A Monetary Multisectoral (Minsky) Model Steve Keen University of Western Sydney Debunking Economics www.debtdeflation.com/blogs www.debunkingeconomics.com 0 1 2 3 4 5 6 7 8 9 10 11 12 13 25 20 15 10 5 0 5 10 15 20 25
Jan 12, 2016
A Monetary Multisectoral (Minsky) Model
Steve KeenUniversity of Western Sydney
Debunking Economicswww.debtdeflation.com/blogs
www.debunkingeconomics.com
0 1 2 3 4 5 6 7 8 9 10 11 12 1325
20
15
10
5
0
5
10
15
20
25
Great Depressionincluding GovernmentGreat Recessionincluding Government
Debt-financed demand percent of aggregate demand
Years since peak rate of growth of debt (mid-1928 & Dec. 2007 resp.)
Per
cent
0
The Bankruptcy of Neoclassical Economics
• Before the crisis…– The state of macro is good…” (Oliver
Blanchard: founding editor, AER: Macro)• After the crisis…
– It is important to start by stating the obvious, namely, that the baby should not be thrown out with the bathwater…” (Blanchard Dell'Ariccia et al. 2010; emphasis added)
• Reality– Neoclassical macroeconomics is a baby that
should never have been conceived
The Bankruptcy of Neoclassical Economics
• Neoclassical theory wrong from first principles:– Treats complex monetary exchange as barter– Assumes macroeconomy is stable– Ignores social class
• Treats entire economy a single agent– Obliterates uncertainty
• “Rational” as capacity to foresee the future; – Uses empirically falsified “money multiplier”
model of money creation; and– Ignores credit and debt.
A tentative, but not-bankrupt, alternative
• A new macroeconomics must do the exact opposite:– Economy as inherently monetary;– Model the economy dynamically;– Social classes rather than isolated agents;– Rational but not prophetic behavior;– Endogenous creation of money by banking sector;
and– Credit and Debt have pivotal roles
• Two instances– Monetary Minsky Great Moderation/Recession model– Dynamic Monetary Multisectoral model
• Base models:– Monetary Circuit Theory (Graziani 1989; Keen 2008)– Goodwin Growth Cycle (Goodwin 1967)
Monetary Circuit Theory• Basic process of endogenous money creation• Entrepreneur approaches bank for loan
• Bank grants loan & creates deposit simultaneously
• Alan Holmes, Senior Vice-President New York Fed, 1969:
• “In the real world, banks extend credit, creating deposits in the process, and look for the reserves later.” (1969, p. 73)
• New loan puts additional spending power into circulation
• Modeling this using strictly monetary framework:
Monetary Circuit Theory• Input financial relations in matrix:
M1
"Type"
"Account"
"Symbol"
"Compound Debt"
"Pay Debt"
"Record Payment"
"Debt-financed Investment"
"Wages"
"Interest"
"Consumption"
"Debt repayment"
"Record repayment"
"Lend from capital"
"Record Loan"
0
"Bank Capital"
BV t( )
0
0
0
0
0
0
0
I
0
J
0
0
"Bank P/L (B.T)"
BT t( )
0
B
0
0
0
E F( )
G
0
0
0
0
1
"Firm Loan (FL)"
FL t( )
A
0
B
C
0
0
0
0
I
0
J
1
"Firm Deposit (FD)"
FD t( )
0
B
0
C
D
E
G H
I
0
J
0
1
"Worker Deposit (WD)"
HD t( )
0
0
0
0
D
F
H
0
0
0
0
BV
System M1
tBV t( )d
dI J
tBT t( )d
dB E F G
tFL t( )d
dA B C I J
tFD t( )d
dC B D E G H I J
tHD t( )d
dD F H
• Symbolic derivation of system of coupled ordinary differential equations
Monetary Circuit Theory• Symbolic substitutions generate model
System M1
tBV t( )d
d
FL t( )
V r t( ) BV t( )
L r t( )
tBT t( )d
drL FL t( ) rD FD t( ) rD HD t( )
BT t( )
B
tFL t( )d
d
BV t( )
L r t( ) FL t( )
V r t( ) P t( ) YR t( ) Inv r t( )
tFD t( )d
drD FD t( ) rL FL t( )
BV t( )
L r t( ) FL t( )
V r t( ) BT t( )
B
HD t( )
W P t( ) YR t( ) Inv r t( )
W t( ) YR t( )
a t( )
tHD t( )d
drD HD t( )
HD t( )
W
W t( ) YR t( )
a t( )
Goodwin Growth Cycle model• Inherently cyclical growth (Goodwin 1967, Blatt 1983)
Y/
lr1
Labour Productivitya
L
dw/dt 1/SIntegrator
w++
1Initial Wage
*L
W
WY +
-Pi I dK/dt
• Closes the loop:
1Initial Capital +
+1/SIntegrator
dK/dt
K 1/3Accelerator
Y
L/
lr100
PopulationN
l
PhillipsCurve dw/dt+- *
10WageResponse
.96"NAIRU"
