Co in-Euziol, Edoua d; Boug ine, Hassan; Rochon, Louis-Philippe
A icle
The e lux phase in mone a y ci cui heo y and s ock- low
consis en models
Eu opean Jou nal o Economics and Economic Policies: In e en ion (EJEEP)
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e lux phase in mone a y ci cui heo y and s ock- low consis en models, Eu opean Jou nal o
Economics and Economic Policies: In e en ion (EJEEP), ISSN 2052-7772, Edwa d Elga Publishing,
Chel enham, Vol. 21, Iss. 3, pp. 486-501,
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The e lux phase in mone a y ci cui heo y
and s ock– low consis en models
Edoua d Co in-Euziol
Labo a oi e Ca ibéen de Sciences Sociales (LC2S), Uni e si é des An illes, Schoelche , Ma inique
Hassan Boug ine
Lau en ian Uni e si y, Sudbu y, Canada
Louis-Philippe Rochon
Lau en ian Uni e si y, Sudbu y, Canada
S ock– low consis en (SFC) modelling and mone a y ci cui heo y (MCT) ha e many simila i-
ies. Howe e , an impo an di e ence conce ns he e lux phase, du ing which he c edi s issued
by banks a e epaid. This phase is cons i u i e o MCT models, bu does no gene ally appea
explici ly in SFC models. The au ho s p opose he e o de elop an SFC model in which he
bank loans issued a he beginning o a pe iod a e explici ly epaid a he end o i . The epaymen
o long- e m bank loans inancing in es men s will hen ep esen a leakage ou side he mone a y
ci cui and a ec he le el o agg ega e demand and he dynamics o he model. The au ho s show
ha conside ing hese epaymen s could ha e a las ing e ec on co po a e p o i s, co po a e indeb -
edness, and g ow h o p oduc ion. This esul sugges s ha i could be in e es ing o ocus mo e on
he e lux phase wi hin SFC models, aking inspi a ion om MCT.
Keywo ds: mone a y ci cui , s ock– low consis ency, e lux, bank loans
JEL codes: E11, E12, E17
1 INTRODUCTION
Mone a y ci cui heo y (MCT) o igina ed in he wo k o Augus o G aziani (1990) in I aly,
Alain Pa guez (1980; 1986) in F ance, and was subsequen ly de eloped by Poulon (1982),
La oie (1996), Secca eccia (1996) and Rochon (1999), among o he s ( o a summa y, see
Co in-Euziol/Rochon 2023). Mone a y ci cui models we e among he i s o in eg a e
money’s ull endogenei y. Money is c ea ed by bankswhen heyg an loans oc edi wo hy
economic agen s, mainly i ms (al hough he model can easily inco po a e household c edi ).
This c edi is necessa y o he p oduc ion p ocess. The mone a y emission is hen based on
hena u eo deb s– ha , once bo owed, i mus be epaid. Indeed, p oduc ion akes ime,
and i ms need access o unds o pay o hei p oduc ion cos s, essen ially wages and a ious
o he cos s ela ed o p oduc ion. MCT hen clea ly highligh s he ac ha he exis ence o
money, p oduc ion and deb a e in insically ela ed (Rochon 1999) and allows us o app oach
Keynes’s wish o build a comple e heo y o a mone a y economy o p oduc ion (Keynes
1936: 293). As Secca eccia (1988: 51) a gued, p oduc ion is a ‘p ocess o deb o ma ion’.
In his sense, s ock– low consis en (SFC) models a e in pe ec con inui y wi h he
wo k o MCT: money is endogenous, c ea ed by he banking sys em, and se es as a
Recei ed 13 Sep embe 2021, accep ed 15 May 2022
Resea ch A icle
This is an open access wo k
Eu opean Jou nal o Economics and Economic Policies: In e en ion, Vol. 21 No. 3, 2024, pp. 486–501
Fi s published online: Augus 2022; doi: 10.4337/ejeep.2022.0086
Jou nal compila ion © 2024 Edwa d Elga Publishing L d
© 2024 The Au ho
medium o all economic exchanges. Besides, by sys ema ically using ansac ion and s ock
ma ices o ace he e olu ion o his o y o all mone a y lows, SFC me hodology ‘p o-
ides cohe ence and o malism o he heo y o he mone a y ci cui , espoused by Augus o
G aziani’(La oie 2004: 146). ‘The e a e no black holes’(Godley 1996: 7) in hese mod-
els, as he sums o each ow and column o he ma ices mus be equal o ze o. The
expenses o some make he e enues o o he s.
