Transcript Money, Credit and Finance Marc Lavoie University of Ottawa

Money, Credit and Finance
Marc Lavoie
University of Ottawa
Outline
• 1. The main claims of the post-Keynesian views
on money, credit and finance
• 2. PK monetary theory in historical perspective.
• 3. The horizontalist and structuralist
controversies.
• 4. New developments in monetary policy
implementation.
• 5. Open-economy monetary economics.
• 6. The integration of PK monetary economics
into PK macroeconomics
Part I
The main claims
Post-Keynesian monetary sub-schools
PostKeynesian
Monetary
Economics
Structuralists
Chartalists
UKCM school
Horizontalists
Circuit theory
Accommodationists
Paris and
Naples
Emissions
theory
Dijon
Free
University of
Berlin School
Neoclassical monetary sub-schools
Neoclassical
monetary schools
Monetarists
IS/LM
New Paradigm
Keynesian
(Stiglitz
Greenwald)
Wicksellian
New Consensus
i
Ms
Ms
Ms
M
Horizontalists
(New Consensus)
Monetarists
IS/LM
Verticalists
Structuralists
(New Paradigm)
A simplified overview
of endogenous money
Endogenous money supply: A PK claim now
accepted by many schools
• Post-Keynesians
• Neo-Austrians
• New Keynesians
– (New consensus authors), Woodford, Taylor, Roemer,
Meyer
– (New Paradigm Keynesians, focus on credit) Stiglitz,
Greenwald, Bernanke
• Real business cycle theorists
– Barro, McCallum
• Goodhart
Main features in monetary economics
Features
PK school
Neoclassical
Money
Has counterpart
entries
Falls from an
helicopter
Money is seen
As a flow and as a
stock
A stock
Money is tied to
Production
Exchange
The supply of money
is
Endogenous
Exogenous
Main concern with
Debts, credits
Assets, money
Causality
Reversed: credits
make deposits
Reserves allow
deposits
Credit rationing due to Lack of confidence
Asymetric information
Main features, interest rates
Features
PK School
Neoclassical
Interest rates
Are distribution
variables
Arise from market
laws
Liquidity preference
Determines the
differential relative to
base rate
Determines the
interest rate
Base rates
Are set by the central
bank
Are influenced by
market forces
The natural rate
Takes multiple values
or does not exist
Is unique, based on
thrift and productivity
Main features, macro implications
Features
PK School
Neoclassical
A restrictive monetary
policy
Has negative effects
in short and long run
Has negative effects
only in the short run
Schumpeter’s
distinction
Monetary analysis
Real analysis
(monetized production (money neutrality,
economy)
inessential veil)
Macro causality
Investment
determines saving
Saving determines
investment
Inflation
The growth in money
stock aggregates is
caused by the growth
in output and prices
Price inflation is
caused by an excess
supply of money
Two kinds of financial systems,
according to Hicks 1974
• The overdraft financial
system
• Firms are in debt towards
commercial banks
• Commercial banks are in
debt towards the central
bank
• The auto or asset-based
financial system
• Firms finance investment
with retained earnings
• Commercial banks have
large amounts of T-bills in
assets
Overdraft vs Asset-based systems
• Overdraft systems
• 90% or more of the world
financial systems (including
the pre-euro Bundesbank)
• Ignored by textbooks
• No control on HPM, except
through credit control
• Clarifies how the monetary
system functions
• In a sense, all systems are of
the overdraft type: no central
bank controls directly the
supply of money
• Asset-based systems
• Only in some anglo-saxon
countries
• Described by mainstream
textbooks
• Based on open-market
operations; is said to be
efficient in controlling the
money stock
• Puts a veil on the operating
procedures of monetary
systems
Simplified neoclassical view
Central bank balance sheet
Assets
Liabilities
Foreign reserves
Banknotes
Domestic T-bills
Reserves of commercial
banks
Simplified PK view
Central bank balance sheet
Assets
Liabilities
Foreign reserves
Banknotes
Domestic T-bills
Reserves of commercial
banks
Government deposits
Loans to domestic
banks
(Central bank bills)
Part II
PK monetary theory
in historical perspective
Cambridge proverbs
• « Highbrow opinion is like a hunted hare; if
you stand in the same place or nearly in
the same place it can be relied upon to
come round to you in circle. » (D.H.
