A Simple Stock-Flow Consistent Model with Short-Term and Long-Term Debt: A Comment on Claudio Sardoni

ABSTRACT

In a recent article of this journal, Claudio Sardoni ([2019]. ‘Investment and Saving in a Dynamic Context: The Contribution of Athanasios (Tom) Asimakopulos.’ Review of Political Economy 31 (2): 233–246) made four claims: (1) An increase in the propensity to save will lower the long-term interest rate; (2) A higher preference for bonds will lead to lower long-term interest rates; (3) A higher level of investment will lead to a higher long-term interest rate; (4) A larger (exogenous) supply of money will lead to a lower long-term interest rate. We confront these four claims with the help of a simple stock-flow consistent (SFC) model which includes firms, banks and households, with the latter holding either bank deposits or bonds issued by firms, while these firms invest in fixed capital and in inventories. We find that higher investment leads to higher interest rates on bonds in the short run, but not in the medium or long run. Similarly, a higher desired inventories-to-output ratio ends up leading to lower interest rates both in the short and the long run. We conclude that using SFC models is particularly adequate when dealing with issues that integrate real and financial variables.

KEYWORDS:

• Stock-flow consistency
• endogenous money
• long-term rates
• liquidity preference
• thrift

JEL Classification:

• B40
• E12
• E43
• E47

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 The main reference of the SFC approach is Godley and Lavoie (2007). An extended survey of SFC models is provided by Nikiforos and Zezza (2017).

2 We point this out because in French and Italian circuit theory, the beginning-of-period stocks of loans would include both the stock of loans leftover from the previous period as well as intra-period advances required to pay wages before these are spent. One could also argue that distributed profits at time t can only be the profits made at time t−1, as in Godley and Lavoie (2007, pp. 389–390), but this change would have no impact on our results.

3 The model has several affinities with the models found in Godley (2004) and in Godley and Lavoie (2007, ch. 9). There were no bonds and no fixed capital in these two models however.

4 We could assume that the deposit rate is lower than the lending rate, in which case banks would make profits that would need to be distributed to households.

5 What the counterpart of this stock of money remains unclear.

6 Asimakopulos (1986b) also makes an alternative claim derived from Joan Robinson’s inflation barrier, whereby, based on the converse of the Cambridge equation, g = r.s_p, at normal capacity utilization, an increase in the rate of growth is only possible if there is an increase in the profit share or in the saving rate. In the case of the inflation barrier, only the increase in the saving rate remains a possibility, because the attempted rise in the profit share would generate a conflictual response by workers who would raise nominal wages and hence induce a price inflation spiral that would be combatted by the monetary authorities through austerity policies. See Lavoie (1990) for a discussion.

7 This may appear to be true in the context of a partial equilibrium model or in an IS/LM model, but Lavoie and Reissl (2019), in another simple SFC model, show that the sign of the effect of an increase in government expenditure or government deficit on endogenous interest rates can go either way.