月曜日, 5月 06, 2019

Monetary Economics An Integrated Approach to Credit, Money, Income, Production and Wealth Wynne Godley and Marc Lavoie

Monetary Economics An Integrated Approach to Credit, Money, Income, Production and Wealth Wynne Godley and Marc Lavoie


1 Introduction

 I have found out what economics is; it is the science of confusing stocks with flows.   

A verbal statement by Michal Kalecki, circa 1936, as cited by Joan Robinson, in ‘Shedding darkness’, Cambridge Journal of Economics, 6(3), September 1982, 295–6.


13.2 A summary 
The sketch of what an alternative monetary theory ought to look like, as has been presented in this book, had been put forward by Godley (1992: 199200). We reproduce below its ten main elements, without further comment, in the belief that they provide a fair summary of the content of the book and of our intentions when writing it. 1. Institutions, in particular industrial corporations and banks, have a distinct existence and motivation; 2. The production process must be seen as taking time, and hence requires credit and is tied to the monetary system; 
500 Monetary Economics 
3. A realistic model must start with a comprehensive system of national accounts, flowsoffundsandbalancesheets,whicharecoherentlyrelated; 4. Hypotheticalequilibriumconditionsshouldbeconceivedintermsofreal stock-flow ratios; 5. The entire system of accounts needs to be inflation accounted; 6. Both closed and open economies should be modelled, so as to highlight different features; 7. Firms operate under conditions of imperfect competition and nondecreasing returns; 8. Pricing decisions are inter-related with growth and adequate finance; 9. Government budgetary policy plays a key role; 10. Inflationmaybegeneratedoutofastruggleforsharesoftherealnational income.

4 In reality, central banks set the target overnight rate (or target one-day repo rate), with the overnight rate closely tracking this target rate, leaving the bill rate adjust to the overnight rate. But the introduction of the overnight rate in a model such as ours would require at least two sets of banks, so that one set could borrow from the other.

Kalecki, M. (1944) ‘Professor Pigou on “The classical stationary state”: A comment’, Economic Journal, 54 (213) (April), pp. 131–2.
 Kalecki, M. (1971) Selected Essays on the Dynamics of the Capitalist Economy (Cambridge: Cambridge University Press).

Minsky, H.P. (1975) John Maynard Keynes (New York: Columbia University Press). 
Minsky, H.P. (1986) Stabilizing an Unstable Economy (New Haven: Yale University Press). 
Minsky, H.P. (1996) ‘The essential characteristics of Post Keynesian economics’, in G. Deleplace and E.J. Nell (eds), Money in Motion: The Circulation and Post-Keynesian Approaches (London: Macmillan), pp. 532–45.

Zezza  (2007)  Is  There  a  Way  Out  of the  Woods?  The  Levy  Economics  Institute  Strategic  Analysis,  November  2007.  At http://www.levy.org/

