Thoughts on Macroeconomic Theory and Practice

by Dirk Ehnts, Econoblog101

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.