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