Using Wynne Godley’s Sectoral Balances Approach to Forecast the US Economy

As you may know, I now use the sectoral balances approach very heavily in looking at economic forecasting. The crux of the sectoral balances is that, from an accounting perspective, every sector's deficit must be offset by an equal surplus in another sector of the economy. I think it is a very valued-added way of breaking down an economy because it allows one to aggregate different sectors of an economy at a level that makes sense given broad cyclical movements and to discern how those movements will impact not just one sector but other sectors of the economy as well. British economist Wynne Godley is the one who most effectively put this approach to practice and a recent interview with Jan Hatzius of Goldman Sachs highlights this fact.
At the very base level, the most useful sectoral dis...

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