Money, Finance, and National Income Determination

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.