Wynne Godley

  • Strategic Analysis | December 2008

    The economic recovery plans currently under consideration by the United States and many other countries seem to be concentrated on the possibility of using expansionary fiscal and monetary policies alone. In a new Strategic Analysis, the Levy Institute’s Macro-Modeling Team argues that, however well coordinated, this approach will not be sufficient; what’s required, they say, is a worldwide recovery of output, combined with sustainable balances in international trade.

  • Strategic Analysis | November 2007

    In their latest Strategic Analysis, Distinguished Scholar Wynne Godley, President Dimitri B. Papadimitriou, and Research Scholars Greg Hannsgen and Gennaro Zezza review recent events in the housing and financial markets to obtain a likely scenario for the evolution of household spending in the United States. They forecast a significant drop in borrowing and private expenditure in the coming quarters, with severe consequences for growth and unemployment, unless (1) the US dollar is allowed to continue its fall and thus complete the recovery in the US external imbalance, and (2) fiscal policy shifts its course—as it did in the 2001 recession.

  • Strategic Analysis | April 2007

    The collapse in the subprime mortgage market, along with multiple signals of distress in the broader housing market, has already drawn forth a large body of comment. Some people think the upheaval will turn out to be contagious, causing a major slowdown or even a recession later in 2007. Others believe that the turmoil will be contained, and that the US economy will recover quite rapidly and resume the steady growth it has enjoyed during the last four years or so.

    Yet no participants in the public discussion, so far as we know, have framed their views in the context of a formal model that enables them to draw well-argued conclusions (however conditional) about the magnitude and timing of the impact of recent events on the overall economy in the medium term—not just the next few months.

  • Working Paper No. 494 | April 2007

    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.

    Associated Program:
    Wynne Godley Marc Lavoie

  • In the Media | May 2006

    Copyright 2006 The Financial Times Limited (London, England)
    Wednesday, May 30, 2006; Financial Times; USA Edition; Letters to the Editor

    Sir, Martin Feldstein (“The falling dollar sets a test for Asia and Europe”, May 26) provides a good account of the problems caused by global imbalances [which closely resembles, in its structure, the analysis contained in many reports published by the Levy Institute during the last seven years]. However, his statement that following devaluation in the mid 1980s there was a 40 per cent fall in the trade deficit is very misleading because, when expressed as a proportion of gross domestic product, the fall was only 1.5 per cent.

    The US trade deficit peaked at about 3 per cent of GDP in 1986 and fell (by 50 per cent!) to 1.5 per cent at the end of 1989. There was a small further fall after the end of 1989, but this was surely caused by the sharp economic slowdown, and ultimately recession, which occurred in 1990.

    A 1.5 per cent improvement in the deficit, which has reached 67 per cent of GDP, would hardly sustain the US economy if there were now the large rise in saving Prof. Feldstein expects. I conclude the strategic predicament, with its disinflationary possibilities for the US and the rest of the world, is more intractable than he suggests. Published by:
    The Financial Times

    Associated Program:
  • Policy Note 2006/4 | April 2006
    A Cri de Coeur
    Many papers published by the Levy Institute during the last few years have emphasized that the American economy has relied too much on the growth of lending to the private sector, most particularly to the personal sector, to offset the negative effect on aggregate demand of the growing current account deficit. Moreover, this growth in lending cannot continue indefinitely.

  • Working Paper No. 441 | February 2006
    A Theory of Intelligible Sequences

    This paper sets out a rigorous basis for the integration of Keynes-Kaleckian macroeconomics (with constant or increasing returns to labor, multipliers, markup pricing, et cetera) with a model of the financial system (comprising banks, loans, credit money, equities, and so on), together with a model of inflation. Central contentions of the paper are that there are virtually no equilibria outside financial markets, and the role of prices is to distribute the national income, with inflation sometimes playing a key role in determining the outcome.

    The model deployed here describes a growing economy that does not spontaneously find a steady state even in the long run, but which requires active management of fiscal and monetary policy if full employment without inflation is to be achieved. The paper outlines a radical alternative to the standard narrative method used by post-Keynesians as well as by Keynes himself.

