Download Towards a post-Keynesian consensus in macroeconomics

Towards a post-Keynesian
consensus in
macroeconomics:
Reconciling the Cambridge
and Wall Street views
Marc Lavoie
University of Ottawa
Problem statement
► The
current financial crisis, which started to
unfold in August 2007, is a reminder that
macroeconomics cannot ignore financial
relations, otherwise financial crises cannot
be explained.
► It was not always clear how Cambridge
economists did integrate financial relations
in their real models.
American PK vs Cambridge PK
► American
PK: Money, debt, liquidity, interest rates,
cash flows
 Fundamentalist PK
 Financial Keynesianism
 Wall Street Keynesianism
► Cambridge
PK: Real economy, actual and normal
profit rates, pricing, rates of utilization
 Kaleckians
 Kaldorians
 Sraffians
Purpose of paper
► Recall
frustrations of American PK strand
► Recall early efforts to remedy
► Discuss efforts in the mid 1980s and early
1990s
► Discuss stock-flow consistent models as
means to reconciliation and provide some
sort of consensus method
Cambridge macroeconomics
without money
► Jan
Kregel (1985, p. 133):
 “Money plays no more than a perfunctory role in the
Cambridge theories of growth, capital and distribution
developed after Keynes”.
► Cambridge
macroeconomic without money is like
Hamlet without the Prince.
► Kregel (1986) calls for the introduction of Bulls
and Bears into heterodox Keynesian analysis, and
for a generalization of liquidity preference theory.
A few efforts by Cambridge authors
to insert monetary factors
►
►
►
Pasinetti (1974) distinguishes between interest rate and
the rate of return of capitalists.
Kaldor’s (1966) neo-Pasinetti model inserts stock market
shares, but omits money deposits, as pointed out by
Davidson (1968, 1972).
Several chapters on money and credit in Robinson’s
(1956) The Accumulation of Capital.
 the loaned amounts depend on the interest covering ratio, that
is, the ratio of (profit) income to due interest payments.
 the borrowing power of entrepreneurs will depend on “the
strictness of the banks’ standards of creditworthiness” and the
state of mind of individual investors, as well as “the subjective
attitude of potential lenders” .
►
Joseph Steindl (1952) pays attention to the debt ratio of
firms, and the possible contradiction in the evolution of
the target and the actual debt ratios
The Sraffian contribution
► Garegnani
(179), Pivetti (1985) and Panico (1988)
argue that the trend rate of interest and the
normal profit rate are linked one on one.
► There is a link with target return pricing and
normal-cost pricing, where the interest rate
determines the target rate of return that will help
to set the markup.
► Raising interest rates to slow down the economy
can have inflationary consequences.
► This approach has been extended within a
Kaleckian model by Dutt (1992), Lavoie (1993),
Hein (2006).
Minsky-Cambridge models
►
►
The Taylor and O’Donnel (1985) model
The Semmler and Franke (1991) model
 Both have portfolio choice (deposits, equities)
 Both have an investment function that depends on confidence
 Both have a differential equation determining confidence (spread profitinterest rates, leverage ratio) and producing cycles.
►
The Delli Gatti and Gallegati (1990s) models.
 Investment is a function of q ratio and a multiple of retained earnings,
this multiple changing pro-cyclically (Minsky 2-price diagram).
►
The Jarsulic 1988, early 1990s models
 Ad hoc non-linearities, effect of debt ratios, chaos
►
Palley (1991, 1994) models
 Introduce loans to consumers.
 An extension of Minky’s FIH to the consumer sector.
 initially, the higher debt taken on by borrowers leads to higher
economic activity; but then, as more interest payments must be made,
this slows down economic activity.
►
Skott’s models (1981, 1988, 1989)
 An earlier forgotten effort at synthesis, which is stock-flow consistent
Drawbacks of previous models:
Sometimes ….
► Models
are not fully stock-flow consistent
► Models do not incorporate growth
► Money is exogenous, or set by the government
deficit
► The leverage ratio is not considered explicity
► There is no stock market, or,
► The stock market value of equities is determined
by fundamentals, and not by the market supply
and demand
Stock-flow consistent models
► The
main claim of the present paper is that
stock-flow consistent models (SFC models),
inspired in particular by the work of Wynne
Godley, are the likely locus of some form of
post-Keynesian consensus in
macroeconomics, as it allows to entertain
both monetary and real issues within a
single model.
SFC models and Minsky
►
►
►
It is interesting to note that the possible links between
flow-of-funds analysis and balance sheet accounts on the
one hand, and the Minskyan view of Wall Street economics
on the other hand, were already underlined by Alan Roe
(1973).
Roe argued that that individuals and institutions generally
follow stock-flow norms, but that during expansion they
may agree to let standards deteriorate. He was also
concerned with sudden shifts in portfolio holdings.
Roe explicitly refers to the work of Minsky on financial
fragility, showing that a stock-flow consistent framework is
certainly an ideal method to analyze the merits and the
possible consequences of Minsky’s financial fragility
hypothesis.
Minsky and SFC models
► “The
structure of an economic model that is
relevant for a capitalist economy needs to
include the interrelated balance sheets and
income statements of the units of the economy”
(Minsky 1996, p. 77).
► Thus starting out with an appropriate balance
sheet matrix insures that economists “analyze
how financial commitments affect the economy”
(Minsky 1986, p. 221), by taking into account all
the interrelated cash flows of the various
sectors.
► Still, different behavioural equations will lead to
different results.
A complete balance sheet
The simple Lavoie and Godley
(2001-02) balance sheet
Split households, add loans to consumers
Add government and the central bank
Focus instead on the porfolio of banks
Add housing and mortgages
Add housing and mortgages
Rich
Households
Other
Households
Productive
capital
Firms
+ ph.hrh
Bills
+ Brh
Cash
+ HPMrh
Central
Bank
+ Drh
+ Kh
+ Bf
+ HPMoh
+ Doh
− Lf
Loans
− Moh
Mortgages
Equities
+ pf.efrh
Net worth
− NWh
∑
+ Kf
+ ph.hoh
Advances
∑
Govt
+ pk.kf
Homes
Deposits
Banks
+ Bb
−B
+ Bcb
0
+ HPMb
− HPM
0
−A
+A
0
−D
0
+L
0
+M
- pf.ef
0
− NWh
− NWf
0
− NWg
0
−K
0
0
0
0
0
0
How about mortgage-backed financial assets?
Conclusion
This tour should dispel the notion that Cambridge
economics was impervious to the challenge posed by the
earlier fundamentalist Post Keynesians, who were very
much concerned with a monetary production economy.
► The SFC approach, despite its complexities, is far
superior to the New consensus approach (new
neoclassical synthesis), which however extended, cannot
take into account the financial commitments of banks
and other agents of the economy – a constraint that has
turned up to be so important for our banking and
financial system during the recent financial crisis.
►