic and continuous time model to analyse stabilisation policy. Although the PB model is also a demand-oriented model, differential or difference equations are used to estimate its stochastic structural parameters. In essence, the steady state and asymptotic properties of models are thus examined in a continuous time framework. One should note that this modelling method in practice becomes onerous to implement especially for large scale models.

The third type of MEM, the WJ, can be referred to as a multi-sector model in which the economy is disaggregated into various interdependent markets, each reaching an equilibrium state by the profit maximising behaviour of producers and utility maximising actions of consumers in competitive markets. Similar to an input-output (IO) approach, different sectors in the WJ model are linked together via their purchases and sales from, and to, each other. However, it is different from an IO model as it is highly non-linear and uses logarithmic differentiation.

The fourth type of MEMs, known as the WL model, has been widely considered as the more relevant MEM for developing countries (Challen and Hagger, 1983). The WL model incorporates an IO table into the Walrasian general equilibrium system, enabling analysts to obtain the sectoral output, value added or employment given the values of the sectoral or aggregate final demand components.

Finally, the foundations of the MS model are based on the evolution of the theory of rational expectations. The MS model is similar to the KK model in that they both are dynamic, non-linear, stochastic and discrete. But in this model the formation of expectations is no longer a function of previous values of dependent variables. The forward looking expectation variables can be obtained only through solving the complete model. The New Classical School demonstrated the role of the supply side and expectations in a MEM with the aim of highlighting the inadequacy of demand management policies. To this end, Sargent (1976) formulated forward-looking variants of this model which suggest no trade-off between inflation and unemployment in the short term, which is in sharp contrast to both the Keynesian and Monetarist modelling perspectives.

It is noteworthy that the subsequent advances in the WJ and WL models led to the formulation of CGE modelling, which is categorised here as the second type of macroeconomic model. The Neoclassical CGE models are based on the optimising behaviour of economic agents. The main objectives of CGE models are to conduct policy analysis on resource economics, international trade, efficient sectoral production and income distribution (Capros, Karadeloglou and Mentzas, 1990).

The 1960s witnessed the flowering of the large scale macroeconometric modelling. This decade saw the construction of the Brookings model, in which an input-output table was incorporated into the model. Adopting the team approach in modelling procedure in the 1970s, the majority of model builders aimed at the commercialisation of the comprehensive macro models, such as DRI, Wharton and Chase, by providing information to private enterprises. Modellers designed their models on the basis of quarterly or monthly data with the goal of keeping the models up-to-date, for commercial gain. As a consequence of taking such measures, model-builders became commercially successful (Fair, 1987). It is believed that in this era, the full-grown models “would contribute substantively to enlarging our understanding of economic processes and to solving real- world economic problems” (Sowey and Hargreaves, 1991: 600).

During the last three decades, MEMs have been internationalised via Project LINK which was first operated at the University of Pennsylvania. In 1987 according to Bodkin (1988b) Project LINK consisted of 79 MEMs of individual countries or aggregations. In Project LINK the world is treated as a closed system of approximately 20,000 equations which “allow trade, capita flows, and possible exchange rate and other repercussions to influence systematically the individual national economies” (Bodkin, 1988b: 222).

 

From STRUCTURAL ECONOMETRIC MODELLING: METHODOLOGY AND TOOLS WITH APPLICATIONS UNDER EVIEWS

Since an early date in the twentieth century, economists have tried to produce mathematical tools which, applied to a given practical problem, formalized a given economic theory to produce a reliable numerical picture. The most natural application is of course to forecast the future, and indeed this goal was present from the first. But one can also consider learning the consequences of an unforeseen event, or measuring the efficiency of a change in the present policy, or even improving the understanding of a set of mechanisms too complex to be grasped by the human mind.

In the last decades, three kinds of tools of this type have emerged, which share the present modelling market.

  •   The “VAR” models. They try to give the most reliable image of the near future, using a complex estimated structure of lagged elements, based essentially on the statistical quality, although economic theory can be introduced, mostly through constraints on the specifications. The main use of this tool is to produce short term assessments.
  •   The Computable General Equilibrium models. They use a detailed structure with a priori formulations and calibrated coefficients to solve a generally local problem, through the application of one or several optimizing behaviors. The issues typically addressed are optimizing resource allocations, or describing the consequences of trade agreements. The mechanisms described contain generally little dynamics.

This is no longer true for the Dynamic Stochastic General Equilibrium models, which dominate the current field. They include dynamic behaviors and take into account the uncertainty in economic evolutions. Compared to the traditional models (see later) they formalize explicitly the optimizing equilibria, based on the aggregated behavior of individual agents. This means that they allow agents to adapt their behavior to changes is the rules governing the behaviors of others, including the State, in principle escaping the Lucas critique. As the model does not rely on traditional estimated equations, calibration is required for most parameters.

  •  The “structural” models. They start from a given economic framework, defining the behaviors of the individual agents according to some globally consistent economic theory. They use the available data to associate to these behaviors reliable formulas, which are linked by identities guaranteeing the consistency of the whole set. These models can be placed halfway between the two above categories: they do rely on statistics, and also on theory. To accept a formula, it must respect both types of criteria.

The use of this last kind of models, which occupied the whole field at the beginning, is now restricted to policy analysis and medium term forecasting. For the latter, they show huge advantages: the full theoretical formulations provide a clear and understandable picture, including the measurement of individual influences. They allow also to introduce stability constraints leading to identified long term equilibriums, and to separate this equilibrium from the dynamic fluctuations which lead to it.

Compared to CGEs and DSGEs, optimization behaviors are present (as we shall see later) and introduced in the estimated equations. But they are frozen there, in a state associated with a period, and the behavior of other agents at the time. If these conditions do not change, the statistical validation is an important advantage. But sensitivity to shocks is flawed, in a way which is difficult to measure.

