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Post-Keynesian stock-flow models after the subprime crisis: the need for micro-foundations


  • Photis Lysandrou

    (City University, UK)


The subprime crisis exposed a flaw in post-Keynesian stock-flow models, namely their concession to mainstream macroeconomic theory that financial markets obey a price-clearing rule. Two reasons lie behind this concession. The first is the assumption that investors give priority to the price dimension of securities and only secondary importance to their quantity dimension. This paper argues that following recent structural changes in domestic economies the securities markets are now dominated by investors who give co-priority to the price and quantity dimensions of securities, for which reason these markets now operate to the same demand-led quantity adjustment process as do all other markets. The second and more fundamental reason is that post-Keynesian stock-flow models lack a micro-foundational unit of analysis from which can be derived an overarching methodological framework that is not only externally realistic but also internally coherent. This paper argues that the unit of analysis that best fits this purpose is the ‘commodity’, a term that will be used both exclusively, to denote only those entities that are priced to a market standard, and inclusively, to denote not only the outcomes of human activities but also the capacities for activity that are subject to pricing standards.

Suggested Citation

  • Photis Lysandrou, 2014. "Post-Keynesian stock-flow models after the subprime crisis: the need for micro-foundations," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 11(1), pages 113-126, April.
  • Handle: RePEc:elg:ejeepi:v:11:y:2014:i:1:p113-126

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    References listed on IDEAS

    1. Till van Treeck, 2009. "A synthetic, stock--flow consistent macroeconomic model of 'financialisation'," Cambridge Journal of Economics, Oxford University Press, vol. 33(3), pages 467-493, May.
    2. Goda, Thomas & Lysandrou, Photis & Stewart, Chris, 2013. "The contribution of US bond demand to the US bond yield conundrum of 2004–2007: An empirical investigation," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 27(C), pages 113-136.
    3. John Grahl & Photis Lysandrou, 2006. "Capital market trading volume: an overview and some preliminary conclusions," Cambridge Journal of Economics, Oxford University Press, vol. 30(6), pages 955-979, November.
    4. Harm Bandholz & Jorg Clostermann & Franz Seitz, 2009. "Explaining the US bond yield conundrum," Applied Financial Economics, Taylor & Francis Journals, vol. 19(7), pages 539-550.
    5. Thomas Goda & Photis Lysandrou, 2014. "The contribution of wealth concentration to the subprime crisis: a quantitative estimation," Cambridge Journal of Economics, Oxford University Press, vol. 38(2), pages 301-327.
    6. Bernanke, B.S., 2011. "International capital flows and the returns to safe assets in the United States 2003-2007," Financial Stability Review, Banque de France, issue 15, pages 13-26, February.
    7. Ricardo J. Caballero, 2010. "The "Other" Imbalance and the Financial Crisis," NBER Working Papers 15636, National Bureau of Economic Research, Inc.
    8. Photis Lysandrou, 2005. "Globalisation as commodification," Cambridge Journal of Economics, Oxford University Press, vol. 29(5), pages 769-797, September.
    9. Photis Lysandrou & Denitsa Stoyanova, 2007. "The Anachronism of the Voice-Exit Paradigm: institutional investors and corporate governance in the UK," Corporate Governance: An International Review, Wiley Blackwell, vol. 15(6), pages 1070-1078, November.
    10. Narayana R. Kocherlakota, 2010. "Modern macroeconomic models as tools for economic policy," The Region, Federal Reserve Bank of Minneapolis, issue May, pages 5-21.
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    More about this item


    post-Keynesian stock-flow models; subprime crisis; micro-foundations; commodity;

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • G01 - Financial Economics - - General - - - Financial Crises


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