An evolutionary theory of systemic risk and its mitigation for the global financial system

This thesis is the outcome of theory development research into an identified gap in knowledge about systemic risk of the global financial system. It takes a systems-theoretic approach, incorporating a simulation-constructivist orientation towards the meaning of theory and theory development, within a realist constructivism epistemology for knowledge generation about complex social phenomena. The specific purpose of which is to describe systemic risk of failure, and explain how it occurs in the global financial system, in order to diagnose and understand circumstances in which it arises, and offer insights into how that risk may be mitigated. An outline theory is developed, introducing a new operational definition of systemic risk of failure in which notions from evolutionary economics, finance and complexity science are combined with a general interpretation of entropy, to explain how catastrophic phenomena arise in that system. When a conceptual model incorporating the Icelandic financial system failure over the years 2003 – 2008 is constructed from this theory, and the results of simulation experiments using a verified computational representation of the model are validated with empirical data from that event, and corroborated by theoretical triangulation, a null-hypothesis about the theory is refuted. Furthermore, results show that interplay between a lack of diversity in system participation strategies and shared exposure to potential losses may be a key operational mechanism of catastrophic tensions arising in the supply and demand of financial services. These findings suggest new policy guidance for pre-emptive intervention calls for improved operational transparency from system participants, and prompt access to data about their operational behaviour, in order to prevent positive feedback inducing a failure of the system to operate within required parameters. The theory is then revised to reflect new insights exposed by simulation, and finally submitted as a new theory capable of unifying existing knowledge in this problem domain

Credit, asset prices and monetary policy

This thesis was submitted for the degree of Doctor of Philosophy and awarded by Brunel University.The developments in asset markets have influenced researchersto focus on the interaction between monetary policy and the financial system. In Chapter I we provide an overview of the role of the financial system for the whole economy. We show the importance of this sector in transmitting the monetary policy actions. The aim of this research is twofold; firstly we want to investigate how important the amount of credit for the whole economy is. To accomplish this objective, in Chapter 2 we make use of the VAR technique to study the monetary transmission mechanism. In particular we are interested in explaining why previous empirical research has found that prices show an increase after monetary tightening. We investigate how an unanticipated movement in the risk free interest rate affects all those variables responsible for the transmission of a monetary shock. Our results suggest that the immediate increase in prices is not due to some form of econometric misspecification, but rather, to the change in the composition of firms' source of finance. Prices rise because the need for external funds increases thus firms' costs of production increase. Another important issue that we want to tackle is the contribution of external finance to the 1990 economic recession. In Chapter 3 we show that the increased level of indebtedness as one of the forces at the root of the economic downturn. We argue that the crisis could be explained on the basis of Minsky's financial instability hypothesis. In the remaining part of this research we tackle the second aim of this research: we focus our attention on the link between asset prices and monetary policy. Asset prices, in fact, can give an indication of future consumers' and firms' decisions on spending and, therefore, might be indicators of future economic activity. Wealth deriving from gains in these markets tends t o increase the level of consumption and investment. A t the same time, sharp movements in asset prices could signal imbalances in the economy; developments of this kind can threaten financial stability. In Chapter 4 we argue there might be a trade-off between financial stability and monetary stability when these are the main objectives of the monetary authorities. First we explore the possibility that the demand equation is affected positively by changes in asset prices, secondly empirical findings suggest that for the period 1992: 10-2003: 1 monetary policy in the UK can be better represented by a rule which takes into consideration movements in house prices and stock prices. The empirical evidence provided in Chapter 4 brings us in Chapter 5 to construct a macroeconomic model where the asset prices enter indirectly into the Central Bank's loss function. We model the aggregate demand of the economy so that output is determined, among other variables, by the wealth effect. The optimal interest rate rule is obtained by optimising intertemporally a loss function that includes inflation and output variance. We find that the optimal policy in the presence of wealth effects not only depends upon inflation and output but also it depends on financial imbalances, as represented by asset price misalignments from fundamentals. The response to asset price deviations from fundamentals becomes more aggressive as wealth effects build up, while the reaction to inflation and the output gap becomes less pronounced