The di e ence be ween hese wo models, he e o e, has mo e o do wi h he mo e
sequen ial na u e o he o me han he la e . As Ma c La oie (2004: 146) explains:
Taken by i sel , he ansac ion low ma ix ells us wha esul s occu by he end o he pe iod.
The heo y o he mone a y ci cui allows us o ell a causal s o y: i helps us o unde s and how
economic ac i i y a ises, and how i is inanced a he beginning o he pe iod.
Fo example, in MCT models, i ms will i s bo ow he unds necessa y o inance hei
p oduc ion expendi u es, hen spend hem (mainly in he o m o wages), collec e enues
by selling hei p oduc ion, and epay he sums ini ially bo owed. In SFC models, how-
e e , only he wo in e media e lows, om i ms o households and ice e sa, appea .
The same hing happens wi h in es men s. Ins ead o conside ing dis inc ly new bank
c edi s o in es men s and epaymen o bank c edi s ha ing inanced pas in es men s,
only ne in es men s a e gene ally conside ed in SFC models.
We belie e ha his analysis in e ms o ne lows can some imes be educ i e in dis-
cussing ne in es men s, because hey co e wo a iables wi h e y di e en dynamics:
new in es men s and he epaymen o bank loans ha inanced pas in es men s. Indeed,
om a Keynesian pe spec i e, i ms mos ly de e mine hei le el o p oduc ion and in es -
men in ela ion o expec a ions o he le el o an icipa ed demand ( o wa d-looking) bu
epay pas bank loans because o decisions aken p e iously (backwa d-looking). F om his
poin o iew, i seems in e es ing o us o go back o he adi ional analyses o he mone-
a y ci cui o be e unde s and he dynamics ha lie behind he a iable o ne in es -
men s. Ou objec i e is o show ha dis inguishing be ween new in es men s and he
epaymen o bank loans ha inanced pas in es men s can modi y sha ply he dynamics
o an SFC model.
To his end, we will e u n in Sec ion 2 o he no ions o low and e lux wi hin MCT.
We will see in Sec ion 3 why hese lows do no appea explici ly any mo e in SFC models.
We will hen show ha i may be ele an o dis inguish in he adi ional ne in es men
unc ion be ween new in es men s and he epaymen o bank c edi s ha inanced pas
in es men s. In Sec ion 4, we p opose an SFC model in which his dis inc ion is made.
We show in Sec ion 5 ha he dynamics o an SFC model can hen be signi ican ly mod-
i ied. We analyse he esul s ob ained in Sec ion 6 and conclude in Sec ion 7.
2 THE DIFFERENT PHASES OF A PERIOD WITHIN AN MCT MODEL
While he mone a y ci cui ex ends o a succession o pe iods o p oduc ion, a pe iod o
p oduc ion is de ined as he in e al be ween he c ea ion and he ul ima e des uc ion o
money. Du ing his in e al, money is ci cula ing, and is o emos a means o paymen ,
al hough i can also be a s o e o weal h, as consume s hoa d money as sa ings. Wi hin a
pe iod, he e a e di e en phases o he ci cui .
The i s phase o he ci cui begins wi h he demand o bank c edi . Acco ding o
Pa guez (1980) and Co in-Euziol/Rochon (2013), c edi is needed o co e bo h he
cos s associa ed wi h he p oduc ion o goods, and also o pu chase capi al goods (in es -
men s). In his sense, c edi is bo h sho - e m (p oduc ion) and longe - e m (in es men ).
The e lux phase in mone a y ci cui heo y and s ock– low consis en models 487
© 2024 The Au ho Jou nal compila ion © 2024 Edwa d Elga Publishing L d
In he simpli ied model, his is ca ied ou mainly by i ms. A his s age o he ci -
cui , i ms can e alua e qui e accu a ely hei in es men needs and po en ial cos s o
p oduc ion, essen ially wages and a ious o he cos s ela ed o p oduc ion. Since he
e enue om he sales o he p oduc a ises la e in he ci cui wi h he sale o hei
goods o se ices, i ms mus inance hei p oduc ion and in es men s by elying on
bank c edi .
