Godley economics (!!) Part II illustrates work conducted by and with Wynne Godley: Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth.

Origins Two strands of research linking stocks and flows: Godley and Cripps (1982) at Cambridge, Cambridge Economic Policy Group, New Cambridge school (1970’s). Tobin (1982) and his associates at Yale, the ‘pitfalls approach’ (1969) the New Haven school.

Revival New impetus with the more recent works of Godley (1996, 1999), which combines elements of the two strands, and adds behavioural equations conducive to simulations. (see Dos Santos (2002) for a general assessment). New School University (Lance Taylor, A. Shaikh, W. Semmler).

General features Tobin (1982, Nobel Lecture) Models ought to track stocks; Models should have several assets and rates of return; Models include financial and monetary operations Models include the sectoral budget constraints and the adding-up constraints in portfolio equations

Other key features There cannot be any black holes. “The fact that money stocks and flows must satisfy accounting identities in individual budgets and in an economy as a whole provides a fundamental law of macroeconomics analogous to the principle of conservation of energy in physics” (Godley and Cripps 1983). There are intrinsic dynamics, Turnovsky (1977) There are lag dynamics, to avoid telescoping time (Hicks, 1965)

Simulations Because the models easily run up a high number of equations, the simulation method is put to the forefront. Hopefully, it can resolve some controversies among theorists.

Procedural rationality Agents react to disequilibria on the basis of partial adjustment functions. There is no need nor no room for the rational expectations hypothesis. Still agents in our models are rational: they display a kind of procedural rationality, sometimes misleadingly called weak rationality or bounded rationality, or more appropriately named reasonable rationality. They react to new information. They entertain norms They may revise these norms

Models are Kaleckian or Kaldorian They are demand-led Imperfect competition, Imperfect information, Markup pricing, Fixed technical coefficients, The relevance of income distribution, The role of capacity utilization and corporate retained profits, the importance of lags and time, Long run trends being conceived as “a slowly changing component of a chain of short period situations” (Kalecki, 1971: 165)

Godley models are PK models Emphasis on monetary economics The monetary side is integrated to the real side There is a link with the monetary circuit Closures are based on the notion of endogenous money Disequilibria can be studied There are inflation-accounted measures of the main variable

Three tools for stock-flow consistency A balance sheet matrix A transactions flow matrix A revaluation (or reconciliation) account

The quadruple entry principle « Because moneyflows transactions involve two transactors, the social accounting approach to moneyflows rests not on a double-entry system but on a quadruple-entry system » (Copeland, 1949)

First step of the monetary circuit with private money

The second step of the monetary circuit with private money

The first step of government expenditures financed by the central bank

The second step of government expenditures financed by the central bank

First step in government expenditures in overdraft system