Microfoundations of macroeconomics. Post-Keynesian contributions on the theory of the firm

Looking through contributions about microeconomic theory, from classics to modern theory, it is possible to identify various attitudes on the role that firms play in the market. To simplify the existing multiplicity of opinion, two distinct positions can be recognized: 1) the first one considers the theory of the firm, its choices about price and production as ruled by consumer sovereignty, assuming that it is the eagerness to buy that drives the market. The entrepreneur’s and consumer’s interests converge thanks to automatic mechanisms leading to equilibrium. It is well-known that neoclassical economists can be ascribed to this trend of study. 2) the second position, on the other hand, considers the side of production as having a higher incidence in the identification of market equilibrium, as firms are able to set prices and co-ordinate demand behaviour. This turn-round in causality defines a market where the demand-supply relationship does not follow the rules of competitive-marginalist equilibrium, but alternative principles. The aim of this study is to analyse the contribution of Post-Keynesian scholars about this theme in the belief that the fundamental assumptions and conclusions they have drawn represent an alternative to the traditional theory, and are worth being considered carefully. However, in the identification of the theoretical foundations of Post-Keynesian microeconomics theory, one can run into the difficulty of reducing to few unification principles the content of very different contributions, which often stand out for their critical positions vis-à-vis orthodox theory rather than for setting up the parts of a single alternative paradigm . Besides, Post-Keynesians have a strong taste for macroeconomics themes, rather than for microeconomics ones, since they believe that the macro aggregates determine the behaviour of small decision-making units. In fact, looking at this literature, one can find a lot of contributions on this subject: the most reputed (Kalecki 1954, and, for an expansion of this, Asimakopulos 1975 and Cowling 1982) explain the formation of prices and produced quantities as the results of decision-making process of firms as a whole. These theories set themselves out as theories of investment decisions, profit accumulation, and the conflicting nature of income distribution. This point of view, however, is submitted to the criticism of those who argue that Post-Keynesian theory does not possess persuasive microeconomics bases and that, even though it can be maintained that in the process of aggregation the firms behave uniformly in influencing aggregate production and income distribution, it is always necessary to define the rules that allow each unit to take its production choices. Most recently, some scholars have committed themselves to define the rules of such a decision-making process and to clarify the reasons why the interests between consumers and producers in the market do not converge. In so doing, they have tried to provide a microeconomic foundation to the distributive conflict identified at an aggregate level. These different contributions underline various dimensions of the undertaker’s decision-making mechanism. However, I believe that they share some common elements, as they are characterized by a common global vision that brings about a persuasive alternative to the theoretical system of neoclassical microeconomics. The aim of the present study is that of presenting the key elements of the Post-Keynesian global vision on the theory of the firm, and of explaining why price mechanisms prevail over quantity-determining mechanism.Post Keynesian; Theory of the firm

Equilibrium exchange rate theories under flexible exchange rate regimes

Economic theory refers to several notions of the exchange rate equilibrium value in a flexible exchange rate regime. It has been defined as that consistent with : a) the equilibrium of trade balance; b)the equilibrium of current account; c) the overall equilibrium of the balance of payments; d) the absence of speculative attacks on foreign exchange markets; e) the absence of a beggar thy neighbour” dispute at an international level; f) the achievement of price stability; g) the pursuit of a monetary policy rule. Through a literature survey we have seen that different exchange rates have effects on output and employment both in the short and in the long run. However the major conclusion was reached by an extension of recent studies, according to which, even if the central bank strictly controls the inflation rate, the absence of a precise objective in terms of price level makes the exchange rate indeterminate.exchange rate; equilibrium; real misalignment

The recessive attitude of EMU policies: reflections on the italian experience, 1998–2008

The EMU assigns a very marginal role to economic policy and relies on the leading idea that, if prices are kept constant, there will be an automatic convergence towards long-run equilibrium income. These beliefs represent the theoretical underpinnings of fiscal and monetary policy strategies in Europe. In order to highlight the weakness of these foundations, the paper evaluates empirically the effects of public expenditure and interest rate setting on equilibrium income in Italy from 1998 to 2008. The analysis supports the conclusions that government spending has a positive impact on national income while inflation targeting has a negative impact. Moreover the empirical evidence shows that a high level of debt does not produce negative effects on GDP. Finally, at a time of financial crisis, these results appear to be reinforced for fiscal policy, but weakened for monetary policy. The paper finally states that the EMU’s rigid rules for both fiscal and monetary policy have recessive attitudes, and limit the use of instruments to deal with high levels of unemployment, definitely undermining the future existence of the single-currency area.Fiscal policy, Monetary policy, EMU, Italy

The recessive attitude of EMU policies: reflections on the italian experience, 1998–2008