 

From Macroeconomic Modeling in the Policy Process: A Review of Tools Used at the Federal Reserve Board and Their Relation to Ongoing Research

models-1models-2models-3

 

From Macroeconomic Modeling in the Policy Process: A Review of Tools Used at the Federal Reserve Board and Their Relation to Ongoing Research

models-4

 

USA Central Bank Models

A. FRB Models (Neo Classical)

  • MPS ( MIT-PENN-FRB)
  • FRB/US (since 1996)
  • FRB/MCM
  • FRB/WORLD
  • FRB/EDO
  • SIGMA
  • VAR Models
  • Accelerator Models

B.  FRB/NY DSGE Model

C.  FRB/Chicago DSGE Model

D. FRB/Philadelphia DSGE Model – PRISM

 

 

Newer Central Bank Models

From Macroeconomic Models for Monetary Policies: A Critical Review from a Finance Perspective

There has been a remarkable evolution of macroeconomic models used for monetary policy at major central banks around the world, in aspects such as model formulation, solution methods, estimation approaches, and importantly, communication of results between central banks. Central banks have developed many different classes and variants of macroeconomic models in the hopes of producing a reliable and comprehensive analysis of monetary policy. Early types of models included quantitative macroeconomic models1, reduced-form statistical models, structural vector autore- gressive models, and large-scale macroeconometric models, a hybrid form combining the long-run structural relationships implied by a partial equilibrium treatment of theory (e.g., the decision rule for aggregate consumption) and reduced-form short-run relationships employing error-correcting equations.

Over the past 20 years in particular, there have been significant advances in the specification and estimation for New Keynesian Dynamic Stochastic General Equilibrium (New Keynesian DSGE) models. Significant progress has been made to advance policymaking models from the older static and qualitative New Keynesian style of modeling to the New Keynesian DSGE paradigm. The New Keynesian DSGE model is designed to capture real world data within a tightly structured and self-consistent macroeconomic model. The New Keynesian DSGE model has explicitly theoretical foundations, allowing it to circumvent the Sims Critique (see Sims, 1980) and the Lucas Critique (see Lucas, 1976), and therefore it can provide more reliable monetary policy analysis than earlier models. A consensus baseline New Keynesian DSGE model has emerged, one that is heavily influenced by estimated impulse response functions based on Structural Vector Autoregression (SVAR) models. In particular, a baseline New Keynesian DSGE model has recently been shown by Christiano et al. (2005) to successfully account for the effects of a monetary policy shock with nominal and real rigidities. Similarly, Smets and Wouters (2003, 2007) show that a baseline New Keynesian DSGE model can track and forecast time series as well as, if not better than, a Bayesian vector autoregressive (BVAR) model. New Keynesian DSGE models have been developed at many central banks, becoming a crucial part of many of their core models.2 Sbordone et al. (2010) have emphasized that an advantage of New Keynesian DSGE models is that they share core assumptions about the behavior of agents, making them scalable to relevant details to address the policy question at hand. For example, Smets and Wouters (2007) introduced wage stickiness and investment frictions into their model, Gertler et al. (2008) incorporated labor market search and wage bargaining, and Bernanke et al. (1999), Chari et al. (1995) and Christiano et al. (2008) studied the interaction between the financial sector and macroeconomic activity.

The devastating aftermath of the financial crisis and the Great Recession has prompted a rethink of monetary policy and central banking. Central bank monetary policy models face new challenges. Many macroeconomists (and in fact, many of the world’s leading thinkers) have called for a new generation of DSGE models. The first and foremost critique of the current state of the art of New Keynesian DSGE models is that these models lack an appropriate financial sector with a realistic interbank market, and as a result, the models fail to fully account for an important source of aggregate fluctuations, such as systemic risk. Second, the linkage between the endogenous risk premium and macroeconomic activity is crucial for policymakers to understand the transmission mechanism of monetary policy, especially in financially stressed periods. In models that lack a coherent endogenous risk premium, policy experiments become unreliable in stressed periods, and the model cannot provide a consistent framework for conducting experimental stress tests regarding financial stability or macroprudential policy. Third, heterogeneity among the players in the economy is essential to our understanding of inefficient allocations and flows between agents. These inefficiencies have an extremely important effect on the equilibrium state of the economy. Without reasonable heterogeneity among agents in models, there is no way to infer the distributional effects of monetary policy.

Finally, and perhaps most importantly in terms of government policy, a new generation of models is in strong demand to provide policymakers a unified and coherent framework for both conventional and unconventional monetary policies. For example, at the onset of the financial crisis, the zero lower bound went from a remote possibility to reality with frightening speed. This led central banks to quickly develop unconventional measures to provide stimulus, including credit easing, quantitative easing and extraordinary forward guidance. These unconventional measures demanded a proper platform to be analyzed. Furthermore, these unconventional monetary policies have blurred the boundary between monetary policy and fiscal policy. Through these policies, central banks gave preference to some debtors over others (e.g. industrial companies, mortgage banks, governments), and some sectors over others (e.g. export versus domestic). In turn, the distributional effects of monetary policy were much stronger than in normal times. As a result, these measures are sometimes referred to as quasi-fiscal policy. As Sims emphasized, a reliable monetary policy experiment cannot ignore the effect of ongoing fiscal policy. In order to implement unconventional measures during the crisis, central banks put much more risk onto government balance sheets than ever before, which had the potential to lead to substantial losses. Thus the government balance sheets in these models should be forward-looking, and its risk characteristics are crucial to the success of the model. 

 

 

Other Central Banks Models

From Macro-Econometric System Modelling @75

A fourth generation of models has arisen in the early 2000s. Representatives are TOTEM (Bank of Canada, Murchinson and Rennison, 2006), MAS (the Modelling and Simulation model of the Bank of Chile, Medina and Soto, 2005), GEM (the Global Economic Model of the IMF, Laxton and Pesenti, 2003), BEQM (Bank of England Quarterly Model, Harrison et al, 2004), NEMO (Norwegian Economic Model at the Bank of Norway, Brubakk et al, 2006), The New Area Wide Model at the European Central Bank, Kai et al, 2008), the RAMSES model at the Riksbank (Adolfson et al, 2007), AINO at the Bank of Finland (Kuismanen et al, 2003), SIGMA (Erceg et al, 2006) at the U.S. Federal Reserve, and KITT (Kiwi Inflation Targeting Technology) at the Reserve Bank of New Zealand, Beneˇs et al, 2009.

