Theoretical Foundations and Policy Responses of Contemporary Economic Crises

  • Mark Baimbridge
  • Ioannis Litsios
  • Karen Jackson
  • Uih Ran Lee
Chapter

Abstract

This chapter explores how developments in macroeconomics following the breakdown of the post-war Keynesian era led to the introduction of fiscal and monetary policymaking based on neoclassical assumptions that ultimately have been largely detrimental. Hence, as a consequence of addressing the problems generated by the global financial crisis and subsequent Great Recession many European economies have now entered a new phase of economic difficultly, a process magnified for a number of eurozone countries engulfed by the sovereign debt crisis. Although the aggressive use of expansionary monetary policy by central banks to push short-term nominal interest rates to historically low levels was the textbook response expected from central banks, it has led to the situation of a liquidity trap as they reach the zero lower bound.

Bibliography

  1. Ahearne, A., Schmitz, B. and von Hagen, J. (2007). Current Account Imbalances in the Euro Area. Available at: http://www.hkimr.org/uploads/seminars/213/sem_paper_0_245_current_account_imbalances.pdf
  2. Alesina, A. and Ardagna, S. (2010). Large Changes in Fiscal Policy: Taxes Versus Spending; in Brown, J.R. (ed.) Tax Policy and the Economy, Volume 24. University of Chicago Press, Chicago, pp. 35–68.Google Scholar
  3. Alesina, A. and Tabbellini, G. (1987). A Positive Theory of Fiscal Deficits and Government Debt in a Democracy, NBER Working Paper 2308, Cambridge, MA.Google Scholar
  4. Arestis, P. and Sawyer, M. (2004). Re-examining Monetary and Fiscal Policy for the 21st Century. Edward Elgar, Cheltenham.CrossRefGoogle Scholar
  5. Arestis, P. and Sawyer, M. (2006). What Type of European Monetary Union? in Whyman, P., Bamibridge, M. and Burkitt, B. (eds.) Implications of the Euro: A Critical Perspective from the Left. Routledge, London, pp. 52–59.Google Scholar
  6. Arestis, P. and Sawyer, M. (2012). Can the Euro Survive After the European Crisis? in Arestis, P. and Sawyer, M. (eds.) The Euro Crisis. Palgrave Macmillan, Basingstoke.CrossRefGoogle Scholar
  7. Arestis, P., McCauley, K. and Sawyer, M. (2001). An Alternative Stability and Growth Pact for the European Union. Cambridge Journal of Economics, 25(1), pp. 113–130.CrossRefGoogle Scholar
  8. Baimbridge, M. and Whyman, P. (2004). Fiscal Federalism and EMU: An Appraisal; in Baimbridge, M. and Whyman, P. (eds.) Fiscal Federalism and European Economic Integration. Routledge, London.Google Scholar
  9. Baimbridge, M. and Whyman, P. (2015). Crisis in the Eurozone: Causes, Dilemmas and Solutions. Palgrave, London.CrossRefGoogle Scholar
  10. Baimbridge, M., Burkitt, B. and Whyman, P.B. (2012a). The Eurozone as a Flawed Currency Area. The Political Quarterly, 83(1), pp. 96–107.CrossRefGoogle Scholar
  11. Baimbridge, M., Whyman, P.B. and Burkitt, B. (2012b). New International Political and Economic Relationships; in White, J. (ed.) Building an Economy for the People: An Alternative Economic and Political Strategy for 21st Century Britain. Manifesto Press, London, pp. 37–45.Google Scholar
  12. Baimbridge, M., Whyman, P.B. and Burkitt, B. (2007). Beyond EU Neoliberalisation: A Progressive Strategy for the British Left, Capital and Class. Special Issue: The Left and Europe, 93(Autumn), pp. 67–91.CrossRefGoogle Scholar
  13. Battini, N., Callegari, G. and Melina, G. (2012). Successful Austerity in the United States, Europe and Japan, IMF Working Paper 12/190.Google Scholar
  14. Bayoumi, T. and Eichengreen, B. (1993). Shocking Aspects of European Monetary Integration; in Torres, F. and Giavazzi, F. (eds.) Adjustment and Growth in the European Monetary Union. Cambridge University Press, Cambridge.Google Scholar
  15. Bayoumi, T. and Masson, P.R. (1995). Fiscal Flows in the United States and Canada: Lessons for Monetary Union in Europe. European Economic Review, 39, pp. 253–274.CrossRefGoogle Scholar
