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Financialisation Issues in a Post-Keynesian Stock-Flow Consistent Model

Financialisation Issues in a Post-Keynesian Stock-Flow Consistent Model. Marc Lavoie University of Ottawa (based on work with Wynne Godley). Paper is…. Based on Chapter 11 of a book written with Wynne Godley

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Financialisation Issues in a Post-Keynesian Stock-Flow Consistent Model

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  1. Financialisation Issues in a Post-Keynesian Stock-Flow Consistent Model Marc Lavoie University of Ottawa (based on work with Wynne Godley)

  2. Paper is… • Based on Chapter 11 of a book written with Wynne Godley • Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth • Macmillan/Palgrave 2007

  3. The model … • Can be found as an E-views file on the web site: • gennaro.zezza.it/software/models

  4. Outline of the presentation • SFC features • Main features of the model • Experiments (simulations): changing some parameter values linked to financialisation issues: charts

  5. SFC ? • All sectors face budget constraints • Financial interdependence between sectors • Stock variables arise from flows and capital appreciation: historical time • There exist stock-flow norms (which may change through time) • People react and adjust to disequilibria

  6. SFC of some form in PKE and other heterodox economics • Davidson, Minsky • Eichner 1985 • Peter Skott 1989 • Institutionalists: Copeland 1947

  7. The buffer principle:All sectors need a buffer that provide an adjustment factor • Firms: inventories and bank loans • Households: holdings of money deposits • Government: bills issued • Central bank: residual purchaser of bills or advances made to private banks • Banks: bills held or advances obtained from central bank

  8. Objective • To simulate a complicated model that entertains several realistic features • All blocks (sectors) are well developed • Growth model • Where demand is constrained in the long run by the growth rate of the supply side (labour productivity) • Here we look at issues tied to financialisation

  9. Firms • Follow normal cost pricing procedures, based on historical costs • Mark-up depends on planned entrepreneurial profits, which depend on investment expenditures • Firms borrow mainly to fund inventories • Firms issue shares to finance investment not funded through retained earnings • The rate of accumulation depends on capacity utilization and the real interest rate • The main drawback is that firms do not hold financial assets

  10. Inflation: a kind of conflictual inflation • Workers are targeting a real wage, based on productivity growth and employment rates. • Firms are looking for a profit margin that will finance a given proportion of their investments. • The inflation rate is proportional to the discrepancy between the actual and the target real wage. • The Phillips curve is flat within a certain employment range.

  11. Households • Consumption on the basis of • past real wealth • current disposable income net of interest payments on loans, plus net additions to outstanding loans • Gross new loans is a fraction of personal income • Standard portfolio equations with adding-up conditions

  12. Government and the central bank • Pure government expenditures (excluding debt servicing) grow at a rate equal to the growth rate of labour productivity. This is the main exogenous variable. • Cash, bank reserves, bills and bonds are all supplied on demand (monetization is fully demand-led)

  13. More realistic PK bank • Banks have own funds (net worth) • Banks have retained earnings • Banks make loans to firms and to consumers • Banks face a BIS-imposed capital adequacy ratio (CAR) – the Cooke ratio (own funds to loans ratio) • Banks have a target liquidity ratio: bills to deposits ratio • (both target ratios must be achieved in the medium run

  14. The determination of interest rates • The (nominal) Treasury bill rate is set exogenously by the central bank. • The bond rate is also set exogenously (or it can be made endogenous, if its supply is set in relative terms) • The deposit rate relative to the bill rate is endogenous, set by banks, based on a bank reaction function that depends on the liquidity preference of banks • The lending rate is marked up over the deposit rate, to insure bank profits and fulfil BIS rules

  15. Experiments • Increase the proportion of gross investment financed by retained earnings (i.e. diminish equity issues) • Increase the proportion of profits distributed as dividends • Increase the desire to hold equities • Increase the ratio of gross new loans to personal income • Increase the default rate on loans

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