How money and debt are described in simple economic models colours economists' interpretation of real world monetary systems. My feeling is that money is somewhat superfluous in these models, but it is necessary to understand why that is the case. This article explains how money and government debt (Treasury bills) operate in the second simplest Stock-Flow Consistent (SFC) model in the textbook Monetary Economics by Godley and Lavoie -- model PC (Portfolio Choice; found in chapter 4).
If the reader is familiar with mainstream models -- like Dynamic Stochastic General Equilibrium models (DSGE) -- the treatment of money and debt is generally similar to model PC. There are a number of convention differences, which means that the formulae look different, but they quite often imply the same behaviour. The real differences show up in the philosophy of the solution of the model, which actually should not affect how money and debt operate as instruments. In interests of brevity, I will defer the discussion of the differences to later. However, understanding how money and debt work within a SFC model -- which can be cleanly solved -- will prepare readers' understanding of the more poorly-defined DSGE models.…Bond Economics
Primer: Money And Debt In SFC Models
Brian Romanchuk
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