Given the recent posts by Daniel Negreiros Conceição and Eric Tymoigne to this blog, and conversations both in the comments section and privately, a revision of my previous post on the topic of modeling the sector financial balances is in order. As before, earlier posts by Rob Parenteau, and Bill Mitchell, in addition to later posts by Daniel and Eric, describe many of the details of this approach and how they fit the graph posted by Paul Krugman. Rob is correct to suggest this would be a much better framework for understanding macroeconomics than the traditional IS-LM model, which was highly flawed to begin. My purpose here is as before is to build on these posts and demonstrate a few uses of the model.First, it must be noted that what we are doing here is merely putting a simple graphical representation to a model that has already been in wide use by many of us for years, and the details for which have been elaborated in much more complex models commonly referred to as “stock-flow consistent models” developed by Wynne Godley, Genarro Zezza, Claudio Dos Santos, Marc Lavoie, and numerous others. Much of this research can be found in publications on the Levy Institute’s website or in the book Monetary Economics: An Integrated Approach to Credit, Money, Income, Production, and Wealth (2006, Palgrave-Macmillan) by Godley and Lavoie. Also, as Eric noted, the SFB model presented here illustrates only financial flows; it is thus showing only a slice of what is presented in the larger models these authors have developed that integrate both flows and stocks coherently and consistently.
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