Wynne Godley, who has died aged 83, was the warmest of men and the greatest of economists. Both at the Treasury, where he worked from 1956 to 1970, and afterwards, from Cambridge and various overseas institutes, he made powerful contributions to public policy and the economic debate, not all of which were sufficiently recognised at the time.

During his Treasury years, he was hugely influential, and officials still acknowledge his lasting contribution. But in later years he was often a voice crying in the wilderness, and his uncannily accurate warnings of the present financial crisis were largely ignored by policymakers, to everybody's cost.

The Honourable Wynne Godley was born in London, the younger son of Lord Kilbracken, an Anglo-Irish, second generation peer. Godley had a troubled childhood and was considered an angry young man. His early years were spent in the company of nannies. He got on better with his grandfather than his father, but remembered happy holidays after his father remarried, spent at the family estate of Killegar, in Co Leitrim, Ireland, not far south of the border.

Godley's early career was devoted not so much to public service as to public delectation. After Rugby school, Warwickshire, and New College, Oxford – where he read politics, philosophy and economics, with Isaiah Berlin as one of his tutors – he became a professional musician. He studied for three years at the Paris Conservatoire, and, in 1951, joined what was then the BBC Welsh Orchestra as principal oboe. But he was a perfectionist. Nervousness about performing in public eventually became too much for him.

This did not prevent him from continuing to appear in public – in rather unusual form. In 1955 he married Kitty, daughter of Jacob Epstein, and became the model for Epstein's sculpture of St Michael at the rebuilt Coventry Cathedral. Godley was tall, very distinguished-looking and considered impossibly handsome by female admirers. But he was also very lean. He was the model for the immortalised head, not the body.

His more mobile career took him as an economist to the Metal Box company for a couple of years, giving him firsthand experience of industry, then onwards to the Treasury, where he worked on macroeconomic policy and short-term economic forecasting, bridging the gap between technical economics and actual policy.

I first met – or, rather, saw – him in the aftermath of the 1967 devaluation of the pound, under Harold Wilson's Labour government. The occasion was a press briefing to explain the underlying strategy, the key calculations having been made by Godley, deputy director of the economic section of the Treasury.

He answered all questions with agonised honesty. Here was a quite exceptional public servant, of the old school. Rumour had it that he was responsible for the briefing note which, misleadingly summarised, became in Wilson's words "the pound in your pocket has not been devalued" – a remark from which Wilson's reputation never quite recovered. The point was that, while foreign holidays and imports would cost more, other prices were not affected, so that the consumer's pound had not been devalued by as much as the headline figure.

In fact the sentence had been drafted by two colleagues. However, Godley had done most of the essential work, and in the utmost secrecy. He was moved over from an obscure part of the public expenditure division, because, as Sir Samuel Brittan, author of Steering the Economy: The Role of the Treasury, recalls: "No one else was capable of doing it. When asked why he was so busy at the time, Godley would say, 'My work on public spending is taking longer than expected.'"

In Whitehall, Godley's path crossed with that of Nicholas Kaldor, who lured him to Cambridge, the university with which he was associated for the rest of his life – for a long time as director of the department of applied economics, as well as a lively fellow of King's College.

While at Cambridge he was brought back briefly to the Treasury as an economic adviser in 1974 to work once again on public expenditure. As the former Treasury permanent secretary Sir Douglas Wass has written, Godley argued correctly that under the prevailing system, "departments had very little incentive to control prices. Indeed, he thought that the system effectively undermined Treasury control, and he advocated a reversion to a planning and control system based entirely on 'cash'" – as opposed to what was known as inflation-adjusted "funny money".

Later, back in his academic role, he gave evidence to the parliamentary select committee on expenditure, hitting the headlines by saying that the defective system had allowed £5bn extra spending over a four-year period. This got into the public prints, in somewhat exaggerated form, as "the missing £5bn".

Godley's advocacy of "cash planning" was a classic example of something that was not music to the ears of colleagues at the time, but on which he was eventually acknowledged to have been right. He predicted that the 1973-74 "Heath-Barber boom" would end in tears. And, as one of his many distinguished proteges, the economist John Llewellyn, has pointed out: "His dire warnings in the late 1970s that unemployment would rise to 3 million in the 1980s earned him the title 'Cassandra of the Fens' and were derided – until they came true", as Cassandra's warnings did.

The Thatcher government of 1979 onwards benefited enormously from Godley's pioneering work on public expenditure control. This did not stop that government from allying with certain academic rivals of Godley's to cut off the research grant on which his Cambridge economic policy group depended. This was a vindictive act by lesser mortals, and Godley felt bitterly hurt by it to his dying day.

Again, his later work on the importance of financial flows and sectoral financial balances was slow to receive recognition. The news that his magnum opus Monetary Economics – An Integrated Approach to Credit, Money, Income, Production and Wealth (with Marc Lavoie, 2007) is reprinting came just after he died.

It is fair to say that Godley consistently warned that the credit explosion would end in tears. He knew that "inflation targeting" was not enough and was scathing about the "golden rule" for controlling public spending.

The present chief economic adviser to the Treasury, Dave Ramsden, acknowledged the Treasury's huge debt to Godley over the years, adding: "In the 2000s, much of which coincided with a period of apparent and widely researched stability, what stands out is his distinctive analysis and his prescience about the looming financial and economic crisis, and the potential role for what had become by then innovative policies in responding." (Monetary Economics stressed the importance of a more active fiscal policy.)

Godley kept up his oboe and piano playing, and for more than a decade was a director of the Royal Opera House. He spent the last 18 months of his life in the company of his daughter Eve, her husband Simon and his two grandchildren, near Portadown, Co Armagh. Despite increasing infirmity, Godley kept up his insightful contributions to the public debate right to the end. One friend prevented by volcanic ash from attending his funeral in the parish church of Drumcree anticipated that "a volcanic intellect will soon be blasting another letter to a heavenly FT, pointing out the mistakes about to be committed by the new government".

He is survived by Kitty, Eve and his grandchildren.

• Wynne Alexander Hugh Godley, economist and musician, born 2 September 1926; died 13 May 2010