61 research outputs found
Debt cycles, instability and fiscal rules: A Godley-Minsky synthesis
© The Author(s) 2017. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved. Wynne Godley and Hyman Minsky were two macroeconomists who 'saw the crisis coming'. This paper develops a simple macrodynamic model that synthesises some key perspectives of their analytical frameworks. The model incorporates Godley's financial balances approach and postulates that private sector's propensity to spend is driven by a stock-flow norm (the target net private debt-to-income ratio) that changes endogenously via a Minsky mechanism. It also includes two fiscal rules: a Maastricht-type fiscal rule, according to which the fiscal authorities adjust the government expenditures based on a target net government debt ratio; and a Godley- Minsky fiscal rule, which links government expenditures with private indebtedness following a counter-cyclical logic. The analysis shows that (i) the interaction between the propensity to spend and net private indebtedness can generate cycles and instability; (ii) instability is more likely when the propensity to spend responds strongly to deviations from the stock-flow norm and when the expectations that determine the stock-flow norm are highly sensitive to the economic cycle; (iii) the Maastricht-type fiscal rule is destabilising while the Godley-Minsky fiscal rule is stabilising; and (iv) the paradox of debt can apply both to the private sector and the government sector
The 'other half' of the public debt-economic growth relationship: A note on Reinhart and Rogoff
Reinhart/Rogoff (2010) and Reinhart et al. (2012) document a negative relationship between public debt and economic growth. However, by classifying the observations of their data set into public debt categories and identifying public debt overhang episodes, they focus only on 'one half' of the public debt–economic growth relationship: the growth-reducing effects of high public debt. This note classifies the observations of their data set into economic growth categories and identifies low-growth episodes. In so doing, it presents the 'other half' of the public debt–economic growth relationship: the debt-increasing effects of low growth. It is argued that the presentation of 'both halves' is essential for a more fruitful research agenda and policy debate
Debt cycles, instability and fiscal rules: A Godley-Minsky model
Wynne Godley and Hyman Minsky were two macroeconomists who ‘saw the crisis coming’. This paper develops a simple macrodynamic model that synthesises some key perspectives of their analytical frameworks. The model incorporates Godley’s financial balances approach and postulates that private sector’s propensity to spend is driven by a stock-flow norm (the target net private debt-to-income ratio) that changes endogenously via a Minsky mechanism. It also includes two fiscal rules: a Maastricht-type fiscal rule, according to which the fiscal authorities adjust the government expenditures based on a target net government debt ratio; and a Godley-Minsky fiscal rule, which links government expenditures with private indebtedness following a counter-cyclical logic. The analysis shows that (i) the interaction between the propensity to spend and net private indebtedness can generate cycles and instability; (ii) instability is more likely when the propensity to spend responds strongly to deviations from the stock-flow norm and when the expectations that determine the stock-flow norm are highly sensitive to the economic cycle; (iii) the Maastricht-type fiscal rule is destabilising while the Godley-Minsky fiscal rule is stabilising; and (iv) the paradox of debt can apply both to the private sector and to the government sector
Towards a climate just financial system
In recent years, private and public financial institutions have increasingly focused on addressing the implications of the climate crisis. However, existing efforts to align the financial system with climate change suffer from a significant limitation: they exacerbate global climate injustice. In this paper, I identify several climate finance injustice channels and explain how these can be addressed via the development of a ‘climate just financial system’. I define the latter as a system whereby climate justice criteria are incorporated into the policies governing public and private financial institutions, and the financing of private and public climate spending is in line with the principle of common but differentiated responsibilities and respective capabilities. A climate just financial system has three key elements: (i) differentiated climate responsibilities for global North and global South financial institutions, with the latter primarily focusing on climate adaptation and the former prioritising climate mitigation; (ii) climate justice stabilising mechanisms that establish a permanent commitment by global North countries to provide climate financing support to global South countries without making the latter more financially vulnerable; and (iii) the incorporation of climate justice criteria in the design and use of climate mitigation tools by global North financial institutions. Creating a climate just financial system requires significant transformations in multilateral financial mechanisms, public banking, central banking, financial regulation and private financial institutions. Although these transformations would face political and technical challenges, they can potentially be overcome if climate justice gets centre stage in the climate policy agenda
Climate change, central banking and financial supervision: beyond the risk exposure approach
It is now increasingly accepted that central banks and financial supervisors can no longer ignore climate change. However, there is no consensus on how they should address climate issues. On the one hand, there is a view that central banks and financial supervisors should mainly contribute to the assessment of the exposure of the financial system to climate-related financial risks, considering at the same time the possibility of incorporating climate risks into monetary policy and financial supervision and regulation. On the other hand, it is argued that central banks and financial supervisors need to take action such that they contribute directly to the decarbonisation of our economies and the prevention of climate systemic risks. In this paper, I analyse the main premises and implications of these two approaches and I explain why a systemic risk approach is necessary in the age of climate emergency. I also discuss the challenges involved in a policy agenda aiming at the reduction of climate systemic risks and I outline how these challenges can be tackled
The climate crisis meets the ECB: tinkering around the edges or paradigm shift?