This begins i s wi h he decision o how much o p oduce and o in es , and how
many wo ke s o hi e, which in u n will de e mine how much o bo ow. The decision
conce ning how much o p oduce will depend mos ly on he i m’s expec a ions o agg e-
ga e demand a ising wi hin he pe iod o p oduc ion, whe eas he decision o in es will
depend on whe he expec a ions o he g ow h o agg ega e demand a e deemed pe ma-
nen . A e all, he e is no need o inc ease he capaci y o p oduce i he g ow h in agg e-
ga e demand is expec ed o be sho -li ed o empo a y.
Agg ega e demand and expec a ions a e hus a he hea o he p oduc ion p ocess and
he mone a y ci cui . Once hese expec a ions a e made and i ms decide on how much o
p oduce and in es and how many wo ke s o hi e a a gi en wage, i ms app oach banks
o inancing. The need o c edi applies o bo h consump ion and in es men -p oducing
i ms equally, as all i ms mus secu e p ope inancing be o e beginning he p oduc ion
p ocess (Rochon 1999).
The second phase hen begins wi h he bank’s decision on whe he o ag ee o g an c edi .
Banks’decisions depend on hei own expec a ions o agg ega e demand. Co in-Euziol/
Rochon (2023) a gue ha ‘ he mone a y ci cui he e o e pi s he expec a ions o he
i ms agains hose o he banks’. I banks a e less op imis ic han i ms, hen c edi
won’ be as o hcoming, and p oduc ion can be us a ed.
This s age is also he ini ial inancing o p oduc ion, o simply wha G aziani (2003)
called ‘ini ial inance’, du ing which money is c ea ed ex nihilo. Banks do no necessa ily
mee all demands o c edi and will e use eques s by i ms ha a e no conside ed c ed-
i wo hy. As Keynes said, he e will always be a ‘ inge o unsa is ied cus ome s’. This said,
banks will inance all i ms ha hey deem c edi wo hy. In his sense, banks a e only con-
s ained by he lack o c edi wo hy cus ome s, and no by deposi s. In he banks’ iew,
he e o e, c edi wo hiness simply means he abili y o i ms o eimbu se wi h in e es he
ini ial c edi , and his de ini ion will be in luenced by he banks’own expec a ions o
e ec i e demand o g ow h. Banks will oscilla e be ween being op imis ic o pessimis ic
abou u u e agg ega e demand.
Once c edi is gi en, a line o c edi will be es ablished enabling i ms o d aw om i
in o de o pay wages, which a e deposi ed in o wo ke s’accoun s, a which ime money is
c ea ed. As G aziani (1985: 164) w i es, ‘[i] a bank’s inance, while gua an eed, has no
ye been used, he co esponding liquidi y has no ye been c ea ed, and i is no possible
o alk o he exis ence o liquidi y’.
I he second phase was abou he c ea ion o money, he hi d phase is abou he ci cula-
ion o money. Indeed, once wages ha e been paid, wo ke s will hen begin spending and pu -
chasing goods and se ices, which means ha money is now changing hands, o a he is
lowing om one bank accoun (households) o ano he ( i ms), he e o e e u ning o
i ms as hey sell hei p oduc s o consume s. Money s ill exis s, bu i is in di e en bank
accoun s. As La oie (1999: 106) poin s ou , ‘[w]hen households disbu se hei money bal-
ances, he banking deposi s e e o i ms, all o mos o which owe money o banks’.So,
i ms a e able o ecap u e pa o hei ini ial ou lays by selling goods and se ices o house-
holds. This is he inal inancing o p oduc ion, o he ‘ inal inance’(G aziani 1990).
Bu money can low back o i ms h ough ano he channel, he channel o inancial sa -
ing, when i ms sell inancial asse s o secu i ies o households. In his sense, consump ion
488 Eu opean Jou nal o Economics and Economic Policies: In e en ion, Vol. 21 No. 3
© 2024 The Au ho Jou nal compila ion © 2024 Edwa d Elga Publishing L d
and he pu chase o secu i ies play a simila ole du ing his e lux phase o he ci cui : ans-
e ing deposi s om households o i ms. Acco ding o Keynes (1937: 667–668), ‘con-
sump ion is jus as e ec i e in liquida ing he sho - e m inance as sa ings is’.
