Heterodox
91-398: In macroeconomics , chartalism is a heterodox theory of money that argues that money originated historically with states' attempts to direct economic activity rather than as a spontaneous solution to the problems with barter or as a means with which to tokenize debt, and that fiat currency has value in exchange because of sovereign power to levy taxes on economic activity payable in
182-690: A fixed exchange rate regime, aligning their currency with one or more foreign currencies, typically the US dollar or the euro . Conventional monetary policy can be ineffective in situations such as a liquidity trap . When nominal interest rates are near zero, central banks cannot loosen monetary policy through conventional means. In that situation, they may use unconventional monetary policy such as quantitative easing to help stabilize output. Quantity easing can be implemented by buying not only government bonds, but also other assets such as corporate bonds, stocks, and other securities. This allows lower interest rates for
273-623: A fixed exchange rate system or even a currency union like the Economic and Monetary Union of the European Union , drawing on the research literature on optimum currency areas . Macroeconomics as a separate field of research and study is generally recognized to start with the publication of John Maynard Keynes ' The General Theory of Employment, Interest, and Money in 1936. The terms "macrodynamics" and "macroanalysis" were introduced by Ragnar Frisch in 1933, and Lawrence Klein in 1946 used
364-451: A hedge fund , Illinois Income Investors, where he was responsible for several strategies utilizing government securities, mortgage backed securities, LIBOR swaps and LIBOR caps, and financial futures markets. By the late 1990s, most of the firm had been largely turned over to his partners, as he had disagreements on the direction of some of its investments. Warren's hedge fund was informed by his developing theories. After his departure at
455-413: A medium of exchange but as a standard of deferred payment , with government money being debt the government could reclaim by taxation. Innes argued: Whenever a tax is imposed, each taxpayer becomes responsible for the redemption of a small part of the debt which the government has contracted by its issues of money, whether coins, certificates, notes, drafts on the treasury, or by whatever name this money
546-436: A 2% inflation rate just because that has been the average the past few years; they will look at current monetary policy and economic conditions to make an informed forecast. In the new classical models with rational expectations, monetary policy only had a limited impact. Lucas also made an influential critique of Keynesian empirical models. He argued that forecasting models based on empirical relationships would keep producing
637-468: A 3% increase in output would lead to a 1% decrease in unemployment. The structural or natural rate of unemployment is the level of unemployment that will occur in a medium-run equilibrium, i.e. a situation with a cyclical unemployment rate of zero. There may be several reasons why there is some positive unemployment level even in a cyclically neutral situation, which all have their foundation in some kind of market failure : A general price increase across
728-799: A basis for making economic forecasting . Well-known specific theoretical models include short-term models like the Keynesian cross , the IS–LM model and the Mundell–Fleming model , medium-term models like the AD–AS model , building upon a Phillips curve , and long-term growth models like the Solow–Swan model, the Ramsey–Cass–Koopmans model and Peter Diamond 's overlapping generations model . Quantitative models include early large-scale macroeconometric model ,
819-610: A broader class of assets beyond government bonds. A similar strategy is to lower long-term interest rates by buying long-term bonds and selling short-term bonds to create a flat yield curve , known in the US as Operation Twist . Fiscal policy is the use of government's revenue ( taxes ) and expenditure as instruments to influence the economy. For example, if the economy is producing less than potential output , government spending can be used to employ idle resources and boost output, or taxes could be lowered to boost private consumption which has
910-533: A certain proportion of his taxes should be paid in a paper money of a certain kind, might thereby give a certain value to this paper money; even though the term of its final discharge and redemption should depend altogether on the will of the prince. Forstater also finds support for the concept of tax-driven money, under certain institutional conditions, in the work of Jean-Baptiste Say , John Stuart Mill , Karl Marx and William Stanley Jevons . Alfred Mitchell-Innes , writing in 1914, argued that money existed not as
1001-564: A core part of contemporary macroeconomics. The 2007–2008 financial crisis , which led to the Great Recession , led to major reassessment of macroeconomics, which as a field generally had neglected the potential role of financial institutions in the economy. After the crisis, macroeconomic researchers have turned their attention in several new directions: Research in the economics of the determinants behind long-run economic growth has followed its own course. The Harrod-Domar model from
