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Monetary Economics PDF

575 Pages·2007·1.97 MB·English
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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 Allrightsreserved.Noreproduction,copyortransmissionofthis publicationmaybemadewithoutwrittenpermission. Noparagraphofthispublicationmaybereproduced,copiedortransmitted savewithwrittenpermissionorinaccordancewiththeprovisionsofthe Copyright,DesignsandPatentsAct1988,orunderthetermsofanylicence permittinglimitedcopyingissuedbytheCopyrightLicensingAgency,90 TottenhamCourtRoad,LondonW1T4LP. Anypersonwhodoesanyunauthorizedactinrelationtothispublication maybeliabletocriminalprosecutionandcivilclaimsfordamages. Theauthorshaveassertedtheirrightstobeidentified astheauthorsofthisworkinaccordancewiththeCopyright, DesignsandPatentsAct1988. Firstpublishedin2007by PALGRAVEMACMILLAN Houndmills,Basingstoke,HampshireRG216XSand 175FifthAvenue,NewYork,N.Y.10010 Companiesandrepresentativesthroughouttheworld. PALGRAVEMACMILLANistheglobalacademicimprintofthePalgrave MacmillandivisionofSt.Martin’sPress,LLCandofPalgraveMacmillanLtd. Macmillan®isaregisteredtrademarkintheUnitedStates,UnitedKingdom andothercountries.PalgraveisaregisteredtrademarkintheEuropean Unionandothercountries. ISBN-13:978–0–230–50055–6hardback ISBN-10:0–230–50055–2hardback Thisbookisprintedonpapersuitableforrecyclingandmadefromfully managedandsustainedforestsources. AcataloguerecordforthisbookisavailablefromtheBritishLibrary. LibraryofCongressCataloging-in-PublicationData Godley,Wynne. Monetaryeconomics:anintegratedapproachtocredit,money, income,productionandwealth/byWynneGodleyandMarcLavoie. p.cm. Includesbibliographicalreferencesandindex. 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 332.4—dc22 2006049315 10 9 8 7 6 5 4 3 2 1 16 15 14 13 12 11 10 09 08 07 PrintedandboundinGreatBritainby AntonyRoweLtd,ChippenhamandEastbourne 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

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