From Macroeconomic Models for Monetary Policies: A Critical Review from a Finance Perspective

  • the Bank of Canada (QPM, ToTEM),
  • the Bank of England (MTMM, BEQM),
  • the Central Bank of Chile (MAS),
  • the Central Reserve Bank of Peru (MEGA-D),
  • the European Central Bank (NAWM, CMR),
  • the Norges Bank (NEMO),
  • the Sveriges Riksbank (RAMSES),
  • the US Federal Reserve (SIGMA, EDO),
  • the Central Bank of Brazil,
  • the Central Bank of Spain,
  • the Reserve Bank of New Zealand,
  • the Bank of Finland,
  • and IMF (GEM, GFM and GIMF).

In particular, the Bank of Canada, the Bank of England, the Central Bank of Chile, the Central European Bank, the Norges Bank, the Sveriges Rikbank, and the U.S. Federal Reserve have incorporated New Keynesian DSGE models into their core models.

 

 

Other Institutions Models

  • USA CBO (Congressional Budget Office)
  • USA OMB ( Office of Management and Budget)
  • USA Department of Energy – EIA Models
  • USA Bureau of Economic Analysis (BEA) Model
  • University of Michigan RSQE Model
  • World Bank
  • UN
  • IMF
  • OECD
  • FAIR US and MC Model at Yale University

 

Other Governmental Agencies Models

  • PITM Model
  • MATH Model
  • KGB Model
  • TRIM Model
  • Claremont Model

 

Private Sector Forecasting Models

  • The Conference Board
  • Wells Fargo
  • JP Morgan
  • Citi
  • Oxford Economics
  • Moody’s Analytics
  • IHS Inc./Global Insight

 

Old Non Governmental Models

  • DRI (Data Resources Inc.)
  • Chase Econometrics
  • Wharton Econometrics

They all merged into an entity IHS, Inc.

In 1987 Wharton Econometric Forecasting Associates (WEFA) merged with Chase Econometrics, a competitor to DRI and WEFA,[13] and in 2001 DRI merged with WEFA to form Global Insight.[14][15] In 2008 Global Insight was bought by IHS Inc., thus inheriting 50 years of experience and more than 200 full-time economists, country risk analysts, and consultants. [16]

 

The following book is a good resource for Lists of Models used in various countries.

  • Macroeconometric Models By Władysław Welfe

 

 

Heterodox Models

 

  • System Dynamics Models
  • Stock Flow Consistent Models
  • Flow of Funds Models
  • Agent based Computational Models
  • Network Economics Approaches

 

From Can Disequilibrium Macroeconomic Models Be Used to Anticipate Financial Instability? A Case Study

Two other approaches to modeling the macroeconomy are flow-of-funds models and stock-flow consistent models, and a fourth is agent-based models. All trace unfolding processes rather than equilibrium snapshots, and are so evolutionary. SFC models also differ from DSGE models in that they aim to be financially complete (but obviously stylized) representations of the economy.

 

Please see my other posts on Heterodox Modeling.

Increasing Returns, Path Dependence, Circular and Cumulative Causation in Economics

Jay W. Forrester and System Dynamics

Micro Motives, Macro Behavior: Agent Based Modeling in Economics

Stock-Flow Consistent Modeling

Foundations of Balance Sheet Economics

Contagion in Financial (Balance sheets) Networks

 

 

Key People:

  • Jan Tinbergen
  • Lawrance Klein
  • Wassily Leontief
  • Tjalling Koopmans
  • Franco Modigliani
  • Kenneth Arrow
  • Trygve Haavelmo
  • T.W. Anderson
  • G. Debreu
  • Leonid Hurwitz
  • Harry Markowitz
Key Sources of Research:

 

 

Macroeconomic Models, Forecasting, and Policymaking

Andrea Pescatori and Saeed Zaman

http://www.relooney.com/NS3040/0_New_14947.pdf

 

 

The Evolution of Macro Models at the Federal Reserve Board

􏰃Flint Brayton, Andrew Levin, Ralph Tryon, and John C. Williams

Revised: February 7, 1997

https://www.federalreserve.gov/pubs/feds/1997/199729/199729pap.pdf

 

 

A Guide to FRB/US

A Macroeconomic Model of the United States

Macroeconomic and Quantitative Studies 􏰂 Division of Research and Statistics Federal Reserve Board Washington, D.C. 20551

version 1.0, October 1996

https://www.federalreserve.gov/pubs/feds/1996/199642/199642pap.pdf

 

 

The FRB/US Model: A Tool for Macroeconomic Policy Analysis

Flint Brayton, Thomas Laubach, and David Reifschneider

2014

https://www.federalreserve.gov/econresdata/notes/feds-notes/2014/a-tool-for-macroeconomic-policy-analysis.html

https://www.federalreserve.gov/econresdata/frbus/us-models-package.htm

https://www.federalreserve.gov/econresdata/frbus/us-documentation-papers.htm

https://www.federalreserve.gov/econresdata/frbus/us-technical-qas.htm

https://www.federalreserve.gov/econresdata/notes/feds-notes/2014/november-2014-update-of-the-frbus-model-20141121.html

 

 

Estimated Dynamic Optimization (EDO) Model

https://www.federalreserve.gov/econresdata/edo/edo-models-about.htm

https://www.federalreserve.gov/econresdata/edo/edo-model-package.htm

https://www.federalreserve.gov/econresdata/edo/edo-documentation-papers.htm

 

 

The FRBNY DSGE Model

Marco Del Negro Stefano Eusepi Marc Giannoni Argia Sbordone Andrea Tambalotti Matthew Cocci Raiden Hasegawa M. Henry Linder

 

2013

https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr647.pdf

 

 

Can Disequilibrium Macroeconomic Models Be Used to Anticipate Financial Instability?