Robertson 1956)
• « Economic ideas move in circles: stand in
one place long enough, and you will see
discarded ideas come round again. »
(A.B. Cramp 1970)
1844 Currency school vs
Banking school
• Ricardo and
Currency school
• Only coins and Bank
of England notes are
money
• The stock of money
determines aggregate
demand
• Aggregate demand
determines prices
• Tooke and the
Banking School
• The definition of
money is more
complicated
• Aggregate demand
determines the stock
of money
• If controls are needed
to influence prices,
control credit
Most of modern monetary controversies can
be brought back to the Currency school and
Banking school debates
•
•
•
•
•
Definitions of money
Stability of the velocity of money
Stability of the deposit multiplier
Money versus credit
The operational target: the supply of high
powered money or interest rates?
• Endogenous or exogenous money (reversed
causality)
• Inflation through excess money growth or
excess wage growth
An additional complexity
• An author can be found in two different
camps at a time. This is often the case of
creative authors.
– Wicksell (who pretends to support the
Quantity Theory, while throwing it back into
question)
– Keynes (who pretends to attack the Quantity
Theory, while barely modifying it)
• Hence it is difficult or even impossible to
classify some authors
Keynes, a proto Monetarist?
• « We are all Keynesians now, says Friedman, at the
height of the IS/LM frenzy.
• This can be better understood by reading Kaldor (1982),
according to whom Keynes’s 1936 monetary theory is
« a modification of the quantity theory of money, not its
abandomnent».
• Keynes 1930 (The Treatise on Money), despite some of
its innovations and some indications about money
endogeneity, is still very much in the Quantity tradition:
– He objects to those who believe that interest rate ought to
be the main operational target of central banks;
– He approves of the money multiplier (Phillips 1920);
– He supports the use of quantitative instruments for the
conduct of monetary policy: open market operations and
changes in reserve coefficients, which, at that time, were
only advocated by Americans and the Fed.
Two different viewpoints, already well
identified in 1959
• « There are two opposing viewpoints concerning
the relationship between the supply of and the
demand for money. On the one hand – for the
quantity theorists and Keynes – the quantity theory
of money is believed to be fixed independently by
the banking system…. The opposing view – held
by the Banking school and Wicksell – is that the
banks set not a quantity but a price. The banking
system fixes a rate (or a set of rates) for the
money market and then lends however much
borrowers ask for, provided that they can offer
satisfactory collaterals». Jacques Le Bourva
1959 (1992).
Back to the future?
• « The quantity theory of money is dying. The most banal
criticisms lodged against it, and long since accepted as
truths by all, concern the instability of the velocity of
circulation of money …. The principal criticism of the
theory, however, rests on the determination of the money
supply. It is essential to the validity of the quantity theory
that the quantity of money be a variable that is
independent of national income and the current
economic situation. This implies tha the bankers fix the
amount of the money supply by some sovereign act
dictated from the heights of their own secret Olympus.
This is precisely the premise of the quantity theory that is
no longer accepted in France today, and so the Banking
school and Wicksell prevail. » Le Bourva 1962 (1992)
Quantity theory of money (Academics) vs
the Radcliffe Commission 1959 (Central bankers and
Kaldor and Kahn)
• Quantity theory
• Control of the money
supply, in particular
reserves, by central
banks
• The velocity of money
and the money
multiplier are quasi
constants
• Causality runs from
money to prices
• Radcliffe Commission
• The central bank controls
interest rates, but very
indirectly only money
aggregates
• The velocity of money is
unstable (many substitutes):
« general liquidity » concept
• Monetary policy only has a
moderate effect on inflation,
which depends on many
other factors
• Credit controls?
The 1960s and 1970s
• The quantity theory and Monetarism gradually take over..
• The Radcliffe view is strongly criticized by Old
Keynesians, who consider it dépassé:
• « There still do exist in England men whose minds were
fromed in 1939, and who haven’t changed a thought
since that time, and who … say money doesn’t matter.
They have embalmed their views in the Radcliffe
Committee, one of the most sterile operations of all
time» Samuelson 1969
• With the oil shocks of the 1970s and the productivity
slowdown, inflation rises.
• Monetarism and monetary targets flourish.
The scourge of monetarism induces
a post-Keynesian reaction
• Until 1970, even 1980, the PK monetary theory is
unclear. Its best exposition can be found in Joan
Robinson’s 1956 book, The Accumulation of Capital, but
it is towards the end of the book, after a complex
exposition of growth theory and value theory, so that
hardly anybody pays attention to her monetary theory.
