Wynne Godley

Kaleckian Models of Growth in a Coherent Stock–Flow Monetary Framework: A Kaldorian View

Abstract: This paper presents a demand-led growth model grounded in a coherent stock-flow monetary accounting framework, where all stocks and flows are accounted for. Wealth is allocated between assets on Tobinesque principles, but no equilibrium condition is necessary to bring the “demand” for money into equivalence with its “supply.” Growth and profit rates, as well as valuation, debt, and capacity utilization ratios are analyzed using simulations in which a growing economy is assumed to be shocked by changes in interest rates, liquidity preference, real wages, and the parameters that determine how firms finance investment.

The Case for a Severe Recession

The authors argue that there are serious structural imbalances in the U.S. economy that make a deep recession likely. In fact, they say there is no natural process by which the economy will recover in short order. Rather, it will require serious government spending to restore economic growth.The authors argue that there are serious structural imbalances in the U.S. economy that make a deep recession likely. In fact, they say there is no natural process by which the economy will recover in short order. Rather, it will require serious government spending to restore economic growth.

An Important Inconsistency at the Heart of the Standard Macroeconomic Model

Abstract: The neoclassical macroeconomic dichotomy between real and nominal variables is shown to be generally false, even within the standard structure of the model. The model implicitly assumes that disbursements via interest payments on bonds somehow ensure that all profits are disbursed. But the two are generally different. Forcing them to match renders the model mathematically inconsistent. Alternately, distinguishing the two rectifies the inconsistency but destroys the dichotomy between real and nominal variables and dramatically alter the model’s outcomes. One striking consequence is that a rise in the money supply can lead to a fall in prices.

Macroeconomic consequences of alternative trade policy options

Abstract This paper presents a real stock flow model capable of simulating the consequences of alternative policies—currency adjustment or various forms of protection undertaken in combination with changes in fiscal stance — designed to remove imbalances in external trade. A range of parameters was chosen to describe the response of money wages to price changes and also the extent to which other countries retaliate. Parameters describing the other responses of the system are chosen so as roughly to correspond with econometric findings. The main purpose of the present paper is to introduce a method of analysis and no strong conclusions about policy are drawn.

A Stock Adjustment Model of Income Determination with Inside Money and Private Debt with Some Preliminary Empirical Results for the United States

Modern macroeconomics emphasises the influence of portfolio adjustment on income and expenditure flows, and it has become commonplace to include wealth terms in functions representing private consumption or savings decisions. But despite the emphasis placed by Brainard and Tobin as far back as 1968 on the need to consider the full implications of identities which constrain portfolio adjustment, few models have explicitly examined the consistency of expenditure decisions with wealth objectives. Indeed, Brainard and Tobin themselves accepted wealth as the outcome of savings decisions without enquiring into the plausibility of the implied accumulation of wealth. Similarly, although monetarist economists have always stressed possible implications of a stable demand function for one class of financial assets — money — they have not integrated this into a fully consistent account of the demand for all financial assets and liabilities.

Time, Inventories, Profits and Pricing

We shall not present a model in this chapter. Instead the chapter will be entirely devoted to the measurement of profits, costs and inventories, together with an analysis of the way in which firms’ pricing decisions distribute the national income. The subject matter is intricate and potentially controversial because there are so many ways in which accounts are kept. Our guiding light will be that the concepts and definitions will always meet the consistency requirements of the double entry matrices which underlie all our work. In particular, the definition of profits and the way in which appropriations are recorded must fit into a transactions matrix describing a whole economy so that all rows and all columns sum to zero. This will guarantee that our concepts are sufficiently good even if they are occasionally controversial since we shall ensure that the sum of all inflows will always be equal to the sum of all outflows.

A Model with both Inside and Outside Money

The following chapter combines Model PC, which described an economy in which there was portfolio choice but only with government (or ‘outside’) money, with Model DIS in which there were inventories but only credit (or ‘inside’) money. We shall call the model to be developed the INSOUT Model, since it combines inside and outside money. In the process we shall describe the main ways in which the central bank exercises control over commercial banks. In addition, the description of commercial banks will go beyond the simple equality between loans and deposits, with which we were content in the previous chapters. In the present chapter, commercial banks will actually need to take decisions of their own.

A Growth Model Prototype

This is by far the most ambitious chapter of the book. It sets out a rigorous basis for the integration of Keynesian-Kaleckian macroeconomics (with constant or increasing returns to labour, growth, mark-up pricing, etc.) with a model of the financial system comprising banks, loans, credit money and equities, together with a model of inflation. Central contentions of the chapter are that, with trivial exceptions, there are no equilibria outside financial markets and that the role of prices is to distribute the national income, with inflation sometimes playing a key role determining the outcome.

Introducing the Open Economy

This chapter extends the closed economy framework developed in previous chapters to describe two economies which trade merchandise with one another. Our methodology differs from the usual textbook approach, according to which models of individual closed economies are eventually ‘opened’, but which give no consideration to what other countries must be held to be doing and how a full set of interactions between all countries might be characterized. The excuse is that the open economy under study is presumed to be small compared to the rest of the world, so that the feedback effects can be assumed to negligible. But then not much can be said about the US economy, the size of which surely guarantees large feedback effects on the rest of the world, nor about the European community or the block of Asian countries including Japan. This partial equilibrium approach is the more surprising because international trade theory is usually treated within a relatively sophisticated two-country and two-good framework. We shall discuss open economy macro-economics using models of an economic system which, taken as a whole, is closed, with all flows and all stocks fully accounted for wherever they arise.1

Government Money with Portfolio Choice

The present chapter combines the circular flow approach to money (featured in the last chapter) with the stock approach. In the circular flow approach, money is a device allowing transactions between agents to take place and illustrates Keynes’s famous ‘transactions’ motive for holding money. In the stock approach, money is seen as a financial asset which agents hold for investment purposes, or more precisely, as a placement as French scholars and Joan Robinson (1956: 8) say. The quantity of money held depends, in particular, on the rate of interest that can be obtained on other assets — an approach associated with Keynes’s ‘speculative’ and ‘precautionary’ motives. Agents make a portfolio choice between money and other possible financial assets. For this reason, the model developed in Chapter 4 is called Model PC, for portfolio choice.