A Case Study

Dirk J. Bezemer

 

https://pdfs.semanticscholar.org/224f/a6d8daa2716892ed0984f8aa0882c6dccefc.pdf

 

 

Central Bank Models:Lessons from the Past and Ideas for the Future

John B. Taylor

November 2016

http://web.stanford.edu/~johntayl/2016_pdfs/Text_Keynote_BoC_Workshop_Taylor-2016.pdf

 

 

DSGE models and central banks

by Camilo E Tovar

2008

http://www.bis.org/publ/work258.pdf

 

 

Macro-Finance Models of Interest Rates and the Economy

Glenn D. Rudebusch∗
Federal Reserve Bank of San Francisco

https://pdfs.semanticscholar.org/6b60/3c8c75a3daa52749dd4ade71f9ae1642f9aa.pdf

 

 

Panel Discussion on Uses of Models at Central Banks

ECB Workshop on DSGE Models and Forecasting September 23, 2016

John Roberts

 

https://www.ecb.europa.eu/pub/conferences/shared/pdf/20160922_dsge/Roberts_Panel_discussion.pdf

 

 

The Chicago Fed DSGE Model

Scott A. Brave Jerey R. Campbell  Jonas D.M. Fisher  Alejandro Justiniano

August 16, 2012

https://www.chicagofed.org/publications/working-papers/2012/wp-02

 

 

Macroeconomics and consumption: Why central bank models failed and how to repair them

John Muellbauer

21 December 2016

http://voxeu.org/article/why-central-bank-models-failed-and-how-repair-them

 

 

Model Comparison and Robustness: A Proposal for Policy Analysis after the Financial Crisis

Volker Wieland

1st Version: November 28, 2010 This Version: March 21, 2011

 

http://www.macromodelbase.com/fileadmin/user_upload/documents/Wieland_CournotConf_110321.pdf

 

 

TOBIN LIVES: INTEGRATING EVOLVING CREDIT MARKET ARCHITECTURE INTO FLOW OF FUNDS BASED MACRO- MODELS

John Duca and John Muellbauer

September 2012

 

http://www.economics.ox.ac.uk/materials/papers/12225/paper622.pdf

 

 

FRB/US Equations Documentation

http://www.petertulip.com/frbus_equation_documentation.pdf

 

 

Challenges for Central Banks’ Macro Models

Jesper Lindé, Frank Smets and Rafael Wouters

2016

 

http://www.riksbank.se/Documents/Rapporter/Working_papers/2016/rap_wp323_160512.pdf

 

 

Central Bank Models: Lessons from the Past and Ideas for the Future

John B. Taylor

2016

 

http://www.bankofcanada.ca/wp-content/uploads/2016/12/central-bank-models-lessons-past.pdf

 

 

Lawrence R. Klein: Macroeconomics, econometrics and economic policy􏰑

Ignazio Visco

2014

 

http://economics.sas.upenn.edu/sites/economics.sas.upenn.edu/files/u4/Visco_Klein_2014.pdf

 

 

Macro-Econometric System Modelling @75

Tony Hall  Jan Jacobs Adrian Pagan

http://www.ncer.edu.au/papers/documents/WP95.pdf

 

 

The Econometrics of Macroeconomic Modelling

Gunnar Ba ̊rdsenØyvind Eitrheim Eilev S. Jansen Ragnar Nymoen

http://folk.uio.no/rnymoen/master210104.pdf

 

 

The Macroeconomist as Scientist and Engineer

N. Gregory Mankiw

May 2006

 

http://scholar.harvard.edu/files/mankiw/files/macroeconomist_as_scientist.pdf?m=1360042085

 

 

 Macroeconometric Models

By Władysław Welfe

 

 

HISTORY OF MACROECONOMETRIC MODELLING: LESSONS FROM PAST EXPERIENCE

Abbas Valadkhani

 

http://eprints.qut.edu.au/385/1/Valadkhani_131.pdf

 

 

ECONOMETRICS: AN HISTORICAL GUIDE FOR THE UNINITIATED

by D.S.G. Pollock

University of Leicester

http://www.le.ac.uk/economics/research/RePEc/lec/leecon/dp14-05.pdf

 

 

RBI-MSE Joint Initiative on Modeling the Indian Economy for Forecasting and Policy Simulations

N R Bhanumurthy NIPFP, New Delhi, India

 

http://www.mse.ac.in/wp-content/uploads/2016/09/Model-1.pdf

 

 

ECONOMIC MODELS

 

http://pages.hmc.edu/evans/chap1.pdf

 

 

MACROECONOMIC MODELLING OF MONETARY POLICY

BY MATT KLAEFFLING

SEPTEMBER 2003

https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp257.pdf?62a2706261fcf6fb02a681c780f3408f

 

 

Macroeconomic Modeling in India

N R Bhanumurthy NIPFP, New Delhi, India

 

http://www.unescap.org/sites/default/files/India-Macroeconomic%20modeling%20in%20India.pdf

 

 

Macroeconomic Modeling in the Policy Process: A Review of Tools Used at the Federal Reserve Board and Their Relation to Ongoing Research

 

Michael Kiley

 

http://www.bcb.gov.br/secre/apres/Apresentação%20Michael%20Kiley.pdf

 

 

Policy Analysis Using DSGE Models: An Introduction

Argia M. Sbordone, Andrea Tambalotti, Krishna Rao, and Kieran Walsh

2010

 

https://www.newyorkfed.org/medialibrary/media/research/epr/10v16n2/1010sbor.pdf

 

 

DSGE Model-Based Forecasting

Marco Del Negro Frank Schorfheide

Staff Report No. 554 March 2012

 

https://pdfs.semanticscholar.org/7597/2761a45dbc2a4b57990d250adb8ae846129f.pdf

 

 

The Use of (DSGE) Models in Central Bank Forecasting: The FRBNY Experience

Marco Del Negro

 

https://www.ecb.europa.eu/pub/conferences/shared/pdf/20160922_dsge/DelNegro_DSGE_forecasting_panel.pdf

 

 