• Before 1970, the main criticisms against the quantity
theory are based on the instability of the velocity of
money or that of the money multiplier (Kaldor 1958,
Minsky 1957). Only Robinson and Kahn have a proper
understanding of the crucial issue
• Starting in 1970, the more essential issue of reversed
causality is brought to the forefront by a number of
authors.
Reverse causality: three groups of authors
• Researchers at the Fed (Holmes 1969, Lombra, Torto,
Kaufman, Feige+McGee)
• Post-Keynesians
– Cramp 1970, Kaldor 1970 and 1980, Robinson 1970
– Davidson and Weintraub 1973, Moore 1979)
• Iconoclasts: Le Bourva 1959 and 1962, F.A. Lutz 1971
– The supply of money is not independent; it is determined
by demand.
– Credits make deposits; deposits make reserves.
– Short-term interest rates are the exogenous variable.
– The money/price causality is reversed.
– We are back to the Banking School and current PKE!
Part III
The Structuralist vs Horizontalist
PK controversies
“A storm in a tea cup” (Moore 2001) ?
• The first exponents of money endogeneity were mainly
“horizontalists”: Robinson, Kahn, Le Bourva, Kaldor, Moore, and the
French “circuitists”.
• The main “structuralist” critics were Le Héron, Dow, Wray, Howells,
Pollin, and Palley, many of which got their inspiration from Minsky.
• As Fontana (2003) puts it, “structuralists took over where the
accommodationists had stopped”.They brought some clarifications
and provided new details. For instance, they insisted that spreads
between interest rates could quickly vary, due to assessed default
risks or changes in liquidity confidence. Sometimes, however, they
constructed a “horizontal strawman” in an effort to highlight the
originality of their contributions.
• To a large extent, the controversy has petered out, for reasons that
will soon be given (although Rochon has rekinkled some excitement
by editing a forthcoming book on the topic!).
The horizontalist claims
• 1. The supply curve of money (or high powered money)
can best be represented as a flat curve, at a given
interest rate. The short-term interest rate can be viewed
as exogenous, under the control of the central bank,
within a reasonable range.
• 2. There can never be an excess supply of money.
• 3. The supply curve curve of credit can best be
represented as flat curves, at a given interest rate (or set
of interest rates).
• 4. Central banks cannot exert quantity constraints on the
reserves of banks.
The structuralist points
• 1a. What about the reaction function of the central bank? [Chick
1977, Rousseas 1986, Palley 1991, Musella and Panico 1995]
• 1b. Long-term and other market-determined rates “cause” the
overnight rate [Pollin 1991]
• 2. If loans create deposits, how do we know that households wish to
hold these deposits? [Howells 1995]
• 3a. What about credit rationing (shape of credit supply curve)?
[Dow2 1989]
• 3b. What about borrower’s risk? [Minsky 1975, Dow and Earl 1982]
• 3c. and lender’s risk (liquidity preference of banks)? [Dow2, Wray
1989, Chick and Dow]
• 4a. Surely the central bank does not always “accommodate” and
hence exerts quantity constraints on bank reserves. [Pollin 1991]
• 4b. What about changes in the velocity of money and liability
management, which are the main sources of money endogeneity
[Pollin 1991, Palley 1994]
The horizontalist answers I
• 1. On the horizontal supply of HPM:
– New operating procedures, based on a target
overnight rate, show clearly that central banks control
the overnight rate and can set it at will; recent events
also show that the central bank reaction function has
a large discretionary component. Thus, we can still
see the target overnight rate as an exogenous
variable, under the full control of the central bank.
– Of course, if, in general, higher economic activity is
accompanied by higher inflation rates, then, through
the central bank reaction function, higher interest
rates are likely to accompany higher economic
activity, and thus the supply of money or HPM will
appear to be upward-sloping through time.
Horizontalist answers II
• 2. On the impossibility of excess money:
– The main argument is the “reflux principle”.
– The stock-flow consistent models of Godley have
shown that, despite the presence of an apparently
independent money demand function and the
presence of a supply of money function based on the
supply of loans, flow-of-funds accounting is such that
deposits must equate loans despite no such
condition being inserted into the model.
– In more sophisticated models, changes in liquidity
preference by households will induce changes in
relative rates; but this was never denied by
Horizontalists.
