Monetary Economics

575 Pages·2007·1.97 MB·English

Monetary Economics
An Integrated Approach to Credit,
Money, Income, Production and Wealth
Wynne Godley and Marc Lavoie
Monetary Economics
Fromthesameauthors:
WynneGodley
Industrial Pricing in the United Kingdom (with Ken Coutts and William D.
Nordhaus)(Cambridge:CambridgeUniversityPress)1978.
Macroeconomics(withFrancisCripps)(Oxford:OxfordUniversityPress)1983.
MarcLavoie
Macroéconomie:Théoriesetcontroversespostkeynésiennes(Paris:Dunod)1987.
Foundations of Post-Keynesian Economic Analysis (Aldershot: Edward Elgar)
1992.
Milton Friedman et son œuvre, (co-edited with Mario Seccareccia) (Montréal:
Pressesdel’UniversitédeMontréal)1993.
Avantagenumérique,l’argentetlaLiguenationaledehockey(Hull:Ventsd’Ouest)
1997.
Désavantage numérique, les francophones dans la LNH (Hull: Vents d’Ouest)
1998.
Central Banking in the Modern World: Alternative Perspectives (co-edited with
MarioSeccareccia)(Cheltenham:EdwardElgar)2004.
IntroductiontoPost-KeynesianEconomics(London:Palgrave/Macmillan)2006.
Monetary Economics
An Integrated Approach to Credit,
Money, Income, Production
and Wealth
Wynne Godley
and
Marc Lavoie
©WynneGodleyandMarcLavoie2007
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Godley,Wynne.
Monetaryeconomics:anintegratedapproachtocredit,money,
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ISBN-13:978–0–230–50055–6
ISBN-10:0–230–50055–2
1.Money.2.Economics–Mathematicalmodels.I.Lavoie,M.(Marc).
II.Title.
HG221.G572007
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Contents
NotationsUsedintheBook ix
ListofTables xviii
ListofFigures xx
Preface xxxiv
1 Introduction 1
1.1 Twoparadigms 1
1.2 Aspiration 4
1.3 Endeavour 9
1.4 Provenance 11
1.5 Somelinkswiththe‘old’Yaleschool 13
1.6 Linkswiththepost-Keynesianschool 16
1.7 Asketchofthebook 18
A1.1Compellingempiricalfailingsoftheneo-classical
productionfunction 20
A1.2Stock-flowrelationsandthepost-Keynesians 21
2 BalanceSheets,TransactionMatricesandtheMonetaryCircuit 23
2.1 Coherentstock-flowaccounting 23
2.2 Balancesheetsorstockmatrices 25
2.3 Theconventionalincomeandexpenditurematrix 33
2.4 Thetransactionsflowmatrix 37
2.5 Fullintegrationofthebalancesheetandthetransactions
flowmatrices 43
2.6 Applicationsofthetransactionsflowmatrix:themonetary
circuit 47
3 TheSimplestModelwithGovernmentMoney 57
3.1 Governmentmoneyversusprivatemoney 57
3.2 Theserviceeconomywithgovernmentmoneyandno
portfoliochoice 58
3.3 FormalizingModelSIM 61
3.4 AnumericalexampleandthestandardKeynesianmultiplier 68
3.5 Steady-statesolutions 71
3.6 Theconsumptionfunctionasastock-flownorm 74
3.7 Expectationsmistakesinasimplestock-flowmodel 78
3.8 Outofthesteadystate 83
3.9 AgraphicalillustrationofModelSIM 88
v
vi Contents
3.10 Preliminaryconclusion 91
A3.1 EquationlistofModelSIM 91
A3.2 EquationlistofModelSIMwithexpectations(SIMEX) 92
A3.3 Themeanlagtheorem 92
A3.4 Governmentdeficitsinagrowingeconomy 95
4 GovernmentMoneywithPortfolioChoice 99
4.1 Introduction 99
4.2 ThematricesofModelPC 99
4.3 TheequationsofModelPC 102
4.4 ExpectationsinModelPC 107
4.5 Thesteady-statesolutionsofthemodel 111
4.6 Implicationsofchangesinparametervaluesontemporary
andsteady-stateincome 116
4.7 Agovernmenttargetforthedebttoincomeratio 124
A4.1 EquationlistofModelPC 126
A4.2 EquationlistofModelPCwithexpectations(PCEX) 126
A4.3 Endogenousmoney 127
A4.4 Alternativemainstreamclosures 129
5 Long-termBonds,CapitalGainsandLiquidityPreference 131
5.1 NewfeaturesofModelLP 131
5.2 Thevalueofaperpetuity 131
5.3 Theexpectedrateofreturnonlong-termbonds 132
5.4 Assessingcapitalgainsalgebraicallyandgeometrically 134
5.5 Matriceswithlong-termbonds 136
5.6 EquationsofModelLP 137
5.7 Theshort-runandlong-runimpactofhigherinterestrates
onrealdemand 150
5.8 Theeffectofhouseholdliquiditypreferenceonlongrates 153
5.9 Makinggovernmentexpendituresendogenous 160
A5.1 EquationsofModelLP 165
A5.2 Theliquiditytrap 167
A5.3 Analternative,moreorthodox,depictionofthebondmarket 168
6 IntroducingtheOpenEconomy 170
6.1 Acoherentframework 170