The EMU assigns a very marginal role to economic policy and relies on the leading idea that, if prices are kept constant, there will be an automatic convergence towards long-run equilibrium income. These beliefs represent the theoretical underpinnings of fiscal and monetary policy strategies in Europe. In order to highlight the weakness of these foundations, the paper evaluates empirically the effects of public expenditure and interest rate setting on equilibrium income in Italy from 1998 to 2008. The analysis supports the conclusions that government spending has a positive impact on national income while inflation targeting has a negative impact. Moreover the empirical evidence shows that a high level of debt does not produce negative effects on GDP. Finally, at a time of financial crisis, these results appear to be reinforced for fiscal policy, but weakened for monetary policy. The paper draws the conclusion that the EMU’s rigid rules for both fiscal and monetary policy have recessive attitudes, and limit the use of instruments to deal with high levels of unemployment, definitely undermining the future existence of the single-currency area.Fiscal policy, Monetary policy, EMU, Italy

Territorial pressure and tourism contribution to GDP: The case of Italian regions

AbstractThis article focuses on long‐run co‐movement between tourists' arrivals and per capita income with the aim of evaluating, through a macroeconomic perspective, whether its excessive increase can be detrimental to economic development. To this aim, GDP per capita in Italian NUTS2 regions is connected, through a dynamic panel cointegrating technique, to arrivals and to a measure of touristic congestion (tourism territorial pressure index). Results show that tourism contributes to the increase of per capita GDP. However, when accounting for the congestion effect, the relation appears to be nonlinear, revealing a detrimental effect on growth driven by an excessive tourism pressure on territories

Structural public balance adjustment and relative poverty in the Eurozone countries: An empirical investigation

The aim of the paper is to evaluate, through panel data dynamic models, the effects of structural public balance adjustment on relative poverty in 16 Eurozone countries from 2005 till 2013. The estimates are conducted by using the mean group (MG), the pooled mean group (PMG) and the dynamic fixed effects (DFE) estimators. The first two yield estimates of the long-run coefficients without the implausible assumption of identical dynamics in each country allowing to detect a stable relationship even in presence of reduced explanatory variables. They all - through the error correction form - allow for considering the relation between the variables in their level and the dynamic of adjustment in the short-run. All the techniques generate outcomes supporting the conclusion that fiscal retrenchments increase relative poverty both in the short and in the long-run

Political Consent in Eastern EU Countries: A Macroeconomic Perspective

The aim of the paper is to investigate the link between trust in national political institutions and macroeconomic performance in the long run in Eastern EU countries. The objective is to answer the question whether the liberalization process and the subsequent exposure to globalized markets realized macroeconomic outcomes that are still cause of concern for these young democracies. The empirical technique is the panel dynamic ordinary least square (PDOLS) estimator, through which the effect of inflation inequality and debt on citizens’ trust in national governments and national parliaments is evaluated in term of long-run dynamics. Results show a negative impact of the indicators considered and highlight the role of macro-variables in the institutional consolidation process even in presence of path dependence dynamics of trust

Discretionary Fiscal Policy Measures and Growth in the Selected Eurozone Countries

The aim of the paper is to evaluate the effects on growth of discretionary fiscal policy measures in selected Eurozone countries in the period ranging from 2001 to 2013. The analysis suggests a positive effect of discretionary fiscal policy measures on GDP and support the conclusion that structural public balance adjustments have negative effects on growth irrespective of macroeconomic conditions. These results show that, if the reduction of the structural balance has to be considered as an objective to be achieved per se, such a goal should not be pursued in times of deteriorating macroeconomic conditions

L'Unione monetaria europea fra integralismo monetario e dipendenza della politica fiscale. Alcune considerazioni

The aim of this note is to raise some doubts about the opportunity to abandon the economic policy strategies that support aggregate demand because it is a prerequisite to realize the credibility of the new currency- the Euro. Prevailing literature states that, in the choice between inflation and unemployment, is always the second one to deserve a more immediate cure. Such position is motivated by the idea that – even if the market is the best way to organize the economic systems - it must occasionally be helped, since there is not an automatic convergence towards the natural equilibrium of full employment

Microcredit in advanced economies as a "third way”: a theoretical reflection

Microcredit has been growing over time and has been gaining an ever increasing position in the budget of monetary and financial institutions in developing countries. The aim of the paper is to investigate the role it can have in advanced economies and whether it might represent a "third way" as an alternative to the traditional conflict between the state and the market. However, while in third world countries microfinance experiences have been ample and finding great success, in developed countries it reaches only a small percentage of the population. This reduced dimension of the microfinance phenomenon depends on two facts: 1) the difficulty of starting income-generating activities with microloans; and 2) the alternative no risk remuneration obtainable in the market (reserve wage). These two conditions are a direct function of the general state of the wealth of the economy. In fact, while in cases of underdevelopment "finance for the poor" represents an instrument to exploit unutilised resources, in advanced economies it is mainly an instrument of solidarity, because it goes to fill the gap left by the absence of social safety nets and the reduction of the welfare state. Therefore microcredit in advanced economies might represent a “third way” as general non-profit organisation instruments do, and has to be investigated within this literature, rather than the framework of financial exclusion