Horizontalist answers III
• 3. On the horizontal supply of credit:
– It has been shown by Wolfson (1996) that there is no
incompatibility between credit rationing and horizontalism.
– It is now clearly established that higher economic activity does
not necessarily entail higher debt ratio for firms (contradicting the
essence of Minsky’s financial fragility hypothesis). This is now
recognized by Wray, a student of Minsky.
– But of course, as firms move from one risk class to another, they
will trigger higher interest rates.
– The remaining issue is lender’s risk: recent events have shown
that banks have no clue what their lender’s risk is, and so it
cannot be ascertained that banks will raise interest rates if their
balance sheet expands.
Credit rationing when there is a reduction in bank confidence
(Credit-worthy demand: demand with appropriate collateral:
Cf. De Soto, and Heinsohn and Steiger)
Interest rate
i2
i1
Creditworthy
demand
Notional
demand

A’
A N
 
Loans
Horizontalist answers IV
• 4. On quantity restraints on bank reserves:
– There is no incompatibility between
horizontalism and bank innovations or liability
management.
– New central bank operating procedures
clearly show what was hidden before: central
banks passively try to provide the reserves
being demanded by the banking system.
Conclusion
• The original horizontalist depiction, that of Kaldor and
Moore, is the most appropriate. Structuralists have
helped to fill in some details. As Wray (2006) concludes:
•
• “There cannot be any automatic and necessary impact of
spending on interest rates because loans and deposits
can and normally do increase as spending rises. The
overnight rate will change only if and when the central
bank decides to allow it to do so. Short-term loan and
deposit retail rates can be taken as a somewhat variable
mark-up and mark-down from the overnight rate.
Part IV
New developments in monetary
policy implementation by central
banks
New operationg procedures and
horizontalism
• Central banks have new operating procedures, although
they are not that much different from what they used to
be. They bring central banks closer to the « overdraft
economy», and further away from the «asset-based
econonomy» as defined by Hicks.
• The procedures of some central banks are more
transparent (than they were and than those of other
central banks), so the horizontalist story is more obvious:
Canada, Australia, Sweden
• The procedures of other central banks are less
transparent; but when interpreted in light of
horizontalism, we can see that their operational logic is
identical to that of the more transparent central banks
(like the Fed).
The new operating procedures put in place in Canada
and other such countries are fully compatible with the
PK monetary theory
• Central banks set a target overnight rate, and a band
around it
• Commercial banks can borrow as much as they can at
the discount rate
• There are no compulsory reserves and no free reserves
(zero net settlement balances)
• The target rate is (nearly) achieved every day
• Central banks only pursue defensive operations, trying to
achieve zero net balances.
• When there are tensions, as during the recent subprime
financial crisis, they try their best to supply the extra
amount of balances demanded by direct clearers (mainly
banks)
The Bank of Canada channel
system
Overnight rate
Bank rate = TR+25pts
Target rate TR
Rate on positive
balances = TR-25pts
- (overdraft) 0 + (surplus)
Settlement
balances
Two different justifications for the
current interest rate procedures ?
• Post-Keynesians
• Based on a
microeconomic
justification
• Tied to the inner
functioning of the
clearing and settlement
system
• Linked to the day-byday, hour-per-hour,
operations of central
banks
• New Consensus
• Based on the 1970
Poole article
• A macroeconomic
justification
• If the IS curve is the
most unstable, use
monetary targeting
• If the LM curve is
unstable (money
demand is unstable),
use interest rate targets
Poole 1970
Interest
rate
LM
LM
IS
IT
IT
IS
A
MT
IT
Investment is unstable:
Use monetary targeting MT
Less variability in output
Output
A = IT
MT
Demand for money is unstable:
Use interest rate targeting
No variability in output
The microeconomic justification for
interest rate targeting
• Central bank interventions are essentially « defensive ».
Their purpose is to compensate the flows of payments
between the central bank and the banking sector.
• These flows arise from: a) collected taxes and
government expenditures; b) interventions on foreign
exchange markets; c) purchases or sales of government
securities, or repurchase of securities arrriving at
maturity; d) provision of banknotes to private banks by
the central bank.
• Without these defensive interventions, bank reserves or
clearing balances would fluctuate enormously from day
to day, or even within an hour. The overnight rate would
fluctuate wildly.