  16. Ben Bernanke. (2000). Essays on the Great Depression. Princeton University Press.Google Scholar
  17. Biggs, M., Mayer, T. and Pick, A. (2010). Credit and Economic Recovery: Demystifying Phoenix Miracles. Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1595980
  18. Bini-Smaghi, L. and Vori, S. (1992). Rating the EC as an Optimum Currency Area: Is It Worse than the US? in O’Brien, R. (ed.) Finance and the International Economy. Oxford University Press, Oxford.Google Scholar
  19. Blanchard, O. and Katz, L. (1992). Regional Evolutions. Brookings Papers on Economic Activity, 1, pp. 1–61.CrossRefGoogle Scholar
  20. Blyth, M. (2013). Austerity: The History of a Dangerous Idea. Oxford University Press, Oxford.Google Scholar
  21. Buiter, W. (2001). Notes on “A Code for Fiscal Stability”. Oxford Economic Papers, 53, pp. 1–19.CrossRefGoogle Scholar
  22. Buti, M. and Giudice, G. (2002). Maastricht Fiscal Rules at Ten: An Assessment. Journal of Common Market Studies, 40(5), pp. 823–847.Google Scholar
  23. Buti, M., Eijffinger, S. and Franco, D. (2003). Revisiting EMU’s Stability Pact: A Pragmatic Way Forward. Oxford Review of Economic Policy, 19(1), pp. 100–111.CrossRefGoogle Scholar
  24. Carling, W. and Soskice, D. (2005). The 3-Equation New Keynesian Model – A Graphical Exposition, University College London, UCL Discussion Papers in Economics, No. 05-03.Google Scholar
  25. Carling, W. and Soskice, D. (2009). Teaching Intermediate Macroeconomics Using the 3-Equation Model; in Fontana, G. and Setterfield, M. (eds.) Macroeconomic Theory and Macroeconomic Pedagogy. Palgrave, London.Google Scholar
  26. Carlstrom, C.T. and Fuerst, T.S. (2003). Comments on Backward-Looking Interest-Rate Rules, Interest-Rate Smoothing, and Macroeconomic Instability, Working Paper 0319, Federal Reserve Bank of Cleveland.Google Scholar
  27. Chen, R., Milesi-Ferretti, G.M. and Tressel, T. (2012). External Imbalances in the Euro Area, IMF Working Paper 12/236.Google Scholar
  28. Chick, V. and Pettifor, A. (2011). The Economic Consequences of Mr. Osborne. Policy Research in Macroeconomics, London.Google Scholar
  29. Clift, B. (2004). New Labour’s Second Term and European Social Democracy; in Ludlam, S. and Smith, M. J. (eds.) Governing as New Labour: Policy and Politics Under Blair. Palgrave, London, pp. 34–52.CrossRefGoogle Scholar
  30. Crockett, A. (1982). International Money: Issues and Analysis. Thomas Nelson and Sons, Surrey.Google Scholar
  31. Davidson, P. (2002). Financial Markets, Money and the Real World. Elgar, Cheltenham.CrossRefGoogle Scholar
  32. Davidson, P. (2009). The Keynes Solution: The Path to Global Economic Prosperity. Palgrave Macmillan, London.Google Scholar
  33. de Grauwe, P. and Vanhaverbeke, W. (1993). Is Europe an Optimum Currency Area? in Masson, P.R. and Taylor, M.P. (eds.) Policy Issues in the Operation of Currency Unions. Cambridge University Press, Cambridge.Google Scholar
  34. Dixon, H. (1997). The Role of Imperfect of Competition in Keynesian Economics’; in Snowdon, B. and Vane, R.H. (eds.) Reflections on the Development of Modern Macroeconomics. Edward Elgar, Cheltenham, UK and Lyme, USA.Google Scholar
  35. Duwicquet, V., Mazier, J. and Saadoui, J. (2012). Exchange Rate Misalignments, Fiscal Federalism and Redistribution: How to Adjust in a Monetary Union. Available at: http://www.euroframe.org/fileadmin/user_upload/euroframe/docs/2012/EUROF12_Duwicquet_etal.pdf
  36. ECB. (2012). Competitiveness and External Imbalances Within the Euro Area, Occasional Paper 139.Google Scholar
  37. Eichengreen, B. (1992). Is Europe an Optimum Currency Area? in Borner, S. and Grubel, H. (eds.) The European Community After 1992: Perspectives from the Outside. Macmillan, London.CrossRefGoogle Scholar
  38. Eichengreen, B. (1994). Fiscal Policy and EMU; in Eichengreen, B. and Frieden, J. (eds.) The Political Economy of European Monetary Integration. Westview Press, Oxford.Google Scholar