    Associated Program:
    Wynne Godley Marc Lavoie

  • In the Media | February 2006

    Copyright 2005 The Financial Times Limited (London, England)
    Wednesday, February 15, 2006; Financial Times; USA Edition; Letters to the Editor

    Sir, Balance of payments deficits often cause concern because they may result in financing difficulties and, possibly, a disorderly depreciation of the currency.

    The U.K. payments deficit would seem to be too small, at present, to worry about. But it is the balance of trade, not payments, that measures the direct effect of a deficit on the demand for domestically produced goods and services.

    The trade deficit of the US is now about 6.5 per cent of gross domestic product while that of the U.K. is about 4.5 per cent. In both countries domestic demand in total has so far been held up by budget deficits as well as by personal expenditure (on consumption and investment combined) far in excess of disposable income, and this has perforce been financed by unusually high borrowing leading to rapidly rising personal indebtedness.

    In other words, the growing subtractions from demand caused by trade deficits, which now seem to be structural, have so far been made good by injections of demand which are essentially temporary.

    The unusual size of the deficits, both in the US and in the U.K., has introduced a novel element into economic prospects viewed strategically because if (or when) personal borrowing and expenditure slows down, neither government has any obvious politically feasible policy instrument to avert a prolonged deficiency in total demand.

    Cuts in interest rates might conceivably reignite the housing booms for a time but could not provide permanent motors for growth.

    Published by:
    The Financial Times
  • In the Media | September 2005

    Copyright 2005 The Financial Times Limited (London, England)
    Wednesday, September 21, 2005; Financial Times; USA Edition; Letters to the Editor

    Sir, In his article, “Only leadership can defuse America's fiscal time-bomb” (September 15), Jagadeesh Gokhale claims that US fiscal deficits will force the Fed to face a “surfeit of Treasuries,” leading it to put too many dollars in circulation as it buys excess bonds; and that the fiscal deficits will lead to slow productivity growth and high unemployment by “eroding the capital stock.”

    With respect to the first claim, Mr. Gokhale misunderstands reserve accounting. Budget deficits lead ceteris paribus to net credits to banking system reserves that are drained through bond sales—either open market sales by the central bank or new issues by the Treasury.


    The central bank would only buy Treasuries if banks were short of reserves—an unlikely event in the current situation with annual budget deficits of at least $330bn.

    In any case, central bank interventions are automatic, triggered by excess or deficient reserve positions of banks that cause the overnight interest rate to move away from target.

    There is no plausible circumstance in which the Fed would not be able to provide or withdraw reserves to keep rates on target.

    Mr. Gokhale's second claim appears to be based on the “crowding-out” argument—that a budget deficit absorbs private sector saving, leaving less to finance private investment. He is ignoring the fact that the current account deficit, now 6.3 per cent of gross domestic product, makes the large budget deficit necessary if aggregate demand is to be sustained. If the government were now to cut its deficit without increasing net export demand, it would only succeed in reducing output, thereby reducing saving and investment as well.

    Whether or not the current fiscal stance is the correct one, it is not creating any operational difficulties for the central bank, nor is it reducing the private capital stock by absorbing saving.

    Published by:
    The Financial Times
  • Strategic Analysis | September 2005
    Can the Symbiosis Last?

    The main arguments in this paper can be simply stated:

    1) If output in the United States grows fast enough to keep unemployment constant between now and 2010, and if there is no further depreciation in the dollar, the deficit in the balance of trade is likely to get worse, perhaps reaching 7.5 per cent by the end of the decade.

    2) If the trade deficit does not improve, let alone if it gets worse, there will be a large further deterioration in the United States’ net foreign asset position, so that, with interest rates rising, net income payments from abroad will at last turn negative and the deficit in the current account as a whole could reach at least 8.5 per cent of GDP.

  • Policy Note 2005/5 | June 2005
    Is it sufficiently realized how intractable those account imbalances—and how dangerous their potential consequences at home and abroad—have now become?

  • Policy Note 2005/4 | April 2005
    The latest batch of numbers from the United States makes for a disturbing read. The GDP growth rate of GDP has been adequate. However, the current account deficit was 6.3 percent of GDP in the fourth quarter of 2004, and the terrible trade figures for January and February promise an even bigger deficit in the first quarter of 2005 (BEA 2005). Let no one suppose that this deterioration is a temporary effect that will automatically turn around soon.