Modern Macroeconomic Models as Tools for Economic Policy

Narayana Kocherlakota

 

https://www.minneapolisfed.org/~/media/files/pubs/region/10-05/2009_mplsfed_annualreport_essay.pdf

 

 

STRUCTURAL ECONOMETRIC MODELLING: METHODOLOGY AND TOOLS WITH APPLICATIONS UNDER EVIEWS

 

http://www.eviews.com/StructModel/structmodel.pdf

 

 

Macroeconomic Models for Monetary Policies: A Critical Review from a Finance Perspective∗

Winston W. Dou †, Andrew W. Lo‡, and Ameya Muley

This Draft: March 12, 2015

https://bfi.uchicago.edu/sites/default/files/research/MacroFinanceReview_v11_DLM.pdf

 

 

Lawrence R. Klein 1920-2013: Notes on the early years

Olav Bjerkholt, University of Oslo

 

 

A History of Macroeconomics from Keynes to Lucas and Beyond

 

By Michel De Vroey

2016

 

 

Economic Theory, Model Size, and Model Purpose

John B Taylor

Chapter in a Book Large Scale Macroe conomtric Models

1981

 

Economic Growth Theories – Orthodox and Heterodox

Economic Growth Theories – Orthodox and Heterodox

My humble  attempt to make sense of Economic Growth Theories.

 

Economic Growth (Trend) and Business Cycles ( Fluctuations)

Growth- Cycles

Economists distinguish between short-run economic changes in production and long-run economic growth. Short-run variation in economic growth is termed the business cycle. Generally, economists attribute the ups and downs in the business cycle to fluctuations in aggregate demand. In contrast, economic growth is concerned with the long-run trend in production due to structural causes such as technological growth and factor accumulation.

 

economic-growth-5

Types of Models

  • Economic Cycles Vs Business Cycles Vs Financial Cycles
  • Economic Growth , Business Growth, Financial Growth
  • Equilibrium Vs. Non Equilibrium
  • Deterministic vs Stochastic
  • Linear Vs Non Linear Models

 

From Introduction to Post Keynesian Economics / Lavoie

economic-schools

 

Classical and Neo Classical Growth Models

(Equilibrium Models) – Supply Side / No aggregate demand -Say Law

  • Wassily Leontief – Input-Output Linear Models
  • John Von Neumann
  • Cass – T Koopmans
  • Solow Swan Growth Model
  • Ramsey Model
  • Endogenous Growth Theory
    • Robelo – AK Model
    • Uzawa – Lucas Model
    • Romer Model
    • Jones Model
    • Grossman Helpman
    • Aghion and Howitt
    • Barro
  • DSGE Models
  • Real Business Cycles

 

Classical/Neo Classical /Monetarists/Neo Keynesian  Economists

  • Alfred Marshall
  • Leon Walrus
  • Irving Fisher
  • Paul Samuelson – Multiplier Accelerator
  • John Maynard Keynes
  • Alvin Hansen – IS-LM Framework
  • AW Phillips
  • Robert M Solow – Neo Classical Growth Model
  • Trevor W Swan
  • Paul Romer – Endogenous Growth Theory
  • Robert Lucas, Jr.
  • Milton Friedman
  • James Tobin
  • John G Gurley
  • Edward S Shaw
  • Knut Wicksell 
  • Franco Modigliani
  • James Meade
  • Luigi Pasinetti
  • Piero Sraffa

 

Keynesian Growth Models

Role of Aggregate Demand

  • John M Keynes Model
  • Harrod Domar Model
  • Hicks – Hansen IS-LM Model
  • AD-AS
  • Tobin’s Model
  • New Keynesian Models
  • Non Walrasion Equilibrium models
  • Phillips Curve

 

economic-growth-2economic-growth-3economic-growth-theory

 

economic-growth-4

 

Heterodox Schools

  • Institutionalist
  • Cambridge Keynesians
  • American Post Keynesians
  • Evolutionary Economics
  • Complexity School/Santa Fe
  • System Dynamics
  • Behavioral Economics
  • Austrian Economics
  • Ecological Economics

 

Cambridge/Oxford Keynesians

(Dynamic/Business Cycles/Non Linear Models)

  • N. Kaldor
  • J Robinson
  • M. Kalecki
  • John Hicks
  • Roy Harrod

 

Post Keynesians

  • Evsey Domar
  • Hyman Minsky
  • Steve Keen
  • Marc Lavoie
  • Richard Werner
  • Perry Mehrling
  • Morris Copeland
  • Wynn Godley
  • Dirk Bezemer
  • Paul Davidson
  • Mark Setterfield
  • Steve Pressman
  • Basil Moore
  • Tom Palley
  • LP Rochon
  • L Randall Ray
  • Eckhard Hein
  • G C Harcourt
  • G Fontana
  • J King
  • AK Dutt
  • Stephanie Kelton
  • Scott Fullwiler
  • Lance Taylor
  • Geoffrey Hodgson
  • Alfred Eichner

     

Evolutionary School / Institutionalist School

(Increasing Returns/Circular and Cumulative Causation)

  • Karl Marx
  • R M Goodwin
  • J Schumpeter
  • Ken Boulding
  • T Veblen
  • Gunnar Myrdal

 

Complexity/Santa Fe

  • Scott Page
  • W Brian Arthur
  • Doyne Farmer

 

System Dynamics

  • John Sterman
  • Jay Forrester
  • Khalid Saeed
  • M Radzicki
  • K Yamaguchi
  • N Forrester
  • Tom Fiddaman
  • David Wheat
  • Peter Senge

 

Austrian Economics

  • F Hayak
  • Ludwig Von Mises
  • Murray Rothbard

 

 

Heterodox Growth Models

  • Kaldor
    • Dixen and Thirlwall
  • Kalecki
    • AK DUTT
    • Marglin
    • Rawthorn
  • Harris
  • Sweezy

 

