Keynesian income-expenditure model

1

• Keynesian income-expenditure model
• S f(Y) I?f(Y) ?NAFA (S-I) f(Y)
• i.e. step change in Y ? perpetual accumulation of
  assets
• Cambridge view
• STOCK of financial assets (not rate of
  acquisition) a function of (in fact proportional
  to) income
• ? NAFAt (1-a) (YDt -YDt-1)
• ? PXt YDt - NAFAt aYDt (1-a)YDt-1
• Where PX private expenditure

2

• And period is length of time agents take to
  adjust stock of assets to incomes
• CEPG research found this to be one year
• Therefore estimated equation (with 3 other
  variables) and found (1975)
• PX 0.533YD 0.416YD(t-1) 0.899 HP 0.790BA
  0.962S
• (increase in HP debt, increase in bank lending,
  stockbuilding)
• Since NAFAt (1-a) (YDt -YDt-1)

3

• And NAFA (S-I) (X-M) (G-T)
• Therefore (M-X) (G-T) (1-a) (YD -YDt-1)
• Fiscal policy must be consistent with current
  account target
• If this is inconsistent with employment target,
  then the two could be reconciled by exchange rate
  depreciation but
• Hard to engineer under a floating regime

4

• real effects liable to be undone by real wage
  resistance
• CEPG were elasticity pessimists anyway
• Therefore might have to resort to
• Credit controls
• Rationing (Kaldor)
• Import controls (tariffs and/or quotas)
  
  

5

• SITUATION IN MARCH 1974
• oil prices up 300 in 6 months
• current account deficit 4bn (4 of gdp)
• price inflation 20v (wage inflation higher)
• unemployment still only 700,000 but rising
  sharply

6

• TREASURY CHARGES AGAINST CEPG
• No theory of investment
• Ignored evidence that overseas sector was source
  of instability on the economy
• Total NAFA had been fairly stable but its
  components (personal corporate) hadnt
• -- instead they cancelled out for reasons no one
  had explained
• Godley accepted third point but said it couldnt
  rehabilitate discretionary fiscal policy

7

• PARLIAMENTARY COMMITTEES CONCLUSIONS
• dont say inflation when you mean reflation
• Treasury and CEPG should hold joint
• Seminars
• Treasury CEPG (with stockbuilding credit
  aggregates in equation) STRENGTHENED case for
  short-term forecasting
• repeated criticism that stable surplus was sum
  of 2 unstable elements
• BUDGET AND CURRENT ACCOUNT DEFICITS PART COMPANY
• Fiscal deficit 7.2 of gdp in 1974, 9 in 1975
• Current account deficit 4.5 of gdp in 1974, 1.7
  in 1975

8

• Kaldor New Cambridge has ceased to hold
• CEPG 1976 review denied this
• Full-employment budget deficit hadnt widened
  if actual deficit had, this was due to the
  recession
• M-X) (G-T) (1-a) (YD -YDt-1)

9

• CHANGING TREASURY ATTITUDE TO DEMAND MANAGEMENT
• Dec 1975 accepted vertical LR Phillips curve (by
  majority vote)
• --move away from Cambridge so far as Godley,
  Kaldor still hostile to natural rate doctrine
• -- but moved Treasury towards Cambridge position
  so far as it gave them firmer basis for rejecting
  fine-tuning