Monetary Economics – Wynne Godley, Marc Lavoie – 1st Edition


“The underlying assumptions of this book are, first, that modern industrial factors have a complex institutional structure that includes production companies, banks, governments and households and, secondly, that the evolution of economies over time It depends on how these institutions make decisions and interact with others.

Our aspiration is to introduce a new way of understanding how these complicated systems work together. Our method is based on the fact that each change for one sector implies an equivalent obligation for another sector (each purchase implies a sale), while each financial balance (the difference between the income of a sector and its disbursements) must result an equivalent change in the sum of its balance (or stock) variables, with each financial asset owned by a sector that has a counterparty liability owed by another. Provided that all sectoral transactions are fully articulated so that ‘everything comes from somewhere and everything goes somewhere’, such a provision of concepts that describe the activities and evolution of the entire economic system, with all financial operations (including the changes in the money supply) in its complete integrated, an accounting level, in the processes that generate income, expenses and factor production. As any model that requires the full range of economic activities described in the national income and cash flow accounts must be extremely difficult, we begin to imagine that they have simplified institutions unrealistically and explore how they work. Then, in stages, we add increasingly realistic features until, in the end, the techniques they describe have a fair resemblance to the modern technologies we know.

In the text we will use the narrative method of exposure that Keynes and his followers used, trying to instill with intuition our conclusions about how particular mechanisms work (say the functions of consumption or demand for assets), one at a time, and how they relate with other parts of the economic system. But our underlying method is completely different. Each of our models, before starting to write it, was configured with its own stock and flow transactions, articulated so exhaustively that, however large or small the model, the nth equation was always implicit in the other equations. – 1. The way the system works as a whole was explored through computer simulation, first solving the model in question for its stable state and then discovering its properties by changing the assumptions about exogenous variables and the text that follows It cannot do more than provide a complementary narrative with equations, but we believe that readers’ understanding will improve, if it is not transformed, if it reproduces the simulations by itself and tests each model as we move forward. It should be easy to download each complete model with data and solution routine.

1 In Chapters 3–5 we present very elementary models, with drastically simplified organic structures, which illustrate some basic principles regarding the operation of the dynamic flow of consistent stock (SFC) models, and which incorporate the creation of “external” money. in the process of income and expenses. Chapter 6 presents the open economy, which develops perfectly from a model that describes the evolution of two regions within a single country. Chapters 7–9 present models with progressively more realistic characteristics that, in particular, present commercial banks and discuss the role of credit and “” internal “” money. The material in chapters 10-11 constitutes a break, in terms of complexity and reality, with everything that has happened before. First, we present models that specify how internal and external money interact, how corporate pricing decisions determine the distribution of national income, and how the financial sector makes it possible for businesses and households to operate in conditions of uncertainty.

The Chapter 11 model includes a representation of growth, investment, social capital and inflation. Finally, in Chapter 12, we return to the open economy (always conceived as a closed system that comprises two factors that exchange goods and assets with each other) and develop the model of Chapter 6 with additional realistic features. It has taken many years to generate the material presented here. “

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  • Notations Used in the Book
    List of Tables
    List of Figures
    1 Introduction
    1.1 Two paradigms
    1.2 Aspiration
    1.3 Endeavour
    1.4 Provenance
    1.5 Some links with the ‘old’ Yale school
    1.6 Links with the post-Keynesian school
    1.7 A sketch of the book
    A1.1 Compelling empirical failings of the neo-classical production function
    A1.2 Stock-flow relations and the post-Keynesians

    2 Balance Sheets, Transaction Matrices and the Monetary Circuit
    2.1 Coherent stock-flow accounting
    2.2 Balance sheets or stock matrices
    2.3 The conventional income and expenditure matrix
    2.4 The transactions flow matrix
    2.5 Full integration of the balance sheet and the transactions flow matrices
    2.6 Applications of the transactions flow matrix: the monetary circuit

    3 The Simplest Model with Government Money
    3.1 Government money versus private money
    3.2 The service economy with government money and no portfolio choice
    3.3 Formalizing Model SIM
    3.4 A numerical example and the standard Keynesian multiplier
    3.5 Steady-state solutions
    3.6 The consumption function as a stock-flow norm
    3.7 Expectations mistakes in a simple stock-flow model
    3.8 Out of the steady state
    3.9 A graphical illustration of Model SIM
    3.10 Preliminary conclusion
    A3.1 Equation list of Model SIM
    A3.2 Equation list of Model SIM with expectations (SIMEX )
    A3.3 The mean lag theorem
    A3.4 Government deficits in a growing economy

