Currency substitution as an automatic stabilizer

In the presence of frictions, the existing literature shows that currency substitution is detrimental for domestic aggregate stability. This paper singles out the role of currency substitution and shows that diversified currency holdings operate as an automatic stabilizer that mitigates belief-driven cyclical fluctuations in Farmer’s (1997) indeterminate monetary economy. When the foreign inflation rate is lower than the domestic inflation rate, the model’s steady state always displays saddle-path stability. Hence, equilibrium indeterminacy originally present in the domestic country is entirely removed in the presence of diversified currency holdings. When the foreign inflation rate is higher than the domestic inflation rate, then depending on the degrees of currency substitution and relative risk aversion, indeterminacy is either impossible or the requisite level of the foreign inflation rate for indeterminacy is too high to square with data. The stabilizing effect of diversified currency holdings on domestic aggregate stability is robust to whether domestic and foreign currencies display as Edgeworth substitutes or complements, or are additively separable in the household’s preferences.

Leaning against the Bubble: Central Bank Intervention in Walrasian Asset Markets

The paper presents a two-period Walrasian financial market model composed of informed and uninformed rational investors, and noise traders. The rational investors maximize second period consumption utility from the payoffs of trading risk-free holdings to risky assets in the first period. The central bank reacts directly to asset price movements by selling or buying assets to stabilize the market price. It is found that the intervention makes the risky asset’s market price per share less sensitive to information shocks, which presses the market price towards its average price thus reducing price variance. The informed investors’ prediction coefficient remains unaffected, but that of the uninformed investors is magnified, which cancels out the negative effect on shock sensitivity thus keeping the expected value of the risky asset’s dividend constant. Finally, the introduction of the policy rule does not affect rational investors’ risk per share. A general conclusion is that the central bank’s policy can be regarded as an effective automatic stabilizer of financial markets.

Employer of Last Resort as a new ‘New Deal’: A few thoughts on Turkey

Modern Monetary Theory emerges as a plausible alternative to solve Turkey’s staggering unemployment problem. This proposed solution here is the introduction of job guarantee program, which produces a non-discretionary automatic stabilizer that fosters both price stability and full employment. As a monetary sovereign, Turkey has the capacity to use deficit spending to bring growth and provide full employment to the millions who are in involuntary unemployment. The goal here is to tame the business cycles without throwing millions into unemployment, which has social and economic ramifications. In the absence of job creation by the private sector, this can be achieved through the use of government, providing job guarantees and the state acting as an employer of last resort by creating public projects, which will be cyclically adjusted in order to achieve full employment. 

PROGRESSIVE TAXATION AND MACROECONOMICS (IN)STABILITY UNDER HOUSEHOLD HETEROGENEITY

It has been shown that progressive income taxation may stabilize an otherwise standard representative-agent real business cycle model with an indeterminate steady state against aggregate fluctuations caused by agents’ animal spirits. By contrast, within an identical model that allows for sustained economic growth, progressive taxation could lead to equilibrium indeterminacy and sunspot-driven fluctuations. In the context of household heterogeneity that gives rise to income and asset inequality, the fiscal authority has (at least) two options of setting the baseline level of taxable income: (i) the economy-wide average level of income and (ii) the economy’s steady-state level of per capita income. I show that the adoption of a fiscal rule (i) invalidates the effects that a progressive tax can exert on the model’s local stability properties. Progressive income taxation thus no longer operates as an automatic stabilizer that mitigates belief-driven cyclical fluctuations in a no-growth economy, nor as an automatic destabilizer that leads to local indeterminacy in a sustained-growth economy. If a tax policy rule (ii) is instead adopted, then the existing literature’s findings of the (de)stabilizing roles of progressive taxation are robust to the inclusion of household heterogeneity.

Wie die Arbeitslosenversicherung die Wirtschaft stabilisiert

ZusammenfassungDie Arbeitslosenversicherung schützt die Arbeitenden vor grösseren Einkommensausfällen in der Rezession und hilft, den Wohlstand über die Zeit zu glätten. Sie ist auch ein wichtiger automatischer Stabilisator, der die Konjunkturschwankungen dämpft. Gerade die Arbeitslosen haben häufig eine hohe Konsumquote und geben in der Rezession jedes zusätzliche Einkommen aus. Die Absicherung der Einkommen stützt zudem die Kreditfähigkeit der Haushalte. Eine solide finanzierte Arbeitslosenversicherung stabilisiert die Konsumnachfrage und festigt die Widerstandskraft der Wirtschaft. Christian Keuschnigg und Michael Kogler, Herausgeber.Marco Di Maggio, Amir Kermani (2017), Unemployment Insurance as an Automatic Stabilizer: The Financial Channel, Harvard Business School Finance Working Paper.

On an Automatic Stabilizer Towards the Autopoietic Social Justice

The chapter aims to design and qualitatively (especially logically) examine an automatic stabilizer which could confer to the social justice (particularly in its distributive action) the property of auto-poieticity. Some conceptual pairs are questioned regarding the vocation of social justice to become and work as an auto-poietic process within the society, such as discretionary vs. automatic, human nature vs. human condition, external goal vs. internal goal, survival vs. freedom. A basic body of the chapter is focused on the issue of automatization way of applying the principles of social justice – mainly the principle of difference. In fact, the auto-poieticity of social justice follows to be performed by a so-called regulon which automatically ensures the principle of difference working. The automatic stabilizer of an auto-poietic social justice will consist just in discretionarily integrating the mentioned regulon in the normative framework of the society in case.

A Proposal for an Automatic Stabilizer in Social Justice

Generally, social justice has two sides which are intercorrelated and inter-dependend: a) constitutive social justice (for example, the so called commutative social justice); b) regulative social justice (for example, the so called distributive social justice). The paper approaches the regulative social justice, more exactly, an automatic mechanism to get it. To this end, an automatic stabilizer to provide distributive social justice, according to the Rawlsian principle of difference. Such an automatic stabilizer is grounded on the wealth, more precise, on the share of the wealth which is not invested in order to benefit to the more disadvantaged class of the society. Paper does not test empirically the proposal, such a propose remaining for next intervention in this publication.

Capitalizing on Economic Function of the Institution of Zakāt in Modern Economy

This study analyzes the economic potential of the institution of Zakāt on income redistribution, poverty and aggregate demand. Through a mathematical exposition, we show that if a person keeps idle investible wealth, then Zakāt will deplete the idle wealth over time. On the macroeconomic front, proportional Zakāt linked with income will act as an automatic stabilizer. If an economy is in disequilibrium and policies fail to immediately recover and boost incomes, wealth Zakāt will enable the distributive allocation that works independently of the business cycles and will help in stabilizing the extremes of the business cycles. In this way, wealth Zakāt will act as a permanent stabilizer. We discuss that Zakāt is an important tool for redistributing income and it can also increase aggregate spending. The redistribution from people with lower MPC to people with higher MPC will boost aggregate spending even with the same level of aggregate income. Finally, we recommend certain steps at the policy and implementation level so that the institution of Zakāt can be effectively utilized to contribute in poverty alleviation. We recommend that it is appropriate to disburse Zakāt at the federal level. This way, the regional disparities can be reduced more effectively. To gain the trust and the confidence of people, it is vital to improve the governance and transparency. In this regard, we recommend that the Zakāt collection and disbursement details shall be reported in a standard way periodically. We also highlight the importance of creating synergies between Zakāt and other welfare programs. We also draw attention towards modifying the accounting standards to achieve transparent computation, assessment and collection.