Saving and Investment Financing: Different Approaches

ABSTRACT

Lavoie and Zezza (2020. “A Simple Stock-Flow Consistent Model with Short-Term and Long-Term Debt.” Review of Political Economy, forthcoming.) present a stock-flow consistent model which critically refers to a recent work of mine (Sardoni, C. 2019. “Investment and Saving in a Dynamic Context: The Contributions of Athanasios (Tom) Asimakopulos.” Review of Political Economy 31 (2): 233–246.) concerned with the complex relation between saving, interest rates, finance and investment. This paper comments on Lavoie’s and Zezza’s interpretation of Sardoni’s position and results and, in turn, presents some critical observations about Lavoie’s and Zezza’s own model. The focus is on the relation between the marginal propensity to save and the long-term interest rate.

KEYWORDS:

• Saving
• long-term interest rate
• investment

Disclosure Statement

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

Notes

1 For more details, see Sardoni (2019, p. 240).

2 Lavoie and Zezza (2020, p. 3) talk of changes of the independent variables that lead to a certain results, or they use the future tense to describe the eventual result associated with a variation of the independent variables.

3 I make this point explicitly: ‘The magnitude of the effect of marginal propensity to save on the long-term interest rate and investment depends on the parameters and the shape of the functions used in the model. In particular, the magnitude depends on the sensitivity of the supply of liquidity to the interest rate and the sensitivity of investment to the interest rate’ (Sardoni 2019, p. 241).

4 Deposits are households’ assets and banks’ liabilities.

5 In this respect, the claim that in my analysis banks ‘are not explicitly present’ (Lavoie and Zezza 2020, p. 2) is surprising.

6 In dealing with firms’ production decisions, Lavoie and Zezza concentrate on inventories and their variations due to disappointed firms’ short-term expectations. They argue that in ‘a sequential analysis, one cannot but take inventories … into account’ (Lavoie and Zezza 2020, p. 5) and refer to Asimakopulos (1983, p. 227) to support their idea. Asimakopulos, however, briefly considers inventories and their variations only when contemplating a case of disappointed expectations. In my model it is implicitly assumed that short-term expectations are always fulfilled.

7 Even though they then assume that the two rates are constant and equal.

8 Lavoie and Zezza (2020, p. 7), following my hypothesis that firms convert their short-term debt into long-term debt at a certain point in time, deduct that the value of the total supply of corporate bonds issued over the years is equal to the value of the firms’ stock of fixed capital of the previous period. This deduction, in my opinion, is unwarranted. If firms repay their debts at the due date, there is no reason to think that the value of stock of bonds at a certain time t is equal to the value of the firms’ stock of fixed capital. The value of the stock of bonds at time t is ${\mathrm{B}}_t={\mathrm{\Sigma }}_0^t\mathrm{\Delta }{B}_t-{\mathrm{\Sigma }}_1^{t}R{B}_t$, where ΔB_t denotes the issuing of bonds at t and BR_t denotes the repayment of past debts at t. Lavoie and Zezza would be correct if firms issue equities rather than bonds to finance their investment, but this is a case that neither Asimakopulos, nor myself, nor Lavoie and Zezza do contemplate.

9 They also add that if the ratio of income to wealth were removed from the portfolio equations ‘nothing much would happen to the bond rate’ (Lavoie and Zezza 2020, p. 10).

10 ‘ … if I were writing the book [The General Theory] again I should begin by setting forth my theory on the assumption that short-period expectations were always fulfilled; and then have a subsequent chapter showing what difference it makes when short-period expectations are disappointed’ (Keynes, 1973, p. 181).