Credit, asset prices and monetary policy

The developments in asset markets have influenced researchersto focus on the interaction between monetary policy and the financial system. In Chapter I we provide an overview of the role of the financial system for the whole economy. We show the importance of this sector in transmitting the monetary policy actions. The aim of this research is twofold; firstly we want to investigate how important the amount of credit for the whole economy is. To accomplish this objective, in Chapter 2 we make use of the VAR technique to study the monetary transmission mechanism. In particular we are interested in explaining why previous empirical research has found that prices show an increase after monetary tightening. We investigate how an unanticipated movement in the risk free interest rate affects all those variables responsible for the transmission of a monetary shock. Our results suggest that the immediate increase in prices is not due to some form of econometric misspecification, but rather, to the change in the composition of firms' source of finance. Prices rise because the need for external funds increases thus firms' costs of production increase. Another important issue that we want to tackle is the contribution of external finance to the 1990 economic recession. In Chapter 3 we show that the increased level of indebtedness as one of the forces at the root of the economic downturn. We argue that the crisis could be explained on the basis of Minsky's financial instability hypothesis. In the remaining part of this research we tackle the second aim of this research: we focus our attention on the link between asset prices and monetary policy. Asset prices, in fact, can give an indication of future consumers' and firms' decisions on spending and, therefore, might be indicators of future economic activity. Wealth deriving from gains in these markets tends t o increase the level of consumption and investment. A t the same time, sharp movements in asset prices could signal imbalances in the economy; developments of this kind can threaten financial stability. In Chapter 4 we argue there might be a trade-off between financial stability and monetary stability when these are the main objectives of the monetary authorities. First we explore the possibility that the demand equation is affected positively by changes in asset prices, secondly empirical findings suggest that for the period 1992: 10-2003: 1 monetary policy in the UK can be better represented by a rule which takes into consideration movements in house prices and stock prices. The empirical evidence provided in Chapter 4 brings us in Chapter 5 to construct a macroeconomic model where the asset prices enter indirectly into the Central Bank's loss function. We model the aggregate demand of the economy so that output is determined, among other variables, by the wealth effect. The optimal interest rate rule is obtained by optimising intertemporally a loss function that includes inflation and output variance. We find that the optimal policy in the presence of wealth effects not only depends upon inflation and output but also it depends on financial imbalances, as represented by asset price misalignments from fundamentals. The response to asset price deviations from fundamentals becomes more aggressive as wealth effects build up, while the reaction to inflation and the output gap becomes less pronounced.EThOS - Electronic Theses Online ServiceGBUnited Kingdo

Macroeconomics After the Great Recession: Consensus or Conflict?

Unlike microeconomics where there are relatively few disagreements, the field of macroeconomics has always been the arena of several competing theories. Despite that history of conflict, in the late 1980s during the Great Moderation, the New Classicals and the New Keynesians reached an agreement, known as the New Consensus during the Great Moderation. For decades, the New Consensus has dominated macroeconomic theory and policymaking not only in the U.S., but also throughout the world. After many years of calm, however, the 2007-2008 subprime mortgage crisis and its consequent Great Recession demonstrated that how fragile that consensus was. While the debate regarding the collapse of the consensus still continues, this thesis aims to understand the implications of the collapse in terms of the future of macroeconomic theory and of policy-making from a critical and historical perspective. To achieve this goal, this thesis will explore the rise and the fall of the New Consensus Theory by first showing, the process that successfully incorporated the once opposing ideologies into one system; second, this paper will study the collapse of the consensus soon after the arrival of the Great Recession. This is followed by a section that aims to draw some lessons learned from the failure of the New Consensus Theory. Finally, the thesis examines the problems associated with policy-making, deficiencies in economic theory and modeling, and the appropriateness of the methodology in the foundations of the New Consensus. Based on these critical and historical evaluations, the thesis concludes with some remarks concerning the future of macroeconomic theory and policy-making