The las phase o he mone a y ci cui is he eimbu semen o deb and he des uc ion
o money, whe e once again deb and money a e in insically linked. As money lows back
o i ms om consump ion spending and inancial sa ings, i ms a e able o eimbu se
hei ini ial deb owa d he banks. These epaymen s conce n sums bo owed o inance
p oduc ion expendi u es (wages) and in es men . In doing so, deb s a e cancelled and
money is des oyed, which ends he ‘pe iod’o he mone a y ci cui . We can no e, ne e -
heless, ha i ms need o eimbu se he c edi o p oduc ion a he end o he ci cui , bu
sums bo owed o in es men will ypically be paid o e se e al pe iods o p oduc ion, as
explained by Secca eccia (1996).
Howe e , i ms may no be able o eimbu se all o hei deb o banks due o he exis-
ence o hoa ded sa ings, o wha we can call liquidi y p e e ence on he pa o house-
holds sugges s ha i ms will be unable o ully eimbu se hei deb owa d he banks.
In his sense, and ully consis en wi h Keynes’s wo k, hoa ded sa ings is a d ain o agg e-
ga e demand, and can easily us a e he ea ly expec a ions o i ms and banks alike ( o
mo e de ails, see Boug ine/Secca eccia 2002).
In SFC models, hese di e en phases do no appea , as ansac ion ma ices ep esen
he ne mone a y lows a he end o a pe iod. In he nex sec ion, we inco po a e he e o-
lu ion conce ning he phases o MCT in o SFC models.
3 FROM MCT TO SFC MODELS
Le us conside , o now, a simple SFC model wi h h ee sec o s (households, i ms, banks).
Households ecei e wages and di idends, consume pa o hei income, and sa e he es .
Fi ms p oduce and in es . In his simple example, i ms’p o i s om he sale o hei p o-
duc ion a e used o inance hei own in es men s o a e dis ibu ed in he o m o di idends
o households. Banks g an loans o i ms, a e assumed o be pe ec ly accommoda ing and
make a p o i h ough he in e es a e hey cha ge on he loans g an ed.
In an SFC model, hese di e en lows will be ep esen ed as ollows in a ansac ion ma ix
(Table 1), wi h he ‘þ’sign indica ing ‘ eceip ’while he ‘–’ sign indica es ‘disbu semen ’.
Wi hin each pe iod, households ea n wages (W) and ecei e di idends om i ms (DP)
and banks (BP). They consume pa o hei income (C) and sa e he es , modi ying
hei bank deposi s (ΔD). On hei cu en accoun , i ms ecei e e enues om he sales
o consump ion (C) and in es men goods. They pay wages (W) and he di e ence
be ween hei sales and p oduc ion cos s make hei p o i s (TP ). These p o i s a e ei he
used o sel - inance (RP) o o pay ou di idends o households (DP). On hei capi al
accoun , i ms decide how much hey wan o in es in ne (I
ne
), depending on he
expec ed agg ega e demand, hei p o i a e, and a inancial bo owe isk. I hey canno
sel - inance all hei in es men s, hey hen eso o bank c edi s (ΔL
Ine
). The a ia ion
o bank loans is he esul o he di e ence be ween he new loans issued by banks and
he epaymen o pas bank loans by i ms. As o banks, pa o hei e enue depends
on he di e ence be ween he in e es hey cha ge on he loans g an ed (i
L
.L
I
)
1
and he
1. The e is conside able li e a u e on how Mbecomes M′ he eby allowing i ms o eimbu se
hei loans wi h in e es . We will no discuss his he e, as i would equi e conside able space and
is beyond he immedia e scope o his pape . Howe e , o a deba e, see Renaud (2000), Rochon
(2009) and Zezza (2012).
The e lux phase in mone a y ci cui heo y and s ock– low consis en models 489
© 2024 The Au ho Jou nal compila ion © 2024 Edwa d Elga Publishing L d
in e es hey pay o hei deposi o s (i
D
.D). Thei p o i s (BP) a e ully dis ibu ed o house-
holds. On hei capi al accoun , we ind he loans g an ed and s ill no epaid, and he
deposi s om households.
