Structural Change in Post Keynesian Monetary Theory: A Non-Compensatory Disequilibrium Framework
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Abstract
Post Keynesian Economics has shifted away and even renegade from Keynes’ original research program, i.e., the Unemployment Equilibrium thesis, endogenous money and liquidity preference determination of interest rate in which money and uncertainty play a fundamental part. This paper attempts to bring back the Keynesian counter-revolution spirit into Post Keynesian Monetary Theory by introducing a Non-Compensatory Disequilibrium Framework (NCDF) that allows structural breaks in budget constraints that lead to a model where Walras’ Law does not hold.
Structural Change in Post Keynesian Monetary Theory: A Non-Compensatory Disequilibrium Framework
Dear author,
This paper presents an interesting account of Post-Keynesian monetary theory. The paper builds a model akin to a stock-flow consistent model to show disequilibrium in the money market.
I think the paper could be improved in many ways. The framework of the paper is very complex and a paper is not enough to discuss it in detail. To make it comprehensible to the general reader, the presentation should be much more detailed. The lack of space in a journal article would be hard to fit, maybe it could be the case to think of a book.
Another main issue is that it is never very clear why this presentation is more appropriate than other post-Keynesian models. The paper argues that it is different, but why should we prefer this to the horizontalists and/or structuralists?
I list below other issues that the paper could address that are not very clear. These are not in any particular order.
1.
What is the ‘structural change’ mentioned in the paper? Some discussions of structural relations only appear at the end of the paper, but are not obvious;
2.
The abstract of the paper emphasizes that ‘Walras’ Law does not hold’. But this is never explained clearly. The only mention to this comes in page 16 where it says “Yet, it can be shown26 that the money market is still in equilibrium and hence the excess supply in the bond market might not have a compensatory disequilibrium somewhere else in the system corroborating that Walras’ Law does not hold.” With a footnote saying “calculations were done using mathematica”. This is hardly a convincing argument that Walras’s law does not hold. If that is a main argument of the paper, it should be shown and not only alluded to;
3.
The paper does not engage much with the more modern approaches to post-Keynesian monetary theory. These tend to deal more with a monetary policy that fixes interest rates instead of controlling the supply of money;
4.
P. 9: “If it is further assumed that the government deficit (L + OP QP RSN − MN) and hence the supply of Bonds (ΔRN) is restricted to the willingness of the public to finance the deficit, any possible increase in reserves through this kind of fiscal policy will be ruled out.” I don’t follow the argument, how can this hold when households are indifferent between public and private bonds (p. 7)? How can the government be limited in its supply of bonds? The only reason I can think of is it more supply increases the risk, but the Keynesian tradition openly accepts the claim that governments can always finance any level of debt in their own currency;
5.
This leads me to another point. There seems to be some disregard for the basic Keynesian multiplier. Higher government spending should increase output and employment through the multiplier. Would this not create the demand for public bonds by itself?;
6.
P. 20: “if interest rates are still too high, the willingness to purchase bonds might be higher than the eagerness to obtain financing through bonds.”. I think this whole disequilibrium discussion only holds if the treasury limits the supply of bonds for some reason. If they supply as many bonds as the public demands like most of the literature nowadays accepts, there should be no mismatch.
I hope you will find these comments helpful to improve your paper.