This document provides an overview of the influences and components of a new macroeconomic model being developed by Greg Hannsgen to analyze fiscal policy. The model builds on Post-Keynesian and stock-flow consistent macroeconomic traditions and incorporates elements such as endogenous money, credit, investment functions, and financial instability. It aims to examine the medium-term effects of fiscal policy on dynamics like the business cycle and potential inflation/deflation paths. The document outlines the supply, demand, financial and policy assumptions incorporated in the model.

1. Inside Money in a Kaldor-Kalecki-
Steindl Fiscal-policy Model: The Unit
of Account, Inflation, Leverage, and
Financial Fragility
Greg Hannsgen
Levy Economics Institute of Bard College, Annandale-on-
Hudson, NY
www.levyinstitute.org
Prepared for International Post Keynesian Conference,
Kansas City, September 2014

2. Some broad influences from existing
literatures, Slide 1
• The Keynes/Kalecki growth-and-distribution literature that
continued with Harrod, Kaldor, Pasinetti, Robinson, Stiendl, and
others
• Neo-Ricardian themes of longer-run monetary influences on
distribution, e.g., Panico (1997)
• Post Keynesian themes of endogenous credit and money,
determination of markup by cash flow needs, importance of income
distribution, futility of nominal “adjustment” in recession,
dual/segmented labor markets, irreversible time, and a role for
expectations in an uncertain world
• Functional finance and chartalism (MMT)
• The literature dubbed the “formal Minskyan literature” by Dos
Santos and others, including Ferri (1990), Ferri and Minsky (1991),
Nishi (2012), Ryoo (2013), Skott (1994), Taylor (1985), etc.
• And more…

3. Some broad influences from existing literatures,
continued
• Stock-flow macro modeling, as in Godley and Lavoie (2012) and the Levy
Institute macro team
• The Cambridge-Keynesian fiscal policy targets literature (e.g., Godley and
Lavoie (2007) and Greenwood-Nimmo (2014))
• Models from finance of probabilities of financial “events”
• Works such as Charpe et al. (2011), Chiarella, Flaschel, and Semmler
(2001), Commendatoré, Panico, and Pinto (2009), Gallegati and Gardini
(1991), Goodwin (1990), and Keen (1995, 2000, 2013, 2014), and
numerous others that treat the economy as a dynamical system, looking at
bifurcations, cycles, hysteresis, and the like.
• Realism from Kaleckian political economy about the political space for
fiscal stimulus (Rugitsky 2013, Moudud and Martinez-Hernandez 2014);
Emphasis also on misguided macro policy.

4. Broad goals of this paper and related
studies by this author
• to look at the effects of fiscal policy on endogenous
fluctuations in macro variables, including
phenomena collectively known as the business cycle
• Specifically, to use analytical methods (theorems),
computed vector fields, and simulated solution
pathways in both static and interactive form
(Wolfram CDFs).

5. Features of model on which this one
builds (Hannsgen 2014a, Hannsgen
2014b)
A Kalecki-Stiendl investment function
Classical/Kaleckian savings propensities
Keynesian instability in the goods market
Wage-led aggregate demand
Kaldorian (1940) nonlinear continuous-time dynamics
Government deficits
Government production of a public service from labor inputs
A fixed tax rate on all income
Leontief technology for goods production using labor and the capital stock
Chartalist state money
A time-varying Kaleckian markup for goods with a nonlinearity in the speed of adjustment
A fixed, policy-determined real interest rate on government securities
A government spending rule with dual resource-utilization targets
One or more additional options for a fiscal stabilizing rule
Endogenous labor-force growth

6. 3D Policy conclusions from old model
(Hannsgen 2014b)
• manifolds that act as “walls” in state space that prevent crossing
into low-markup region via continuous flow—but a big nudge in the
interest-rate would work if distance not too far
• For high p, birth of a corridor of stability where there is a tendency
to move toward target values, instead of following unbounded
pathways
• Balanced-budget targets do not yield stability due to fiscal drag
• Still, if targets for p and u are still low, then unemployment will be
high in long run
• Caveat: Results may be dependent on calibrated values of
parameters and on avoiding “structural breaks” that change the
dynamics

7. Some shortcomings in previous model
• Lack of role for banks and stock markets, which are of
course sometimes endogenous sources of instability
• No role for net worth in consumption—important
perhaps in medium and long runs
• open to orthodox charge that inflation will somehow
arise in the model as a “price” of deficit spending
• Have not worked Minskyan model of financial crises
into simulations or analytical results
• Reported simulations need to include more outcome
variables, such as wage share, profit rate, growth rate,
etc.
• No technological change—endogenous or otherwise

