A Stock Adjustment Model of Income Determination with Inside Money and Private Debt with Some Preliminary Empirical Results for the United States

Modern macroeconomics emphasises the influence of portfolio adjustment on income and expenditure flows, and it has become commonplace to include wealth terms in functions representing private consumption or savings decisions. But despite the emphasis placed by Brainard and Tobin as far back as 1968 on the need to consider the full implications of identities which constrain portfolio adjustment, few models have explicitly examined the consistency of expenditure decisions with wealth objectives. Indeed, Brainard and Tobin themselves accepted wealth as the outcome of savings decisions without enquiring into the plausibility of the implied accumulation of wealth. Similarly, although monetarist economists have always stressed possible implications of a stable demand function for one class of financial assets — money — they have not integrated this into a fully consistent account of the demand for all financial assets and liabilities.