Wynne Godley and Hyman Minsky were two macroeconomists who ‘saw the crisis coming’. This paper develops a simple macrodynamic model that synthesises some key perspectives of their analytical frameworks. The model incorporates Godley’s financial balances approach and postulates that private sector’s propensity to spend is driven by a stock-flow norm (the target net private debt-to-income ratio) that changes endogenously via a Minsky mechanism. It also includes two fiscal rules: a Maastricht-type fiscal rule, according to which the fiscal authorities adjust the government expenditures based on a target net government debt ratio; and a Godley–Minsky fiscal rule, which links government expenditures with private indebtedness following a counter-cyclical logic. The analysis shows that (i) the interaction between the propensity to spend and net private indebtedness can generate cycles and instability; (ii) instability is more likely when the propensity to spend responds strongly to deviations from the stock-flow norm and when the expectations that determine the stock-flow norm are highly sensitive to the economic cycle; (iii) the Maastricht-type fiscal rule is destabilising while the Godley–Minsky fiscal rule is stabilising; and (iv) the paradox of debt can apply both to the private sector and the government sector.
Abstract. Several authors, particularly from ecological economics, locate a ‘growth imperative’ within the current monetary system based on credit money and positive interest rates. The strongest claim comes from papers such as Binswanger (2009, 2015) arguing based on a monetary circuit model that growth is unavoidable to maintain economic stability independent on the will of the economic agents. On the other side of the spectrum, Jackson & Victor (2015) have disputed this claim, presenting a post-Keynesian stock-flow consistent model that converges to a stationary state in their numerical simulations.
The central aim of this paper is to clarify why certain modeling approaches lead to a growth imperative and others do not. We analyzed the models in the tradition of Binswanger and concluded that their accounting of banks’ capital is inconsistent, and a modeling assumption central for a growth imperative is not underpinned theoretically: Bank’s equity capital has to increase even if debt does not. This is a discrepancy between the authors’ intentions in their texts and their actual models.
Second, we analyze several post-Keynesian models, a single static one, and four discrete time stock-flow consistent models. We show how to perform a stability analysis in the parameter space, and find that depending on parameter values, the stationary state can be stable or not. A stationary state with zero net saving and investment can be reached with positive interest rates, if the parameter ‘consumption out of wealth’ is above a threshold that rises with the interest rate.
We conclude that a monetary system based on interest-bearing debt-money with private banks does not lead to an ‘inherent’ growth imperative, but the stationary state can be unstable. This is caused by agents’ decisions, not by structural inevitableness. The stability analysis adds additional insights to numerical simulations of the dynamics, because we can precisely determine the parameter ranges where a stationary state can be reached.
Abstract The paper moves from a discussion of the challenges posed by the crisis to standard macroeconomics and the solutions adopted within the DSGE community. Although sev- eral recent improvements have enhanced the realism of standard models, we argue that major drawbacks still undermine their reliability. In particular, DSGE models still fail to recognize the complex adaptive nature of economic systems, and the implications of money endogeneity. The paper argues that a coherent and exhaustive representation of the inter-linkages between the real and financial sides of the economy should be a pivotal feature of every macroeconomic model and proposes a macroeconomic framework based on the combination of the Agent Based and Stock Flow Consistent approaches. The papers aims at contributing to the nascent AB-SFC literature under two fundamental respects: first, we develop a fully decentralized AB-SFC model with several innovative features, and we thoroughly validate it in order to check whether the model is a good candidate for policy analysis applications. Results suggest that the properties of the model match many empirical regularities, ranking among the best performers in the related literature, and that these properties are robust across different parameterizations. Second, the paper has also a methodological purpose in that we try to provide a set or rules and tools to build, calibrate, validate, and display AB-SFC models.
This link gives you access freely to the paper until August 18.
Alessandro Caiani, Antoine Godin, Eugenio Caverzasi, Mauro Gallegati, Stephen Kinsella, Joseph E. Stiglitz, Agent based-stock flow consistent macroeconomics: Towards a benchmark model, Journal of Economic Dynamics and Control, Volume 69, August 2016, Pages 375-408
Malcolm Sawyer and Marco Veronese Passarella, ‘The Monetary Circuit in the Age of Financialisation: A Stock-Flow Consistent Model with A Twofold Banking Sector’, Metroeconomica, doi: 10.1111/meca.12103, 2015 Abstract: The paper explores how the Theory of Monetary Circuit can be developed to reflect some important features of the evolution of the financial system in the past three decades, which have been associated with what may be termed ‘financialisation.’ For this purpose, we embed the benchmark single-period monetary circuit scheme proposed by Graziani in a richer set of institutional arrangements. The stock-flow consistent modelling technique pioneered by Godley and Lavoie is used to support our narrative.
Abstract: The emergence and persistence of large trade imbalances as well as the volatility of financial flows among countries have been attributed, at least in part, to the inadequacy of the current international monetary system after the breakdown of Bretton Woods. From a different perspective, the current eurozone crisis is also the result, in our view, of a flawed institutional setting. These problems call for reforms to mitigate or avoid the recessionary bias that is the outcome of current systems, as Keynes predicted in the discussion preceding the Bretton Woods agreements. In this paper we briefly review the evidence on international imbalances, and survey the rapidly growing literature on the subject. We introduce a set of models based on the stock-flow-consistent approach pioneered by Godley (1999) and Lavoie and Godley (2003). We discuss how to use these models to explore potential reform of the international monetary system.
The first version of this paper dates back to 2011… but it has been written to provide a benchmark model so that other researchers could expand on it, so it should not become obsolete too quickly!
The European Journal of Economics and Economic Policies: Intervention has just published a special issue dedicated to Post-Keynesian stock-flow consistent modeling.
Introduction by Antoine Godin, papers:
Huub Meijers, Joan Muysken and Olaf Sleijpen
– The deposit financing gap: another Dutch disease
Saed Khalil and Stephen Kinsella
– Bad banks choking good banks: simulating balance sheet contagion
Eugenio Caverzasi and Antoine Godin
– Financialisation and the sub-prime crisis: a stock-flow consistent model
Jacques Mazier and Sebastian Valdecantos
– A multi-speed Europe: is it viable? A stock-flow consistent approach
Biagio Ciuffo and Eckehard Rosenbaum
– Comparative numerical analysis of two stock-flow consistent post-Keynesian growth models
DOI: 10.2753/PKE0160-3477340407 Abstract:
This paper develops a stock-flow consistent model that explicitly integrates the role of liquidity preference and perceived uncertainty into the decision-making process of households, firms, and commercial banks. Emphasis is placed on (1) the link between the precautionary motive and the asset choice of the private sector, (2) the effect of perceived uncertainty on the desired margins of safety and borrowing, and (3) the impact of financial obligations on the liquidity preference of households and firms. Performing a simulation experiment, the paper illuminates the channels through which a rise in perceived uncertainty is likely to set off a recessionary process. Keywords: liquidity preference, perceived uncertainty, recessionary process, stock-flow consistent modeling