6.2 Thematricesofatwo-regioneconomy 171
6.3 Theequationsofatwo-regioneconomy 173
6.4 Thesteady-statesolutionsofModelREG 176
6.5 ExperimentswithModelREG 180
6.6 Thematricesofatwo-countryeconomy 187
6.7 Theequationsofatwo-countryeconomy 191
6.8 RejectingtheMundell–Flemingapproachandadopting
thecompensationapproach 194
Contents vii
6.9 Adjustmentmechanisms 201
6.10 Concludingthoughts 207
A6.1 EquationsofModelREG 209
A6.2 EquationsofModelOPEN 211
A6.3 Historicalandempiricalevidenceconcerningthe
compensationprinciple 213
A6.4 Otherinstitutionalframeworks:thecurrencyboard 214
A6.5 Howtoeasilybuildanopenmodel 215
7 ASimpleModelwithPrivateBankMoney 217
7.1 Privatemoneyandbankloans 217
7.2 Thematricesofthesimplestmodelwithprivatemoney 218
7.3 TheequationsofModelBMW 222
7.4 Thesteadystate 227
7.5 Out-of-equilibriumvaluesandstabilityanalysis 233
7.6 Theroleoftherateofinterest 240
7.7 Alookforward 247
A7.1 TheequationsofModelBMW 247
8 Time,Inventories,ProfitsandPricing 250
8.1 Theroleoftime 250
8.2 Themeasureofprofits 252
8.3 Pricing 263
8.4 Numericalexamplesoffluctuatinginventories 276
A8.1 ANumericalexampleofinventoryaccounting 278
9 AModelwithPrivateBankMoney,InventoriesandInflation 284
9.1 Introduction 284
9.2 TheequationsofModelDIS 285
9.3 Additionalpropertiesofthemodel 293
9.4 Steady-statevaluesofModelDIS 295
9.5 Dealingwithinflationin(aslightlymodified)ModelDIS 300
A9.1 EquationlistofModelDIS 308
A9.2 Thepeculiarroleofgivenexpectations 310
A9.3 EquationlistofModelDISINF 312
10 AModelwithbothInsideandOutsideMoney 314
10.1 Amodelwithactivecommercialbanks 314
10.2 Balancesheetandtransactionmatrices 315
10.3 Producingfirms 318
10.4 Households 322
10.5 Thegovernmentsectorandthecentralbank 331
10.6 Thecommercialbankingsystem 333
10.7 Makingitallsingwithsimulations 342
10.8 Conclusion 374
viii Contents
A10.1Overdraftbankingsystems 374
A10.2Arithmeticalexampleofachangeinportfoliopreference 376
11 AGrowthModelPrototype 378
11.1 Prolegomena 378
11.2 Balancesheet,revaluationandtransactions-flowmatrices 379
11.3 Decisionstakenbyfirms 383
11.4 Decisionstakenbyhouseholds 392
11.5 Thepublicsector 397
11.6 Thebankingsector 399
11.7 Fiscalandmonetarypolicies 404
11.8 Householdsinthemodelasawhole 422
11.9 Financialdecisionsinthemodelasawhole 435
11.10 Aconcludingrecap 441
12 AMoreAdvancedOpenEconomyModel 445
12.1 Introduction 445
12.2 Thetwomatrices 446
12.3 Equationsofthegenericmodel 450
12.4 Alternativeclosures 462
12.5 Experimentswiththemainfixedexchangerateclosure 466
12.6 Experimentswithalternativefixedexchangerateclosures 472
12.7 Experimentswiththeflexibleexchangerateclosure 478
12.8 Lessonstobedrawn 487
A12.1Afundamentalandusefulopen-economyflow-of-funds
identity 490
A12.2Analternativeflexibleexchangerateclosure 492
13 GeneralConclusion 493
13.1 Uniquefeaturesofthemodelspresentedhere 493
13.2 Asummary 499
References 501
Index 514
Notations Used in the Book
A Advancesdemandedbyprivatebanks
d
A,As Centralbankadvancesmadetoprivatebanks
add Randomchangeinliquiditypreference
add Spreadofbondrateoverthebillrate
bL
add Spreadofbillrateoverthedepositrate
l
add Randomchangeingovernmentexpenditures
2
AF Amortizationfunds
$
B Billsheldby£householdsbutissuedbythe
£
$country
B£ Billsheldby$householdsbutissuedbythe£country
$
$
B Billsheldbythe£centralbankbutissuedbythe
cb£
$country(foreignreservesofcountry£)
$
B Billsheldby$centralbankandissuedbythe
cb$
$country
B£ Billsheldbythe£centralbankandissuedbythe
cb£
£country
B ,B Billsdemandedbyhouseholds(exante)
d hd
B ,B Billsactuallydemandedbybanks
b bd
B Billsnotionallydemandedbybanks
bdN
B Billsheldbythecentralbank
cb
B ,B Billsheldbyhouseholds
h hh
Bs Treasurybillssuppliedbygovernment
bandB,bandT LowerandupperrangeoftheflatPhillipscurve
BL Long-termbondsdemandedbyhouseholds
d
BL Long-termbondsheldbyhouseholds
h
BLs Long-termbondsissuedbygovernment
BLR Bankliquidityratio,actualorgrossvalue
BLR Bankliquidityratio,netofadvances
N
BLPR Banksliquiditypressureratio
bot Bottomofanacceptablerange
botpm Bottomoftheacceptablerangeoftheprofitability
marginofbanks
ix