Peter Skott

Stagflationary Consequences of Prudent Monetary Policy in a Unionized Economy

Peter Skott — Wed, 19 Sep 2012 11:48:51 PDT

Stylised models of the policy game between monetary policy makers and the private sector have suggested that discretionary policy regimes suffer from an inherent inflationary bias and that pre-commitment to a target rate of inflation may be desirable. This paper shows that in the presence of labour unions, the monetary policy game can lead to radically different results: a central bank that is completely indifferent to the level of inflation may obtain outcomes with high employment rates and zero inflation while 'prudent', inflation-averse, central banks generate stagflation with positive inflation and low rates of employment

Economic divergence and institutional change: some observations on the convergence literature

Peter Skott — Wed, 19 Sep 2012 11:44:32 PDT

Poor economic performance in a country will often lead to changes in the domestic policies and institutions, political instability, or changes in international relations. Induced institutional change of this kind affects the interpretation of the empirical evidence on economic convergence: a divergent process may be stabilized by institutional and political intervention. Stabilization may result even if the effects of each intervention are stochastic and the expected value of the benefits from each reform is non-positive. Thus, the appearance of conditional convergence may carry no implications for ’the underlying parameters of technology and preferences.’ ©1999 Elsevier Science B.V. All rights reserved.

Paradoxical effects of drug policy in a model with imperfect competition and switching costs

Peter Skott et al. — Wed, 19 Sep 2012 11:39:22 PDT

This paper presents a stylized model of the market for hard drugs. We assume that there is imperfect competition, that the demand side is dominated by addicts, and that the presence of switching costs leads to consumer loyalty. Drug policies affect the values of the parameters of the model, including the degree of consumer loyalty and the static price elasticity of demand. Taking into account these effects, it is shown that tough policies may lead to an increase in the marketing activities by suppliers and cause a long-run increase in the number of addicts and total consumption.

Comments on "Integrated Keynesian disequilibrium dynamics"

Peter Skott — Wed, 19 Sep 2012 11:28:19 PDT

This comment on Asada et al.’s paper discusses the contrast between ‘integrated Keynesian disequilibrium dynamics’ (IKDD) and New Keynesian theory. Two areas are singled out: the treatment of stability issues and the approach to behavioral foundations. IKDD present a sophisticated stability analysis and rightly avoid the New Keynesian obsession with microfoundations based on optimizing behavior. The IKDD program, however, might benefit if behavioral questions were given greater prominence.

A model of power-biased technological change

Peter Skott et al. — Wed, 19 Sep 2012 11:24:53 PDT

New technologies have allowed firms to monitor low-skill workers more closely, thus reducing the power of these workers. We show that this ‘power-biased’ change may generate rising wage inequality and increases in the work intensity and unemployment of low-skill workers.

Efficiency Mages. Mark-Up Pricing and Effective Demand

Peter Skott — Wed, 19 Sep 2012 10:46:51 PDT

The combination of an efficiency wage approach with the explicit consideration of pricinq and product market conditions leads to the existence of a unique NAIRU. The value of the NAIRU can be influenced by a variety of supply side policies but aqqreqate demand policies may also play a role. The effort function will be related to workers' waqe aspirations and if waqe aspirations depend on past outcomes of the distributional struqqle then an important element of hysteresis is introduced into the system. Expansionary demand policies which increase employment will be asaociated with unanticipated inflation. Real waqes will fall below the neqotiated level and this may cause a qradual shift in waqe aspirations and in the effort function.

Wage inequality and skill asymmetries

Peter Skott et al. — Wed, 19 Sep 2012 10:37:23 PDT

Using a simple model with two levels of skill, we assume that high skill workers who fail to get high skill jobs may accept low skill positions; low skill workers do not have the analogous option of filling high skill position. This asymmetry implies that an adverse, skill neutral shock to aggregate employment may cause an increase in wage inequality, both between and within skill categories, as well as an increase in unemployment, especially among low skill workers. Movements in productivity, unemployment and inequality may thus be linked to induced overeducation and credentialism.

An empirical evaluation of three post Keynesian models

Peter Skott et al. — Wed, 19 Sep 2012 10:16:34 PDT

Structuralist and post Keynesian models differ in their assumptions about firms’ investment behavior and pricing/output decisions. This paper compares three benchmark models: Kaleckian, Robinsonian and Kaldorian. We analyze the implications of these models for the steady growth path and the cyclical properties of the economy, and evaluate the consistency of the theoretical predictions with empirical evidence for the US. Our regression results and the stylized cyclical pattern of key variables are consistent with the Kaldorian model. The Kaleckian investment function and the Robinsonian pricing behavior find no support in the data.

Real exchange rates and the long‐run effects of aggregate demand in economies with underemployment

Peter Skott et al. — Wed, 19 Sep 2012 10:07:21 PDT

Successful economic development to a large extent derives from the mobilization of underemployed resources. Demand policy can play an important role. It is critical, however, to consider balance of payments constraints and to ensure an expansion of investment in the modern sector. A combination of investment promotion and exchange rate intervention may be required to achieve these goals.

Pluralism, the Lucas critique, and the integration of macro and micro

Peter Skott — Wed, 19 Sep 2012 09:58:44 PDT

Mainstream macroeconomics has pursued micro founded models based on the explicit optimization by representative agents. The result has been a long and wasteful detour. But elements of the Lucas critique are rele- vant, also for heterodox economists.