Authors who support the
microeconomic explanation
• Several central bank economists
– Bindseil 2004 ECB, Clinton 1991 BofC,
Lombra 1974 and Whitesell 2003 Fed
• Some post-Keynesian authors
– Eichner 1985, Mosler 1997-98, Wray 1998
and neo-chartalists in general
• Institutionalists
– Fullwiler 2003 et 2006
Bank of Sweden: overdraft system
• « Lending to the banking system currently comprises a
significant part of the Riksbank’s assets….
• Stage 1 involves a forecast of … how much liquidity
needs to be supplied or absorbed for the banks to be
able to avoid using the deposit and lending facilities
during the coming week …. Stage 3 involves executing
open market operations to parry the daily fluctuations in
the banking system’s current payments so the banking
system will not need to utilise the facilities »
– Mitlind and Vesterlund, Bank of Sweden Economic Review, 2001
The Fed never tried to constaint reserves !
• “The primary objective of the Desk’s open
market operations has never been to
‘increase/decrease reserves to provide for
expansion/contraction of the money supply’
but rather to maintain the integrity of the
payments system through provision of
sufficient quantities of Fed balances such
that the targeted funds rate is achieved”.
Fullwiler (2003)
This was understood a long time ago by
some PK economists
• “The Fed’s purchases or sales of government
securities are intended primarily to offset the
flows into or out of the domestic monetaryfinancial system” (Eichner, 1987, p. 849).
• “Fed actions with regards to quantities of
reserves are necessarily defensive. The only
discretion the Fed has is in interest rate
determination” Wray (1998, p. 115).
There is no relationship between open
market operations and bank reserves
• “No matter what additional variables were
included in the estimated equation, or how the
equation was specified (e.g., first differences,
growth rates, etc.), it proved impossible to obtain
an R2 greater than zero when regressing the
change in the commercial banking system’s
nonborrowed reserves against the change in the
Federal Reserve System’s holdings of
government securities ....”(Eichner, 1985, pp.
100, 111).
Cf Poole in 1982, JMCB
• «The old procedures [before 1979-1982] are
best characterized as an adjustable federal
funds rate peg system ….The new system
[1979-1982] is qualitatively similar to the old
….The vast bulk of speculation about Fed
intentions by money market participants
concerns Fed attitudes toward interest rates….
The issue is always one of when and how hard
the Fed will push rates ….»
Why is the federal funds rate sometimes
different from the target rate ?
• In Canada, the Bank is able to know with perfect
certainty the demand for settlement (clearing) balances.
• In the States, the Fed forecasts the net demand. Without
reserve averaging, the federal funds rate would fluctuate
widely between zero and the discount rate, as the set
daily supply would be different from the given demand
(two vertical curves).
• With reserve averaging, banks can speculate on future
values of the federal funds rate, and get extra reserves
when the rate turns out to be low. The daily supply is still
fixed, but the demand is interest elastic.
Problems with no tunnel and a not so credible
target: central bank needs to be very precise in its
daily forecast of reserves demand (Whitesell 2003)
S
S’
Lending rate
Target
Fed rate
Expected Fed
funds rate
Demand for reserves
Deposit rate
Reserves
And it is the same for the ECB !
•
‘The logic of the ECB’s liquidity management ...
can be summarised very roughly as follows: The
ECB attempts to provide liquidity through its
open market operations in a way that, after
taking into account the effects of autonomous
liquidity factors, counter-parties can fulfil their
reserve requirements as an average over the
reserve maintenance period. If the ECB provides
more (less) liquidity than this benchmark,
counterparties will use on aggregate the deposit
(marginal lending) facility’ Bindseil and Seitz
2001
The case of the ECB: reserve averaging
with a tunnel/corridor
S’
S
Lending rate
Target rate
Demand for reserves
Deposit rate
Reserves
The Cambridgian hare!
• « Today’s views and practice on monetary
policy implementation and in particular on
the choice of the operational target have
returned to what economists considered
adequate 100 years ago, namely to target
short-term interest rates » Ulrich Bindseil
2004, ECB, formerly from the
Bundesbank
Part V
Open-economy monetary
economics
Exogenous interest rates in open
economies?
• Wray 2006 argues that interest rates are clearly exogenous in
flexible exchange regimes and endogenous in fixed exchange
regimes, because the central bank must protect its reserves; but
what about China!)
• My position and that of Godley (The PK horizontalist position ?) is
that interest rates are exogenous both in flexible and in fixed
exchange rate regimes.
