Endogenous Money in a Coherent Stock-Flow Framework

A method advocated by Wynne Godley to model monetary macroeconomics, is presented. The method, based on a transactions matrix, essentially makes sure that every flow goes somewhere and comes from somewhere, so that there are no black holes. The method is put to use for several purposes: to illustrate the monetary circuit of credit money; to demonstrate that there can be a separate portfolio (stock) demand for money, but not one independent from the rest of the model; to show that there cannot be an excess supply of credit; to handle the cases of credit for speculation purposes and high liquidity preference; to underline that endogenous money at fixed interest rates is still compatible with any government deficit; and to show that even when banks have liquidity norms, larger amounts of loans do not necessarily induce higher interest rates. Briefly stated, the paper shows that many of the claims made by Horizontalist authors are confirmed when a fully coherent accounting framework is put in place to assess their claims.

"Endogenous Money in a Coherent Stock-Flow Framework"

A method advocated by Wynne Godley to model monetary macroeconomics, is presented. The method, based on a transactions matrix, essentially makes sure that every flow goes somewhere and comes from somewhere, so that there are no black holes. The method is put to use for several purposes: to illustrate the monetary circuit of credit money; to demonstrate that there can be a separate portfolio (stock) demand for money, but not one independent from the rest of the model; to show that there cannot be an excess supply of credit; to handle the cases of credit for speculation purposes and high liquidity preference; to underline that endogenous money at fixed interest rates is still compatible with any government deficit; and to show that even when banks have liquidity norms, larger amounts of loans do not necessarily induce higher interest rates. Briefly stated, the paper shows that many of the claims made by Horizontalist authors are confirmed when a fully coherent accounting framework is put in place to assess their claims.

"Changes in Central Bank Procedures during the Subprime Crisis and Their Repercussions on Monetary Theory"

The subprime financial crisis has forced several North American and European central banks to take extraordinary measures and to modify some of their operational procedures. These changes have made even clearer the deficiencies and lack of realism in mainstream monetary theory, as can be found in both undergraduate textbooks and most macroeconomic models. They have also forced monetary authorities to reject publicly some of the assumptions and key features of mainstream monetary theory, fearing that, on that mistaken basis, actors in the financial markets would misrepresent and misjudge the consequences of the actions taken by the monetary authorities. These changes in operational procedures also have some implications for heterodox monetary theory; in particular, for post-Keynesian theory. The objective of this paper is to analyze the implications of these changes in operational procedures for our understanding of monetary theory. The evolution of the operating procedures of the Federal Reserve since August 2007 is taken as an exemplar. The American case is particularly interesting, both because it was at the center of the financial crisis and because the U.S. monetary system and its federal funds rate market are the main sources of theorizing in monetary economics.Federal Funds Rate; Corridor System; Interest on Bank Reserves; Money Multiplier

Simple open economy macro with comprehensive accounting a radical alternative to the Mundell Fleming model

This paper presents a stock flow model of two economies (together comprising the whole world) which trade goods and financial assets with one another. The accounting framework, though comprehensive in its own terms, is very much simplified (it has interest rates without interest payments and exchange rate changes without changes in relative prices) so as to reach the main conclusions as simply and easily as possible. The paper is (a contrario) critical of attempts to deploy open economy models which only analyse the operations of a single economy, without regard to the responses of the rest of the world. In particular, the paper is critical of the influential Mundell-Fleming (M-F) model and finds that the characteristic M-F results are confuted once a full set of double entry accounts is used with all processes firmly located in historical time

Simple open economy macro with comprehensive accounting: a two country model

This paper presents a stock flow model of two economies (together comprising the whole world) which trade goods and financial assets with one another. The accounting framework, though comprehensive in its own terms, is very much simplified so as to reach the main conclusions as simply and easily as possible. The first part of the paper describes a single-economy on a fixed exchange rate, with no private capital flows, in order to obtain simple analytic solutions which display the basic constraints and forces at work. The second part describes a flexible exchange rate model, with two economies trading financial assets as well as merchandise. A final section adapts the two country model to describe a fixed exchange rate regime. In all models interest rates are exogenous and the money supply is (found to be) endogenous

"Kaleckian Models of Growth in a Stock-Flow Monetary Framework: A Neo-Kaldorian Model"

This paper presents a simple growth model grounded in a stock-flow monetary accounting framework. The framework ensures that all stocks and all flows are accounted for and that the real and financial sides of the economy are coherent with one another. Credit, money, equities and stocks of real capital link periods of time with one another in articulated sequences. Wealth is allocated between assets on Tobinesque principles but no equilibrium condition is necessary to bring the "demand" for money into equivalence with its "supply". Growth and profit rates, as well as valuation, debt and capacity utilization ratios are analysed using simulations in which a growing economy is assumed to be shocked by changes in interest rates, liquidity preference, real wages, and the parameters which determine how firms finance investment. acceleration in recent years that might explain the growth in earnings inequality. There has also been no dramatic change in the number of workers who are undereducated. These results reinforce the conclusions of earlier work that reports of a growing skills mismatch are likely overdrawn.

Kaleckian Models of Growth in a Stock-Flow Monetary Framework: A Neo-Kaldorian Model

This paper presents a simple growth model grounded in a stock-flow monetary accounting framework. The framework ensures that all stocks and flows are accounted for and that the real and financial sides of the economy are coherent with one another. Credit, money, equities, and stocks of real capital link periods of time with one another in articulated sequences. Wealth is allocated between assets on Tobinesque principles but no equilibrium condition is necessary to bring the "demand" for money into equivalence with its "supply." Growth and profit rates, as well as valuation, debt, and capacity utilization ratios, are analysed using simulations in which a growing economy is assumed to be shocked by changes in interest rates liquidity preference, real wages, and the parameters that determine how firms finance investment.

"Prolegomena to Realistic Monetary Macroeconomics: A Theory of Intelligible Sequences"

This paper sets out a rigorous basis for the integration of Keynes-Kaleckian macroeconomics (with constant or increasing returns to labor, multipliers, mark-up pricing, etc.) with a model of the financial system (comprising banks, loans, credit money, equities, etc.), together with a model of inflation. Central contentions of the paper are that, with trivial exceptions, there are no equilibria outside financial markets, and the role of prices is to distribute the national income, with inflation sometimes playing a key role in determining the outcome. The model deployed here describes a growing economy that does not spontaneously find a steady state even in the long run, but which requires active management of fiscal and monetary policy if full employment without inflation is to be achieved. The paper outlines a radical alternative to the standard narrative method used by post-Keynesians as well as by Keynes himself.