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#17328550837451092-459: A lecture about functional finance at Franklin the year before. In 2014 he became visiting professor at the University of Bergamo . He is attributed with creating Mosler's law dealing with fiscal policy of a nation during a recession. Specifically, Mosler's law states that "[...] no financial crisis [is] so deep that a sufficiently large fiscal adjustment cannot deal with it." He stated that
1183-442: A medium-run equilibrium (or "potential") level, the process would be slow at best. Keynes coined the term liquidity preference (his preferred name for what is also known as money demand ) and explained how monetary policy might affect aggregate demand, at the same time offering clear policy recommendations for an active role of fiscal policy in stabilizing aggregate demand and hence output and employment. In addition, he explained how
1274-420: A parallel division of macroeconomic policies into short-run policies aimed at mitigating the harmful consequences of business cycles (known as stabilization policy ) and medium- and long-run policies targeted at improving the structural levels of macroeconomic variables. Stabilization policy is usually implemented through two sets of tools: fiscal and monetary policy. Both forms of policy are used to stabilize
1365-422: A production cost, therefore the government should fund for at least 90% of the cost paid by the firms. Finally, he supports issuing medical debit cards to all citizens, for a fixed amount. This covers any medical costs and any amount above this will be covered by "catastrophe insurance". At the end of every year, citizens would receive a portion of their unused medical debit card. In a brief proposal, Mosler stated
1456-498: A similar effect. Government spending or tax cuts do not have to make up for the entire output gap . There is a multiplier effect that affects the impact of government spending. For instance, when the government pays for a bridge, the project not only adds the value of the bridge to output, but also allows the bridge workers to increase their consumption and investment, which helps to close the output gap. The effects of fiscal policy can be limited by partial or full crowding out . When
1547-541: A special case of the more general Ramsey growth model , where households' savings rates are not constant as in the Solow model, but derived from an explicit intertemporal utility function . In the 1980s and 1990s endogenous growth theory arose to challenge the neoclassical growth theory of Ramsey and Solow. This group of models explains economic growth through factors such as increasing returns to scale for capital and learning-by-doing that are endogenously determined instead of
1638-403: A whole intellectural framework - a novel theory of economics that explained why markets might not clear, which would evolve into a school of thought known as Keynesian economics , also called Keynesianism or Keynesian theory. In Keynes' theory, aggregate demand - by Keynes called "effective demand" - was key to determining output. Even if Keynes conceded that output might eventually return to
1729-532: Is a proponent and research financier of post-Keynesian Modern Monetary Theory . He was awarded an honorary doctorate by the Franklin University Switzerland , and in 2014 was appointed Visiting Professor at the University of Bergamo , Italy. Mosler has run as an independent for multiple offices including: United States president , a delegate to Congress three times, and lieutenant governor. In 2018, he ran unsuccessfully for governor of
1820-547: Is affected. Expansionary monetary policy lowers interest rates, increasing economic activity, whereas contractionary monetary policy raises interest rates. In the case of a fixed exchange rate system, interest rate decisions together with direct intervention by central banks on exchange rate dynamics are major tools to control the exchange rate. In developed countries, most central banks follow inflation targeting , focusing on keeping medium-term inflation close to an explicit target, say 2%, or within an explicit range. This includes
1911-498: Is called. He has to acquire his portion of the debt from some holder of a coin or certificate or other form of government money, and present it to the Treasury in liquidation of his legal debt. He has to redeem or cancel that portion of the debt...The redemption of government debt by taxation is the basic law of coinage and of any issue of government ‘money’ in whatever form. Knapp and "Chartalism" were referenced by John Maynard Keynes in
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#17328550837452002-437: Is confident that inflation is a non-factor in his analysis given current procurement policy as long as there is sufficient excess capacity. In his theory the government has the complete ability to constantly expand net spending and guarantee consumption and growth. He supports unlimited FDIC deposit insurance for all bank deposits for US banks. He stresses that federal spending is in no way constrained by tax revenues, therefore
2093-468: Is implemented through automatic stabilizers without any active decisions by politicians. Automatic stabilizers do not suffer from the policy lags of discretionary fiscal policy . Automatic stabilizers use conventional fiscal mechanisms, but take effect as soon as the economy takes a downturn: spending on unemployment benefits automatically increases when unemployment rises, and tax revenues decrease, which shelters private income and consumption from part of
