Monetary economics : an integrated approach to credit, money, income, production and wealth / Wynne Godley and Marc Lavoie.

Format:

Book

Author/Creator:

Godley, Wynne.

Contributor:

Lavoie, M. (Marc)

Language:

English

Subjects (All):

Money.

Economics--Mathematical models.

Economics.

Physical Description:

xliii, 530 pages : illustrations ; 23 cm

Place of Publication:

Basingstoke [England] ; New York : Palgrave Macmillan, 2007.

Summary:

This book challenges the mainstream paradigm, which is based on the inter-temporal optimization of welfare by individual agents. It introduces a new methodology for studying how it is institutions (firms, banks, governments, foreigners and households) which create flows of income, expenditure and production together with stocks of assets (including money) and liabilities, thereby determining how whole economies evolve through time. It is a central contention that any realistic representation of a monetary economy must be grounded in a fully articulated system of national income and flow-of-funds accounts which is so complete that the nth variable is logically implied by the other n-1. As the financial balances of each sector have exact counterparts in changes in stock variables, historical time is introduced into the basic system of concepts, with asset and liability stocks providing the link between each period and each succeeding period.

It is taken as axiomatic that decisions are based on expectations about the future reached under conditions of uncertainty, so for every sector there must exist at least one flexible option or 'buffer' over which that sector has no direct control and which adjusts passively when expectations are falsified. For firms the buffer will normally take the form of inventories, for banks and governments it will be stocks of government securities, for households it will be stocks of credit money. Accordingly, outside financial markets there is neither need nor place for equilibrium conditions to bring supply into equivalence with demand. It will almost always be quantities rather than prices which give the signals which keep the economy on track.

Starting with extremely simple stock-flow consistent (SFC) models, the text describes a succession of increasingly complex models, using a conventional narrative style backed up by equations which bring precision to individual propositions. However, underlying each narrative there exists a simulation model constructed with such rigour that, in harmony with its basis in comprehensive accounting, there is always one equation which is implied logically by all the others. Solutions of these models are used to illustrate, with figures, ways in which whole economies evolve when shocked in various ways. Readers will be able to download all the models and explore their properties for themselves. A major conclusion is that economies require management via fiscal and monetary policy if full employment without inflation is to be achieved.

Contents:

