Towards a reconstruction of macroeconomics using a stock flow consistent (SFC) model

This paper aims to rehabilitate “stock flow consistent” (SFC) macroeconomics as a radical alternative to the neo-classical approach which has dominated the subject during the last thirty years. Commercial banks are reckoned to play a central role in the macroeconomic process because they co-ordinate all the disparate aspirations, expectations and actions of the different sectors and this is one of many ways in which the model deployed here differs, not only from mainstream models, but also from “old fashioned” Keynesian models which have largely become extinct. A comprehensive system of stock and flow accounts, using four sectors and seven financial assets, will be deployed, followed by a narrative description of a theoretical model which can be numerically solved to yield sequences evolving in real time towards steady states. Details of the model’s equations are not disclosed but the paper clearly indicates an alternative methodology, while the simulations lend plausibility to some distinctive conclusions

"The US Economy: A Changing Strategic Predicament"

Right through the boom years prior to 2001, the U.S. economy faced a strategic predicament in that the main engine of growth (credit financed private spending) was unsustainable, from which it followed that the whole stance of U.S. fiscal policy would have to be radically changed if the New Economy were not to become stagnant. The boom was indeed broken because private expenditure fell relative to income. The potentially dire effects on the level of activity were mitigated by a transformation in the fiscal policy stance, accompanied by a radical change in attitudes toward budget deficits, which suddenly became respectable. This analysis argues that a new strategic predicament is on the horizon as a result of the exceptionally large and growing balance of payments deficit.

"Some Unpleasant American Arithmetic"

Is it sufficiently realized how intractable those U.S. imbalances -- and how dangerous their potential consequences at home and abroadÑhave now become?

"Open Economy Macroeconomics Using Models of Closed Systems"

The following paper presents a series of two-country models, each of which makes up a whole world. The models are all based on a rigorous and watertight system of stock and flow accounts and can be used to generate numerical simulations of the way in which of the whole system evolves through time on various assumptions regarding institutions, policies, and behavioral responses. The paper emphasizes that the supply of internationally traded assets is as important as demand in the determination of exchange rates. All the models describe income determination and inflation as well as international trade and intercountry dealings in assets. Apart from deploying a method of analysis believed to be capable of substantial further development, the paper finds that no vestige of the "price-specie flow" mechanism remains once asset demands and supplies are comprehensively represented and inter-related with income flows. It also finds that once the supply of internationally traded assets (for instance, as a result of imbalances in trade) are taken into account, the role of expectations in determining exchange rates--though very important--is exaggerated in much contemporary theorizing.

"Seven Unsustainable Processes: Medium-Term Prospects and Policies for the United States and the World"

The purpose of the paper is not to make short-term predictions about the life expectancy of the current economic expansion in the United States, but to determine if the present stance of fiscal and trade policy is appropriate looking to the medium turn. The expansion has been generated by economic processes that are unsustainable--processes in private saving, private borrowing, and asset prices that have fueled the growth of demand against a negative impetus both from fiscal policy and from net export demand. Given unchanged fiscal policy and the consensus forecast for growth in the rest of the world, continued expansion requires that private expenditure continue to expand relative to income on a record and growing scale, and it seems impossible that this source of growth can be forthcoming indefinitely, although it may well continue into next year. When private demand falters, it will be necessary to bring about a substantial relaxation of fiscal policy and to ensure that there is a structural improvement in the United States's balance of payments.

Open Economy Macroeconomics Using Models of Closed Systems

The concept of the minimum wage has undergone several rhetorical permutations. Originally conceived as a living wage, which would function as a family wage, it ultimately became a matter of macroeconomic policy, the goals of which were to achieve greater efficiency and in some cases economic development. In recent years, the rhetoric has narrowed to a debate that pits a youth disemployment effect against assisting the poor. This paper traces the rhetorical evolution of the minimum wage and shows how the rhetoric employed by various groups has been shaped by the specifics of the political and economic environment.

"Imbalances Looking for a Policy"

The latest batch of numbers from the United States makes for a disturbing read. The growth rate of GDP has been adequate, but the current account deficit was 6.3 percent of GDP in the fourth quarter of 2004, and the terrible trade figures for January and February promise an even bigger deficit in the first quarter of 2005 (BEA 2005). Let no one suppose that this deterioration is a temporary effect that will automatically turn around soon.

"Kick-Start Strategy Fails to Fire Sputtering U.S. Economic Motor"

There is a strategic need, if a "growth recession" is to be avoided, for a new motor to drive the economy, particularly if there is a further decline in private expenditure relative to income that could generate a further hole in aggregate demand.