Reforming the International Monetary System

Reforming the international monetary system: a stock-flow-consistent approach
Sebastian Valdecantos Halporn and Gennaro Zezza
Journal of Post Keynesian Economics, vol. 38, n.2, 2015, pp.167-191

Abstract: The emergence and persistence of large trade imbalances as well as the volatility of financial flows among countries have been attributed, at least in part, to the inadequacy of the current international monetary system after the breakdown of Bretton Woods. From a different perspective, the current eurozone crisis is also the result, in our view, of a flawed institutional setting. These problems call for reforms to mitigate or avoid the recessionary bias that is the outcome of current systems, as Keynes predicted in the discussion preceding the Bretton Woods agreements. In this paper we briefly review the evidence on international imbalances, and survey the rapidly growing literature on the subject. We introduce a set of models based on the stock-flow-consistent approach pioneered by Godley (1999) and Lavoie and Godley (2003). We discuss how to use these models to explore potential reform of the international monetary system.

The first version of this paper dates back to 2011… but it has been written to provide a benchmark model so that other researchers could expand on it, so it should not become obsolete too quickly!

Link to the model
Link to the Eviews code for the US$ model
Link to the Eviews code for the SDR model
Link to the Eviews code for the first Bancor model
Link to the Eviews code for the second Bancor model


The wage share

I stopped publishing on the blog because I have been VERY busy preparing new courses for the Fall Term. One of them is Economics of Crisis and Austerity at the New School for Social Research.

I am guiding students on how to look into the data, and this (well-known) chart is interesting


The chart is plotting the ratio of “Compensation of employees” to Gross Domestic Income, as published by the BEA, in the NIPA, Table 1.10. Shaded areas are the official recession periods published by the NBER.

The chart shows some facts, namely that

  1. the share of wages, as measured in the chart, has for some time been at its lowest level, with respect to the last 60 years
  2. the share of wages has always been increasing before a recession, and falling afterwards

Can we therefore infer that a new recession is not imminent? Possibly.

I would certainly conclude, looking at the chart above, that the Fed had no reason to increase interest rates. The chart below shows the (monthly average of the) Federal Funds rate, as published by the Federal Reserve.


In many cases – although not always – an increase in this reference rate was followed by a recession, and our first chart above shows that the implication would be a fall in the wage share.

Should the same pattern apply now, an increase in interest rates in the US would bring US workers into even bigger troubles.


Crystal balls? Or good economics?

An article from Bloomberg listed nine people who saw the Greek crisis coming years ago. The list may be narrowly confined to anglo-saxon economists, but I am quite happy that most of the people listed worked at, or were/are affiliated to, the Levy Institute.

Wynne Godley

Wynne Godley is the first in the list, given his prescient words in the London Review of Books, in October 1992. I am happy I contributed to spreading his thoughts in Italy.

Mat Forstater

Mat Forstater is a friend I regularly meet at the annual Minsky Summer Seminar at the Levy.

Stephanie Kelton

Stephanie Kelton now chief economist on the U.S. Senate Budget Committee, was often at the Minsky Seminar, before her latest appointment.

Randy Wray

Stephanie worked with Randy Wray, who is among the most prolific and influential economists at the Levy.

If so many economists doing research together got it right on Greece (as well as on the 2007 recession) maybe it is not by the power of crystal balls, but because of robust, consistent economic thinking?


Greece: Conditions and Strategies for Economic Recovery


Our latest Strategic Analysis for Greece

Greece: Conditions and Strategies for Economic Recovery
Dimitri B. Papadimitriou, M. Nikiforos, G. Zezza

The Greek economy has the potential to recover, and in this report we argue that access to alternative financing sources such as zero-coupon bonds (“Geuros”) and fiscal credit certificates could provide the impetus and liquidity needed to grow the economy and create jobs. But there are preconditions: the existing government debt must be rolled over and austerity policies put aside, restoring trust in the country’s economic future and setting the stage for sustainable income growth, which will eventually enable Greece to repay its debt.

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