  • Strategic Analysis | August 2004
    Why Net Exports Must Now Be the Motor for U.S. Growth

    The American economy has grown reasonably fast since the second half of 2003, and the general expectation seems to be that satisfactory growth will continue more or less indefinitely. This paper argues that the expansion may indeed continue through 2004 and for some time beyond. But with the government and external deficits both so large and the private sector so heavily indebted, satisfactory growth in the medium term cannot be achieved without a large, sustained, and discontinuous increase in net export demand. It is doubtful whether this will happen spontaneously, and it certainly will not happen without a cut in domestic absorption of goods and services by the United States which would impart a deflationary impulse to the rest of the world. We make no short-term forecast. Instead, using a model rooted in a consistent system of stock and flow variables, we trace out a range of possible medium term scenarios in order to evaluate strategic predicaments and policy options without being at all precise about timing.

  • Strategic Analysis | March 2003
    A Changing Strategic Predicament

    Right through the boom years prior to 2001, the American economy faced a strategic predicament in that the main engine of growth (credit-financed private spending) was unsustainable, from which it followed that the whole stance of the government's fiscal policy would have to be radically changed if the New Economy were not to become stagnant. The boom was indeed broken, because private expenditure fell relative to income. The potentially dire effects on the level of activity were mitigated by a transformation in the fiscal policy stance, accompanied by a radical change in attitudes toward budget deficits, which suddenly became respectable. This analysis argues that a new strategic predicament is on the horizon as a result of the exceptionally large and growing balance of payments deficit.

  • Strategic Analysis | April 2002

    Notwithstanding the great achievements of the American economy, the growth of aggregate demand during the past several years has been structured in a way that would eventually prove unsustainable. During the main period of economic expansion, the fiscal stance tightened at a much greater pace than in any period during the previous 40 years, and net export demand progressively deteriorated to record deficit levels. It follows that the expansion aggregate demand had been driven by a similarly unprecedented expansion of private expenditure relative to income, financed by growing injections of net credit, which caused the indebtedness of the nonfinancial private sector to escalate to unprecedented levels. The conclusion drawn was that this process must come to an end at some stage, and that when it did, the entire stance of fiscal policy would have to move in an expansionary direction, and that for economic growth to be sustained indefinitely, net export demand would have to recover as well.

  • Policy Note 2002/1 | January 2002

    There is a strategic need, if a “growth recession” is to be avoided, for a new motor to drive the economy, particularly if there is a further decline in private expenditure relative to income that could generate a further hole in aggregate demand.

  • Strategic Analysis | October 2001

    The United States should now be prepared for one of the deepest and most intractable recessions of the post–World War II period, with no natural process of recovery in prospect unless a large and complex reorientation of policy occurs both here and in the rest of the world. The grounds for reaching this somber conclusion are that very large structural imbalances, with unique characteristics, have been allowed to develop. These imbalances were always bound to unravel at some stage, and it now looks as though the unraveling is well under way. There may be no spontaneous recovery because the unraveling that has started is a reversion toward what, in the relevant sense, is a normal situation. This consideration leads us to take issue with some distinguished commentators, such as Alan Blinder (2001) and Laura Tyson (2001), who apparently assume that because a spontaneous recovery will occur relatively soon, any fiscal relaxation should be temporary. The general predicament is made worse by a deteriorating world economy; US exports fell sharply in the first seven months of 2001, when the balance of payments was already heavily in deficit.

    Associated Program:
    Wynne Godley Alex Izurieta

  • Strategic Analysis | August 2001
    A Rejoinder to Goldman Sachs’s J. Hatzius’s “The Un-Godley Private Sector Deficit” in US Economic Analyst (27 July)

    Distinguished Scholar Wynne Godley and Research Scholar Alex Izurieta respond to Jan Hatzius’s rebuttal of their July 2001 Strategic Analysis, in which they stated that the American economy was probably already in recession, and that a prolonged period of subnormal growth and rising unemployment was likely unless there were another round of policy changes. Hatzius, a senior economist with Goldman Sachs, vigorously disagreed.