8. Elements added to model in earlier
paper
• A Minskyan Poisson model of financial crashes
• An unconventional nonlinear wage Phillips curve
• Endogenous equity prices and issuance
• Bank deposits
• Margin finance for equity positions
• Bank loans to workers
• A wage contour that fixes relative wages in the government and private
sectors
• Endogenous productivity growth via Kaldor-Verdoorn effects
• Cash-flow ratio effects in the investment function
• The addition of energy inputs to the production function for goods
• Greenhouse gas accumulations via a physical identity
• Time-varying credit constraints in the form of stock-flow norms
• A time-varying markup for bank loans

9. Types of policy implications looked for
with this new model
• Medium-term Minskyan asset-debt effects of fiscal
policy
• These might include qualitative changes in the
dynamics (switches between unstable and stable
regimes), as the capital stock or government debt
accumulate over time.
• Implied pathways for inflation/deflation
• Possible additional roles of nudges to policy
parameters
• Minskyan shocks leading to permanent effects, and a
more realistic sense of potential for fiscal stabilization

10. “Supply side” of model
• Leontief production function with labor, capital
goods, and energy
• Rate of expansion of labor force a decreasing
function of unemployment rate
• Growth of labor productivity an increasing
function of capital-stock growth rate
(Kaldor/Verdoorn)
• Stock of capital goods depreciates at constant
rate
• Equation from physics determines greenhouse
gas accumulation at time t

11. Demand-side behavioral assumptions
• Investment a function of capacity utilization, after-tax
profit rate, and liquidity ratio (Kalecki/Steindl and many
others)
• Kaldorian (1940) nonlinearity in investment function
• Workers borrow and spend what they can
• K-sector households consume a fraction of their
disposable incomes and a fraction of appreciation in
their equity holdings
• Expected number of financial crises per year depends
on financial fragility and capacity utilization (more on
model of financial crashes later)

12. Factors affecting broad inflation
• Nominal wage subject to one of two rules:
(1) Private sector wage a function of capacity
utilization or (2) public-sector (P-sector) wage grows at
rate chosen by P-sector
Ratio of public sector wage and private sector wage
constant
Energy costs assumed constant but could be shocked
• Rate of change of goods markup a declining function of
(1) net operating revenues and/or (2) capacity
utilization. Latter relationship has long flat segment
near “normal” capacity utilization rate

13. Income flows
• P-sector and K-sector workers receive wages
• K-sector households receive dividends from
financial and nonfinancial firms and interest
on bank deposits
• Banks collect interest on loans to workers, the
P-sector, and wealthy households
• P-sector workers, K-sector workers, and
wealthy households pay taxes on all income

14. Model’s assumptions about government
money, taxation, and spending
• Monetary base (reserves + currency) endogenous
• Mix of monetary base and currency determined
by asset demand functions
• Government deficits imply issuance of state
money and bills
• Interest rate on bills is policy-determined
• Interest rate rule specifies a fixed “real” rate
• Government production determined by policy
rule
• Constant tax rate on all household income

15. Model’s assumptions about bank
credit
• Bank loans are given for equity positions, unsold
inventories, and consumer purchases
• Bank loan rates are subject to a time-varying markup
• Bank loan markup varies with financial fragility level
• Bank credit is rationed. Amount of margin and
consumer loans determined by prudence and inflation-adjusted
interest rate.
• Bank rate markups jump when a crisis occurs.

16. Stock-price model
• No Tobinesque stable asset demand and supply
curves
• Almost always, price-earnings ratio determined
by growth rate and leverage used by investors
• Rare financial shocks from conditional Poisson
model cause sudden drop in stock price index, as
mentioned before. Rate at which these occur is a
function of capacity utilization and financial
fragility.

17. Financial shock model
• Rate of occurrence of financial shocks (number per year) is
a decreasing function of (1) financial fragility and (2)
capacity utilization
• Financial fragility (1) increases with liquidity ratios in W-sector
and K-sector households, (2) is a decreasing function
of capacity utilization, and (3) is a decreasing function of
the safe-asset ratio (bills plus money over capital)
• Consumer credit limit and margin limit a decreasing
function of “Prudence.” Also, loan rate effects.
• Prudence declines with (1) capacity utilization; (2) time
since last crisis (“the instability of stability”); and increases
with (3) spending on financial supervision/regulation.
• Shocks cause jumps in bank-loan markups and stock prices

18. “Previous study” or “Hannsgen 2014”
“Fiscal policy, chartal money, mark-up
Dynamics and unemployment
insurance in a model of growth
and distribution.”
July issue Metroeconomica
Link back to presentation

19. Levy Institute Macro Team Strategic
Analysis Series
Series reports the results of simulations
conducted using the Levy
Institute’s 3-sector stock-flow
model for the United States.
Link back to presentation