The relationship between monetary policy and investment in South Africa

This thesis examines the relationship of monetary policy and investment in a theoretical framework in which monetary and real economic forces are intrinsically interlinked. The full shift from a money, real dichotomy in historical economic thought to the notion of money being an essential determinant of economic outcomes is traced to the work of Keynes, partly in the Treatise (1930), but more completely in the General Theory (1936). The treatment of monetary forces in economic growth models is examined. It is found that the money, investment relationship, with close money, real interaction, is appropriately pursued in the approach to monetary theory adopted by those who could broadly be characterised as Post Keynesian. The operation of monetary forces through the banking system is examined using this theoretical backdrop. A symbolic model is developed of the influence channels implied by the theoretical analysis, using the South African monetary system as the specific focus. The symbolic model is expressed in a form which enables empirical examination. South African data are compiled and used to determine the nature and statistical significance of hypothesised relationships. The implications of the theoretical analysis and empirical examination are drawn out both for monetary theory within the Post Keynesian mould, and for the conduct of monetary policy, in South Africa in particular.EconomicsD. Litt. et Phil. (Economics

Kondratieff Waves: Juglar – Kuznets – Kondratieff; Yearbook

In the period from the 1920s to 1930s the theory of economic cycles underwent dramatic changes. Due to the research of such famous economists as Nikolay Kondratieff, Joseph Kitchin, Wesley Mitchell, Simon Kuznets, and Joseph Schumpeter the idea of a whole system of economic cycles (with characteristic periods between two and sixty years) was developed. The idea of a system of intertwined economic cycles is nowadays paramount to the school of evolutionary economics and its development promises rather interesting future outcomes. That is why this issue of our ‘Kondratieff Waves’ Yearbook is devoted to the interconnections between various economic cycles. As to the subtitle of this volume, one should note that many of the contributors refer to the system of cycles and the fact that real economic cycles make up a system, whereas among different types of cycles, the Juglar, Kuznets, and Kondratieff cycles are the most important ones for the present-day economic dynamics. Although Kondratieff himself considered long waves as above all an economic phenomenon, the theory of the long waves became, however, very actively developed in connection with their political and geopolitical aspects. In this Yearbook, the political aspect of Kondratieff waves is the subject of several articles in the second section. The last section of this Yearbook is devoted to the heritage of Kondratieff and other prominent economists. The year 2015 marks the 150th anniversary of the outstanding Russian economist, one of the most prominent researchers of medium-term economic cycles, Mikhail Tugan-Baranovsky, and the volume is concluded with Kondratieff's article about him. Concerning 2015, we should mention another anniversary, namely, 30 years since the death of Simon Kuznets (1901–1985). This edition will be useful for economists, social scientists, as well as for a wide range of those interested in the problems of the past, present, and future of global economy and globalization

Financialisation and the Myth of Poverty Alleviation in Ghana: A Theoretical and Empirical Investigation of the Impact of Financial Liberalisation on Sustainable Economic Development

The key theme of the thesis is that the rise of finance (financialisation) in Ghana has done very little, if any, in the fight against poverty. It has, however, resulted in rising financial profits, financialising poverty and stagnating the real sector of the economy. The thesis analyses financialisation in a low middle-income country. The focus is to investigate the impact of the exponential growth of finance on poverty alleviation in Ghana. It adopts a political economy approach to the changing behaviour/conduct of banks, industrial enterprises and households. Different strands of thoughts are reviewed in their understanding of financialisation. The theoretical framework is set vis-à-vis the empirical reality to assess whether the Ghanaian economy is financialised. It has been presented in this thesis that Ghana is indeed a financialised economy. However, it demonstrates several unique characteristics for different sectors because of its subordinate/inferior status shaped by imperial relations between states in the world market. The thesis found rising profit for the banking industry, but limited lending to industrial enterprises for long-term investment. However, what is unique in the context of Ghana is excessive lending to the government. The capital structure of firms in Ghana composed of mainly internal funds, as banks are reluctant to lend to firms due to the lucrative returns on less risky government securities. Banks then demand high collateral from firms together with high interests on capital. These obstructive factors, coupled with other contradictions in the political-economic arrangement, impact high cost on firms and therefore limit their ability to make enough profit. Consequently, firms employ less labour and are unable to pay higher wages, resulting in chronic poverty. This thesis presents that financial inclusion policy as a way of empowering the poor makes poverty a financial problem, which requires new credit relation- the financialisation of poverty. The thesis, therefore, argues that poverty should be viewed as a monetary and non-monetary problem