1.1 Two paradigms 1

1.2 Aspiration 4

1.3 Endeavour 9

1.4 Provenance 11

1.5 Some links with the 'old' Yale school 13

1.6 Links with the post-Keynesian school 16

1.7 A sketch of the book 18

A1.1 Compelling empirical failings of the neo-classical production function 20

A1.2 Stock-flow relations and the post-Keynesians 21

2 Balance Sheets, Transaction Matrices and the Monetary Circuit 23

2.1 Coherent stock-flow accounting 23

2.2 Balance sheets or stock matrices 25

2.3 The conventional income and expenditure matrix 33

2.4 The transactions flow matrix 37

2.5 Full integration of the balance sheet and the transactions flow matrices 43

2.6 Applications of the transactions flow matrix: the monetary circuit 47

3 The Simplest Model with Government Money 57

3.1 Government money versus private money 57

3.2 The service economy with government money and no portfolio choice 58

3.3 Formalizing Model SIM 61

3.4 A numerical example and the standard Keynesian multiplier 68

3.5 Steady-state solutions 71

3.6 The consumption function as a stock-flow norm 74

3.7 Expectations mistakes in a simple stock-flow model 78

3.8 Out of the steady state 83

3.9 A graphical illustration of Model SIM 88

3.10 Preliminary conclusion 91

A3.1 Equation list of Model SIM 91

A3.2 Equation list of Model SIM with expectations (SIMEX) 92

A3.3 The mean lag theorem 92

A3.4 Government deficits in a growing economy 95

4 Government Money with Portfolio Choice 99

4.2 The matrices of Model PC 99

4.3 The equations of Model PC 102

4.4 Expectations in Model PC 107

4.5 The steady-state solutions of the model 111

4.6 Implications of changes in parameter values on temporary and steady-state income 116

4.7 A government target for the debt to income ratio 124

A4.1 Equation list of Model PC 126

A4.2 Equation list of Model PC with expectations (PCEX) 126

A4.3 Endogenous money 127

A4.4 Alternative mainstream closures 129

5 Long-term Bonds, Capital Gains and Liquidity Preference 131

5.1 New features of Model LP 131

5.2 The value of a perpetuity 131

5.3 The expected rate of return on long-term bonds 132

5.4 Assessing capital gains algebraically and geometrically 134

5.5 Matrices with long-term bonds 136

5.6 Equations of Model LP 137

5.7 The short-run and long-run impact of higher interest rates on real demand 150

5.8 The effect of household liquidity preference on long rates 153

5.9 Making government expenditures endogenous 160

A5.1 Equations of Model LP 165

A5.2 The liquidity trap 167

A5.3 An alternative, more orthodox, depiction of the bond market 168

6 Introducing the Open Economy 170

6.1 A coherent framework 170

6.2 The matrices of a two-region economy 171

6.3 The equations of a two-region economy 173

6.4 The steady-state solutions of Model REG 176

6.5 Experiments with Model REG 180

6.6 The matrices of a two-country economy 187

6.7 The equations of a two-country economy 191

6.8 Rejecting the Mundell-Fleming approach and adopting the compensation approach 194

6.9 Adjustment mechanisms 201

A6.1 Equations of Model REG 209

A6.2 Equations of Model OPEN 211

A6.3 Historical and empirical evidence concerning the compensation principle 213

A6.4 Other institutional frameworks: the currency board 214

A6.5 How to easily build an open model 215

7 A Simple Model with Private Bank Money 217

7.1 Private money and bank loans 217

7.2 The matrices of the simplest model with private money 218

7.3 The equations of Model BMW 222

7.4 The steady state 227

7.5 Out-of-equilibrium values and stability analysis 233

7.6 The role of the rate of interest 240

7.7 A look forward 247

A7.1 The equations of Model BMW 247

8 Time, Inventories, Profits and Pricing 250

8.1 The role of time 250

8.2 The measure of profits 252

8.3 Pricing 263

8.4 Numerical examples of fluctuating inventories 276

A8.1 A Numerical example of inventory accounting 278

9 A Model with Private Bank Money, Inventories and Inflation 284

9.2 The equations of Model DIS 285

9.3 Additional properties of the model 293

9.4 Steady-state values of Model DIS 295

9.5 Dealing with inflation in (a slightly modified) Model DIS 300

A9.1 Equation list of Model DIS 308

A9.2 The peculiar role of given expectations 310

A9.3 Equation list of Model DISINF 312

10 A Model with both Inside and Outside Money 314

10.1 A model with active commercial banks 314

10.2 Balance sheet and transaction matrices 315

10.3 Producing firms 318

10.4 Households 322

10.5 The government sector and the central bank 331

10.6 The commercial banking system 333

10.7 Making it all sing with simulations 342

A10.1 Overdraft banking systems 374

A10.2 Arithmetical example of a change in portfolio preference 376

11 A Growth Model Prototype 378

11.1 Prolegomena 378

11.2 Balance sheet, revaluation and transactions-flow matrices 379

11.3 Decisions taken by firms 383

11.4 Decisions taken by households 392

11.5 The public sector 397

11.6 The banking sector 399

11.7 Fiscal and monetary policies 404

11.8 Households in the model as a whole 422

11.9 Financial decisions in the model as a whole 435

11.10 A concluding recap 441

12 A More Advanced Open Economy Model 445

12.2 The two matrices 446

12.3 Equations of the generic model 450

12.4 Alternative closures 462

12.5 Experiments with the main fixed exchange rate closure 466

12.6 Experiments with alternative fixed exchange rate closures 472

12.7 Experiments with the flexible exchange rate closure 478

12.8 Lessons to be drawn 487

A12.1 A fundamental and useful open-economy flow-of-funds identity 490

A12.2 An alternative flexible exchange rate closure 492

13 General Conclusion 493

13.1 Unique features of the models presented here 493.

Notes:

Includes bibliographical references (pages 501-513) and index.

ISBN:

0230500552

9780230500556

OCLC:

70708099

Online:

Contributor biographical information

Publisher description