Working Paper No. 167 | June 1996

Money, Finance, and National Income Determination

An Integrated Approach

Traditional economic models have largely failed to account adequately for the roles of money and finance in economic operations. For example, traditional models assume an exogenously determined, fixed money stock and ignore the outcomes of spending changes that result from changes in bank loans. As such, traditional models take place outside of historical time and have no role for institutions in determining economic outcomes other than to promote optimizing behavior. In this working paper, Distinguished Scholar Wynne Godley presents a formalized stock-flow model consistent with the ideas of Keynes, Kaldor, and especially Hicks. Godley's model takes place in historical time and under conditions of uncertainty and incorporates a role for the financial sector in providing funding for both capital investment and firm operations, should expectations prove false. The model was subjected to numerical simulation and found solvable and stable.

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