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Fiscal Policy and the Economics of Financial Balances

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  • Gennaro Zezza

Abstract

This paper presents the main features of the macroeconomic model being used at The Levy Economics Institute of Bard College, which has proven to be a useful tool in tracking the current financial and economic crisis. We investigate the connections of the model to the "New Cambridge" approach, and discuss other recent approaches to the evolution of financial balances for all sectors of the economy. We will finally show the effects of fiscal policy in the model, and its implications for the proposed fiscal stimulus on the U.S. economy. We show that the New Cambridge hypothesis, which claimed that the private sector financial balance would be stable relative to income in the short run, does not hold for the short term in our model, but it does hold for the medium/long term. This implies that the major impact of the fiscal stimulus in the long run will be on the external imbalance, unless other measures are taken.

Suggested Citation

  • Gennaro Zezza, 2009. "Fiscal Policy and the Economics of Financial Balances," Economics Working Paper Archive wp_569, Levy Economics Institute.
  • Handle: RePEc:lev:wrkpap:wp_569
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Incorporating the Rentier Sectors into a Financial Model
      by Michael in Michael Hudson on 2012-09-12 16:56:01

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    Cited by:

    1. Sergio Cesaratto, 2012. "Neo-Kaleckian and Sraffian controversies on accumulation theory," Department of Economics University of Siena 650, Department of Economics, University of Siena.
    2. Lorenzo Esposito & Giuseppe Mastromatteo, 2019. "Defaultnomics: Making Sense of the Barro-Ricardo Equivalence in a Financialized World," Economics Working Paper Archive wp_933, Levy Economics Institute.
    3. Gennaro Zezza, 2012. "The impact of fiscal austerity in the Eurozone," Review of Keynesian Economics, Edward Elgar Publishing, vol. 1(0), pages 37-54.
    4. Paolo Casadio & Antonio Paradiso, 2012. "Private sector balance, financial markets, and US cycle: a SVAR analysis," Journal of Economic Studies, Emerald Group Publishing, vol. 39(6), pages 709-723, October.
    5. Özgür Bayram SOYLU, 2020. "A simple model of developing countries: financing the current account deficit Abstract: A stock flow consistent model provides a monetary and financial framework to macroeconomics. It clearly shows th," Eastern Journal of European Studies, Centre for European Studies, Alexandru Ioan Cuza University, vol. 11, pages 123-145, June.
    6. 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.
    7. Engelbert Stockhammer & Joel Rabinovich & Niall Reddy, 2018. "Distribution, wealth and demand regimes in historical perspective," FMM Working Paper 14-2018, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    8. Piero Ferri, 2011. "Macroeconomics of Growth Cycles and Financial Instability," Books, Edward Elgar Publishing, number 14260, June.
    9. Engelbert Stockhammer & Rafael Wildauer, 2016. "Debt-driven growth? Wealth, distribution and demand in OECD countries," Cambridge Journal of Economics, Oxford University Press, vol. 40(6), pages 1609-1634.
    10. Yannis Dafermos, 2018. "Debt cycles, instability and fiscal rules: a Godley–Minsky synthesis," Cambridge Journal of Economics, Oxford University Press, vol. 42(5), pages 1277-1313.
    11. Michael Hudson & Dirk Bezemer, 2012. "Incorporating the Rentier Sectors into a Financial Model," World Economic Review, World Economics Association, vol. 2012(1), pages 1-1, September.
    12. Michaelis Nikiforos, 2018. "Distribution-led growth through methodological lenses," FMM Working Paper 24-2018, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    13. Michalis Nikiforos, 2016. "Distribution-led Growth through Methodological Lenses," Economics Working Paper Archive wp_879, Levy Economics Institute.
    14. Michalis Nikiforos & Gennaro Zezza, 2017. "Stock†Flow Consistent Macroeconomic Models: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 31(5), pages 1204-1239, December.
    15. Stockhammer, Engelbert & Rabinovich, Joel & Reddy, Niall, 2017. "Distribution, wealth and demand regimes in historical perspective. USA, UK, France and Germany, 1855-2010," Economics Discussion Papers 2017-5, School of Economics, Kingston University London.

    More about this item

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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