When all these sector sources-and-uses-of-funds statements are placed side by side, we obtain (c) the flow-of-funds matrix for the economy as a whole.That is the sum and substance of the matter., 18(2), May, 219-230] The flow-of-funds accounts allow us to link a sector’s balance sheet (statements about stocks of financial and real net wealth) to income statements (statements about flows) in a consistent fashion.Key members of this group were Martin Fetherston, Wynne Godley and Francis Cripps, who were from a Keynesian persuasion but departed from the usual Keynesian thinking when it came to balance of payments issues. While the sectoral balances approach had been understood much earlier (for example, by Nicolas Kaldor and others), it became popularised by the New Cambridge macroeconomics analysis which introduced the concept of the into the forefront of its Keynesian income-expenditure model.
Importantly, transactions within the private domestic sector do not alter the net financial position of the sector overall.
For example, if a bank creates a loan for one of its customers then its assets rise but on the other side, the liabilities of the customer increases by an equal amount – leaving no change in the net position of the sector.
That is not to be taken as a criticism of the approach – it is merely an observation.
It also doesn’t reduce the utility and insights that the approach provides.
I was also referred to a recent blog written by the senior economist at the British TUC – Fiscal fallacies (2): accounting identities and the case for government loan-expenditures – which appears to entertain the view that the sectoral balances framework provides a “case for expansionary policy”. The sectoral balances framework is intrinsically linked to the flow of funds analysis.
An early exponent of the flow-of-funds approach, Lawrence Ritter wrote in 1963 that: The flow of funds is a system of social accounting in which (a) the economy is divided into a number of sectors and (b) a “sources- and-uses-of-funds statement” is constructed for each sector.Those who conclude that this framework is really just an accounting structure are incorrect.Equally, those who conclude that the accounting relationships that are part of the sectoral balances framework are matters of interpretation are also incorrect.The government sector – which comprised all levels of government and their agencies. The private domestic sector – which comprised households and firms ( including banks). The external sector – which comprised all non-residents (private households, firms and governments).From an Modern Monetary Theory (MMT) perspective (2) and (3) comprise the non-government sector.I have noted some misperceptions about the derivation, meaning and application of the so-called sectoral balances framework that is used in Modern Monetary Theory (MMT) to help explicate the relationship between the government and the non-government sectors.