Heterodox / Post Keynesian School – Ideas

  • Debt Deflation of Irving Fisher
  • Financial Stability Hypothesis of Hyman Minsky
  • Credit/Debt Cycles of Steve Keen
  • Stock Flow Consistent (Accounting) Models of Marc Lavoie and Wynn Godley
  • Joseph Schumpeter – Innovation/Creative Destruction
  • Richard Werner – Disaggregated Credit – Financial vs Real 
  • Perry Mehrling / Zoltan Pozsar – Money View
  • Morris Copeland – Flow of Funds
  • Austrian School – Hayak / Von Mises / Rothberg
  • Dirk Bezemer – Money as Credit / Accounting Models
  • Richard Koo – Balance sheet Recession
  • Quadruple Accounting / Interlocking Balance sheets
  • Asset Liability Matrix Analysis – K Tsujimura
  • Financial Social Accounting Matrix (F-SAM)
  • Monetary Circuit
  • Banks as Payment System
  • Banks as Market Makers (Dealers)
  • Liquidity – Solvency Nexus
  • Central Banks as Lender and Dealer of Last Resort
  • Focus on Disaggregated / Operational/Horizontal View of Banks and Central Banks and Financial Markets.

 

 

From Growth theory after Keynes, part I: the unfortunate suppression of the Harrod-Domar model

After Harrod and Domar independently developed a dynamic Keynesian circular flow model to illustrate the instability of a growing economy, mainstream economists quickly reduced their model to a supply side-only growth model, which they subsequently rejected as too simplistic and replaced with Solow’s neoclassical growth model. The rejection process of first diminishing the model and then replaced it with a neoclassical alternative was similar to how the full Keynesian macroeconomic paradigm was diminished into IS-LM analysis and then replaced by a simplistic neoclassical framework that largely ignored the demand side of the economy. Furthermore, subsequent work by mainstream economists has resulted in a logically inconsistent framework for analyzing economic growth; the popular endogenous growth models, which use Schumpeter’s concept of profit-driven creative destruction to explain the technological change that Solow left as exogenous, are not logically compatible with the Solow model.

 

From Institutional Economics, Post Keynesian Economics, and System Dynamics: Three Strands of a Heterodox Economics Braid

A. Lineage of Institutional Economics

In Figure 1, the intellectual lineage leading to the present-day school of institutional economics begins with Quesnay and Smith and follows two principal routes. The first runs through Ricardo and Marx and then through the “American institutionalists” Veblen, Commons, and Mitchell. The last link in this route passes through Clarence Ayres, Galbraith, and Myrdal. The second or “thermodynamics/general systems” route runs through Ricardo and Marx, passes through Schumpeter (1976), and links with Boulding (1970, 1978, 1991), Georgescu-Roegen (1971), and Robert Ayres (1978). This route has also been influenced by the cybernetics of Norbert Wiener (1948). Figure 1 also shows, via two-way arrows, four schools of thought that directly complement institutional economics: Post Keynesian economics, behavioral economics, ecological economics, and evolutionary economics. An argument can be made, however, that a two-way arrow between agent-based computational economics and institutional economics should be included as well.

 

B. Lineage of Post Keynesian Economics

Figure 1 presents one direct route and two main “directions of flow,” each incorporating several routes, that lead to the modern Post Keynesian school of economics. The direct route simply runs from Quesnay and Marx to Leontieff and then to the Post Keynesian school because input-output analysis is frequently used by Post Keynesian economists. On the other hand, the first main direction of flow runs through the Cambridge Post Keynesians (e.g., Robinson, Kaldor, Passinetti) and the founders of American Post Keynesian school (e.g., Weintraub, Davidson, Eichner, Minsky). This direction is traversed by way of Quesnay, Marx, and Kalecki or via Smith, Malthus, Keynes, Harrod, and Domar. The second main direction of flow runs through those economists who pioneered the “engineering systems” approach to economics such as Tustin (1953), Phillips (1950, 1954,1957), Allen (1955), Goodwin,10 and Leijonhufvud (1968).11 This direction is traversed via: (1) Keynes directly, (2) early Keynesian business cycle theorists such as Harrod, Hicks and Samuelson, (3) Hayek, because Post Keynesians such as Kaldor had their thinking influenced to some degree by Austrian economics, and (4) Schumpeter, because Goodwin both taught, and was taught by, Schumpeter [see Goodwin (1993, p. 305)].

 

C. Lineage of Ecological Economics

 

In Figure 1, the intellectual lineage leading to the present-day school of ecological economics begins with Quesnay and Smith and follows three principal routes. The first runs through Malthus and then directly to Costanza and Daly (1992). The second runs through Quesnay and then through Leontieff. The third runs through Ricardo and Marx and then passes through Schumpeter. In terms of complementary schools of thought, both evolutionary economics and institutional economics are linked to ecological economics with a two- way arrow. An argument can be made, however, that a two-way arrow between ecological economics and agent- based computational economics should be added because the emergence and evolution of social structures such as property rights and environmental valuations and norms, that are crucial to avoiding “tragedy of the commons” and other non-sustainable dynamics, can be identified and studied.

 

D.  Agent Based Computational Economics/Complexity/Santa Fe Institute

In Figure 1, there are several routes that lead to the present -day school of agent -based computational economics. The main route runs from John von Neumann and his work on self-replicating machines during the nineteen forties directly to the agent-based school; via John Nash and then Thomas Schelling [due to Schelling’s (1978) path-breaking agent-based work on the emergence of racially segregated neighborhoods]; or via some of von Neumann’s present-day followers such as John Holland [Holland and Miller (1991)], Stuart Koffman, John Miller (1998), W. Brian Arthur (1993, 1994), and Christopher Langton (1989).20 Leigh Tesfatsion (1997, 2000, 2001a, 2001b, 2002), Robert Axtell, Joshua Epstein, Robert Axelrod and David Lane (1993) would also be legitimately included in this group. Most of these modern day researchers have ties to the Santa Fe Institute, an organization specializing in the study of complex systems.21  One of the leaders of the Sante Fe Institute, W. Brian Arthur (1988, 1990), has written extensively about being influenced by economists who emphasized the importance of positive feedback loops, increasing returns, and path dependency, in explaining evolutionary economic behavior. As a result, in Figure 1 links to Arthur run from Nicholas Kaldor (1981), Gunnar Myrdal, Paul David (1985), and Ilya Progogine (1993).