2184-409: Is measured by the unemployment rate, i.e. the percentage of persons in the labor force who do not have a job, but who are actively looking for one. People who are retired, pursuing education, or discouraged from seeking work by a lack of job prospects are not part of the labor force and consequently not counted as unemployed, either. Unemployment has a short-run cyclical component which depends on
2275-416: Is referred to as an "environment's source function", and this function is depleted as resources are consumed or pollution contaminates the resources. The "sink function" describes an environment's ability to absorb and render harmless waste and pollution: when waste output exceeds the limit of the sink function, long-term damage occurs. The division into various time frames of macroeconomic research leads to
2366-464: Is that of an economy's openness, economic theory distinguishing sharply between closed economies and open economies . It is usual to distinguish between three time horizons in macroeconomics, each having its own focus on e.g. the determination of output: National output is the total amount of everything a country produces in a given period of time. Everything that is produced and sold generates an equal amount of income. The total net output of
2457-470: Is the product of two inputs: capital and labor. The Solow model assumes that labor and capital are used at constant rates without the fluctuations in unemployment and capital utilization commonly seen in business cycles. In this model, increases in output, i.e. economic growth, can only occur because of an increase in the capital stock, a larger population, or technological advancements that lead to higher productivity ( total factor productivity ). An increase in
2548-606: The Consulier GTP and the Mosler MT900 . Starting in 1985, his cars were marketed by startup company Consulier, later renamed Mosler Automotive . His models were marked by excellent performance and high speeds. Mosler was so confident about one of his models, the Consulier GTP, that he offered a bounty of $ 25,000 to anyone who could beat it in a race. Car and Driver took up the gauntlet and defeated his car. Mosler noted that
2639-592: The Federal Reserve and the European Central Bank , which are generally considered to follow a strategy very close to inflation targeting, even though they do not officially label themselves as inflation targeters. In practice, an official inflation targeting often leaves room for the central bank to also help stabilize output and employment, a strategy known as "flexible inflation targeting". Most emerging economies focus their monetary policy on maintaining
2730-739: The U.S. Virgin Islands as an independent. Mosler attended the University of Connecticut where he graduated with a degree in economics. He initially went on to work at the Savings Bank of Manchester in Manchester, Connecticut in 1973. Next he went on to work in Hartford for Bache and Co. before moving to New York City . From there he would go on to work on Wall Street , specifically, Bankers Trust NYC, and then William Blair in Chicago. In 1982 he founded
2821-468: The multiplier effect would magnify a small decrease in consumption or investment and cause declines throughout the economy, and noted the role that uncertainty and animal spirits can play in the economy. The generation following Keynes combined the macroeconomics of the General Theory with neoclassical microeconomics to create the neoclassical synthesis . By the 1950s, most economists had accepted
Chartalism - Misplaced Pages Continue
2912-411: The 1940s attempted to build a long-run growth model inspired by Keynesian demand-driven considerations. The Solow–Swan model worked out by Robert Solow and, independently, Trevor Swan in the 1950s achieved more long-lasting success, however, and is still today a common textbook model for explaining economic growth in the long-run. The model operates with a production function where national output
3003-776: The Centre of Full Employment and Equity or CofFEE at the University of Newcastle in Australia, coined the term Modern Monetary Theory to describe modern Neo-Chartalism, and that term is now widely used. Scott Fullwiler has added detailed technical analysis of the banking and monetary systems. Rodger Malcolm Mitchell's book Free Money describes in layman's terms the essence of chartalism. Some contemporary proponents, such as Wray, situate chartalism within post-Keynesian economics , while chartalism has been proposed as an alternative or complementary theory to monetary circuit theory , both being forms of endogenous money , i.e., money created within
3094-491: The Great Depression struck, the reigning economists had difficulty explaining how goods could go unsold and workers could be left unemployed. In the prevailing neoclassical economics paradigm, prices and wages would drop until the market cleared, and all goods and labor were sold. Keynes in his main work, the General Theory , initiated what is known as the Keynesian revolution . He offered a new interpretation of events and
3185-470: The Keynesian school. A central development in new classical thought came when Robert Lucas introduced rational expectations to macroeconomics. Prior to Lucas, economists had generally used adaptive expectations where agents were assumed to look at the recent past to make expectations about the future. Under rational expectations, agents are assumed to be more sophisticated. Consumers will not simply assume