  39. Eichengreen, B. (1996). Golden Fetters: The Gold Standard and the Great Depression, 1919–1939. Oxford University Press, Oxford.CrossRefGoogle Scholar
  40. Ermisch, J. (1991). European Integration and External Constraints on Social Policy: Is a Social Charter Necessary? National Institute Economic Review, 136(May), pp. 93–108.CrossRefGoogle Scholar
  41. EU Commission. (1996). The Community Budget – 1996 Edition. Office for the Official Publications of the European Communities, Luxembourg.Google Scholar
  42. Fontana, G. (2003). Post Keynesian Approach to Endogenous Money: A Time Framework Explanation. Review of Political Economy, 15(3), pp. 291–314.CrossRefGoogle Scholar
  43. Fontana, G. (2009). Whither New Consensus Macroeconomics? The Role of Government and Fiscal Policy in Modern Macroeconomics, Levy Economics Institute, Working Paper 563.Google Scholar
  44. Frydman, R. and Phelps, E.S. (eds.) (1983). Individual Forecasting and Aggregate Outcome: Rational Expectations Examined. Cambridge University Press, Cambridge.Google Scholar
  45. Giavazzi, F. and Pagano, M. (1990). Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries, NBER Working Paper 3372, Cambridge, MA.CrossRefGoogle Scholar
  46. Goodhart, C.A.E. (1995). The Political Economy of Monetary Union; in Kenen, P.B. (ed.) Understanding Independence: The Macroeconomics of the Open Economy. Princeton University Press, Princeton.Google Scholar
  47. Goodhart, C.A.E. and Smith, S. (1993). Stabilisation. European Economy, Reports and Studies, 5, pp. 419–455.Google Scholar
  48. Goodfriend, M. and King, R.G. (1997). The New Neoclassical Synthesis and the Role of Monetary Policy. NBER Macroeconomics Annual 1997, 12, pp. 231–296.CrossRefGoogle Scholar
  49. Gravelle, J.G. and Hungerford, T.L. (2011). Can Contractionary Fiscal Policy Be Expansionary? Congressional Research Service 7-5700 R41849.Google Scholar
  50. Guajardo, J., Leigh, D. and Pescatori, A. (2011). Expansionary Austerity: New International Evidence, IMF Working Paper 11/158.Google Scholar
  51. Holinski, N., Kool, C. and Muysken, J. (2012). Persistent Macroeconomic Imbalances in the Euro Area: Causes and Consequences. Federal Reserve Bank of St. Louis Review, 94(1), pp. 1–20.Google Scholar
  52. Holland, S. (1995). Squaring the Circle? The Maastricht Convergence Criteria, Cohesion and Employment; in Coates, K. and Holland, S. (eds.) Full Employment for Europe. Spokesman, Nottingham.Google Scholar
  53. Italianer, A. and Vanheukelen, M. (1993). Proposals for Community Stabilisation Mechanisms: Some Historical Applications. European Economy, Reports and Studies, 5, pp. 495–510.Google Scholar
  54. Jaumotte, F. and Sodsriwiboon, P. (2010). Current Account Imbalances in the Southern Euro Area, IMF Working Paper 10/139.CrossRefGoogle Scholar
  55. Jayadev, A. and Konczal, M. (2010). The Boom Not the Slump: The Right Time for Austerity. The Roosevelt Institute, New York.Google Scholar
  56. Jirankova, M. and Hnat, P. (2012). Balance of Payments Adjustment Mechanisms in the Euro Area. Eastern Journal of European Studies, 3(1) pp. 67–86.Google Scholar
  57. Jordà, Ò and Taylor, A.M. (2013). The Time for Austerity: Estimating the Average Treatment Effect of Fiscal Policy, Paper Presented at the NBER Summer Institute.Google Scholar
  58. Joyce, M., Tong, M. and Woods, R. (2011). The United Kingdom’s Quantitative Easing Policy: Design, Operation and Impact. Bank of England Quarterly Bulletin, Q3, pp. 200–212.Google Scholar
  59. Keen, S. (2011). Debunking Economics. Zed Books, London.Google Scholar
  60. Keen, S. (2017). Can We Avoid Another Financial Crisis?. Polity, Cambridge.Google Scholar
  61. Keynes, J.M. (1942). ‘Proposals for an International Currency (or Clearing) Union’, Fourth Draft of the ‘Keynes Plan’, reproduced in Horsefield, J.K. (1969) The International Monetary Fund 1945–1965 – Volume 3: Documents. International Monetary Fund, Washington DC, pp. 3–36.Google Scholar