• Capital K determines output Y via the accelerator:
• Y determines employment L via productivity a:
• L determines employment rate l via population N:
• l determines rate of change of wages w via Phillips Curve
• Integral of w determines W (given initial value)
• Y-W determines profits P and thus Investment I…
K 1/3Accelerator
Y
/lr1
Labour Productivitya
L
/lr
1Population
Nl
PhillipsCurve dw/dt
1/SIntegrator
w++
1Initial Wage *
LW
Y +-
Pi I dK/dt
3Initial Capital +
+1/SIntegrator
+- *10
WageResponse
.96"NAIRU"
Goodwin's cyclical growth model
Time (Years)0 2 4 6 8 10
.50
.75
1.00
1.25
1.50Employment
Wages
Goodwin's cyclical growth model
Employment.9 .95 1 1.05
Wa
ge
s.7
.8
.9
1.0
1.1
1.2
1.3
Explicit Monetary Minsky Model
• Coupled with Goodwin model to yield final system
Financial Sector
tBV t( )d
d
FL t( )
V r t( ) BV t( )
L r t( )
tBT t( )d
drL FL t( ) rD FD t( ) rD HD t( )
BT t( )
B
tFL t( )d
d
BV t( )
L r t( ) FL t( )
V r t( ) P t( ) YR t( ) Inv r t( )
tFD t( )d
drD FD t( ) rL FL t( )
BV t( )
L r t( ) FL t( )
V r t( ) BT t( )
B
HD t( )
W P t( ) YR t( ) Inv r t( )
W t( ) YR t( )
a t( )
tHD t( )d
drD HD t( )
HD t( )
W
W t( ) YR t( )
a t( )
Physical output, labour and price systems
Rate of change of capital stocktKR t( )d
dKR t( ) g t( )
Level of outputYR t( )
KR t( )
v
Employment L t( )YR t( )
a t( )
Rate of Profit r t( )P t( ) YR t( ) W t( ) L t( ) rL FL t( ) rD FD t( )
P t( ) KR t( )
Rate of employmentt t( )d
d t( ) g t( ) ( )[ ]
Rate of real economic growth g t( )Inv r t( )
v
tW t( )d
dW t( )( ) Ph t( )( )
1
t( )
t t( )d
d
1
P t( ) tP t( )d
d
Rate of change of wages
Rate of change of prices
tP t( )d
d
1P
P t( )W t( )
a t( ) 1 ( )
Rates of growth of population and productivityta t( )d
d a t( )
tN t( )d
d N t( ) N 0( ) N0
Explicit Monetary Minsky Model• Single sector model (not yet calibrated to data) can
generate “Great Moderation and Great Recession”
0 20 40 60
20
10
0
10
20
InflationUnemployment
Inflation and Unemployment
Per
cent
0
0 20 40 60100
1000
1 104
Real Output
$/Y
ear
0 20 40 600
1
2
3
4
5
Debt to Output Ratio
Year
Yea
rs to
rep
ay d
ebt
0 20 40 6010
0
10
20
30
40
50
60
70
80
90
100
110
WorkersCapitalistsBankers
Income Distribution
Year
Per
cen
t of
GD
P
Multi-sectoral extension• Stylized version of monetary flows table:
Assets Liabilities EquityAccount Bank
ReserveSector 1
LoanSector
2 LoanSector 1
DepositSector 2
DepositWorker
DepositBank
Equity
Symbol BR(t) FL1(t) FL1(t) FD1(t) FD2(t) WD(t) BE(t)
Compound Debt A1 A2
Deposit Interest B1 B2
Wages -C1 -C2 C1+C2
Worker Interest -D -D
Investment K E -E Intersectoral C -F F Intersectoral A -G G Intersectoral E -H H Consumption K I -I
Consumption C -J J Consumption A -K K
Consumption E -L L Pay Interest -M MRepay Loans N -N Recycle Reserves -O O O
New Money P P
Multi-sectoral extension• Profit now net of intersectoral input purchases:
n
K K K K KS S L L D DS K
K K
n
C C C C CS S L L D DS C
K C
t P t Q t W t L t W t L t r K t r K t
P t K t
t P t Q t W t L t W t L t r C t r C t
P t K t
Capital Stock
1 1Output
1 1Labor
1Price Level
1
Labor Productivity
DKC C
PR C K
C C CQC C
C C CLC C
C CPC C C
C C
F tdK K tt
dt t P t
dQ t Q t K t
dt v
dL t L t Q t
dt a t
W tdP t P t
dt a t s
da t a t
dt
• Each sector modeled as Goodwin cycle
• Financial flows matrix captures intersectoral dependencies
Multi-sectoral extension• “Conjecture: The repeated development of an
unstable state of the economy is … an unavoidable consequence of, the local instability of the state of balanced growth.” (Blatt 1983, p. 161)
0 20 40 60 80 1005
0
5
10
15
Capital GoodsConsumer GoodsAgricultureEnergy
The Rate of Profit in a Monetary Multisectoral Model of Production
Years
Pro
fit/C
apita
(P
erce
nt)
Multi-sectoral extension
• “The usual image of the business cycle was of a wavelike movement, and the waves of the sea were the accepted metaphor… The reality in the nineteenth and early twentieth centuries was, in fact, much closer to the teeth of a ripsaw which go up on a gradual plane on one side and drop precipitately on the other…” (Galbraith 1975, p. 104)
