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Working Paper No. 494 | April 2007

Fiscal Policy in a Stock-flow Consistent (SFC) Model

This paper deploys a simple stock-flow consistent (SFC) model in order to examine various contentions regarding fiscal and monetary policy. It follows from the model that if the fiscal stance is not set in the appropriate fashion—that is, at a well-defined level and growth rate—then full employment and low inflation will not be achieved in a sustainable way. We also show that fiscal policy on its own could achieve both full employment and a target rate of inflation. Finally, we arrive at two unconventional conclusions: first, that an economy (described within an SFC framework) with a real rate of interest net of taxes that exceeds the real growth rate will not generate explosive interest flows, even when the government is not targeting primary surpluses; and, second, that it cannot be assumed that a debtor country requires a trade surplus if interest payments on debt are not to explode.

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Author(s):
Wynne Godley Marc Lavoie

Publication Highlight

Book Series
A Great Leap Forward
Heterodox Economic Policy for the 21st Century
Author(s): L. Randall Wray
January 2020

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