The IDMF (Integrating Dynamic Money-Flow) Conceptual Framework and its Policy Implications (brief summary)

Conceptual Framework

The Keynesian analytical and policy framework relies empirically on the National Income and Product Accounts (NIPA), which are conceptually unable to deal with money and credit. Two conceptual innovations of the IDMF conceptual framework make it possible to "complete the Keynesian Revolution" by systematically integrating Flow of Funds Accounts (FOFA) money and credit data with the NIPA income and spending data:

• Primary Credit.  This concept fills the NIPA "financial gap" between saving and investment by netting out FOFA intermediate ("pass-through") credit flows much as the NIPA "value added" concept nets out intermediate income and spending flows. This makes it possible to empirically trace the way Primary Financial Saving flows through the Credit Market into the Primary Borrowing that finances GDP spending.

• Non-Credit Money.  A precise non-credit (pseudo-commodity inventory) concept of Money Stocks and Money Creation replaces the functionally inappropriate "static" double-entry-accounting, medieval-goldsmith-invented, concept of fractional-reserve "credit money" now used in the FOFA. This makes possible empirical analysis of the key dynamic relationship between money growth and GDP growth: M1gr = GDPgr - MDRgr (when gr = growth rate, Money Demand Ratio = M1/GDP)

Policy Implications

• Systematic empirical coordination of monetary, fiscal and other macro policies.
  

• Monetary Policy.  Aims at a stable "soft landing" real GDP growth track to full-employent, by precise Monetary Policy Formula: GDPgr = M1gr - MDRgr. (MDR = current trend of M1/GDP)
  

• Budget Policy.  Aims at annual balance of the Policy Budget, based on "stabilized-employment" (4% unemployment) estimates.
  

• Fiscal Policy.  Aims at a stable National Credit Balance (between the economy's total supply and demand for credit), at stable low interest rates, by the FASTA (Formula-Automatic Stabilization Tax Adjustment) policy tool. This changes the federal "Stabilization Deficit" (or surplus) to offset destabilizing changes in non-federal financial saving and borrowing.
  

• Anti-Inflation Policy.  Aims to systematically coordinate and improve all anti-inflation policy tools -- without using monetary-policy-induced high unemployment.

• Structural Balance Policy.  Aims at long-run sustainability by minimizing "cyclical" deviations from normal structural relationships, and gross inequalities of income, wealth and economic power.

Looking Ahead.  To the extent that all countries adopt these policy tools, it will be much easier to coordinate national policies, and even to formulate an integrated international stabilization and growth policy. This has immediate implications for the current plans for European economic integration, and for reversal of the present world recession. Within the next few years this approach could have almost as revolutionry an effect on macroeconomic analysis, policy and teaching as the original Keynesian Revolution had after World War II.