  62. Lavoie, M. (2004). The New Consensus on Monetary Policy Seen from a Post-Keynesian Perspective; in Lavoie M. and Seccareccia M. (eds.) Central Banking in Morden World: Alternative Perspective. Edward Elgar, CheltenhamGoogle Scholar
  63. Lavoie, M. (2006). A Post-Keynesian Amendment to the New Consensus on Monetary Policy. Metroeconomica, 57(2), pp. 165–192.CrossRefGoogle Scholar
  64. Lea, R. (2010). Time for a Global Vision for Britain; in Baimbridge, M. Whyman, P. B. and Burkitt, B. (eds.) Britain in a Global World: Options for a New Beginning. Imprint Academic, Exeter.Google Scholar
  65. Leigh, D., Devries, P., Freedman, C., Guajardo, J., Laxton, D. and Pescatori, A. (2010). Will It Hurt? Macroeconomic Effects of Fiscal Consolidation, IMF World Economic Outlook.Google Scholar
  66. MacDougall, D. (1992). Economic and Monetary Union and the European Community Budget. National Institute Economic Review, May, 64–68.CrossRefGoogle Scholar
  67. MacDougall, D. (2003). Economic and Monetary Union and the European Community Budget; in Baimbridge, M. and Whyman, P. (eds.) Economic and Monetary Union in Europe: Theory, Evidence and Practice. Edward Elgar, Cheltenham.Google Scholar
  68. Marquand, D. (1999). Premature Obsequies: Social Democracy Comes in from the Cold; in Gamble, A. and Wright, T. (eds.) The New Social Democracy. Blackwell, Oxford.Google Scholar
  69. Masson, P.R. and Taylor, M.P. (1993). Common Currency Areas and Currency Unions: An Analysis of the Issues, Parts I and II. Journal of International and Comparative Economics, 1(3–4), pp. 231–294.Google Scholar
  70. McCombie, J.S.L. and Thirlwall, A.P. (1994). Economic Growth and the Balance-of-Payments Constraint. Macmillan, Basingstoke.CrossRefGoogle Scholar
  71. Minsky, H.P. (2008). John Maynard Keynes. McGraw-Hill, London.Google Scholar
  72. Minsky, H.P. (1982). Can “It” Happen Again? Essays on Instability and Finance. ME Sharpe Inc, Armonk, NY.Google Scholar
  73. Minsky, H.P. (1992). The Financial Instability Hypothesis, The Jerome Levy Economics Institute Working Paper No. 74.Google Scholar
  74. Monvoisin, V. and Rochon L.P. (2006). The Post-Keynesian Consensus, the New Consensus and Endogenous Money; in Gnos C. and Rochon L.-P. (eds.) Post Keynesian Principles of Economic Policy. Edward Elgar, Cheltenham.Google Scholar
  75. Moore, B.J. (1983). Unpacking the Post Keynesian Black Box: Bank Lending and the Money Supply. Journal of Post Keynesian Economics, 5(4), pp. 537–556.CrossRefGoogle Scholar
  76. Mundell, R.A. (1968). International Economics. Macmillan, London.Google Scholar
  77. Myrdal, G. (1957). Economic Theory and Underdeveloped Regions. Duckworth, London.Google Scholar
  78. Palley, T.I. (2006). A Post-Keynesian Framework for Monetary Policy: Why Interest Rate Operating Procedures Are Not Enough; in Gnos C. and Rochon L.-P. (eds.) Post-Keynesian Principles of Economic Policy. Edward Elgar, Cheltenham.Google Scholar
  79. Perotti, R. (2011). The Austerity Myth: Pain Without Gain, Bank of International Settlements Working Paper 362.Google Scholar
  80. Persson, T. and Svensson, L. (1989). Why a Stubborn Conservative Would Run a Deficit: Policy with Time Inconsistent Results. Quarterly Journal of Economics, 104(2), pp. 325–345.Google Scholar
  81. Pilbeam, K. (2006). International Finance. Palgrave Macmillan, Basingstoke.CrossRefGoogle Scholar
  82. Pisani-Ferry, J., Italianer, A. and Lescure, R. (1993). Stabilisation Properties of Budgetary Systems: A Simulation Analysis. European Economy, Reports and Studies, 5, pp. 513–538.Google Scholar
  83. Rochon, L.P. (1999). Credit, Money and Production: An Alternative Post-Keynesian Approach. Edward Elgar, Cheltenham.Google Scholar
  84. Rochon, L.P. (2004). Wicksell after the Taylor Rule: A Post-Keynesian critique of the New Consensus, Paper Was Presented at the ROBINSON Seminar, University of Ottawa.Google Scholar
