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, Cambridge Economic Policy Group, New Cambridge school (1970’s).

Tobin (1982) and his associates at Yale, 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).

New School University (Lance Taylor, A. Shaikh, W. Semmler).

PK Background

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).

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

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 Centralbank

Banks Σ

Inventories +IN +IN

Fixedcapital

+K +K

HPM +Hh H +Hb 0

Money +M M 0

Bills +Bh B +Bcb +Bb 0

Bonds +BL.pbL BL.pBL 0

Loans Lh Lf +L 0

Equities +e.pe e.pe 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

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