tag:blogger.com,1999:blog-4799264811265759956.post3430355302160780507..comments2015-05-29T10:13:43.500-04:00Comments on Quantitative Finance: Foundations and Applications: More on income, expenditure, and endogenous money - a non-vacuous responseMatheushttp://www.blogger.com/profile/05386153701958504638noreply@blogger.comBlogger6125tag:blogger.com,1999:blog-4799264811265759956.post-12497709756841484642013-06-21T07:45:47.056-04:002013-06-21T07:45:47.056-04:00Are you saying that investment requires savings or...Are you saying that investment requires savings or investment causes saving?<br /><br />If I get a $100 loan from the bank and spend it on capital goods my spending has created savings but it didn't require them.<br />Has not the increase in debt temporarily added to demand?<br />And when it's paid back will it not then decrease demand by an equal amount?<br /><br />This seems to imply that, although the overall effect of credit creation on AD is indeed equal to zero, that, depending on what point in the life cycle of the loan from views it from, the effect on AD can be either positive or negative.<br />The seemingly contradictory statements<br />- the change in debt does not affect AD<br />- the change in debt does affect AD<br />turn out to be perfectly reconcilable and equally true.<br /><br />Is any of this an even remotely close to an accurate description of Mr. Grasselli's views?<br />Vilhelmohttp://www.blogger.com/profile/04501940617030009190noreply@blogger.comtag:blogger.com,1999:blog-4799264811265759956.post-85989446715246623462012-10-13T17:51:23.945-04:002012-10-13T17:51:23.945-04:00Bond Guy,
I said workers' saving and investme...Bond Guy,<br /><br />I said workers' saving and investment are zero in the model. So one just needs to consider capitalists saving and investment. <br /><br />Capitalists' Saving is Pi_R<br /><br />Capitalists' Investment is I<br /><br />Since Saving = Investment for an economy as a whole (closed), <br /><br />these difference between the two should be equal to zero and the difference between the two can only be equal to ΔD if ΔD is zero. Ramananhttp://www.concertedaction.com/noreply@blogger.comtag:blogger.com,1999:blog-4799264811265759956.post-78290972002860175182012-10-13T16:48:05.863-04:002012-10-13T16:48:05.863-04:00Further explanation. You wrote quite a bit, and ye...Further explanation. You wrote quite a bit, and yes you correctly (in my view) argued that the accounting is wrong. But within your text, I'm not sure I see the exact reason why the equation you pinpointed was wrong. But if the accounting identity used is the Kalecki profit equation, the contradiction is obvious.<br /><br />More specifically, let <br />e(t) = (undistributed profit in the business sector)(t) - investment(t) [for the simplified economy].<br /><br />According to the Keen equation, e(t) equals the change in debt.<br /><br />However, the accounting identity requires that (Latex notation, \int = integral)<br /><br /><br />\int_{t^0}^{t_f} e(t) = 0, \forall t_0, t_f.<br /><br />If we make strong continuity assumptions (continuous function except at a finite number of points, for example), it is a basic exercise to verify that e(t) = 0 \forall t. [If we don't make such continuity assumptions, e(t) can be arbitrary values over sets of zero measure (E.g., over all rational numbers.)]<br /><br />Thus, we cannot have the change in debt term in there.<br /><br />However, one way it could be preserved is to assume that the banking sector is the sector selling the capital goods (it gets the profits from the sale of capital goods, and the increase in bank loans is matched by an increase in bank equity, not an increase in deposits. That's a fairly unusual model, to say the least.<br />bond guynoreply@blogger.comtag:blogger.com,1999:blog-4799264811265759956.post-61096191246624297002012-10-13T16:01:33.568-04:002012-10-13T16:01:33.568-04:00Bond Guy,
Wanted to ask which parts I was not cle...Bond Guy,<br /><br />Wanted to ask which parts I was not clear - for a feedback. <br /><br />This is because I am in complete agreement with you. (And other people in agreement with me found it generally clear). <br /><br />Also, see my comment(s) in the previous post where I show that either one assumes workers have to save or else Π_R = I. <br /><br />"Aside on continuous time: using continuous time is a particular nightmare in your modelling. You have to implicitly include a lot of continuity conditions on your time series in order to be able to move from the accounting identities that define economic systems to point-in-time conditions."<br /><br />Very good point. This is the reason I suggested the usage of the Dirac delta function. <br /><br />Not that I would like to use it myself . Just for others who want to make a connection. <br /><br />(One cannot assume debt injections as discontinuous and at the same time income flows as continuous). Ramananhttp://www.concertedaction.com/noreply@blogger.comtag:blogger.com,1999:blog-4799264811265759956.post-18923681271289892052012-10-13T11:53:08.403-04:002012-10-13T11:53:08.403-04:00"The whole point of the Appendix in the paper..."The whole point of the Appendix in the paper is to show that recorded income equals recorded expenditure at the end of a given period (say one year). We don't use continuous mathematics to upset accounting identities, but rather as "a simple way to represent the conceptual difference between spending plans and current received income".<br /><br />Sorry to be bugging ... But assuming the proof is correct. <br /><br />If you model debt injections as step functions, you should use delta functions for income/expenditure flows. <br /><br />Your models will be better off if you have two sets of variables Y_E, Y_I and Y_E(e) and Y_I(e). <br /><br />Y_E = Y_I (*always and always*) <br /><br />whatever Y_E(e) is doing. <br /><br />By using the same variable for two different things will lead you to future paths which are not possible in real life. Ramananhttp://www.concertedaction.com/noreply@blogger.comtag:blogger.com,1999:blog-4799264811265759956.post-54778161403687381842012-10-13T10:09:22.522-04:002012-10-13T10:09:22.522-04:00I cannot understand Ramanan's critique as it w...I cannot understand Ramanan's critique as it was very unclear, but his basic point was right - your accounting doesn't work, as far as I can tell.<br /><br />Look up the Kalecki profit equation (or the Levy profit equation; there's a good summary in a paper at the Levy Institute). The full equation is pretty complicated, but for the simplified economy you have (aggregated private sector, no external sector or government, or household saving), the equation reduces to (or so I hope...):<br /><br />Undistributed profits = business sector investment.<br /><br />I.e., business investment is self-financing under these conditions. There is no need for debt financing in your equation. <br /><br />Why you may need debt financing in a model is that you have a business sector split into a consumer goods and a capital goods sector. The consumer good sector needs to borrow to invest, but that becomes a source of profits (and cash) for the capital goods sector. Thus the investment is done by one sub-sector, and the profits appear in another sub-sector.<br /><br />Since your model has aggregated the business sector into a single entity, the increase in debt in the business sector will coincide with an increase in bank deposits for the same sector. You have superimposed a non-necessary behavioral condition that debt growth matches investment - the investment could have been financed by the business sector's increasing bank balances. Your equations, as far as I can decipher them, are missing the profit flow created by the investment.<br /><br />I would recommend reading (or re-reading) the Godley & Lavoie book, and the part about the business capital account.<br /><br />Aside on continuous time: using continuous time is a particular nightmare in your modelling. You have to implicitly include a lot of continuity conditions on your time series in order to be able to move from the accounting identities that define economic systems to point-in-time conditions.<br /><br />Bond Guynoreply@blogger.com