Posted by: Dirk | August 18, 2013

Macroeconomics: theory and practice

I have been working on stock-flow consistent models lately, starting with Godley/Lavoie. I liked the book tremendously because the assumptions that are needed for the model are not as brutal to reality as good old neo-classical economics and the IS/LM model. In the Godley/Lavoie tpye models, supply does not equal demand, and while (realized) demand can never exceed supply (spoiler: plus inventory) we call the opposite situation a rise in inventory. Also, investment is financed by loans, not savings. The next good choice is to use balance sheets and double entry book-keeping. There are also some choices which I found a little confusing, but that’s why I tried to come up with a model myself.

Anyway, I just saw that apparently there is some progress in macroeconomics in the sense that the Chief Global Economist of Standard and Poor’s has explained: “Repeat after me: Banks Cannot And Do Not “Lend Out” Reserves”. The text contains the following quote in the context of quantitative easing:

Banks do need to hold reserves (as a liquidity buffer) against their deposits, and banks create deposits when they lend. But normally banks are not reserve constrained, so excess reserves do not loosen a reserve constraint.

I hope that there will  be more announcements of important figures from the financial industry to explain to the public, the media, the policy makers, and – last but not least – academic economists how banking and money work. I would still estimate the number of German professors economics who “get” money as below twenty, but only if I include technical universities (“Fachhochschulen”). I have recently written about the decline of influence of German academic economists. If the discipline can’t get its act together (here in Germany) it is doomed to become insignificant. However, a failure could have even more disastrous consequences to the the whole society.



  1. “while (realized) demand can never exceed supply”

    Yes demand and supply differ by change in inventories, the former can be higher when change in inventories is negative such as on a weekend.

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