3276-1169: The Lucas critique. Like classical models, new classical models had assumed that prices would be able to adjust perfectly and monetary policy would only lead to price changes. New Keynesian models investigated sources of sticky prices and wages due to imperfect competition , which would not adjust, allowing monetary policy to impact quantities instead of prices. Stanley Fischer and John B. Taylor produced early work in this area by showing that monetary policy could be effective even in models with rational expectations when contracts locked in wages for workers. Other new Keynesian economists, including Olivier Blanchard , Janet Yellen , Julio Rotemberg , Greg Mankiw , David Romer , and Michael Woodford , expanded on this work and demonstrated other cases where various market imperfections caused inflexible prices and wages leading in turn to monetary and fiscal policy having real effects. Other researchers focused on imperferctions in labor markets, developing models of efficiency wages or search and matching (SAM) models, or imperfections in credit markets like Ben Bernanke . By
3367-604: The United States Congress; his last congressional race was in 2012. In 2014, Mosler ran for lieutenant governor of the U.S. Virgin Islands as an independent, but quit the race early due to a difference of opinion with his running mate Soraya Diase Coffelt . In 2018, he ran unsuccessfully for governor of the US Virgin Islands as an independent candidate, coming in fourth with 4.7% of the vote. Mosler developed several luxury sports cars and supercars , including
3458-447: The business cycle, and a more permanent structural component, which can be loosely thought of as the average unemployment rate in an economy over extended periods, and which is often termed the natural or structural rate of unemployment. Cyclical unemployment occurs when growth stagnates. Okun's law represents the empirical relationship between unemployment and short-run GDP growth. The original version of Okun's law states that
3549-459: The case of a very low interest level, the economy may be in a liquidity trap in which monetary policy becomes ineffective, which makes fiscal policy the more potent tool to stabilize the economy. Thirdly, in regimes where monetary policy is tied to fulfilling other targets, in particular fixed exchange rate regimes, the central bank cannot simultaneously adjust its interest rates to mitigate domestic business cycle fluctuations, making fiscal policy
3640-409: The consequences of international trade in goods , financial assets and possibly factor markets like labor migration and international relocation of firms (physical capital). It explores what determines import , export , the balance of trade and over longer horizons the accumulation of net foreign assets . An important topic is the role of exchange rates and the pros and cons of maintaining
3731-646: The consumption of undesirable goods. In February 2009, Mosler declared his candidacy with the Federal Elections Commission to run for the office of President of the United States as an independent. In April 2010, he withdrew to run for a U.S. Senate seat in Connecticut , briefly as a Democrat, but ultimately as an independent. In the final tally he received 0.98% of the vote. Mosler has run unsuccessfully three times for U.S. Virgin Islands delegate to
Chartalism - Misplaced Pages Continue
3822-540: The currency they issue. Georg Friedrich Knapp , a German economist , invented the term "chartalism" in his State Theory of Money , which was published in German in 1905 and translated into English in 1924. The name derives from the Latin charta , in the sense of a token or ticket. Knapp argued that "money is a creature of law" rather than a commodity . Knapp contrasted his state theory of money with " metallism ", as embodied at
3913-576: The development of policy and explains what he deems "true" as proper alternatives. In recognition that his "leadership in the field of economics is notable" Mosler was awarded an honorary doctorate from Franklin University Switzerland in 2014, after the Mosler Economic Policy Center (a center founded by him and aimed at encouraging education and research in new concepts and methods of economic policy analysis) had promoted
4004-404: The development of the macroeconomic research mainstream . Macroeconomics encompasses a variety of concepts and variables, but above all the three central macroeconomic variables are output, unemployment, and inflation. Besides, the time horizon varies for different types of macroeconomic topics, and this distinction is crucial for many research and policy debates. A further important dimension
4095-678: The difference may be considerable. Economists interested in long-run increases in output study economic growth. Advances in technology, accumulation of machinery and other capital , and better education and human capital , are all factors that lead to increased economic output over time. However, output does not always increase consistently over time. Business cycles can cause short-term drops in output called recessions . Economists look for macroeconomic policies that prevent economies from slipping into either recessions or overheating and that lead to higher productivity levels and standards of living . The amount of unemployment in an economy
4186-767: The differences between bank money and state money. James K. Galbraith supports chartalism and wrote the foreword for Mosler's book Seven Deadly Innocent Frauds of Economic Policy in 2010. Macroeconomics Heterodox Macroeconomics is a branch of economics that deals with the performance, structure, behavior, and decision-making of an economy as a whole. This includes regional, national, and global economies . Macroeconomists study topics such as output / GDP (gross domestic product) and national income , unemployment (including unemployment rates ), price indices and inflation , consumption , saving , investment , energy , international trade , and international finance . Macroeconomics and microeconomics are