• By contrast sophisticated neoclassical authors argue that interest
rates are exogenous in neither flexible nor fixed exchange rate
regimes.
• Or, within the Mundell-Fleming model, IS/LM neoclassical authors
argue that monetary policy is effective in a flexible exchange rate
regime, but powerless in a fixed exchange rate regime, because the
supply of money is then endogenous, as it varies in line with the
balance of payments.
A critique of the Mundell-Fleming model in
fixed exchange regime
• In the Mundell-Fleming model, the supply of money is
endogenous, but still supply-led; demand must adjust to
it.
• In PKE, the supply of money is endogenous, but it is
demand-led, as in a close economy. Any increase in
foreign reserves will be compensated by a decrease in
another asset of the central bank, or will be
compensated by an increase in some liability of the
central bank.
• This is the compensation thesis, or the thesis of
endogenous sterilization (Godley and Lavoie 2005-06).
Simplified PK view
Central bank balance sheet
Assets
Liabilities
Foreign reserves
Banknotes
Domestic T-bills
Reserves of commercial
banks
Government deposits
Loans to domestic
banks
(Central bank bills)
A critique of the sophisticated neoclassical
model in flexible exchange regimes
• The neoclassical argument is that changes in expected
future spot exchange rates determine the forward rate
relative to the spot rate.
• This differential, through the covered interest parity
condition, which is known to hold at all times, determines
the domestic interest rate relative to world rates.
• The answer to this claim is, once again, reverse
causality (Smithin 1994, Lavoie 2000). It is the
differential between domestic and world interest rates
that determines, nearly as an identity, the differential
between the forward and the spot exchange rates. The
forward rate has nothing to do with the expected spot
rate. Forward rates in no way predict future spot rates
(Moosa 2004).
Part V
The integration of PK monetary
economics into PK
macroeconomics
The integration of PK monetary economics
into PK macroeconomics
• (a) in PK models competing with New
Consensus models, Rochon and
Setterfield 2007, Hein and Stockhammer
(see lecture on Friday)
• (b) in PK growth and distribution models;
• (c) through the stock-flow consistent
approach (SFC) tied to flow-of-funds
analysis.
The integration of PK monetary economics
into PK models of growth and distribution
• Very early on, it was pointed out that neo-Keynesian
models of growth were neglecting monetary factors
(Kregel 1985, “Hamlet without the Prince”).
• For instance, Davidson (1972) pointed out that the
famous neo-Pasinetti model of Kaldor (1966), which, in a
very astute way, introduced stock market equities in a
neo-Keynesian model, was omitting money balances.
• The same drawback hurt early Kaleckian growth models.
• The situation started to change only in the early 1990s,
when the impact of interest rates was considered
explicity, and when debt ratios also got introduced, along
with cash-flow issues or interest payments relative to
profits.
The case of the Kaleckian model
• The canonical Kaleckian growth model is made up of three
equations: an investment function, a saving function, and a pricing
function.
• Obviously the interest rate can be introduced into the investment
function.
• Should it be the real interest rate (higher opportunity costs) or the
nominal interest rate (lower cash flow, lower retained earnings)?
• But if so, an increase in the interest rate also has an impact on the
saving function (reducing the overall saving rate).
• And the interest rate may also have an impact on the normal profit
rate (the Banking School argument, picked up by Sraffians), thus
having an impact on the markup.
• And all these will have an impact on the debt ratio, and hence may
have a feedback effect on the investment function.
• Things quickly get more complicated. Despite assuming short-run
stability, there may not be long-run stability (the debt ratio may
explode in the long run).
• What if we introduce inflation and unemployment. More
complications! [See Hein’s book 2008]
The Stock-flow consistent approach
• The Holy Grail of PKE has always been the full integration of
monetary and real macroeconomic analysis, i.e., provide a true
“Monetary” analysis in the Schumpeter sense.
• Until recently, this seemed like a rather impossible task.
• Godley (1996, 1999) has now done it, under the name of SFC.
[Other authors, around W. Semmler, also achieve something nearly
similar]
• Portfolio and liquidity preference issues, along with banking and
financial stocks of assets and liabilities, are now tied with flows of
production, income, and expenditures. Deflated and monetary
variables can also be carefully distinguished.
• The method is presented in Godley and Lavoie (2007).
• In my view, the method is particularly appropriate to model the
interaction between (Minsky) financial crises and real crises.
• The lecture this evening will give a simple example of SFC.