Financialisation Issues in a Post-Keynesian Stock-Flow Consistent Model Marc Lavoie

Godley economics (!!)  Paper based on a book written with Wynne Godley:  Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth. (2007)

Origins: Integrating the real and the monetary sides  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).

PK Background  Davidson, Minsky, Chick, Wray  Eichner, Skott  Institutionalists: Copeland, Dawson  Kalecki: « I have found what economics is; it is the science of confusing stocks with flows ». circa 1936

Stock-flow consistent approach  Budget constraints;  Financial flows;  Social accounting matrices: Interconnections;  Changes in stocks result from flows and capital appreciation (intrinsic dynamics).

Other key feature  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).

Or in the words of Lance Taylor (2004, p. 2),  SFC helps to « remove many degrees of freedom from possible configurations of patterns of payments at the macro level, making tractable the task of constructing theories to ‘close’ the accounts into complete models ».

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.  gennaro.zezza.it/software/models.

Financialization models in this SFC spirit  Zezza and Dos Santos 2004;  Le Héron and Mouakil, 2006;  Van Treek 2007;  Skott and Ryoo 2007.

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

Main behavioural equations: Households  Consumption is a function of wealth net of debt and of disposable income net of interet payments  Portfolio decisions with standard adding-up constraints

Firms  Normal cost pricing with partial adjustment to investment  Investment is a function of capacity utilization rates and real interest rates  Inventories are financed by banks  Fixed investment is financed by retained earnings or equity issues

Government + central bank  Pure expenditures grow at the rate of labour trend productivity  Central bank controls both the short and the long rate of interest  Monetization is demand-led

Commercial banks  Have a bank liquidity ratio target range (bills/deposits) Banks raise the deposit rate relative to the bills rate when the actual ratio is too low  Face a capital adequacy ratio requirement (BIS) Banks raise the lending rate relative to the deposit rate when actual ratio is too low

Buffers are the key in a model where the only price-clearing mechanism is the stock market  Households: money deposits  Firms: inventories and loans  Government: bills issued  Central bank: bills held  Banks: bills held

Increase in target proportion of gross investment being financed by gross retained earnings