4277-440: The economic system is dependant upon the environment. In this case, the circular flow of income diagram may be replaced by a more complex flow diagram reflecting the input of solar energy, which sustains natural inputs and environmental services which are then used as units of production . Once consumed, natural inputs pass out of the economy as pollution and waste. The potential of an environment to provide services and materials
4368-529: The economy , i.e. limiting the effects of the business cycle by conducting expansive policy when the economy is in a recession or contractive policy in the case of overheating . Structural policies may be labor market policies which aim to change the structural unemployment rate or policies which affect long-run propensities to save, invest, or engage in education or research and development. Central banks conduct monetary policy mainly by adjusting short-term interest rates . The actual method through which
4459-454: The economy is usually measured as gross domestic product (GDP). Adding net factor incomes from abroad to GDP produces gross national income (GNI), which measures total income of all residents in the economy. In most countries, the difference between GDP and GNI are modest so that GDP can approximately be treated as total income of all the inhabitants as well, but in some countries, e.g. countries with very large net foreign assets (or debt),
4550-494: The economy was sufficient to explain the Great Depression , and that aggregate demand oriented explanations were not necessary. Friedman also argued that monetary policy was more effective than fiscal policy; however, Friedman doubted the government's ability to "fine-tune" the economy with monetary policy. He generally favored a policy of steady growth in money supply instead of frequent intervention. Friedman also challenged
4641-503: The economy, as by government deficit spending or bank lending, rather than from outside, as by gold. In the complementary view, chartalism explains the "vertical" (government-to-private and vice versa) interactions, while circuit theory is a model of the "horizontal" (private-to-private) interactions. Hyman Minsky seemed to incorporate a Chartalist approach to money creation in his Stabilizing an Unstable Economy , while Basil Moore , in his book Horizontalists and Verticalists , delineates
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#17328550837454732-460: The economy, could hardly generate the large short-run output fluctuations that we observe. In addition, there is strong empirical evidence that monetary policy does affect real economic activity, and the idea that technological regress can explain recent recessions seems implausible. Despite criticism of the realism in the RBC models, they have been very influential in economic methodology by providing
4823-687: The end of 1997, Warren's former business lost money when several dealers refused to make payments on credit default swaps on Russian debt. Separately, Warren attributed the crisis to the fixed exchange rate Russia had at the time. Excited to share his various economic theories, Warren met economist Arthur Laffer through a referral from Donald Rumsfeld . At a meeting of Social Policy in NYC, William Vickrey suggested Warren to seek out post-Keynesian economists L. Randall Wray , Bill Mitchell , and Stephanie Kelton to discuss his ideas. These post-Keynesian economists had been familiar with chartalism , and recognized
4914-464: The energy crisis could be solved by lowering the speed limit nationally to 30 mph. According to Mosler, this would cut gasoline consumption and pollution since automobiles run more efficiently at slower speeds, while also greatly increase the demand for public transportation. He states that such an initiative would eventually lead to a supply shock forcing prices down, and improve real terms of trade. Mosler supports government purchases of houses in
5005-601: The entire economy is called inflation . When prices decrease, there is deflation . Economists measure these changes in prices with price indexes . Inflation will increase when an economy becomes overheated and grows too quickly. Similarly, a declining economy can lead to decreasing inflation and even in some cases deflation. Central bankers conducting monetary policy usually have as a main priority to avoid too high inflation, typically by adjusting interest rates. High inflation as well as deflation can lead to increased uncertainty and other negative consequences, in particular when
5096-466: The exogenous technological improvement used to explain growth in Solow's model. Another type of endogenous growth models endogenized the process of technological progress by modelling research and development activities by profit-maximizing firms explicitly within the growth models themselves. Since the 1970s, various environmental problems have been integrated into growth and other macroeconomic models to study their implications more thoroughly. During
5187-405: The fall in market income. There is a general consensus that both monetary and fiscal instruments may affect demand and activity in the short run (i.e. over the business cycle). Economists usually favor monetary over fiscal policy to mitigate moderate fluctuations, however, because it has two major advantages. First, monetary policy is generally implemented by independent central banks instead of