Keynesian Theory and the Aggregate-Supply/Aggregate-Demand Framework: A Defense

Peter Skott — Wed, 07 Mar 2012 09:40:58 PST

This paper defends the Aggregate-Supply/Aggregate-Demand framework against recent criticisms by Barro and others. Using four models - a neoclassical-synthesis Keynesian, a monetarists mark 1, a rational expectation/new classical, and a Kaleckian/post-Keynesian - based on this framework, it is shown that it provides an internally-consistent and potentially useful teaching tool, that Keynesian versions of it do follow some of Keynes's ideas, that a Kaleckian/post-Keynesian version is consistent with empirical data, and that the criticisms by Barro and others are unwarranted.

Clower on Effective Demand

Peter Skott et al. — Wed, 07 Mar 2012 09:38:26 PST

This note examine's Clower's recent criticisms of Keynes' theory of effective demand and argues that Keynes added much to Marshallian theory when he extended to the aggregate level, that his theory does have implications for unemployment without requiring wage rigidity, that his theory does not depend on the non-clearance of the good market, and the main difference between Keynes and the Keynesians concerns the consequences of wage-price flexibility.

Economic Explanation, Ordinality and the Adequacy of Analytic Specification

Peter Skott et al. — Wed, 07 Mar 2012 09:35:19 PST

This paper examines the implicit links between models containing ordinal variables and their underlying unquantified counterparts that are necessary to make the former viable theoretical constructions. It is argued that when the underlying unquantified structure is unknown, the permissible transformations of scale applicable to the ordinal variables have to be restricted beyond that which is permitted by dint of the ordinality itself. The possibility of an underlying structure being known but unspecified is also considered. In the case of the efficiency wage model, the only usable transformations of the ordinal effort scale are those which are multiples of each other.

Election campaigns, agenda setting and electoral outcomes

Peter Skott et al. — Wed, 07 Mar 2012 09:32:44 PST

Framing effects and bounded rationality imply that election campaigns may be an important determinant of election outcomes. This paper uses a two-party setting and simple game theoretic models to analyse the strategic interaction between the parties’ campaign decisions. Alternations of power emerge naturally, even if both electoral preferences and party positions remain constant

Fairness as a source of hysteresis in employment and relative wages

Peter Skott — Wed, 07 Mar 2012 09:30:44 PST

This paper analyses the influence of norms of fairness on wage formation. Fairness is defined by `real-wage' and `relative-wage' norms that relate wage offers to workers' own current wage and to the wages of other groups of workers, and, to avoid shirking, firms pay fair wages. The wage norms change endogenously, and the result is hysteresis with respect to both employment and the distribution of wages. An extension of the model that allows `induced overeducation' may help explain trends in wage inequality.

Steindlian Models of Growth and Stagnation

Peter Skott et al. — Wed, 07 Mar 2012 09:25:57 PST

This paper examines Steindl’s original 1952 model and relates it to subsequent stagnationist models. The model is then extended by introducing endogenous changes in the markup and a reformulation of the investment function. These extensions address weaknesses of the simpler models, find support in Steindl’s writing and leave intact some of Steindl’s key results. In a further extension, we add a labour market and analyse the stabilizing influence of a Marxian reserve-army mechanism. The implications of this model for the effects of increased monopolization are largely in line with Steindl’s predictions.

Japanese growth and stagnation: a Keynesian perspective

Peter Skott et al. — Wed, 07 Mar 2012 09:23:24 PST

This paper uses a modified Harrodian model to understand both the long period of rapid Japanese growth and the recent period of stagnation. The model has multiple steady-growth solutions when the labour supply is highly elastic, and government intervention, we argue, took the Japanese economy onto a high-growth trajectory. Labour constraints began to ap- pear around 1970, and a combination of high saving rates and slow popu- lation growth account for the stagnation of the 1990s. This combination produces a structural liquidity trap and threatens the sustainability of at- tempts to ensure near full employment through fiscal policy or by running a persistent trade surplus. JEL Categories: E12, E63, O53

Financialization in Kaleckian economies with and without labor constraints

Peter Skott et al. — Wed, 07 Mar 2012 09:08:54 PST

Macroeconomic implications of financialization

Peter Skott et al. — Wed, 07 Mar 2012 09:07:14 PST

A growing literature suggests that 'financialization' may weaken the performance of non-financial corporations and constrain the growth of ag- gregate demand. This paper evaluates (some of) the claims that have been made using two alternative approaches (one derived from Skott (1981, 1988, 1989) and one from Lavoie and Godley (2001-2002)) and two differ- ent settings (a labor-constrained setting and a dual-economy setting). All models pay explicit attention to financial stock-flow relations. The results are insensitive to the precise specification of household saving behavior but depend critically on the labor market assumptions (labor-constrained vs dual) and the specification of the investment function (Harrodian vs stagnationist). JEL Categories: E12, E21, E44

Wage Formation and the (Non-)Existence of the NAIRU

Peter Skott — Wed, 07 Mar 2012 08:24:39 PST

The influence of NAIRU theory on economic policy is both puzzling and unfortunate, especially in a European context. This paper shows that standard rationality assumptions and objective functions may fail to generate a well-defined NAIRU in a unionized economy. It then presents two simple models with endogenous wage aspirations. One version of the model produces a unique long-run NAIRU while the other implies the presence of aspiration-induced hysteresis in the employment rate. The hysteretic version seems preferable on theoretical grounds and - at a stylized level - this version also fits the empirical evidence better than the non-hysteretic version. The argument implies that an expansionary aggregate demand policy combined with temporary incomes policies may reduce European unemployment permanently without adverse inflationary consequences.