Transcript Godley economics - University of Ottawa

Financialisation Issues in a
Post-Keynesian Stock-Flow
Consistent Model
Marc Lavoie
Godley economics (!!)
 Paper based on a book written with
Wynne Godley:
 Monetary Economics: An Integrated
Approach to Credit, Money, Income,
Production and Wealth. (2007)
Origins: Integrating the real and
the monetary sides
Two strands of research linking stocks
and flows:

Godley and Cripps (1982) at Cambridge,
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Cambridge Economic Policy Group,
New Cambridge school (1970’s).
Tobin (1982) and his associates at Yale,
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the ‘pitfalls approach’ (1969)
the New Haven school.
Revival
 New impetus with the more recent works of
Godley (1996, 1999), which combines
elements of the two strands, and adds
behavioural equations conducive to
simulations.

(see Dos Santos (2002) for a
general assessment).
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New School University (Lance
Taylor, A. Shaikh, W. Semmler).
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PK Background
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Davidson, Minsky, Chick, Wray
Eichner, Skott
Institutionalists: Copeland, Dawson
Kalecki: « I have found what
economics is; it is the science of
confusing stocks with flows ».
circa 1936
Stock-flow consistent approach
Budget constraints;
Financial flows;
Social accounting matrices:
Interconnections;

Changes in stocks result from flows
and capital appreciation (intrinsic
dynamics).
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Other key feature

There cannot be any black holes.
 “The fact that money stocks and flows
must satisfy accounting identities in
individual budgets and in an economy
as a whole provides a fundamental
law of macroeconomics analogous to
the principle of conservation of
energy in physics” (Godley and Cripps
1983).
Or in the words of Lance Taylor
(2004, p. 2),
 SFC helps to « remove many degrees
of freedom from possible
configurations of patterns of
payments at the macro level, making
tractable the task of constructing
theories to ‘close’ the accounts into
complete models ».
Simulations
 Because the models easily run up a
high number of equations, the
simulation method is put to the
forefront.
 Hopefully, it can resolve some
controversies among theorists.
 gennaro.zezza.it/software/models.
Financialization models in this SFC
spirit

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Zezza and Dos Santos 2004;
Le Héron and Mouakil, 2006;
Van Treek 2007;
Skott and Ryoo 2007.
Three tools for stock-flow
consistency
 A balance sheet matrix
 A transactions flow matrix
 A revaluation (or reconciliation)
account
Households
Firms
Govt
Central
bank
Σ
Banks
Inventories
+IN
+IN
Fixed
capital
+K
+K
H
HPM
+Hh
Money
+M
Bills
+Bh
B
Bonds
+BL.pbL
BL.pBL
Loans
Lh
Lf
Equities
+e.pe
e.pe
+Bcb
+Hb
0
M
0
+Bb
0
0
+L
0
0
Bank capital +OFb
OFb
0
Balance
Vh
Vf
Vg
0
0
(IN+K)
Σ
0
0
0
0
0
0
Main behavioural equations:
Households
 Consumption is a function of wealth
net of debt and of disposable income
net of interet payments
 Portfolio decisions with standard
adding-up constraints
Firms
 Normal cost pricing with partial
adjustment to investment
 Investment is a function of capacity
utilization rates and real interest rates
 Inventories are financed by banks
 Fixed investment is financed by
retained earnings or equity issues
Government + central bank
 Pure expenditures grow at the rate of
labour trend productivity
 Central bank controls both the short
and the long rate of interest
 Monetization is demand-led
Commercial banks
 Have a bank liquidity ratio target
range (bills/deposits)
 Banks raise the deposit rate relative to
the bills rate when the actual ratio is too
low
 Face a capital adequacy ratio
requirement (BIS)
 Banks raise the lending rate relative to
the deposit rate when actual ratio is too
low
Buffers are the key in a model where the
only price-clearing mechanism is the stock
market
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Households: money deposits
Firms: inventories and loans
Government: bills issued
Central bank: bills held
Banks: bills held
Increase in target proportion of gross
investment being financed by gross
retained earnings