The political economy debate on ‘financialisation’ – a macroeconomic perspective

A number of important contributions to the political economy literature have argued that changes in the financial sector have been amongst the main reflections, or even the driving forces, of recent transformations of capitalism in the rich countries. This hypothesis has been referred to as 'financialisation'. We argue in this article that the interdisciplinary literature could be enriched if the macroeconomic dimension of financialisation was more explicitly taken into account. In particular, important macroeconomic constraints regarding the determination of profits, in the face of a decreasing importance of physical investment and an increased importance of financial operations, are often not explicitly considered. We compare our macroeconomic approach with contributions from different strands in the existing literature, including empirical analyses of new patterns of profit generation, the 'varieties of capitalism' approach, the British 'social accounting' literature, and the French 'regulationist' literature. Our theoretical framework is illustrated by means of an empirical comparison of the effects of financialisation in the USA and in Germany.Financialisation, political economy, varieties of capitalism, social accounting, regulationism

Reconsidering the Investment-Profit Nexus in Finance-Led Economies: an ARDL-Based Approach

A simple Post Keynesian growth model is developed, in which financial variables are explicitly taken into account. Different possible accumulation regimes are derived with respect to changes of these variables. Several variants of an investment function are estimated econometrically. The ARDL-based approach proposed by Pesaran et al. (2001) is argued to be superior for this purpose to the traditional cointegration approach. The econometric results are discussed with respect to a remarkable phenomenon that can be observed for some important OECD countries since the early 1980s: accumulation has generally been declining while profit rates have shown a tendency to rise. The author concentrates on one potential explanation of this phenomenon which is particularly relevant for the USA and relies on the hypothesis of a high propensity to consume out of capital income. The paper also gives an alternative explanation of the so-called "New Economy boom" in the USA at the end of the 1990s.Investment, Profitability, Financialisation, Time Series Econometrics.

Asymmetric income and wealth effects in a non-linear error correction model of US consumer spending

Various deviations from the Permanent Income consumption model with rational expectations have been discussed in the literature, including loss aversion and liquidity constraints. In the existing literature, these two types of consumption asymmetry are usually considered as mutually exclusive. Using a single data set for US personal consumption, income and wealth, we show that evidence of either loss aversion or liquidity constraints can indeed be produced, depending on the theoretical and econometric framework applied. We then propose a synthetic asymmetric error correction model and find evidence that can be interpreted as indicating both long-run loss aversion and short-run liquidity constraints. This result can also be interpreted in the context of the secular decline in the US personal savings rate over the past decades: although wealth declines can have considerable negative consumption effects in the short run, households have apparently been able, in the longer run, to substantially increase consumption expenditure following income and wealth increases, but to keep the necessary reductions in consumer spending, as a consequence of income and wealth declines, within relatively small limits. Yet, given increasing personal indebtedness, this asymmetric consumption pattern may be unsustainableAsymmetric error correction model, consumer economics, aggregate con-sumption and wealth.

A Synthetic, Stock-Flow Consistent Macroeconomic Model of Financialisation

This article is centred around the notions of shareholder value orientation and financialisation. Shareholder value orientation is reflected by a high dividend payout ratio applied by firms and the reluctance of firms to finance physical investment via new equity issues. Financialisation is the more general development towards an increased importance of the financial sector of the economy relative to the non-financial sector. In this article, a synthetic, stock-flow consistent model is developed that attempts to encompass and at times adjust some important recent works on the effects of financialisation. This includes contributions from the fields of mainstream information economics and Post Keynesian economics. We conduct simulations reflecting increased shareholder value orientation and show that the model produces a number of results that appear consistent with many stylised facts particularly of the US economy since the early 1980s.Stocks and Flows, Corporate Governance, Investment Finance, Payout Policy, Income Distribution

A Synthetic, Stock-Flow Consistent Macroeconomic Model of Financialisation

This article is centred around the notions of shareholder value orientation and financialisation. Shareholder value orientation is reflected by a high dividend payout ratio applied by firms and the reluctance of firms to finance physical investment via new equity issues. Financialisation is the more general development towards an increased importance of the financial sector of the economy relative to the non-financial sector. In this article, a synthetic, stock-flow consistent model is developed that attempts to encompass and at times adjust some important recent works on the effects of financialisation. This includes contributions from the fields of mainstream information economics and Post Keynesian economics. We conduct simulations reflecting increased shareholder value orientation and show that the model produces a number of results that appear consistent with many stylised facts particularly of the US economy since the early 1980s

Asymmetric income and wealth effects in a non-linear error correction model of US consumer spending

