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Framing finance: A methodological account

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  • Sheila C. Dow

Abstract

The way in which financial markets are framed depends on who is doing the framing, although there are reflexive interdependencies between these framings. Mainstream economics frames financial markets as archetypical competitive markets, focusing on prices as the key information on which to base analysis. This follows from traditional positivist methodology where computability is the key to theory appraisal. Central banks draw on this analysis for their own framing, but modify it significantly in the face of the requirement to take decisions under palpable uncertainty; some understanding is perceived to be necessary for prediction. Participants in financial markets in turn employ quantitative models for forming their expectations; in conditions of market turbulence the limits to these models become evident, and indeed material to prices themselves. Further, for these participants, markets are a social phenomenon. Finally the households and firms whose experience of financial markets enables or constrains spending frame financial markets in yet another way. The underlying argument of the paper is that the way in which financial markets are framed in theory should reflect the different framings in the economy, and that this would benefit from input from other disciplines.

Suggested Citation

  • Sheila C. Dow, 2013. "Framing finance: A methodological account," Working Papers PKWP1308, Post Keynesian Economics Society (PKES).
  • Handle: RePEc:pke:wpaper:pkwp1308
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    File URL: http://www.postkeynesian.net/downloads/working-papers/PKWP1308.pdf
    File Function: First version, 2013
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    References listed on IDEAS

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    Keywords

    Framing; finance; monetary policy;

    JEL classification:

    • B00 - Schools of Economic Thought and Methodology - - General - - - History of Economic Thought, Methodology, and Heterodox Approaches
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles

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