Accordingly,  in  equilibrium  models,  solving  the  optimization  problems  is  what  determines the  model  outcome.  In  accounting  models,  its  completeness  drives  the  outcome,  as  the  ‘watertight accounting  of  the  model  implies  that  there  will  always  be  one  equation  which  is  logically  implied by  the  others’  (Godley  1999:395)  –  with  important  practical  implications.  For  instance,  in accounting  models  including  a  private  sector  (firms  and  households),  a  government  sector  and  a foreign  sector,  sectoral  balances  must  sum  to  zero.  Specifically,  Godley  and  Lavoie  (2007b:xxxvi) note  the  ‘strategic  importance’  of  the  ‘accounting  identity  which  says  that,  measured  in  current prices,  the  government’s  budget  deficit  less  the  current  account  deficit  is  equal,  by  definition,  to private  saving  minus  investment’.  This  identity  allowed  Godley  and  Wray  (2000)  to  conclude  that ‘Goldilocks  was  doomed’:  with  a  government  surplus  and  current  account  deficit,  economic  growth had  to  be  predicated  on  private  debt  growth  –  an  inference  impossible  to  make  from  an  equilibrium model.  Accounting  models  can  identify  a  growth  path  as  unsustainable  given  the  existing  bedrock accounting  relations  in  our  economic  system,  leading  to  a  sure  prediction  of  its  reversal  (even though  the  triggering  event,  and  its  timing,  will  be  less  clear).  No  such  certainty  is  built  into 
Whilst  these  are  surely  helpful  recommendations  -  including  financial  and  capital  variables in  official  macroeconomic  assessment  would  be  a  major  step  forward  -,    the  authors  seem  oblivious of  the  fact  that  this  presaging  is  precisely  what  the  Godley  model  employed  at  the  Levy  Institute had  been  doing  from  before  2000,  actually  using  the  disaggregation  of  assets  and  institutions  they recommend.  What  is  also  missing  is  any  discussion  of  the  size  of  the  US  debt  and  its  systemic implications  as  a  constraint  on  further  US  growth,  which  is  central  in  the  flow-of-fund  models discussed  in  the  present  paper,  and  which  underpinned  Godley  and  Wray’s  (2000)  prediction  that ‘Goldilocks  is  doomed’.  From  the  latter  perspective,  analysing  the  flow  of  funds  for  crisis  potential without  reviewing  debt  build-up  as  in  Palumbo  and  Parker  (2009),  is  akin  to  avoiding  a  discussion 

Wynne Godley is a Distinguished Scholar at the Levy Economics Institute of Bard College, New York and a Visiting Research Associate with the Cambridge Endowment for Research in Finance (2002-2005). From 2000 he has consistently argued that a US housing market slowdown was unavoidable in the medium term, and that its implication would be recession in the US. Godley warned that ‘Goldilocks is doomed’, as he put it in a 2000 article with Wray. ‘Goldilocks’ was the simile after the children’s tale, employed in the years after the dotcom crash for the US economy, which was said to be neither too ‘cold’ (low unemployment) nor too ‘hot’ (low inflation). Godley and Wray (2000) argued that this stability was unsustainable, as it was driven by households’ debt growth, in turn fuelled by capital gains in the real estate sector. Based on an accounting framework of the US economy developed by Godley (on which more below), they predicted that that as soon as debt growth slowed down – as it inevitably would within years -, growth would falter. When house prices had started to fall, Godley and Zezza (2006) published Debt and Lending: A Cri de Coeur. They demonstrated again the US economy’s dependence on debt growth and argued that only the small slowdown in the rate at which US household debt levels were rising, resulting form the house price  decline,  would  immediately  lead  to  a  “sustained  growth  recession  …  somewhere  before  2010” (Godley  and  Zezza,  2006:3).  In  January  2007,  the  US  Congressional  Budget  Office  (CBO) produced  its  annual  report,  which,  as  Godley  and  others  noted  in  an  April  2007  analysis,  had predictions  on  GDP  and  inflation  “indicating  a  Goldilocks  world  in  the  medium  term”  which  they deemed  ”wildly  implausible”  (p.1)  as  it  required  continued  growth  in  household  indebtedness  while real  estate  collateral  values  were  I  na  steep  and  continued  fall.  In  contrast  to  CBO  projections  of GDP growth  averaging  2.85  percent  between  2007  and  2010,  Godley  in  April  2007  predicted  output growth  “slowing  down  almost  to  zero  sometime  between  now  and  2008  and  then  recovering  toward 3  percent  or  thereabouts  in  2009–10”;  but  warned  that  “unemployment  [will]  start  to  rise significantly  and  does  not  come  down  again.”  (Godley  et  al  2007:  3).  Again,  in  November  2007 Godley  and  others  forecast  “a  significant  drop  in  borrowing  and  private  expenditure  in  the  coming quarters,  with  severe  consequences  for  growth  and  unemployment”.  These  forecasts  describe  the actual  developments  from  spring  2007  until  the  time  of  this  writing  in  spring  2009.  If  anything,  they were  sanguine:  US  growth  not  only  ‘slowed  to  zero’  but  actually  turned  negative  in  2008,  and  the recovery  ‘toward  3  percent  or  thereabouts  in  2009–10’  is  now  widely  forecast,  but  yet  to  start.