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.

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

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

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

The Great Moderation and the Decoupling of Monetary Policy from Long-Term Rates in the U.S. and Germany

We apply the asymmetric ARDL model advanced by Shin, Yu and Greenwood-Nimmo (2009) to the analysis of the patterns of pass-through from policy-controlled interest rates to a variety of longer-term rates in the U.S. and Germany. Our results reveal three main phenomena. Firstly, while the e®ect of a rate hike is largely con¯ned to the short-run, the e®ect of a rate cut is muted in the short-run but non-negligible at longer horizons. We characterise this pattern as a switch from short-run positive asymmetry to long-run negative asymmetry, a pattern that potentially reconciles the con°icting empirical evidence and theoretical conjectures that dominate the existing literature. Secondly, our results con¯rm that there has been a decoupling of long-term rates from policy-controlled rates during the period of the Great Moderation in both the U.S. and Germany, albeit in a complex and nonlinear way. Thirdly, by replicating Taylor's (2007) counterfactual exercise using our asymmetric models, we ¯nd that Taylor over-estimates the importance of policy-controlled rates for the broader economy. Equivalently, our results do not support Greenspan's belief that the decoupling is a recent phenomenon. In light of our findings, we conclude that a narrow focus on the interest rate as the sole instrument of monetary policy is likely to be sub-optimal under current institutional arrangements.Asymmetric ARDL Model and Dynamic Multipliers, Great Moderation, Asymmetric Interest Rate Pass-through