The Stock-Flow Consistent Approach with Active Financial Markets

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The Stock-Flow Consistent Approach with Active Financial Markets

Palgrave Macmillan
  • Department Of Economics


9780230294455_10_cha09.indd 9 The Stock-flow Consistent Approach with Active Financial Markets* Jan Toporowski and Jo Michell 9.1 Introduction Wynne Godley is best known for his insightful forecasting using stock- flow consistent models. His insistence that economic stocks and flows should be consistently laid out was also, if less obviously, an insistence that all economic variables are interrelated. Accordingly, production could not be carried out without distributional implications. More importantly, for the theory of a modern credit economy, the financial flows that arise in the process of production and exchange have to be integrated into the model of the economy at large. Stock-flow consistency has clear implications for economic forecast- ing. However, it also has very critical implications for econometrics, in its modern sense of deriving theory from statistical data. For, if statistics are themselves the product of a stock-flow consistent taxonomy, then there are no independent variables, but all variables are interdependent (Godley and Lavoie, 2007; Toporowski, 2001). One interpretation of this interdependence could be the New Classical view that an economy is at all times more or less in successive states of general equilibrium, or shifting between them under the impact of various ‘shocks’, usually identified with hindsight. In such a situation, forecasting is only possi- ble on the basis of probability distributions derived from the frequency distribution of past ‘shocks.’ We argue here that a disequilibrium interpretation is also possible. This could be a Wicksellian cumulative process derived from non- equilibrium transactions in markets over real time. Two situations may 173 * This chapter draws on discussions that we have had with Jago Penrose and Marc Lavoie. The authors take full responsibility for all remaining errors. 9780230294455_10_cha09.indd 1739780230294455_10_cha09.indd 173 9/30/2011 6:02:54 PM9/30/2011 6:02:54 PM This fi

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