We can now build upon his simple example o accoun mo e di ec ly o he ini ial
inance o p oduc ion. To achie e his, i is necessa y o add new lines o his ma ix,
which accoun o he inancing by banks o i ms’p oduc ion expendi u es (he e sum-
ma ized as he paymen o wages alone) and in es men s.
Row 1 o Table 2 deals wi h he ad ances made by banks o i ms o inance hei p o-
duc ion expendi u es; his is he ini ial inance. Row 10 conce ns he epaymen by i ms
o hese ad ances o he banks a he end o he pe iod ( e lux phase). As o in es men s,
SFC models usually only conside ne in es men s; his means he di e ence be ween new
in es men s and he epaymen o bank c edi s ha ing inanced pas in es men s.
In MCT, i ms will i s bo ow he sums necessa y o he inancing o hei non-sel -
inanced in es men s ( ow 2), and hen, du ing he e lux phase, using hei p o i s,
hey epay pa o he loans ha ing inanced pas in es men s ( ow 11). The ansac ion
ma ix o an SFC model ha explici ly akes in o accoun he low and e lux phases
would hus be as shown in Table 2, wi h ou new ows (indica ed in i alics). We hen
ob ain a ma ix depic ing explici ly he di e en phases o MCT.
F om his ma ix, i is unde s andable why i does no seem necessa y o explici ly show he
low and e lux phases in an SFC model, since ows 1 and 10 o Table 2 cancel each o he ou
comple ely. The ne lows induced by hese p oduc ion expenses can he e o e be educed o
ow 5, which is he only one e ained in SFC models. The same is ue o he inancing o
in es men s. By calling ΔL
ne
he di e ence be ween new loans aken ou by i ms o inance
hei in es men s and he epaymen o pas bank loans, ows 2 and 11 in Table 2 can be
summa ized by a ow showing he ne change in bank loans, wi h: ΔLIne ¼ΔLI−R.This
o mula ion is usually e ained in SFC models, as we can see in Table 1.
Howe e , i his simpli ica ion makes sense o p oduc ion expendi u es, we belie e
ha his analysis in e ms o ne lows can some imes be educ i e wi h espec o ne
in es men s. Indeed, ne in es men s co e wo a iables wi h e y di e en dynamics:
new in es men s and he epaymen o bank loans ha inanced pas in es men s. This
di e ence is i s ly empo al. The epaymen o bank loans is o en based on due da es
Table 1 T ansac ion ma ix o a simple h ee-sec o SFC model
Fi ms Households Banks ∑
Cu en Capi al Cu en Capi al
Consump ion þC−C0
In es men þI
ne
−I
ne
0
Wage paymen −WþW0
Fi ms’p o i s −TP þRP þDP 0
In e es on loans −i
L
.L
I
þi
L
.L
I
0
In e es on deposi s þi
D
.D−i
D
.D0
Banks’p o i s þBP −BP 0
Change in loans þΔL
Ine
−ΔL
Ine
0
Change in deposi s −ΔD+ΔD0
∑00 0 000
490 Eu opean Jou nal o Economics and Economic Policies: In e en ion, Vol. 21 No. 3
© 2024 The Au ho Jou nal compila ion © 2024 Edwa d Elga Publishing L d
se in loan con ac s signed some ime in he pas , while new in es men s will mainly
depend on he cu en economic ac i i y. I is also spa ial. A any gi en ime, companies
a e dele e aging by epaying pas loans, while o he companies a e aking on new deb . I
is he e o e no ob ious o cap u e h ough a single a iable wo sub- a iables wi h e y
di e en dynamics.
