Develops a simple model of aggregate demand that explicitly incorporates the financial sector balances approach of Wynne Godley. Demonstrates how this can be used to understand the 1990s expansion and the recession beginning in late 2000s

This paper uses the sector financial balances model of aggregate demand to illustrate the effects of fiscal austerity policies on the economy. It further demonstrates that government deficits are not directly controllable by policy makers but are rather endogenous to the responses of the private...