I already commented under your earlier post: we need less of IS-LM and more of the models based on stock-flow consistency. They model the indebtedness and wealth effects directly. That is why they predicted the crisis, unlike IS-LM or neoclassical macro.No One Saw This Coming":Understanding Financial Crisis ThroughAccounting Models byBezemer, Dirk J,Groningen UniversityIf you use stock-flow consistency you cannot possibly find that austerity is expansionary, unless you make some crazy assumptions about propensity to spend being driven by the state of the federal budget (nobody looks at that when spending/investing, it is refuted by data).And, added bonus; a fiat money issuing government cannot run out of its own money so it can deliver both price stability and full employment, no liquidity traps involved.Lavoie and Godley show that at no point will the govt find that its interest payments are out of control when it follows a simple rule: assure full employment.
Wednesday, September 14, 2011
SFC models v. IS-LM
Ron T posted this comment at Paul Krugman's blog. It is worth reposting here since it cuts right to the point. I hope that PK reads it and consults the references. Maybe PK can brush of MMT as peripheral, but can he brush off former British Treasury "wise man" Wynne Godley, too?