20 November 2016

Government money and saving

How private sector saving affects the fiscal multiplier and the government's budget

In the last post we looked at they way in which government spending and taxation interacts with the circular flow of money. In particular, we found that, in an economy with no saving, money introduced by the government is repeatedly spent creating additional income beyond that created by the initial government spending. Since the government collects an income tax on each transaction, the money introduced by the government spending is gradually withdrawn as it is re-spent. This "leakage" of money out of circulation places a limit on the total amount of spending and income that can ultimately arise. The eventual total level of aggregate income was shown to be a multiple, \(\frac {1}{\theta}\), of the initial government spend (where \(\theta\) is the tax rate). Here we'll consider what changes in this story when the population decide to save some of their income.

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20 November 2016

The circular flow of government money

Government spending, taxation and the fiscal multiplier

The term fiscal policy describes the spending and taxation decisions taken by government and is used to differentiate these policies from other economic policies of government such as the setting of interest rates (monetary policy). The impact of the circular flow of money on incomes is complicated by government spending and taxation and the effect is encapsulated in a concept called the fiscal multiplier which is the focus of this post.

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17 July 2016

Exogenous and endogenous variables

What does the modeller control and what does the model control?

In the previous monetary economics models we set up the scenario we wanted to model, with equations, some numbers for each of the parameters, and some starting ("initial") conditions. Once we set the models up we simply left them to run their course on the basis of the conditions we'd chosen. In this post we'll model a scenario where conditions change during the course of the model run. In doing so we'll draw a distinction between exogenous and endogenous variables.

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05 June 2016

The Paradox of Thrift

Why saving isn't always a virtue

In the last model we simply watched money circulate around our economy. Because the same amount of money was spent in each time period, income was constant and there was nothing in the model to change this status quo. In this model, we'll allow our citizens an additional freedom. Instead of spending every pound they earn, they will have two options for how to use their income: they can save some part of it, and spend the rest.

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04 June 2016

Spending, income and the circular flow of money

The simplest economic model conceivable

This is the first in what I hope to be a series of posts on modelling the economy. My intention is to explore economic modelling using a bit of theory, a bit of code, and some attempt to understand the results intuitively. I'll use the Python programming language to do this and describe and share all of the code. I was motivated to do this by reading Monetary Economics by Wynne Godley and Marc Lavoie, which describes increasingly complex models of the monetary economy in great detail. I am actually only about halfway through the book and decided to consolidate what I had learned so far. This post, and probably the next few, actually steps back from the starting point of Godley & Lavoie and describes a much simpler model in an attempt to isolate and identify some of the fundamental components and processes which contribute to the behaviour of the economy. This post shows that:

  • Income and money are separate concepts. Money is a stock, income is a flow (measured per unit of time)
  • Income is identically equal to spending, since these flows form two sides of every transaction
  • Total income over some time period is generated by a given stock of money circulating at a certain rate (termed the "velocity of money")
  • In an economy with a fixed money supply and wherein all income is spent, total income is constant over time
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