Monetary economics: an integrated approach to credit, money, income, production and wealth PDF
Preview Monetary economics: an integrated approach to credit, money, income, production and wealth
Monetary Economics From the same authors: Wynne Godley Industrial Pricing in the United Kingdom (with Ken Coutts and William D. Nordhaus) (Cambridge: Cambridge University Press) 1978. Macroeconomics (with Francis Cripps) (Oxford: Oxford University Press) 1983. Mare Lavoie Macroeconomie: Theories et controverses postkeynesiennes (Paris: Dunod) 1987. Foundations of Post-Keynesian Economic Analysis (Aldershot: Edward Eigar) 1992. Mi/ton Friedman et san reuvre, (co-edited with Mario Seceareccia) (Montreal: Presses de l'Universite de Montreal) 1993. Avantage numerique, l'argentet la Ligue nationale de hockey (Hull: Vents d'Ouest) 1997. Desavantage numerique, les francophones dans la LNH (Hull: Vents d'Ouest) 1998. Central Banking in the Modem World: Alternative Perspectives (co-edited with Mario Seccareccia) (Cheltenham: Edward Elgar) 2004. Introduction to Post-Keynesian Economics (London: Palgrave/Macmillan) 2006. Microeconomics: Principles and Poliey, First Canadian Edition (with William J. Baumol, Alan S. Blinder and Mario Seccareccia) (Toronto: Nelson Education) 2009. Macroeeonomics: Principles and Policy, First Canadian Edition (with William J. Baumol, Alan S. Blinder and Mario Seccareccia) (Toronto: Nelson Education) 2009. Money and Macroeconomic Issues: Alfred Eichner and Post Keynesian Economics (co-edited with Louis-Philippe Rochan and Maria Seccareccia) (Armonk: M.E. Sharpe) 2010. Monetary Economics An Integrated Approach to Credit, Money, Income, Production and Wealth Second Edition by Wynne Godley Late Emerin,s Professor, Killg's College, Cambridge U/lil't'TSity, Cambridge, Ullited Kil1gdom and Mare Lavoie Professor, Departmem o{ Eco/lomics, University o(Ot(OIl'(I, CQllatla palgrave macmillan * © Wynne Godley and Marc Lavoie 2006, 2012 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6-10 Kirby Street, London EC 1N 8TS Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First edition published 2006 This edition published 2012 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin's Press LLC, 175 Fifth Avenue, New York, NY 10010. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN 978-0-230-30184-9 ISBN 978-1-137-08599-3 (eBook) DOI 10.1007/978-1-137-08599-3 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging. pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue re cord for this book is available from the British Library. A catalog record for this book is available from the Library of Congress. Contents Notations Used in the Book ix List ofTables xviii List of Figures xx Preface xxxiv Summary xliv 1 Introduction 1 1.1 Two paradigms 1 l.2 Aspiration 4 1.3 Endeavour 9 1.4 Provenance 11 l.5 Some links with the 'old' Yale school 13 1.6 Links with the post-Keynesian school 16 l. 7 A sketch of the book 18 Al.1 Compelling empirical failings of the neo-classical production function 20 Al.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 v vi Contents 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 4.1 Introduction 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 Endogenousmoney 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 Contents vii 6.8 Rejecting the Mundell-Fleming approach and adopting the campensation approach 194 6.9 Adjustment mechanisms 201 6.10 Concluding thoughts 207 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 Müney 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 9.1 Introduction 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 :no A9.2 The peculiar role of given expectations 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 viii Contc/Jts 10.7 Making it a11 sing with simulations 342 10.8 Conclusion 374 A10.1 Overdraft banking systems 374 AlO.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 fi.rms 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 12.1 Introduction 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 13.2 A summary 499 References 501 Index 514 Notations Used in the Book Ad Advances demanded by private banks A,As Central bank advances made to private banks add Random change in liquidity preference addbL Spread of bond rate over the bill rate addl Spread of bill rate over the deposit rate addz Random change in government expenditures AF Amortization funds B$f, Bills held by f, households but issued by the $ country BE Bills held by $ households but issued by the f, country B~ Bills held by the f, central bank but issued by the ebf, $ country (foreign reserves of country f,) Bills held by $ central bank and issued by the $ country Bills held by the f, central bank and issued by the f, country Bd,Bhd Bills demanded by households (ex ante) Bb, Bbd Bills actually demanded by banks BbdN Bills notionally demanded by banks Beb Bills held by the central bank Bh,Bhh Bills held by households Bs Treasury bills supplied by government bandB, bandT Lower and upper range of the flat Phillips curve BLd Long-term bonds demanded by households BLh Long-term bonds held by households BLs Long-term bonds issued by government BLR Bank liquidity ratio, actual or gross value BLRN Bank liquidity ratio, net of advances BLPR Banks liquidity pressure ratio bot Bottom of an acceptable range botpm Bottom of the acceptable range of the profitability margin of banks ix
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