    Associated Program:
    Wynne Godley Alex Izurieta

  • Strategic Analysis | July 2001
    Prospects and Policies for the U.S. Economy: A Strategic View

    The American economy is probably now in recession, and a prolonged period of subnormal growth and rising unemployment is likely unless there is another round of policy changes. A further relaxation of fiscal policy will probably be needed, but if a satisfactory rate of growth is to be sustained, this will have to be complemented by measures that raise exports relative to imports.

  • Policy Note 2001/1 | January 2001

    The United States' economic expansion of the past eight years has been fueled by a rise in private sector indebtedness. In 1997 the private sector spending exceeded income for the first time since 1952, and since then the gap between the two has risen markedly. The situation closely mirrors that experienced in the United Kingdom during the 1980s, when a two-year slowdown resulted in absolute declines in GDP and a three-percentage-point increase in the unemployment rate.

    Associated Program:

  • Working Paper No. 302 | June 2000
    A Neo-Kaldorian Model

    This paper presents a simple growth model grounded in a stock-flow monetary accounting framework. The framework ensures that all stocks and all flows are accounted for and that the real and financial sides of the economy are coherent with one another. Credit, money, equities and stocks of real capital link periods of time with one another in articulated sequences. Wealth is allocated between assets on Tobinesque principles but no equilibrium condition is necessary to bring the "demand" for money into equivalence with its "supply." Growth and profit rates, as well as valuation, debt and capacity utilization ratios are analysed using simulations in which a growing economy is assumed to be shocked by changes in interest rates, liquidity preference, real wages, and the parameters which determine how firms finance investment.

    Associated Program:
    Marc Lavoie Wynne Godley

  • Policy Note 2000/6 | June 2000

    The economic expansion in the United States has been driven to an unusual extent by falling personal saving and rising borrowing by the private sector. If this process goes into reverse, as has happened under comparable circumstances in other countries, there will be severe recession unless there is a big relaxation in fiscal policy.

    Associated Program:

  • Strategic Analysis | January 2000
    Notes on the U.S. Trade and Balance of Payments Deficits

    If the United States’ balance of trade does not improve, the country could eventually find itself in a “debt trap,” the author says. The aim of this paper, the second in a series offering Godley’s strategic analysis, is to display what seems reasonably likely to happen if world output recovers but otherwise past trends, policies, and relationships continue. The potential usefulness of the exercise is to warn policymakers of dangers that may exist and to help them think out what policy instruments are, or should be made, available to deal with worst cases, should they arise.

  • Working Paper No. 281 | September 1999

    The following paper presents a series of two-country models, each of which makes up a whole world. The models are all based on a rigorous and watertight system of stock and flow accounts and can be used to generate numerical simulations of the way in which of the whole system evolves through time on various assumptions regarding institutions, policies, and behavioral responses. The paper emphasizes that the supply of internationally traded assets is as important as demand in the determination of exchange rates. All the models describe income determination and inflation as well as international trade and intercountry dealings in assets. Apart from deploying a method of analysis believed to be capable of substantial further development, the paper finds that no vestige of the "price-specie flow" mechanism remains once asset demands and supplies are comprehensively represented and inter-related with income flows. It also finds that once the supply of internationally traded assets (for instance, as a result of imbalances in trade) are taken into account, the role of expectations in determining exchange rates—though very important—is exaggerated in much contemporary theorizing.

  • Policy Note 1999/4 | April 1999

    Growing government budget surpluses combined with growing trade deficits have generated record private sector deficits. Unless households continue to reduce their saving—creating an increasingly unsustainable debt burden—the impetus that has driven the expansion will evaporate.

  • Policy Note 1999/1 | January 1999

    In 1998 the volume of private spending in the United States rose by almost twice the increase in disposable income. The impact of this excess private spending financed by increased net borrowing has been profound; without it, the economy would have stagnated. Can this pattern of demand growth continue? The answer is a resounding no.