 

E.  Lineage of Behavioral Economics

In Figure 1, the intellectual lineage leading to the present-day school of behavioral economics begins with Quesnay, Smith, and Ricardo and follows three principal routes. The first runs through Marx, to Dobb, Baran, Sweezy and Mandel, and then through some more modern-day radical political economists such as Sherman, Weiskopf, Bowles [Bowles, Ginits and Osborne (2001)], Foley (1997), and Marglin (1984). The second runs through Marx and then through Schumpeter, passes through Richard Day (1975) [see also Day and Eliasson (1986) and Day and Chen (1993)], and then through George Akerlof, Richard Thayler, and Robert Frank. The third runs through Veblen, Commons and Mitchell and then through Duesenberry and Simon (1957, 1979, 1984). It continues directly through Ackerlof, Thayler and Frank and also takes a side branch through Cyert and March (1963). This last route emphasizes the contributions to behavioral economics of the “Carnegie School” and the work of Herbert Simon. Indeed, Simon is considered to be the father of the field and frequently wrote that his thinking on bounded rationality was influenced by the work of John Commons [e.g., Simon (1979, p. 499; 1991, p. 87)].

 

F.  Lineage of Austrian Economics

In Figure 1, the intellectual lineage leading to the present-day school of Austrian economics begins with Quesnay, Smith and Ricardo and works its way to Carl Menger via Say and Mill. This route continues via Menger’s most prominent disciples Böhm-Bawerk and Wieser to Mises and then to his student Hayek.27 From Hayek, the route extends to the more modern-day Austrians such as Israel Kirzner (1987, 1997) and Murray Rothbard and finally to the school itself. A two-way arrow is shown between the Austrians and agent-based computational economics because many of Mises’ and Hayek’s beliefs are in harmony with central tenets of agent-based modeling. Indeed, Vriend (2002) lays out a strong case that Hayek was essentially an agent-based computational economist.

 

G.  Lineage of Evolutionary Economics

In Figure 1, the intellectual lineage leading to the present-day school of evolutionary economics begins with Quesnay and Smith and follows several routes. The first runs through both Marx and Schumpeter and then through economic historians such as David (1985) and Rostow (1990). The second runs through Schumpeter and the neo-Schumpeterians such as Nelson (1995), Winter (1964), Witt (1992, 1993), Iawi (1984a, 1984b), Eliasson, Silverberg (1988), and Dosi [and Nelson (1994)]. The third runs through Schumpeter and then the far-from-equilibrium thermodynamicists [Prigogine (1993), Nicolis, Allen (1988)] and the punctuated equilibrium theorists [Tushman and Romanelli (1985)], and finally through England (1994), who notes that he was inspired by Boulding (1970, 1978, 1991), Georgescu-Roegen (1971), and Prigogine (1993). The fourth runs through Schumpeter and the classical thermodynamicists [Georgescu-Roegen (1971), Ayres (1978)], and then through England (1994), or directly to the school. Two-way arrows indicating complementary schools of thought are drawn between all of the other evolutionary schools except the Austrians.

 

 

Key sources of Research:

 

A Contribution to Theory of Economic Growth

Robert Solow

1956

https://www.econ.nyu.edu/user/debraj/Courses/Readings/Solow.pdf

 

 

On the Concept of Optimal Economic Growth

T Coopmans

 

http://cowles.yale.edu/sites/default/files/files/pub/d01/d0163.pdf

 

Interactions between the Multiplier Analysis and the Principle of Acceleration

Paul A. Samuelson

The Review of Economics and Statistics
Vol. 21, No. 2 (May, 1939), pp. 75-78

 

 

ON THE MECHANICS OF ECONOMIC DEVELOPMENT

Robert E. LUCAS, Jr.

 

http://www.parisschoolofeconomics.eu/docs/darcillon-thibault/lucasmechanicseconomicgrowth.pdf

 

 

Increasing Returns and Long-Run Growth

Paul M. Romer

 

http://ihome.ust.hk/~dxie/OnlineMacro/romerjpe1986.pdf

 

 

‘Growth theory after Keynes, part I: the unfortunate suppression of the Harrod-Domar model’

Van den Berg, Hendrik

(2013)

The Journal of Philosophical Economics, VII:1

 

http://www.jpe.ro/pdf.php?id=4995

 

 

‘Growth theory after Keynes, part II: 75 years of obstruction by the mainstream economics culture’

Van den Berg, Hendrik

(2014)

The Journal of Philosophical Economics, VII:2

 

http://jpe.ro/pdf.php?id=6300

 

 

The Neoclassical Growth Model and Twentieth-Century Economics

Mauro Boianovsky and Kevin D. Hoover

http://public.econ.duke.edu/~kdh9/Source%20Materials/Research/Boianovsky-HooverIntroductionGrowth.pdf

 

 

TREVOR SWAN AND THE NEOCLASSICAL GROWTH MODEL

Robert W. Dimand and Barbara J. Spencer (née Swan)

 

http://www.nber.org/papers/w13950.pdf

 

 

The History of Macroeconomics from Keynes’s General Theory to the Present

Michel De Vroey and Pierre Malgrange

June 2011

 

http://sites.uclouvain.be/econ/DP/IRES/2011028.pdf

 

 

Keynes and the Cambridge School

G. C. Harcourt and Prue Kerr

 

https://historiadelamacroeconomia.wikispaces.com/file/view/Chapter22.pdf

 

 

NEW GROWTH THEORY, EFFECTIVE DEMAND, AND POST-KEYNESIAN DYNAMICS

Amitava Krishna Dutt

September 2001

 

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.463.871&rep=rep1&type=pdf

 

 

A Brief Introduction to Post Keynesian Macroeconomics

J. E. King

2013

 

http://wug.akwien.at/WUG_Archiv/2013_39_4/2013_39_4_0485.pdf

 

 