Mo eo e , wi hin he amewo k o he SFC model (Le Hé on 2009; 2011; 2012; 2013;
2015; Co in-Euziol/Piluso 2021) and MCT (Rochon 2009; Co in-Euziol/Rochon 2013),
a ious au ho s ha e shown ha aking in o accoun he epaymen o bank loans ha
inanced pas in es men s could ha e a las ing e ec on he dynamics o an economy. We
can imagine, o example, a si ua ion whe e banks become so pessimis ic abou u u e le els
o agg ega e demand ha hey e use o e inance i ms o g an new loans –o eac simila ly
bu o a lesse deg ee. Ob iously, his would ha e impo an consequences. Fo ins ance,
hese epaymen s ep esen a spending o i ms, as shown in Table 2, bu he epaymen
o he bank loan p incipal does no gene a e any income, since i leads o he disappea ance
o he co esponding c edi line. The epaymen o a bank loan p incipal is he e o e a non-
e enue-gene a ing cos (Ba è e 1990). The inc ease in epaymen olumes by i ms hen
ends o aise hei p oduc ion spendings wi hou inc easing he le el o income in he econ-
omy. This can c ea e a misma ch be ween he alue a which i ms wish o sell hei p oduc-
ion and he le el o agg ega e demand, hus a ec ing he dynamics o economies.
The e o e, we belie e ha i may be ele an o build an SFC model ha explici ly dis-
inguishes be ween loans ha inance new in es men s, on he one hand, and he epay-
men o loans ha inanced pas in es men s, on he o he . In he ollowing sec ion, we
show ha conside ing he epaymen o i ms’deb can signi ican ly modi y he dynamics
o an SFC model.
Table 2 T ansac ion ma ix wi h explici lux and e lux phases
Fi ms Households Banks ∑
Cu en Capi al Cu en Capi al
1. Financing o wages (ini ial
inance)
þL
W
−L
W
0
2. Financing o in es men
(ini ial inance)
þΔL
I
−ΔL
I
0
3. Consump ion þC−C0
4. In es men þI−I0
5. Paymen o wages −WþW0
6. Fi ms’p o i s −TP þRP þDP 0
7. In e es on loans −i
L
.L
I
þi
L
.L
I
0
8. In e es on deposi s þi
D
.D−i
D
.D0
9. Banks’p o i s þBP −BP 0
10. Repaymen o bank loans
ha ing inanced wages
−L
W
þL
W
0
11. Repaymen o bank loans
ha ing inanced in es men s
−RþR0
12. Change in deposi s −ΔDþΔD0
∑00 0 000
The e lux phase in mone a y ci cui heo y and s ock– low consis en models 491
© 2024 The Au ho Jou nal compila ion © 2024 Edwa d Elga Publishing L d
4 A SIMPLE SFC MODEL WITH REPAYMENT OF PAST BANK LOANS
In his sec ion, we p esen a simple h ee-sec o SFC model ( i ms, households, banks) in
which i ms inance pa o hei in es men s wi h bank loans ha mus be epaid o e
se e al pe iods. The model is simila o Le Hé on/Co in-Euziol (2021). The main di e -
ence is ha , wi hin each pe iod, i ms will epay a pa o hei deb ou o hei p o i s.
4.1 Fi ms
Wi hin each pe iod o p oduc ion, i ms de e mine hei le el o ou pu (Y), based on
expec ed household consump ion spending (C) and households’planned in es men deci-
sions (equa ion (1)).
The p oduc ion capaci y o i ms is limi ed by he amoun o capi al hey own (K) and
he p oduc pe uni o ixed capi al ( ), assumed o be ixed (equa ion (2)).
Fi ms’in es men decisions du ing a pe iod (equa ion (3)) ely on he a e o capi al u i-
liza ion (equa ion (4)), he p o i a e ne o epaymen s o he las pe iod (equa ion (5)) and
he bo owe inancial isk (RE ), which depends on he deb le e age and long- e m in e es
a es (equa ion (6)). These in es men s will inc ease he s ock o capi al (equa ion (7)).
Co po a e p o i s (TP) a e he di e ence be ween co po a e e enues and co po a e
cos s (equa ion (8)). These cos s a e composed o he wages paid o households (W)
and he in e es paid on he deb hey ha e con ac ed o inance hei in es men s
(i
L
.LI
−1). To ob ain co po a e p o i s ne o he epaymen o i ms’deb , i is hen neces-
sa y o sub ac om hese p o i s he expenses co esponding o he epaymen o bank
loans in ha pe iod, which inanced pas in es men s (R). The equa ion o hese new p o -
i s ne o epaymen s can he e o e be w i en as ollows (equa ion (9)).
