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Fiscal policy in a stock-flow consistent (SFC) model

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  • Wynne Goldey
  • 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: (1) 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 (2) that it cannot be assumed that a debtor country requires a trade surplus if interest payments on debt are not to explode.

Suggested Citation

  • Wynne Goldey & Marc Lavoie, 2007. "Fiscal policy in a stock-flow consistent (SFC) model," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 30(1), pages 79-100.
  • Handle: RePEc:mes:postke:v:30:y:2007:i:1:p:79-100 DOI: 10.2753/PKE0160-3477300104
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    References listed on IDEAS

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    1. Cottrell, Allin, 1994. "Keynes and the Keynesians on the Fisher Effect," Scottish Journal of Political Economy, Scottish Economic Society, vol. 41(4), pages 416-433, November.
    2. Marc Lavoie, 2002. "Interest parity, risk premia, and Post Keynesian analysis," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 25(2), pages 237-249.
    3. Dimitri B. Papadimitriou & L. Randall Wray, "undated". "Targeting Inflation, The Effects of Monetary Policy on the CPI and Its Housing Component," Economics Public Policy Brief Archive ppb_27, Levy Economics Institute.
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    1. repec:ums:papers:2012-10 is not listed on IDEAS
    2. Soon Ryoo & Peter Skott, 2013. "Public debt and full employment in a stock-flow consistent model of a corporate economy," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 35(4), pages 511-528.
    3. Peter Skott, 2016. "Aggregate demand, functional finance, and secular stagnation," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 13(2), pages 172-188, September.
    4. Gunther Tichy, 2010. "War die Finanzkrise vorhersehbar?," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 11(4), pages 356-382, November.
    5. Louis-Philippe Rochon & Marc Setterfield, 2011. "Post-Keynesian Interest Rate Rules and Macroeconomic Performance: A Comparative Evaluation," Chapters,in: Credit, Money and Macroeconomic Policy, chapter 7 Edward Elgar Publishing.
    6. Bezemer, Dirk J., 2010. "Understanding financial crisis through accounting models," Accounting, Organizations and Society, Elsevier, vol. 35(7), pages 676-688, October.
    7. Bezemer, Dirk J, 2009. "“No One Saw This Coming”: Understanding Financial Crisis Through Accounting Models," MPRA Paper 15892, University Library of Munich, Germany.
    8. Skott Peter & Ryoo Soon, 2014. "Public debt in an OLG model with imperfect competition: long-run effects of austerity programs and changes in the growth rate," The B.E. Journal of Macroeconomics, De Gruyter, vol. 14(1), pages 1-20, January.
    9. Passarella, Marco, 2012. "A simplified stock-flow consistent dynamic model of the systemic financial fragility in the ‘New Capitalism’," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 570-582.
    10. Alan Walks, 2014. "Canada's Housing Bubble Story: Mortgage Securitization, the State, and the Global Financial Crisis," International Journal of Urban and Regional Research, Wiley Blackwell, vol. 38(1), pages 256-284, January.
    11. Wayne, James J., 2014. "A Scientific Macroeconomic Model Derived from Fundamental Equation of Economics," MPRA Paper 59591, University Library of Munich, Germany.
    12. 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 (IfW), vol. 7, pages 1-44.
    13. Gennaro Zezza, 2012. "The impact of fiscal austerity in the Eurozone," Review of Keynesian Economics, Edward Elgar Publishing, vol. 1(0), pages 37-54.
    14. Skott, Peter & Ryoo, Soon, 2015. "Functional finance and intergenerational distribution in a Keynesian OLG model," UMASS Amherst Economics Working Papers 2015-13, University of Massachusetts Amherst, Department of Economics.
    15. Yannis Dafermos, 2015. "Debt cycles, instability and fiscal rules: a Godley-Minsky model," Working Papers 20151509, Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol.
    16. Marco, Passarella, 2011. "Systemic financial fragility and the monetary circuit: a stock-flow consistent approach," MPRA Paper 28498, University Library of Munich, Germany.
    17. Iwo Augustyński, 2016. "Skutki podniesienia kwoty wolnej od podatku od dochodów osobistych," Gospodarka Narodowa, Warsaw School of Economics, issue 1, pages 55-71.
    18. 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.
    19. 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.
    20. Sarlin, Peter & Ramsay, Bruce A., 2015. "Ending over-lending: assessing systemic risk with debt to cash flow," Working Paper Series 1769, European Central Bank.
    21. Hassan Bougrine & Teppo Rakkolainen, 2009. "Optimal Economic Growth Using Fiscal and Monetary Policies," Discussion Papers 50, Aboa Centre for Economics.
    22. Hassan Bougrine, 2012. "Fiscal austerity, the Great Recession and the rise of new dictatorships," Review of Keynesian Economics, Edward Elgar Publishing, vol. 1(0), pages 109-125.

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