CONTEMPORARY ECONOMIC GROWTH MODELS AND THEORIES: A LITERATURE REVIEW

Ilkhom SHARIPOV

 

http://www.ceswp.uaic.ro/articles/CESWP2015_VII3_SHA.pdf

 

 

The structure of growth models: A comparative survey

Antonio D’Agata

Giuseppe Freni

 

http://growthconf.ec.unipi.it/papers/DAgataFreni.pdf

 

 

Major Schools of Economic Theory

 

http://www.tamut.edu/Walter-Casey/DOCUMENTS/CV-and-papers/Economic%20Theory.pdf

 

 

Getting rid of Keynes? A survey of the history of macroeconomics from Keynes to Lucas and beyond

 

Michel De Vroey

2010

 

https://www.nbb.be/doc/oc/repec/reswpp/wp187en.pdf

 

 

Neoclassical Growth Theory and Heterodox Growth Theory: Opportunities For and Obstacles To Greater Engagement

Mark Setterfield

December 2009

 

http://internet2.trincoll.edu/repec/WorkingPapers2009/wp09-01.pdf

 

 

Endogenous Growth: A Kaldorian Approach

Mark Setterfield

2010

 

https://pdfs.semanticscholar.org/bea6/c7a330e8859a2fd6bf09043e864ac71bbe92.pdf

 

 

Financialization in Kaleckian economies with and without labor constraints

Soon Ryoo and Peter Skotty

18th March 2008

 

https://www.umass.edu/economics/publications/2008-05.pdf

 

 

Post-Keynesian macroeconomics since the mid-1990s – main developments

Eckhard Hein

Working Paper, No. 75/2016

Institute for International Political Economy Berlin

 

 

Aggregate Demand, Aggregate Supply and Economic Growth

AMITAVA KRISHNA DUTT

2006

 

http://piketty.pse.ens.fr/files/Dutt2006.pdf

 

 

A dynamic synthesis of basic macroeconomic theory: implications for stabilization policy analysis

Forrester, N. B.

(1982).

(Doctoral dissertation, M. I. T., Alfred P. Sloan School of Management).

 

 

The System Dynamics National Model

Jay Forrester

http://systemsmodelbook.org/uploadedfile/1470_0a924c5b-b909-42fa-be9b-932588278f36_forre004.pdf

 

 

Understanding Recent Developments in Growth Theory

Lars Weber

 

https://www.systemdynamics.org/conferences/2007/proceed/papers/WEBER326.pdf

 

 

Linking Economic Modeling and System Dynamics: A Basic Model for Monetary Policy and Macroprudential Regulation

 

Klaus Dieter John

 

https://www.systemdynamics.org/conferences/2012/proceed/papers/P1396.pdf

 

 

System Dynamics and Its Contribution to Economics and Economic Modeling

M Radzicki

https://www.researchgate.net/publication/227167378_System_Dynamics_and_Its_Contribution_to_Economics_and_Economic_Modeling

 

 

Evolutionary Economics and System Dynamics

M Radzicki

J Sterman

http://www.systemdynamics.org/conferences/1993/proceed/radzi338.pdf

 

 

A Post Keynesian Model of Macroeconomic Growth, Instability, and Income Distribution

M Radzicki and K Saeed

http://www.systemdynamics.org/conferences/1993/proceed/saeed435.pdf

 

 

Institutional Economics, Post Keynesian Economics, and System Dynamics: Three Strands of a Heterodox Economics Braid

M Radzicki

2008

https://www.researchgate.net/publication/237138677_Institutional_Economics_Post_Keynesian_Economics_and_System_Dynamics_Three_Strands_of_a_Heterodox_Economics_Braid

 

 

Was Alfred Eichner a System Dynamicist?

M Radzicki

2006

https://www.researchgate.net/publication/239920399_Was_Alfred_Eichner_a_System_Dynamicist

 

 

Mr. Hamilton, Mr. Forrester and a Foundation for Evolutionary Economics

Michael J. Radzicki

2004

 

http://www.systemdynamics.org/conferences/2003/proceed/PAPERS/923.pdf

 

 

Disequilibrium Systems Representation of Growth Models—Harrod-Domar, Solow, Leontief, Minsky, and Why the U.S. Fed Opened the Discount Window to Money-Market Funds

Frederick Betz

 

http://file.scirp.org/pdf/ME_2015120814432915.pdf

 

 

An Institutional Dynamics Model of the Euro zone crisis: Greece as an Illustrative Example

Domen Zavrl
Miroljub Kljajić

2010

 

http://www.systemdynamics.org/conferences/2010/proceed/papers/P1144.pdf

 

 

“Deterministic chaos in an experimental economic system.”

Sterman, John D.

Journal of Economic Behavior & Organization 12.1 (1989): 1-28.

https://dspace.mit.edu/bitstream/handle/1721.1/47164/deterministicchax00ster.pdf?sequence=1

 

 

NONLINEAR MODE-INTERACTION IN THE MACROECONOMY

Erik MOSEKILDE, Erik REIMER LARSEN, John D. STERMAN

and Jesper SKOVHUS THOMSEN

1992

 

https://www.researchgate.net/profile/John_Sterman2/publication/225978240_Nonlinear_Mode-Interaction_in_the_Macroeconomy/links/5733372708ae298602dce4ba.pdf

 

 

Devil’s staircase and chaos from macroeconomic mode interaction

Larsen, Erik Reimer, et al.

Article in Journal of Economic Dynamics and Control ·

February 1993

 

https://www.researchgate.net/profile/Erik_Mosekilde/publication/4830250_Devil’s_staircase_and_chaos_from_macroeconomic_mode_interaction/links/5789dd4908ae59aa6676bfe6.pdf

 

 

Mode‐locking and entrainment of endogenous economic cycles.

Haxholdt, C., Kampmann, C., Mosekilde, E., & Sterman, J. D.

System Dynamics Review, 11(3), 177-198.

(1995).

https://dspace.mit.edu/bitstream/handle/1721.1/48535/modelockingentra00haxh.pdf?sequence=1