    Associated Program:
    Wynne Godley Bill Martin

  • Strategic Analysis | January 1999
    Medium-term Prospects and Policies for the United States and the World

    The purpose of this Strategic Analysis is not to make short-term predictions about the life expectancy of the current economic expansion in the United States, but to determine if the present stance of fiscal and trade policy is appropriate in the medium term. The expansion has been generated by economic processes that are unsustainable—processes in private saving, private borrowing, and asset prices that have fueled the growth of demand against a negative impetus from both fiscal policy and net export demand. Given unchanged fiscal policy and the consensus forecast for growth in the rest of the world, continued expansion requires that private expenditure continue to expand relative to income on a record and growing scale. It seems impossible that this source of growth can be forthcoming indefinitely, although it may well continue into next year. When private demand falters, it will be necessary to bring about a substantial relaxation of fiscal policy and ensure a structural improvement in the United States’ balance of payments. (Table 1 revised October 2000.)

  • Working Paper No. 242 | July 1998

    This paper formally integrates the theory of money and credit derived ultimately from Wicksell into the Keynesian theory of income determination, with assets allocated according to Tobinesque principles. The model deployed has much in common with the modern "endogenous money" school initiated by Kaldor which emphasizes the essential role played by credit in any real life economy, since production takes time and the future is always uncertain. New ground is broken methodologically because all the propositions are justified by simulations of a rigorous (60-equation) model, making it possible to pin down exactly why the results come out as they do. One conclusion of the paper is that there is no such thing as a supply of money distinct from the money which agents wish to hold or find themselves holding. This finding is inimical, possibly in the end lethal, to the way macroeconomics is currently taught as well as to the neoclassical paradigm itself.

  • Working Paper No. 236 | May 1998

    The standard neoclassical model is the foundation of most mainstream macroeconomics. Its basic structure dominates the analyis of macroeconomic phenomena, the teaching of the subject, and even the formation of economic policy. And, of course, the modern quantity theory of money and its attendant monetarist prescriptions are grounded in the model's strict separation between real and nominal variables. It is quite curious, therefore, to discover that this model contains an inconsistency in its treatment of the distribution of income. And when this seemingly small discrepancy is corrected, without any change in all of the other assumptions, many of the model's characteristic results disappear.

    Two instances are of particular interest. First, the strict dichotomy between real variables and nominal variables breaks down, so that, for example, an increase in the exogenously given money supply changes real variables such as household income, consumption, investment, the interest rate, and hence real money demand. Secondly, since the price level depends on the interaction of real money demand and the nominal money supply, and since the former is now affected by the latter, price changes are no longer proportional to changes in the money supply. Indeed, we will demonstrate that prices can even fall when the money supply rises. The link to the quantity theory of money, and to monetarism, is severed.

    Associated Program:
    Wynne Godley Anwar M. Shaikh

  • Working Paper No. 205 | August 1997

    Distinguished Scholar Wynne Godley creates a numerical simulation model that attempts a synthesis between the monetary theory of Hicks and Kaldor, the asset allocation theory of James Tobin, and the Keynesian theory of income and output determination. Methodologically, it substitutes Walrasian rigor for the usual narrative exposition used by post-Keynesian writers—and indeed, by Keynes himself—before the computer age. The meaning of the title is that the model describes neither an equilibrium where prices clear markets nor a disequilibrium where price signals do not work properly because of the rigidities, information inadequacies, etc. characteristic of, for instance, "New Keynesian" macroeconomics.

  • Working Paper No. 167 | June 1996
    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.

  • Public Policy Brief No. 23 | September 1995
    The U.S. Balance of Payments, International Indebtedness, and Economic Policy

    According to Wynne Godley, the significance of the deficit in the United States' balance of payments has been underestimated in both public policy and academic discussions, despite the fact that American markets are increasingly dominated by foreign manufacturers. Godley analyzes the problem posed by the current balance of payments deficit. Breaking down the current account into its component parts, he traces the cause of the deficit. He refutes the arguments of other economists that the balance of payments deficit is self-correcting, unimportant, or the result of other domestic forces (namely, too low a level of national saving), and outlines policy approaches to solving the problem. Godley notes that although the strategic problems posed are specific to this country and the United States may have to take unilateral action to solve them, the problems have arisen because there is no significant international regulation of the system as a whole. Inherent flaws have developed in the system of international production, trade, and payments as that system has expanded and become increasingly deregulated. “All the difficulties that exist, or that are foreshadowed in this brief, would be best resolved by energetic international cooperation, of which there is at present little sign.”

  • Working Paper No. 138 | April 1995
    A Background Brief

    No further information available.

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