5278-478: The first examples of general equilibrium models based on microeconomic foundations and a specification of underlying shocks that aim to explain the main features of macroeconomic fluctuations, not only qualitatively, but also quantitatively. In this way, they were forerunners of the later DSGE models. New Keynesian economists responded to the new classical school by adopting rational expectations and focusing on developing micro-founded models that were immune to
5369-580: The foreclosure process from the bank at the lower of the fair market value or remaining mortgage balance. The government then would rent the house back to the original owner and after two years the house is put on the market with the original owner having the first rights of purchase. Mosler supports eliminating the income tax and replacing it with a real estate tax to "anchor the currency". He also supports eliminating tax advantages for any savings accounts, since he states savings do not increase investments necessarily. He supports luxury taxes being used to limit
5460-429: The government takes on spending projects, it limits the amount of resources available for the private sector to use. Full crowding out occurs in the extreme case when government spending simply replaces private sector output instead of adding additional output to the economy. A crowding out effect may also occur if government spending should lead to higher interest rates, which would limit investment. Some fiscal policy
5551-821: The government will always be able to make payments in its own currency, stating "Federal Government checks don't bounce". He goes on to state that any and all debt passed on to future generations will never be burdensome, since they will undoubtedly consume whatever is produced. He developed much of his belief from his time as a hedge fund manager when many investors predicted the Italian government defaulting on bonds, whereas he predicted, correctly, that Italian government would not default and thus made considerable returns. Mosler supports government funding for full-time employment with full health care coverage for employees and dependents, thus triggering all firms providing health care to remain competitive. He states health cannot be viewed as
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#17328550837455642-493: The inflation (or deflation) is unexpected. Consequently, most central banks aim for a positive, but stable and not very high inflation level. Changes in the inflation level may be the result of several factors. Too much aggregate demand in the economy will cause an overheating , raising inflation rates via the Phillips curve because of a tight labor market leading to large wage increases which will be transmitted to increases in
5733-538: The interest rate is changed differs from central bank to central bank, but typically the implementation happens either directly via administratively changing the central bank's own offered interest rates or indirectly via open market operations . Via the monetary transmission mechanism , interest rate changes affect investment , consumption , asset prices like stock prices and house prices , and through exchange rate reactions export and import . In this way aggregate demand , employment and ultimately inflation
5824-466: The late 1990s, economists had reached a rough consensus. The market imperfections and nominal rigidities of new Keynesian theory was combined with rational expectations and the RBC methodology to produce a new and popular type of models called dynamic stochastic general equilibrium (DSGE) models. The fusion of elements from different schools of thought has been dubbed the new neoclassical synthesis . These models are now used by many central banks and are
5915-417: The macro economy. RBC models were created by combining fundamental equations from neo-classical microeconomics to make quantitative models. In order to generate macroeconomic fluctuations, RBC models explained recessions and unemployment with changes in technology instead of changes in the markets for goods or money. Critics of RBC models argue that technological changes, which typically diffuse slowly throughout
6006-434: The macro/micro divide is institutionalized in the field of economics. Most economists identify as either macro- or micro-economists. Macroeconomics is traditionally divided into topics along different time frames: the analysis of short-term fluctuations over the business cycle , the determination of structural levels of variables like inflation and unemployment in the medium (i.e. unaffected by short-term deviations) term, and
6097-552: The model used in the race was a worn-out Consulier and even so offered to pay if he was allowed to use his own driver and replace the brake pads. Car and Driver refused. Mosler subsequently offered the challenge once more for a higher bounty of $ 100,000 and held an event at Sebring where the Consulier again proved to be far quicker than any other road car. In the 1990s he developed environmentally friendly vehicles including both electric cars and composite-bodied automobiles. The company
6188-472: The money market is modeled as giving equilibrium between the money supply and liquidity preference (equivalent to money demand). Warren Mosler Warren Mosler (born September 18, 1949) is an American hedge fund executive and entrepreneur. He is a co-founder of the Center for Full Employment And Price Stability at University of Missouri-Kansas City and the founder of Mosler Automotive . Mosler