  85. Romer, D. (2000). Keynesian Macroeconomics Without LM Curve. Journal of Economic Perspectives, 14(2), pp. 149–169.CrossRefGoogle Scholar
  86. Romer, P.M. (1994). The Origins of Endogenous Growth. Journal of Economic Perspectives, 8(1), pp. 3–22.CrossRefGoogle Scholar
  87. Sala-i-Martin, X. and Sachs, J. (1992). Fiscal Federalism and Optimum Currency Areas: Evidence for Europe from the United States, in: Canzoneri, M.B. et al., (eds.) Establishing a Central Bank: Issues in Europe and Lessons from the US. Cambridge University Press, Cambridge.Google Scholar
  88. Sapir, A. and Sekkat, K. (1999). Optimum Electoral Areas: Should Europe Adopt a Single Election Day? European Economic Review, 43, pp. 1595–1619.CrossRefGoogle Scholar
  89. Sawyer, M. (2012). Remedies for the Eurozone Crisis: Quack and Otherwise. Available at: http://ssrn.com/abstract=2078821.
  90. Schumpeter, J.A. (1934). The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest and the Business Cycle. Transaction Publishers, London.Google Scholar
  91. Seater, J.J. (1993). Ricardian Equivalence. Journal of Economic Literature, 31(1), pp. 142–190.Google Scholar
  92. Setterfield, M. (2004). Central Banking, Stability and Macroeconomic Outcomes; in Lavoie M. and Seccareccia, M. (eds.) Central Banking in the Modern World: Alternative Perspectives. Edward Elgar, Cheltenham.Google Scholar
  93. Smithin, J. (2004). Interest Rate Operating Procedures and Income Distribution; in Lavoie M. and Seccareccia M. (eds.) Central Banking in the Modern World: Alternative Perspectives. Edward Elgar, Cheltenham.Google Scholar
  94. Södersten, B. and Reed, G. (1994). International Economics. Macmillan, Basingstoke.Google Scholar
  95. Taylor, J.B. (2000). Reassessing Discretionary Fiscal Policy. Journal of Economic Perspective, Summer.CrossRefGoogle Scholar
  96. Thirlwall, A. P. and Gibson, H. D. (1992). Balance of Payments Theory and the United Kingdom Experience. Macmillan, Basingstoke.CrossRefGoogle Scholar
  97. Tinbergen, J. (1952). On the Theory of Economic Policy. North-Holland, Amsterdam.Google Scholar
  98. von Hagen, J. (1993). Monetary Union and Fiscal Union: A Perspective from Fiscal Federalism; in Masson, P.R. and Taylor, M.P. (eds.) Policy Issues in the Operation of Currency Unions. Cambridge University Press, Cambridge.Google Scholar
  99. Walsh, C.E. (2002). Teaching Inflation Targeting: An Analysis of Intermediate Macro. Journal of Economic Education, 33, pp. 333–346.CrossRefGoogle Scholar
  100. Weber, A.A. (1991). Reputation and Credibility in the European Monetary System. The European Economy, 12, pp. 57–102.CrossRefGoogle Scholar
  101. Whyman, P. (2010). Stabilising Economic and Monetary Union in Europe: The Potential for a Semi-Automatic Stabilisation Mechanism; in Columbus, F. (ed.) Progress in Economics Research, Volume 18. Nova Science Publishers, Hauppauge, NY.Google Scholar
  102. Williamson, J. and Milner, C. (1991). The World Economy: A Textbook in International Economics. Harvester Wheatsheaf, Hemel HempsteadGoogle Scholar
  103. Woodford, M. (2001). The Taylor Rule and Optimal Monetary Policy. American Economic Review, 91(2), pp. 232–237.CrossRefGoogle Scholar
  104. Woodford, M. (2002). Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton University Press, Princeton.Google Scholar

Copyright information

© The Editor(s) (if applicable) and The Author(s) 2017, corrected publication March 2018. 2017

Authors and Affiliations

  • Mark Baimbridge
    • 1
  • Ioannis Litsios
    • 2
  • Karen Jackson
    • 3
  • Uih Ran Lee
    • 4
  1. 1.School of Management University of BradfordBradfordUK
  2. 2.Plymouth Business School University of PlymouthPlymouthUK
  3. 3.Westminster Business School University of WestminsterLondonUK
  4. 4.Department of Economics and Related StudiesUniversity of YorkYorkUK

Personalised recommendations