An investigation of the recent financial crisis : causes, implications and directions

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Money and sustainability: Transitioning to an ecological monetary system

A profound transformation of our monetary paradigm is urgently needed. To re-think, re-imagine, and re-design our monetary system is of critical priority if we want to have a chance at sustainability. The current dominant monetary-banking-financial system is inherently, and by design, a source and a force of unsustainability lying at the core of our economies and societies. It's a system actively contributing to ecological degradation, socio-political crises, and economic instability, uncertainty, and alienation. But there are alternatives and these must be given the spotlight. Not tweaks or reforms to the system, but radical shifts in how we deal, use, relate to, and feel regarding money. The societal challenge we must embrace is rapidly transitioning our monetary reality into a purposeful ecological monetary ecosystem aligned with the regeneration of our planet and all life in it. This Doctoral thesis contributes to the emergence and development of a new monetary paradigm with planet and people at its core. The research is intrinsically transdisciplinary and based on mixed-methods. Different methodologies were used, combining qualitative with quantitative methods and more passive research with more action-oriented transformative research, including field visits, interviews with practioners, and direct interaction with local and regional complementary currency experiments. By combining a transdisciplinary literature review with an action-research approach this thesis offers novel insights into the transition process to an ecological monetary ecosystem. A set of regenerative principles and priorities for monetary reform that would enable us to root money back into the real economy, coherent with the laws of physics and aligned with an ecology of life is offered. Moreover, a model for a multi-currency ecosystem is explored and presented at the end of this thesis. The implications of such a fundamental revolution in the core design of our increasingly monetized economies could potentially put us back on track and re-align our socio-economic and political system with our climate agreements, our SDG and our intentions for peace and prosperity.Uma profunda transformação do nosso paradigma monetário é urgentemente necessária. Re-pensar, re-imaginar, e re-desenhar o nosso sistema monetário é uma prioridade societal crítica se quisermos garantir a nossa sustentabilidade. O actual sistema monetário-bancário-financeiro dominante é inerentemente, e por design, uma fonte e uma força de insustentabilidade que se encontra no cerne das nossas economias e sociedades. É um sistema que contribui activamente para a degradação ecológica, crises sócio-políticas, e para a instabilidade, incerteza e alienação económica. Mas existem alternativas e estas têm de ser objecto de atenção especial. Não ajustamentos ou "reformas" ao sistema, mas mudanças radicais na forma como lidamos, utilizamos, nos relacionamos e sentimos em relação ao dinheiro. O desafio social que temos de abraçar é a rápida transição das nossas realidades monetárias para um ecossistema propositadamente alinhado com a regeneração do nosso planeta e de toda a vida. Esta tese de doutoramento contribui para a emergência e desenvolvimento de um novo paradigma monetário com o planeta e as pessoas no seu âmago. A investigação é intrinsecamente transdisciplinar e baseada numa abordagem de métodos mistos. Foram utilizadas diferentes metodologias, combinando métodos qualitativos com métodos quantitativos, e investigação mais passiva com investigação transformadora mais orientada para a acção, incluindo visitas de campo, entrevistas e interacção directa com experiências de moedas complementares locais e regionais. Ao combinar uma revisão transdisciplinar da literatura, com uma abordagem de investigaçãoacção, esta tese oferece novas ideias e concepções sobre o processo de transição para um ecossistema monetário ecológico. É oferecido um conjunto de princípios regenerativos e prioridades para a reforma monetária que nos permitiria enraizar o dinheiro de volta à economia real, coerente com as leis da física e alinhado com uma ecologia da vida. No final da tese é ainda explorado e apresentado um modelo para um ecosistema monetário com base na co-existência de múltiplos circuitos monetários. As implicações de uma tal revolução no nosso sistema monetário e no centro das nossas economias, cada vez mais monetizadas, poderão ser potenciadoras de uma transição para um novo caminho societal, alinhado com os nossos acordos climáticos, os nossos ODS e as nossas intenções de paz e prosperidade