Macro-financial developments of Slovakia: an empirical analysis based on the monetary circuit theory International Conference “National and Regional Economics VII” October, 1-3, 2008 University of Košice, Slovakia Matthieu Llorca University of Burgundy, L.E.G/FARGO-CEMF

1. Introduction Economic success of Slovakia: 01/01/2009 New Member of Euro Area and the first country of the Viségrad Group Theoretical framework used: heterodox analysis, i.e the monetary circuit theory Is the monetary circuit theory relevant to explain macro-financial develoments over the last decade in Slovakia?

We focus on two elements of the monetary circuit theory: - The Keynes-Kalecki identity - The nature endogenous of money Organization of the paper: 1. Characteristics of the monetary circuit theory 2. Descriptive analysis of the macro-financial development in Slovakia 3. Econometrics findings

2. Theoretical framework: the monetary circuit theory (MCT) 2.1 Theoretical roots: - Wicksell (1898) - Keynes (1929, 1936 and 1937) - Kalecki (1933, 1938 and 1954) - Sylos-Labini (1948) - Schumpeter (1953) - Joan Robinson (1956)  2.2 Theoretical development of the MCT: 60s-70s decade  French school (Le Bourva 1962, Barrère 1973, Parguez 1975, 80, 84 and 96, Schmitt 1966, 71, 75 and 84)  Italian school (Graziani 1984, 85, 89 and 90, Messori 1985, Bellofiore, 1985)  Postkeynesian (Rochon, Lavoie, Seccareccia…..)

2.3 Characteristics of the MCT Monetary theory of production: credit, money and production theory Profit and repartition theory Sequential dynamic approach (sequential historical time, Robinson, 1980); Uncertainty (Davidson) Hierarchical relationship between the six economic agents (firms, commercial banks, central bank, households, government and rest of the world) We focus on two MCT pillars among others: - nature endogenous of money (2.3.1) - the Keynes-Kalecki identity (2.3.2)

2.3.1 Endogenous nature of money - Money is created ex nihilo by commercial banks (Aglietta, 1979) - Credit i.e Keynes finance motive - Production makes the endogenous nature of money - Credits makes deposits -When the loans are repaid, deposits are destroyed Theoretical debates about endogenous money (Pollin, 1991): - - Accommodationist view (Moore, 1989) - - Structuralist view (Palley 1996, 98) - - Liquidity preference view (Howells 1995)

Accom. viewStructralist viewLiquidity Pref. View Money supply is determined by the demand for bank loans Loans create deposits Central bank must and always accommodate bank demand for reserves and currency The monetary authority is only able to control interest rates but not the supply of reserves The money supply function is perfectly interest rate elastic The central bank does not fully accommodate reserves demand by commercial banks the central bank retains some control over the supply of reserves (targeting monetary base or interest rates) there is no independent demand function money economic units have different liquidity preferences about the amount of money they wish to hold SO credit money can be in excess supply if the supply of deposits is insufficient to match the demand for loans, individual preferences will change relative interest rates, thereby raising the supply of deposits and reducing the demand for loans

Endogenous money in MCT: horizontalist view i.e central bank has an accomodationnist role and must fix nominal interest rates (Arestis, 1996) Saving-investment identity: Keynes-Kalecki identity Structural relationship formulated by Keynes (1935) and Kalecki (1936, chap. 6 and 7 of the TG) 5 sectors: - Firms - Households - Banks - Government - Rest of the world

(Se – Ie) + (Sf – If) = (Sg – Ig) + (Sm – Im) + (Sb – Ib) if an economic sector has a net lending financial position, another sector will have a net borrowing financial position The hierarchy between the different sector in the circuit explains the causality inside the Keynes-Kalecki identity running from the right side of the identity (i.e budget deficit, private consumption and bank profits) to the left side: namely firms profits and current account

3. Macro-financial developments of Slovakia: descriptive analysis

4. Econometrics findings Quarterly data extracted from National Bank of Slovakia (2002/1 to 2007/4)