1. 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

2. 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)

3. 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

4. * 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)

5. 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

6. 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

7. 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

8. 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)

9. 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