The Long Road to Redemption
All through his work on policy assessment and forecasting—on both sides of the Atlantic—after stepping down from the DAE, Godley has been working on the side to extend and improve the ideas that sank without trace in 1983. Helped by long collaborations wi
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It was not enough to keep pointing out clouds on the horizon that others had not seen. Although Godley’s development of the Levy Institute model had already shown some unusual trends in the US e conomy, they were of no concern to commentators for whom healthily rising flows defused any danger from stock changes. He needed a more durable statement of the underlying principles alongside the flow of policy reports. The effort began almost as soon as Macroeconomics had dropped cold off the press, and was to last until 2007, Godley’s 82nd year.
Cambridge Developments In Macroeconomics, Godley and Cripps had taken an important first step towards modelling an economy in which transactions had to be financed and their balance sheet impacts kept consistent, but in which the special nature of public borrowing (and hence the power of fiscal policy) was still acknowledged. With Ken Coutts and Graham Gudgin, Godley had followed up in 1985 by refined the system of macroeconomic inflation accounting, for a closed economy with firm, household, © The Author(s) 2019 A. Shipman, Wynne Godley, https://doi.org/10.1007/978-3-030-12289-8_15
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bank and government sectors. But their paper dealt entirely with accounting identities and did not introduce any behavioural relations that might have led to policy conclusions (Coutts et al. 1985). A Monetary Theory and Economic Institutions conference at the European University Institute (EUI) in Florence in 1987 gave Anyadike-Danes and Godley (1987) them the opportunity to present a more developed version of the income-expenditure system in Macroeconomics, with more explicit treatment of the financial side. The paper recalled the stable ratio of gross financial assets to disposable income, empirically familiar from earlier Cambridge work and pointed out that this implied a stable long-run ratio of total non-financial debt to disposable income. By accounting identity, the total (gross) acquisition of financial assets would be the change in private financial liabilities plus the non-financial debt. So total non-financial assets should also show a long-run stable ratio to disposable income (Anyadike-Danes and Godley 1987: 105). This, they noted, was precisely the empirical finding reported by Benjamin Friedman (1982). Former Policy Group members who had remained in Cambridge continued to discuss aspects of the macro accounting model, with Ken Coutts particularly involved in the refinement of accounting matrices and the critique of mainstream macroeconomics. As the group of DAE macroeconomists who shared his perspective diminished, Godley also reached out to former colleagues who shared his interest in developing a framework that could reliably tell policymakers the current state of the economy and show them in advance what their planned interventions were likely to do.
Correspondence with Bryan Hopkin Sir Bryan Hopkin, who had become a Professor of Economics at the University of Wales at Cardiff after leaving the Treasury (as head of the Government Economic Service) in 197
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