6279-420: The new classical real business cycle models , microfounded computable general equilibrium (CGE) models used for medium-term (structural) questions like international trade or tax reforms, Dynamic stochastic general equilibrium (DSGE) models used to analyze business cycles, not least in many central banks, or integrated assessment models like DICE . The IS–LM model, invented by John Hicks in 1936, gives
6370-564: The oil crises of the 1970s when scarcity problems of natural resources were high on the public agenda, economists like Joseph Stiglitz and Robert Solow introduced non-renewable resources into neoclassical growth models to study the possibilities of maintaining growth in living standards under these conditions. More recently, the issue of climate change and the possibilities of a sustainable development are examined in so-called integrated assessment models , pioneered by William Nordhaus . In macroeconomic models in environmental economics ,
6461-606: The only usable tool for such countries. Macroeconomic teaching, research and informed debates normally evolve around formal ( diagrammatic or equational ) macroeconomic models to clarify assumptions and show their consequences in a precise way. Models include simple theoretical models, often containing only a few equations, used in teaching and research to highlight key basic principles, and larger applied quantitative models used by e.g. governments, central banks, think tanks and international organisations to predict effects of changes in economic policy or other exogenous factors or as
6552-447: The opening pages of his 1930 Treatise on Money and appear to have influenced Keynesian ideas on the role of the state in the economy. By 1947, when Abba Lerner wrote his article "Money as a Creature of the State", economists had largely abandoned the idea that the value of money was closely linked to gold. Lerner argued that responsibility for avoiding inflation and depressions lay with
6643-475: The original simple Phillips curve relationship between inflation and unemployment. Friedman and Edmund Phelps (who was not a monetarist) proposed an "augmented" version of the Phillips curve that excluded the possibility of a stable, long-run tradeoff between inflation and unemployment. When the oil shocks of the 1970s created a high unemployment and high inflation, Friedman and Phelps were vindicated. Monetarism
6734-465: The political institutions that control fiscal policy. Independent central banks are less likely to be subject to political pressures for overly expansionary policies. Second, monetary policy may suffer shorter inside lags and outside lags than fiscal policy. There are some exceptions, however: Firstly, in the case of a major shock, monetary stabilization policy may not be sufficient and should be supplemented by active fiscal stabilization. Secondly, in
6825-449: The price level are directly caused by changes in the money supply . Whereas there is empirical evidence that there is a long-run positive correlation between the growth rate of the money stock and the rate of inflation, the quantity theory has proved unreliable in the short- and medium-run time horizon relevant to monetary policy and is abandoned as a practical guideline by most central banks today. Open economy macroeconomics deals with
6916-518: The price of the products of employers. Too little aggregate demand will have the opposite effect of creating more unemployment and lower wages, thereby decreasing inflation. Aggregate supply shocks will also affect inflation, e.g. the oil crises of the 1970s and the 2021–2023 global energy crisis . Changes in inflation may also impact the formation of inflation expectations , creating a self-fulfilling inflationary or deflationary spiral. The monetarist quantity theory of money holds that changes in
7007-399: The recent recession could have been alleviated much quicker from a full payroll tax holiday that suspended FICA taxes (or massive government spending increases, depending on one's politics) until unemployment fell. He opposes overly high taxes since they discourage consumption within an economy but does agree a certain tax level is needed to guarantee citizens use the dollar as a currency. He
7098-416: The same predictions even as the underlying model generating the data changed. He advocated models based on fundamental economic theory (i.e. having an explicit microeconomic foundation ) that would, in principle, be structurally accurate as economies changed. Following Lucas's critique, new classical economists, led by Edward C. Prescott and Finn E. Kydland , created real business cycle (RBC) models of
7189-494: The savings rate leads to a temporary increase as the economy creates more capital, which adds to output. However, eventually the depreciation rate will limit the expansion of capital: savings will be used up replacing depreciated capital, and no savings will remain to pay for an additional expansion in capital. Solow's model suggests that economic growth in terms of output per capita depends solely on technological advances that enhance productivity. The Solow model can be interpreted as
7280-619: The state because of its ability to create or tax away money. Historian Constantina Katsari sees principles from both metallism and chartalism reflected in the monetary system introduced by Augustus to the eastern provinces of the Roman Empire , from the early 1st century to the late 3rd century AD. Economists Warren Mosler , L. Randall Wray , Stephanie Kelton , and Bill Mitchell are largely responsible for reviving chartalism as an explanation of money creation ; Wray refers to this revived formulation as Neo-Chartalism . Mitchell, founder of
