Contents
Notations Used in the Book ix
List of Tables xviii
List of Figures xx
Preface xxxiv
1 Introduction 1
1.1 Two paradigms 1
1.2 Aspiration 4
1.3 Endeavour 9
1.4 Provenance 11
1.5 Some links with the ‘old’ Yale school 13
1.6 Links with the post-Keynesian school 16
1.7 A sketch of the book 18
A1.1 Compelling empirical failings of the neo-classical
production function 20
A1.2 Stock-flow relations and the post-Keynesians 21
2 Balance Sheets, Transaction Matrices and the Monetary Circuit 23
2.1 Coherent stock-flow accounting 23
2.2 Balance sheets or stock matrices 25
2.3 The conventional income and expenditure matrix 33
2.4 The transactions flow matrix 37
2.5 Full integration of the balance sheet and the transactions
flow matrices 43
2.6 Applications of the transactions flow matrix: the monetary
circuit 47
3 The Simplest Model with Government Money 57
3.1 Government money versus private money 57
3.2 The service economy with government money and no
portfolio choice 58
3.3 Formalizing Model SIM 61
3.4 A numerical example and the standard Keynesian multiplier 68
3.5 Steady-state solutions 71
3.6 The consumption function as a stock-flow norm 74
3.7 Expectations mistakes in a simple stock-flow model 78
3.8 Out of the steady state 83
3.9 A graphical illustration of Model SIM 88
3.10 Preliminary conclusion 91
A3.1 Equation list of Model SIM 91
A3.2 Equation list of Model SIM with expectations (SIMEX) 92
A3.3 The mean lag theorem 92
A3.4 Government deficits in a growing economy 95
4 Government Money with Portfolio Choice 99
4.1 Introduction 99
4.2 The matrices of Model PC 99
4.3 The equations of Model PC 102
4.4 Expectations in Model PC 107
4.5 The steady-state solutions of the model 111
4.6 Implications of changes in parameter values on temporary
and steady-state income 116
4.7 A government target for the debt to income ratio 124
A4.1 Equation list of Model PC 126
A4.2 Equation list of Model PC with expectations (PCEX) 126
A4.3 Endogenous money 127
A4.4 Alternative mainstream closures 129
5 Long-term Bonds, Capital Gains and Liquidity Preference 131
5.1 New features of Model LP 131
5.2 The value of a perpetuity 131
5.3 The expected rate of return on long-term bonds 132
5.4 Assessing capital gains algebraically and geometrically 134
5.5 Matrices with long-term bonds 136
5.6 Equations of Model LP 137
5.7 The short-run and long-run impact of higher interest rates
on real demand 150
5.8 The effect of household liquidity preference on long rates 153
5.9 Making government expenditures endogenous 160
A5.1 Equations of Model LP 165
A5.2 The liquidity trap 167
A5.3 An alternative, more orthodox, depiction of the bond market 168
6 Introducing the Open Economy 170
6.1 A coherent framework 170
6.2 The matrices of a two-region economy 171
6.3 The equations of a two-region economy 173
6.4 The steady-state solutions of Model REG 176
6.5 Experiments with Model REG 180
6.6 The matrices of a two-country economy 187
6.7 The equations of a two-country economy 191
6.8 Rejecting the Mundell–Fleming approach and adopting
the compensation approach 194
Contents vii
6.9 Adjustment mechanisms 201
6.10 Concluding thoughts 207
A6.1 Equations of Model REG 209
A6.2 Equations of Model OPEN 211
A6.3 Historical and empirical evidence concerning the
compensation principle 213
A6.4 Other institutional frameworks: the currency board 214
A6.5 How to easily build an open model 215
7 A Simple Model with Private Bank Money 217
7.1 Private money and bank loans 217
7.2 The matrices of the simplest model with private money 218
7.3 The equations of Model BMW 222
7.4 The steady state 227
7.5 Out-of-equilibrium values and stability analysis 233
7.6 The role of the rate of interest 240
7.7 A look forward 247
A7.1 The equations of Model BMW 247
8 Time, Inventories, Profits and Pricing 250
8.1 The role of time 250
8.2 The measure of profits 252
8.3 Pricing 263
8.4 Numerical examples of fluctuating inventories 276
A8.1 A Numerical example of inventory accounting 278
9 A Model with Private Bank Money, Inventories and Inflation 284
9.1 Introduction 284
9.2 The equations of Model DIS 285
9.3 Additional properties of the model 293
9.4 Steady-state values of Model DIS 295
9.5 Dealing with inflation in (a slightly modified) Model DIS 300
A9.1 Equation list of Model DIS 308
A9.2 The peculiar role of given expectations 310
A9.3 Equation list of Model DISINF 312
10 A Model with both Inside and Outside Money 314
10.1 A model with active commercial banks 314
10.2 Balance sheet and transaction matrices 315
10.3 Producing firms 318
10.4 Households 322
10.5 The government sector and the central bank 331
10.6 The commercial banking system 333
10.7 Making it all sing with simulations 342
10.8 Conclusion 374
A10.1 Overdraft banking systems 374
A10.2 Arithmetical example of a change in portfolio preference 376
11 A Growth Model Prototype 378
11.1 Prolegomena 378
11.2 Balance sheet, revaluation and transactions-flow matrices 379
11.3 Decisions taken by firms 383
11.4 Decisions taken by households 392
11.5 The public sector 397
11.6 The banking sector 399
11.7 Fiscal and monetary policies 404
11.8 Households in the model as a whole 422
11.9 Financial decisions in the model as a whole 435
11.10 A concluding recap 441
12 A More Advanced Open Economy Model 445
12.1 Introduction 445
12.2 The two matrices 446
12.3 Equations of the generic model 450
12.4 Alternative closures 462
12.5 Experiments with the main fixed exchange rate closure 466
12.6 Experiments with alternative fixed exchange rate closures 472
12.7 Experiments with the flexible exchange rate closure 478
12.8 Lessons to be drawn 487
A12.1 A fundamental and useful open-economy flow-of-funds
identity 490
A12.2 An alternative flexible exchange rate closure 492
13 General Conclusion 493
13.1 Unique features of the models presented here 493
13.2 A summary 499
References 501
Index 514