    4 Government Money with Portfolio Choice
    4.1 Introduction
    4.2 The matrices of Model PC
    4.3 The equations of Model PC
    4.4 Expectations in Model PC
    4.5 The steady-state solutions of the model
    4.6 Implications of changes in parameter values on temporary and steady-state income
    4.7 A government target for the debt to income ratio
    A4.1 Equation list of Model PC
    A4.2 Equation list of Model PC with expectations (PCEX)
    A4.3 Endogenous money
    A4.4 Alternative mainstream closures

    5 Long-term Bonds, Capital Gains and Liquidity Preference
    5.1 New features of Model LP
    5.2 The value of a perpetuity
    5.3 The expected rate of return on long-term bonds
    5.4 Assessing capital gains algebraically and geometrically
    5.5 Matrices with long-term bonds
    5.6 Equations of Model LP
    5.7 The short-run and long-run impact of higher interest rates on real demand
    5.8 The effect of household liquidity preference on long rates
    5.9 Making government expenditures endogenous
    A5.1 Equations of Model LP
    A5.2 The liquidity trap
    A5.3 An alternative, more orthodox, depiction of the bond market

    6 Introducing the Open Economy
    6.1 A coherent framework
    6.2 The matrices of a two-region economy
    6.3 The equations of a two-region economy
    6.4 The steady-state solutions of Model REG
    6.5 Experiments with Model REG
    6.6 The matrices of a two-country economy
    6.7 The equations of a two-country economy
    6.8 Rejecting the Mundell–Fleming approach and adopting the compensation approach
    6.9 Adjustment mechanisms
    6.10 Concluding thoughts
    A6.1 Equations of Model REG
    A6.2 Equations of Model OPEN
    A6.3 Historical and empirical evidence concerning the compensation principle
    A6.4 Other institutional frameworks: the currency board
    A6.5 How to easily build an open model

    7 A Simple Model with Private Bank Money
    7.1 Private money and bank loans
    7.2 The matrices of the simplest model with private money
    7.3 The equations of Model BMW
    7.4 The steady state
    7.5 Out-of-equilibrium values and stability analysis
    7.6 The role of the rate of interest
    7.7 A look forward
    A7.1 The equations of Model BMW

    8 Time, Inventories, Profits and Pricing
    8.1 The role of time
    8.2 The measure of profits
    8.3 Pricing
    8.4 Numerical examples of fluctuating inventories
    A8.1 A Numerical example of inventory accounting

    9 A Model with Private Bank Money, Inventories and Inflation
    9.1 Introduction
    9.2 The equations of Model DIS
    9.3 Additional properties of the model
    9.4 Steady-state values of Model DIS
    9.5 Dealing with inflation in (a slightly modified) Model DIS
    A9.1 Equation list of Model DIS
    A9.2 The peculiar role of given expectations
    A9.3 Equation list of Model DISINF

    10 A Model with both Inside and Outside Money
    10.1 A model with active commercial banks
    10.2 Balance sheet and transaction matrices
    10.3 Producing firms
    10.4 Households
    10.5 The government sector and the central bank
    10.6 The commercial banking system
    10.7 Making it all sing with simulations
    10.8 Conclusion
    A10.1 Overdraft banking systems
    A10.2 Arithmetical example of a change in portfolio preference

    11 A Growth Model Prototype
    11.1 Prolegomena
    11.2 Balance sheet, revaluation and transactions-flow matrices
    11.3 Decisions taken by firms
    11.4 Decisions taken by households
    11.5 The public sector
    11.6 The banking sector
    11.7 Fiscal and monetary policies
    11.8 Households in the model as a whole
    11.9 Financial decisions in the model as a whole
    11.10 A concluding recap

    12 A More Advanced Open Economy Model
    12.1 Introduction
    12.2 The two matrices
    12.3 Equations of the generic model
    12.4 Alternative closures
    12.5 Experiments with the main fixed exchange rate closure
    12.6 Experiments with alternative fixed exchange rate closures
    12.7 Experiments with the flexible exchange rate closure
    12.8 Lessons to be drawn
    A12.1 A fundamental and useful open-economy flow-of-funds identity
    A12.2 An alternative flexible exchange rate closure

    13 General Conclusion
    13.1 Unique features of the models presented here
    13.2 A summary
  • Citation
    • Full Title: Monetary Economics
    • Author/s:
    • ISBN-10: 0230500552
    • ISBN-13: 9780230500556
    • Edition: 1st Edition
    • Publication date: 2007
    • Topic: Business
    • Subtopic: Economy
    • File Type: eBook
    • Idioma: English

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