7371-749: The study of long-term economic growth. It also studies the consequences of policies targeted at mitigating fluctuations like fiscal or monetary policy , using taxation and government expenditure or interest rates, respectively, and of policies that can affect living standards in the long term, e.g. by affecting growth rates. Macroeconomics as a separate field of research and study is generally recognized to start in 1936, when John Maynard Keynes published his The General Theory of Employment, Interest and Money , but its intellectual predecessors are much older. Since World War II, various macroeconomic schools of thought like Keynesians , monetarists , new classical and new Keynesian economists have made contributions to
7462-414: The synthesis view of the macroeconomy. Economists like Paul Samuelson , Franco Modigliani , James Tobin , and Robert Solow developed formal Keynesian models and contributed formal theories of consumption, investment, and money demand that fleshed out the Keynesian framework. Milton Friedman updated the quantity theory of money to include a role for money demand. He argued that the role of money in
7553-422: The time in the gold standard , where the value of a unit of currency depended on the quantity of precious metal it contained or could be exchanged for. He argued the state could create pure paper money and make it exchangeable by recognising it as legal tender , with the criterion for the money of a state being "that which is accepted at the public pay offices". When Knapp was writing, the prevailing view of money
7644-505: The two most general fields in economics. The focus of macroeconomics is often on a country (or larger entities like the whole world) and how its markets interact to produce large-scale phenomena that economists refer to as aggregate variables. In microeconomics the focus of analysis is often a single market, such as whether changes in supply or demand are to blame for price increases in the oil and automotive sectors. From introductory classes in "principles of economics" through doctoral studies,
7735-419: The underpinnings of aggregate demand (itself discussed below). It answers the question "At any given price level, what is the quantity of goods demanded?" The graphic model shows combinations of interest rates and output that ensure equilibrium in both the goods and money markets under the model's assumptions. The goods market is modeled as giving equality between investment and public and private saving (IS), and
7826-696: The validity of Mosler's analysis. Laffer also his staff economist Mark McNary, who provided editorial and research assistance in Warren's self-published monograph , "Soft-Currency Economics". Academically, he is known for his writings on Modern Monetary Theory , an economic theory that describes the way fiat money is created and used in modern economies. His unorthodox views have gained a substantial following among participants in Internet discussion groups and academics. In 2010 he published Seven Deadly Innocent Frauds of Economic Policy outlining errors that can be made in
7917-402: The word "macroeconomics" itself in a journal title in 1946. but naturally several of the themes which are central to macroeconomic research had been discussed by thoughtful economists and other writers long before 1936. In particular, macroeconomic questions before Keynes were the topic of the two long-standing traditions of business cycle theory and monetary theory . William Stanley Jevons
8008-468: Was one of the pioneers of the first tradition, whereas the quantity theory of money , labelled the oldest surviving theory in economics, as an example of the second was described already in the 16th century by Martín de Azpilcueta and later discussed by personalities like John Locke and David Hume . In the first decades of the 20th century monetary theory was dominated by the eminent economists Alfred Marshall , Knut Wicksell and Irving Fisher . When
8099-416: Was particularly influential in the early 1980s, but fell out of favor when central banks found the results disappointing when trying to target money supply instead of interest rates as monetarists recommended, concluding that the relationships between money growth, inflation and real GDP growth are too unstable to be useful in practical monetary policy making. New classical macroeconomics further challenged
8190-488: Was sold in June 2013. Mosler also designed his own catamaran that he prides on being much lighter, faster, and more fuel-efficient than other models. He is operating a unique 'tandem' four-hulled ferry that doesn't promote sea sickness to take passengers from St. Croix to St. Thomas. Around 2010, Mosler relocated to the U.S. Virgin Islands in order to participate in a government-sponsored economic growth initiative. In 2013,
8281-527: Was that it had evolved from systems of barter to become a medium of exchange because it represented a durable commodity which had some use value . However, as modern chartalist economists such as Randall Wray and Mathew Forstater have pointed out, chartalist insights into tax-driven paper money can be found in the earlier writings of many classical economists, for instance Adam Smith , who observed in The Wealth of Nations : A prince, who should enact that
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