Various deviations from the Permanent Income consumption model with rational expectations have been discussed in the literature, including loss aversion and liquidity constraints. In the existing literature, these two types of consumption asymmetry are usually considered as mutually exclusive. Using a single data set for US personal consumption, income and wealth, we show that evidence of either loss aversion or liquidity constraints can indeed be produced, depending on the theoretical and econometric framework applied. We then propose a synthetic asymmetric error correction model and find evidence that can be interpreted as indicating both long-run loss aversion and short-run liquidity constraints. This result can also be interpreted in the context of the secular decline in the US personal savings rate over the past decades: although wealth declines can have considerable negative consumption effects in the short run, households have apparently been able, in the longer run, to substantially increase consumption expenditure following income and wealth increases, but to keep the necessary reductions in consumer spending, as a consequence of income and wealth declines, within relatively small limits. Yet, given increasing personal indebtedness, this asymmetric consumption pattern may be unsustainabl

'Financialisation' in Kaleckian/Post-Kaleckian models of distribution and growth

The macroeconomic effects of ‘financialisation’ are assessed applying two different variants of a Kaleckian model of distribution and growth. The focus is on the effects of changes in distribution between shareholders/rentiers, firms and workers, as well as on the effects of increasing ‘shareholder value orientation’ of management’s investment decisions. An isolated increase in the ‘shareholder value orientation’ of management’s investment decisions has a uniquely negative effect on capacity utilisation, the profit rate and capital accumulation in both models. An associated rise in the dividend rate, however, has contradicting effects. In both Kaleckian models the ‘normal’ case of a negative effect throughout the endogenous variables, the ‘puzzling’ case of a positive effect throughout, and an ‘intermediate’ case with a positive effect on capacity utilisation and the profit rate and with a negative effect on capital accumulation may arise, depending on the parameter values in the investment and the saving function of the models. ‘Profits without investment’, the ‘intermediate’ case in both models, is a possible medium- or long-run accumulation regime. However, if a rising dividend rate is associated with a particularly strong increase in the mark-up and hence with pronounced redistribution at the expense of labour, the possibility of such a regime will be undermined, provided that unit profits do not have a strong effect on firms’ real investment. The long-run sustainability of such a regime will also be questioned by the adverse effects of low investment on capital stock and productivity growth.Financialisation, Distribution, Growth, Kaleckian models

The macroeconomics of "financialisation" and the deeper origins of the world economic crisis

In recent years, the interdisciplinary literature on financialisation has become one of the most quickly developing areas in the social sciences, including (Post Keynesian) macroeconomics. We discuss the relevance of the financialisation hypothesis in a non-technical manner from a macroeconomic perspective. Our interpretation of financialisation allows one to analyse the fundamental changes that the US and other economies have undergone over the past three decades or so. In particular, it helps to understand how the US economy has turned from a "debt-led" system, combining relatively weak physical investment activity, strong consumer spending, high income inequality and increasing indebtedness of firms and private households, to a "debt-burdened" system. In light of the current world economic crisis, the Keynesian financialisation hypothesis now seems to be increasingly shared among policy makers and economists

Liquidity constraints versus loss aversion in household consumption: a simple reconciliation

Various deviations from the Permanent Income consumption model with rational expectations have been discussed in the literature, including loss aversion and liquidity constraints. In the existing literature, these two types of consumption asymmetry are usually considered as mutually exclusive. Using a single data set for US personal consumption, income and wealth for the period 1953q1-2007q3, we show that evidence of either loss aversion or liquidity constraints can indeed be produced, depending on the theoretical and econometric framework applied. We then apply a synthetic asymmetric error correction model that distinguishes short-run and long-run asymmetries and helps reconcile the conflicting results from the previous literature. Our findings can also be interpreted in the context of the secular decline in the US personal savings rate before the outbreak of the financial crisis in 2007

Conflicting claims and equilibrium adjustment processes in a stock-flow consistent macro model

We revisit the old but still vibrant Post-Keynesian debate over "fully-adjusted positions", defined by the long-run equality of actual and standard utilisation rates. The central proposition of this paper is that in a world where different groups inside and outside firms have different objectives, the equality of actual and standard utilisation should not be treated as the (only possible) long-run equilibrium condition. The argument is illustrated in a model of target return pricing with conflict inflation, building on Lavoie (2002, 2003). A "common language" for the conflicting claims by shareholders, managers, workers and banks is developed in terms of target profit rates, and it is shown that these contradictory claims can be partly reconciled through variations in the utilisation rate. The analysis unifies history and equilibrium in the sense that the nature of and the adjustment to the final equilibrium position depends on the objectives of the dominant social groups. We distinguish a "Fordist regime" and a "financialisation regime" and produce simulation results within a simple stock-flow consistent model that are broadly consistent with the stylised facts of these distinct historical phases of capitalism.Macroeconomic policies, New Consensus Model, Post-Keynesian Model, inflation targeting