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Fiscal Policy in a Stock-Flow Consistent (SFC) Model

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  • Wynne Godley
  • Marc Lavoie

Abstract

This paper deploys a simple stock-flow consistent (SFC) model in order to examine various contentions regarding fiscal and monetary policy. It follows from the model that if the fiscal stance is not set in the appropriate fashion—that is, at a well-defined level and growth rate—then full employment and low inflation will not be achieved in a sustainable way. We also show that fiscal policy on its own could achieve both full employment and a target rate of inflation. Finally, we arrive at two unconventional conclusions: first, that an economy (described within an SFC framework) with a real rate of interest net of taxes that exceeds the real growth rate will not generate explosive interest flows, even when the government is not targeting primary surpluses; and, second, that it cannot be assumed that a debtor country requires a trade surplus if interest payments on debt are not to explode.

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Bibliographic Info

Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_494.

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Date of creation: Apr 2007
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Handle: RePEc:lev:wrkpap:wp_494

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Web page: http://www.levyinstitute.org

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Cited by:
  1. Marco, Passarella, 2011. "A simplified stock-flow consistent dynamic model of the systemic financial fragility in the 'New Capitalism'," MPRA Paper 28499, University Library of Munich, Germany.
  2. Lengnick, Matthias & Krug, Sebastian & Wohltmann, Hans-Werner, 2013. "Money creation and financial instability: An agent-based credit network approach," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 7(32), pages 1-44.
  3. Dirk J. Bezemer, 2012. "Modelos contables y comprensión de la crisis financiera," Revista de Economía Institucional, Universidad Externado de Colombia - Facultad de Economía, vol. 14(26), pages 47-76, January-J.
  4. Passarella, Marco, 2011. "The two-price model revisited. A Minskian-Kaleckian reading of the process of 'financialization'," MPRA Paper 32033, University Library of Munich, Germany.
  5. Soon Ryoo & Peter Skott, 2011. "Public debt and full employment in a stock-flow consistent model of a corporate economy," UMASS Amherst Economics Working Papers 2011-26, University of Massachusetts Amherst, Department of Economics.
  6. Hassan Bougrine & Teppo Rakkolainen, 2009. "Optimal Economic Growth Using Fiscal and Monetary Policies," Discussion Papers 50, Aboa Centre for Economics.
  7. repec:hal:journl:halshs-00488760 is not listed on IDEAS
  8. Marco, Passarella, 2011. "Systemic financial fragility and the monetary circuit: a stock-flow consistent approach," MPRA Paper 28498, University Library of Munich, Germany.
  9. Bezemer, Dirk J., 2010. "Understanding financial crisis through accounting models," Accounting, Organizations and Society, Elsevier, vol. 35(7), pages 676-688, October.
  10. Gunther Tichy, 2010. "War die Finanzkrise vorhersehbar?," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 11(4), pages 356-382, November.
  11. Bezemer, Dirk J, 2009. "“No One Saw This Coming”: Understanding Financial Crisis Through Accounting Models," MPRA Paper 15892, University Library of Munich, Germany.
  12. Peter Skott & Soon Ryoo, 2012. "Public Debt and Functional Finance in an OLG Model with Imperfect Competition," UMASS Amherst Economics Working Papers 2012-10, University of Massachusetts Amherst, Department of Economics.

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