20 25 30 35 402
0
2
4
6
40
60
80
100
120
Rate of GrowthDebt Ratio (RHS)
Debt Level and Economic Growth
Multi-sectoral extension• Model fundamentally monetary: physical cycles cause
and caused by cycles in finance
20 25 30 351 10
5
1 106
1 107
1 108
10000
1 105
1 106
1 107
LoansDepositsBank Reserves (RHS)
Bank Assets & Liabilities
Addendum: Reforming economic education• Making real dynamics sexy & accessible• Free prototype QED “Quesnay Economic Dynamics”• Inspired by Godley SAM approach
– Extended to continuous time• Ideally suited to financial flows
Explicit Monetary Minsky Model
• Freely available at www.debtdeflation.com/blogs/qed
• Advanced versions under development
• Mathematica version for arbitrary number of sectors available soon
• New economic dynamic monetary modeling program “Minsky” available by early 2012
Conclusion: Kuznets was correct…
• According to … modern followers [of past economists], static economics is a direct stepping stone to the dynamic system…
• According to other economists, the body of economic theory must be cardinally rebuilt, if dynamic problems are to be discussed efficiently…
• … as long as static economics will remain a strictly unified system based upon the concept of equilibrium, … its analytic part will remain of little use to any system of dynamic economics…
• the static scheme in its entirety, in the essence of its approach, is neither a basis, nor a stepping stone towards a proper discussion of dynamic problems. Kuznets, S. (1930, pp. 422-428, 435-436; emphasis added)
References• Bezemer, D. J. (2009). ““No One Saw This Coming”: Understanding Financial
Crisis Through Accounting Models.” Groningen, The Netherlands, Faculty of Economics University of Groningen.
• Blatt, J. M. (1983). Dynamic economic systems : a post-Keynesian approach. Armonk, N.Y, M.E. Sharpe.
• Bezemer, D. J. (2010). "Understanding financial crisis through accounting models." Accounting, Organizations and Society 35(7): 676-688.
• Biggs, M., T. Mayer, et al. (2010). "Credit and Economic Recovery: Demystifying Phoenix Miracles." SSRN eLibrary.
• Blanchard, O., G. Dell'Ariccia, et al. (2010). "Rethinking Macroeconomic Policy." Journal of Money, Credit, and Banking 42: 199-215.
• Goodwin, R. (1967). A growth cycle. Socialism, Capitalism and Economic Growth. C. H. Feinstein. Cambridge, Cambridge University Press: 54-58.
• Graziani, A. (1989). "The Theory of the Monetary Circuit." Thames Papers in Political Economy Spring: 1-26.
• Holmes, A. R. (1969). Operational Constraints on the Stabilization of Money Supply Growth. Controlling Monetary Aggregates. F. E. Morris. Nantucket Island, The Federal Reserve Bank of Boston: 65-77.
References
• Keen, S. (1995). "Finance and Economic Breakdown: Modeling Minsky's 'Financial Instability Hypothesis.'." Journal of Post Keynesian Economics 17(4): 607-635.
• Keen, S. (2008). Keynes’s ‘revolving fund of finance’ and transactions in the circuit. Keynes and Macroeconomics after 70 Years. R. Wray and M. Forstater. Cheltenham, Edward Elgar: 259-278.
• Kuznets, S. (1930). "Static and Dynamic Economics." The American Economic Review 20(3): 426-441.
• Kydland, F. E. and E. C. Prescott (1990). "Business Cycles: Real Facts and a Monetary Myth." Federal Reserve Bank of Minneapolis Quarterly Review 14(2): 3-18.
• Minsky, H. P. (1982). Can "it" happen again? : essays on instability and finance. Armonk, N.Y., M.E. Sharpe.
• Schumpeter, J. A. (1934). The theory of economic development : an inquiry into profits, capital, credit, interest and the business cycle. Cambridge, Massachusetts, Harvard University Press.
• Solow, R. M. (2001) “From Neoclassical Growth Theory to New Classical Macroeconomics”, in J. H. Drèze (ed.), Advances in Macroeconomic Theory. New York, Palgrave
• Solow, R. (2008). "The State of Macroeconomics." The Journal of Economic Perspectives 22(1): 243-246.