The European Central Bank (ECB) has recently incorporated climate considerations into its operations. In this paper, I assess whether the ECB’s approach is consistent with the challenges of the climate crisis era. I first identify three transformative implications of the climate crisis for central banking. These are that central banks (i) are becoming less able to control inflation via monetary policy tools, (ii) can no longer ignore their responsibility to support decarbonisation, and (iii) cannot rely on traditional risk exposure approaches to prevent financial instability that stems from physical risks. I then analyse to what extent these implications are reflected in the ECB climate actions and plans, showing that there is a very significant gap between the ECB’s ‘tinkering around the edges’ approach and the central banking challenges posed by the climate crisis. Using post-Keynesian, critical macro-finance and political economy perspectives, I develop the theoretical underpinnings of a climate-aligned central banking paradigm and analyse the implications of this paradigm for the ECB policy toolbox and mandate. I also identify the ideological and political economy factors that prevent the ECB from undergoing a climate paradigm shift
Greening capital requirements
Capital requirements play a central role in financial regulation and have significant implications for financial stability and credit allocation. However, in their existing form, they fail to capture environment-related financial risks and act as a barrier to the transition to an environmentally sustainable economy. This paper considers how capital requirements can become green and explores how green differentiated capital requirements (GDCRs) can be incorporated into financial regulation frameworks
Greening capital requirements
Capital requirements play a central role in financial regulation and have significant implications for financial stability and credit allocation. However, in their existing form, they fail to capture environment-related financial risks and act as a barrier to the transition to an environmentally sustainable economy. Environmental issues can be incorporated into capital requirements using three different approaches: (i) microprudential approaches, which suggest that capital requirements need to be adjusted based on micro-level exposures to environmental risks; (ii) weak macroprudential approaches, which emphasise the exposure of financial institutions to systemic risks linked to specific sectors and geographical areas; and (iii) strong macroprudential approaches, whereby systemic risks are analysed by explicitly considering macrofinancial feedback loops and double materiality. In the age of environmental crisis, strong macroprudential approaches should play a prominent role in the greening of capital requirements. Green differentiated capital requirements (GDCRs) are one of the tools that are consistent with a strong macroprudential approach. If designed to accurately capture the environmental footprint of bank assets and minimise adverse financial side effects, GDCRs can contribute to the greening of the banking system and the reduction of physical risks. The positive effects of GDCRs can be enhanced if they are combined with other financial and non-financial environmental policy tools
Financing Climate Investment in the EU: The Role of Monetary and Financial Policies
The climate crisis requires an unprecedented transformation of the EU fiscal-, industrial-, trade-, and regulatory-policy frameworks. However, this transformation needs to be supported by the greening of the EU monetary and financial policies. This would facilitate the financing of the large amount of investment in climate mitigation and adaptation that is needed in the coming years. In this chapter, we present a set of tools that central banks, financial regulators, and financial supervisors can employ to advance the EU decarbonisation and climate-resilience targets. We highlight that these tools should be used in a context of a concrete ‘sticks and carrots’ policy-mix framework that moves beyond market-based approaches
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Greening capital requirements
Capital requirements play a central role in financial regulation and have significant implications for financial stability and credit allocation. However, in their existing form, they fail to capture environment-related financial risks and act as a barrier to the transition to an environmentally sustainable economy. Environmental issues can be incorporated into capital requirements using three different approaches: (i) microprudential approaches, which suggest that capital requirements need to be adjusted based on micro-level exposures to environmental risks; (ii) weak macroprudential approaches, which emphasise the exposure of financial institutions to systemic risks linked to specific sectors and geographical areas; and (iii) strong macroprudential approaches, whereby systemic risks are analysed by explicitly considering macrofinancial feedback loops and double materiality. In the age of environmental crisis, strong macroprudential approaches should play a prominent role in the greening of capital requirements. Green differentiated capital requirements (GDCRs) are one of the tools that are consistent with a strong macroprudential approach. If designed to accurately capture the environmental footprint of bank assets and minimise adverse financial side effects, GDCRs can contribute to the greening of the banking system and the reduction of physical risks. The positive effects of GDCRs can be enhanced if they are combined with other financial and non-financial environmental policy tools
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