P o i hen has wo uses: pa is dis ibu ed o households in he o m o di idends
(equa ion (10)) and he es is used o inance in es men s (equa ion (11)). The change
in i ms’deb owa ds banks is he di e ence be ween non-sel - inanced in es men s
and he epaymen o bank loans made du ing he pe iod unde e iew (equa ion (12)).
We suppose, as in Rochon (2009), ha i ms epay wi hin each pe iod a gi en pa , θ,
o hei deb (equa ion (13)).
Ou pu : Y¼CþI(1)
P oduc i e capaci y: Y¼ K (2)
In es men s: I¼ðγ0þγ1:u−1þγ2:
−1þγ3:RE−1Þ:K−1(3)
Ra e o capi al u iliza ion: u−1¼Y
Y(4)
P o i a e ne o epaymen s: ¼TP−R
Y(5)
Bo owe inancial isk: RE ¼iL:
LI
Y(6)
Capi al accumula ion: K¼K−1þI(7)
Co po a e p o i s: TP ¼Y−W−iLLI
−1(8)
492 Eu opean Jou nal o Economics and Economic Policies: In e en ion, Vol. 21 No. 3
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Co po a e p o i s ne o epaymen s: TP −R¼Y−W−iLLI
−1−R(9)
Dis ibu ed p o i s: DP ¼ð1−s Þ:ðTP −RÞ(10)
Re ained p o i s: RP ¼TP −R−DP (11)
Bank loans: ΔLI¼I−RP −R(12)
R¼θLI
−1(13)
4.2 Households
Households ecei e wages (W), which ep esen a ixed sha e (ρ) o i ms’ e enues (equa-
ion (14)). They also ecei e inancial income, which consis s o he p o i s dis ibu ed by
i ms (DP ), banks (BP), and in e es paid on hei deposi s (equa ion (15)). Households
consume in each pe iod a ixed sha e (c
1
) o hei expec ed wages, a ixed bu smalle sha e
(c
2
) o hei expec ed inancial income, and an e en smalle sha e (c
3
) o hei bank depos-
i s p e iously accumula ed (D
–1
) (equa ion (16)), as in Le Hé on (2008; 2009; 2011;
2012; 2013). Consump ion depends on expec ed wages (equa ion (17)) and expec ed
inancial income (equa ion (18)) because households can only know hei whole e enues
a he end o he pe iod. Thei expec ed e enues will hen depend on hei e enues in
he las pe iod and on a co ec i e coe icien applied o he di e ence be ween hei
expec ed and ac ual e enues in he las pe iod. The sha e o households’unconsumed
income is added o hei bank deposi s (equa ion (19)), since we suppose o simplici y
ha he inancial sec o is only made up o banks. They ecei e all he households’sa ings
and g an c edi s o i ms.
Wages: W¼ρY(14)
Household inancial income: FI ¼DP þBP þiDD−1(15)
Consump ion: C¼c1Weþc2FIeþc3D−1(16)
Expec ed wages: We¼W−1þΩWðW−1−We
−1Þ(17)
Expec ed inancial income: FIe¼FI−1þΩFIðFI−1−FIe
−1Þ(18)
Deposi s: ΔD¼WþFI −C(19)
4.3 Banks
The banking sec o plays a pu ely accommoda i e ole in his model in he sense ha i
sys ema ically g an s c edi wo hy i ms he eques ed c edi s. Fi ms epay all hei deb
incu ed o p oduc ion a he end o he pe iod bu epay he deb incu ed o he pu -
chase o capi al a a gi en a e, θ. Banks a e also esponsible o collec ing bank deposi s
om households. We assume ha he a e o e u n (iD) on household bank deposi s (D)
is ixed. The loans g an ed by banks o i ms a e also g an ed a a gi en ixed a e (i
L
),
which is a ma k-up o e a es on deposi s. We assume he e ha all i ms ecei e he
same a e o in e es , which we ealize is no e lec i e o eali y. The banks’p o i s a e
he e o e he di e ence be ween he in e es ea ned on loans g an ed and he in e es
paid on household deposi s (equa ion (20)). These p o i s a e en i ely gi en ou as di i-
dends o households.
The e lux phase in mone a y ci cui heo y and s ock– low consis en models 493
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