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Keynesian income-expenditure model S = f(Y) If(Y) NAFA (=S-I) = f(Y) i.e. step change in Y perpetual accumulation of assets Cambridge view: STOCK of financial assets (not rate of acquisition) a function of (in fact proportional to) income NAFAt = (1-α) (YDt -YDt-1) PXt= YDt - NAFAt= αYDt +(1-α)YDt-1 Where PX = private expenditure

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And period is length of time agents take to adjust stock of assets to incomes CEPG research found this to be one year Therefore estimated equation (with 3 other variables) and found (1975) PX = 0.533YD +0.416YD(t-1) + 0.899 HP +0.790BA +0.962S (increase in HP debt, increase in bank lending, stockbuilding) Since NAFAt = (1-α) (YDt -YDt-1)

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And NAFA = (S-I) = (X-M) + (G-T) Therefore (M-X) = (G-T) – (1-α) (YD -YDt-1) Fiscal policy must be consistent with current account target If this is inconsistent with employment target, then the two could be reconciled by exchange rate depreciation but * Hard to engineer under a floating regime

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* real effects liable to be undone by real wage resistance * CEPG were elasticity pessimists anyway Therefore might have to resort to * Credit controls * Rationing (Kaldor) * Import controls (tariffs and/or quotas)

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SITUATION IN MARCH 1974 * oil prices up 300% in 6 months * current account deficit £4bn (4% of gdp) * price inflation 20%v (wage inflation higher) * unemployment still only 700,000 but rising sharply

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TREASURY CHARGES AGAINST CEPG No theory of investment Ignored evidence that overseas sector was source of instability on the economy Total NAFA had been fairly stable but its components (personal & corporate) hadnt -- instead they cancelled out for reasons no one had explained Godley accepted third point but said it couldnt rehabilitate discretionary fiscal policy

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PARLIAMENTARY COMMITTEES CONCLUSIONS 1)dont say inflation when you mean reflation 2)Treasury and CEPG should hold joint Seminars Treasury: CEPG (with stockbuilding & credit aggregates in equation) STRENGTHENED case for short-term forecasting + repeated criticism that stable surplus was sum of 2 unstable elements BUDGET AND CURRENT ACCOUNT DEFICITS PART COMPANY Fiscal deficit 7.2% of gdp in 1974, 9% in 1975 Current account deficit 4.5% of gdp in 1974, 1.7% in 1975

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Kaldor: New Cambridge has ceased to hold CEPG 1976 review denied this: Full-employment budget deficit hadnt widened – if actual deficit had, this was due to the recession M-X) = (G-T) – (1-α) (YD -YDt-1)

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CHANGING TREASURY ATTITUDE TO DEMAND MANAGEMENT Dec 1975; accepted vertical LR Phillips curve (by majority vote) --move away from Cambridge so far as Godley, Kaldor still hostile to natural rate doctrine -- but moved Treasury towards Cambridge position so far as it gave them firmer basis for rejecting fine-tuning

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