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Keynesian income-expenditure model
S = f(Y) I≠f(Y) ∴NAFA (=S-I) = f(Y)
i.e. step change in Y  perpetual accumulation of assets
Cambridge view:
STOCK of financial assets (not rate of acquisition) a function
of (in fact proportional to) income
∴ NAFAt = (1-α) (YDt -YDt-1)
∴ PXt= YDt - NAFAt= αYDt +(1-α)YDt-1
Where PX = private expenditure
• And period is length of time agents take to adjust stock of
assets to incomes
CEPG research found this to be one year
Therefore estimated equation (with 3 other variables) and found
(1975)
PX = 0.533YD +0.416YD(t-1) + 0.899 HP +0.790BA +0.962S
(increase in HP debt, increase in bank lending, stockbuilding)
Since NAFAt = (1-α) (YDt -YDt-1)
And NAFA = (S-I) = (X-M) + (G-T)
Therefore (M-X) = (G-T) – (1-α) (YD -YDt-1)
Fiscal policy must be consistent with current account
target
If this is inconsistent with employment target, then
the two could be reconciled by exchange rate
depreciation but
* Hard to engineer under a floating regime
• * real effects liable to be undone by real wage
resistance
• * CEPG were ‘elasticity pessimists’ anyway
Therefore might have to resort to
* Credit controls
* Rationing (Kaldor)
* Import controls (tariffs and/or quotas)
SITUATION IN MARCH 1974
* oil prices up 300% in 6 months
* current account deficit £4bn (4% of gdp)
* price inflation 20%v (wage inflation higher)
* unemployment still only 700,000 but rising
sharply
TREASURY CHARGES AGAINST CEPG
• No theory of investment
• Ignored evidence that overseas sector was source
of instability on the economy
• Total NAFA had been fairly stable but its
components (personal & corporate) hadn’t
-- instead they cancelled out for reasons no one had
explained
Godley accepted third point but said it couldn’t
rehabilitate discretionary fiscal policy
PARLIAMENTARY COMMITTEE’S CONCLUSIONS
1) don’t say inflation when you mean reflation
2) Treasury and CEPG should hold joint
Seminars
Treasury: CEPG (with stockbuilding & credit aggregates in
equation) STRENGTHENED case for short-term forecasting
+ repeated criticism that stable surplus was sum of 2 unstable
elements
BUDGET AND CURRENT ACCOUNT DEFICITS PART COMPANY
Fiscal deficit 7.2% of gdp in 1974, 9% in 1975
Current account deficit 4.5% of gdp in 1974, 1.7% in 1975
• Kaldor: ‘New Cambridge has ceased to hold’
• CEPG 1976 review denied this:
• Full-employment budget deficit hadn’t
widened – if actual deficit had, this was due to
the recession
• M-X) = (G-T) – (1-α) (YD -YDt-1)
• CHANGING TREASURY ATTITUDE TO DEMAND
MANAGEMENT
• Dec 1975; accepted vertical LR Phillips curve (by
majority vote)
• --move away from Cambridge so far as Godley,
Kaldor still hostile to ‘natural rate’ doctrine
• -- but moved Treasury towards Cambridge
position so far as it gave them firmer basis for
rejecting fine-tuning