Wynne Godley and Hyman Minsky were two macroeconomists who ‘saw the crisis coming’. This paper develops a simple macrodynamic model that synthesises some key perspectives of their analytical frameworks. The model incorporates Godley’s financial balances approach and postulates that private sector’s propensity to spend is driven by a stock-flow norm (the target net private debt-to-income ratio) that changes endogenously via a Minsky mechanism. It also includes two fiscal rules: a Maastricht-type fiscal rule, according to which the fiscal authorities adjust the government expenditures based on a target net government debt ratio; and a Godley–Minsky fiscal rule, which links government expenditures with private indebtedness following a counter-cyclical logic. The analysis shows that (i) the interaction between the propensity to spend and net private indebtedness can generate cycles and instability; (ii) instability is more likely when the propensity to spend responds strongly to deviations from the stock-flow norm and when the expectations that determine the stock-flow norm are highly sensitive to the economic cycle; (iii) the Maastricht-type fiscal rule is destabilising while the Godley–Minsky fiscal rule is stabilising; and (iv) the paradox of debt can apply both to the private sector and the government sector.
Modelo de Stock-Flujo Consistente para el Análisis Macroeconómico (SFARG)
Gabriel Michelena and Nahuel Guaita
El siguiente documento presenta la primer versión del modelo de Stock y Flujo Consistente para el análisis de variables macroeconómicas de la economía Argentina (SFARG). Este modelo es el resultado del trabajo integral de un equipo de investigadores dedicado exclusivamente a la evaluación de impacto de medidas productivas y comerciales dentro de la Dirección de Estudios para el Desarrollo Productivo (DEDP), perteneciente al Ministerio de Producción (MIPROD) de la Argentina. El SFARG se enmarca dentro de los denominados modelos de un solo país ya que el resto del mundo se encuentra incorporado de manera poco desarrollada o ad-hoc. El objetivo del documento consiste en desarrollar el marco analítico y el instrumental cuantitativo para analizar el impacto de un conjunto variedad de políticas entre las que se incluye movimientos en la tasa de interés, cambios en la demanda agregada y políticas de empleo entre otras. A diferencia de los modelos utilizados comúnmente dentro de la literatura, este modelo puede ser ubicado dentro de la tradición de stock-ﬂujo (SFC) desarrollada, en forma pionera, por Wynne Godley (1996). El SFARG puede ser caracterizado como estructuralista o neo kaleckiano y se basa en los trabajos previos de distintos autores, entre los que se destacan Blecker (2002), Dutt (1990), Lavoie y Godley (2007), y Lance Taylor (1991, 2004). La consistencia de los modelos SFC está determinada por la utilización de Matrices de Contabilidad Social (SAM), las cuales incorporan tanto elementos de la economía real como ﬁnancieros. El trabajo consta de cuatro secciones y se estructura de la siguiente manera. En la primera sección se presenta la formalización del modelo y los bloques de ecuaciones. A continuación, en la segunda sección se detalla la especiﬁcación econometrica que dará paso a la calibración posterior de los parámetros correspondientes.En la sección tercera se presenta la SAM Financiera.En la cuarta presentamos algunas simulaciones con diversos shock de política. Por último, en la sección seis se destacan los principales resultados y se presentan las conclusiones ﬁnales del trabajo
I am organizing one/two sessions on SFC modeling at the next EcoMod conference in Venice, July 4-6, 2018. If interested please send me your proposal. The deadline is January 28, 2018.
I am particularly interested in empirical SFC models for developing economies, but other topics will be welcome as well
The stock-flow consistent (SFC) modeling approach, grounded in the pioneering work of Wynne Godley and James Tobin in the 1970s, has been adopted by a growing number of researchers in macroeconomics, especially after the publication of Godley and Lavoie (2007), which provided a general framework for the analysis of whole economic systems, and the recognition that macroeconomic models integrating real markets with flow-of-funds analysis had been particularly successful in predicting the Great Recession of 2007–9. We introduce the general features of the SFC approach for a closed economy, showing how the core model has been extended to address issues such as financialization and income distribution. We next discuss the implications of the approach for models of open economies and compare the methodologies adopted in developing SFC empirical models for whole countries. We review the contributions where the SFC approach is being adopted as the macroeconomic closure of microeconomic agent-based models, and how the SFC approach is at the core of new research in ecological macroeconomics. Finally, we discuss the appropriateness of the name “stock-flow consistent” for the class of models we survey.
Forthcoming in Journal of Economic Surveys
Abstract. Several authors, particularly from ecological economics, locate a ‘growth imperative’ within the current monetary system based on credit money and positive interest rates. The strongest claim comes from papers such as Binswanger (2009, 2015) arguing based on a monetary circuit model that growth is unavoidable to maintain economic stability independent on the will of the economic agents. On the other side of the spectrum, Jackson & Victor (2015) have disputed this claim, presenting a post-Keynesian stock-flow consistent model that converges to a stationary state in their numerical simulations.
The central aim of this paper is to clarify why certain modeling approaches lead to a growth imperative and others do not. We analyzed the models in the tradition of Binswanger and concluded that their accounting of banks’ capital is inconsistent, and a modeling assumption central for a growth imperative is not underpinned theoretically: Bank’s equity capital has to increase even if debt does not. This is a discrepancy between the authors’ intentions in their texts and their actual models.
Second, we analyze several post-Keynesian models, a single static one, and four discrete time stock-flow consistent models. We show how to perform a stability analysis in the parameter space, and find that depending on parameter values, the stationary state can be stable or not. A stationary state with zero net saving and investment can be reached with positive interest rates, if the parameter ‘consumption out of wealth’ is above a threshold that rises with the interest rate.
We conclude that a monetary system based on interest-bearing debt-money with private banks does not lead to an ‘inherent’ growth imperative, but the stationary state can be unstable. This is caused by agents’ decisions, not by structural inevitableness. The stability analysis adds additional insights to numerical simulations of the dynamics, because we can precisely determine the parameter ranges where a stationary state can be reached.
Abstract The paper moves from a discussion of the challenges posed by the crisis to standard macroeconomics and the solutions adopted within the DSGE community. Although sev- eral recent improvements have enhanced the realism of standard models, we argue that major drawbacks still undermine their reliability. In particular, DSGE models still fail to recognize the complex adaptive nature of economic systems, and the implications of money endogeneity. The paper argues that a coherent and exhaustive representation of the inter-linkages between the real and financial sides of the economy should be a pivotal feature of every macroeconomic model and proposes a macroeconomic framework based on the combination of the Agent Based and Stock Flow Consistent approaches. The papers aims at contributing to the nascent AB-SFC literature under two fundamental respects: first, we develop a fully decentralized AB-SFC model with several innovative features, and we thoroughly validate it in order to check whether the model is a good candidate for policy analysis applications. Results suggest that the properties of the model match many empirical regularities, ranking among the best performers in the related literature, and that these properties are robust across different parameterizations. Second, the paper has also a methodological purpose in that we try to provide a set or rules and tools to build, calibrate, validate, and display AB-SFC models.
This link gives you access freely to the paper until August 18.
Alessandro Caiani, Antoine Godin, Eugenio Caverzasi, Mauro Gallegati, Stephen Kinsella, Joseph E. Stiglitz, Agent based-stock flow consistent macroeconomics: Towards a benchmark model, Journal of Economic Dynamics and Control, Volume 69, August 2016, Pages 375-408
Tim Jackson, Peter Victor and Ali Asjad Naqvi, ‘Towards a Stock-Flow Consistent Ecological Macroeconomics’, ESRC Passage Working paper Series 15-02, 2015 Abstract: Modern western economies (in the Eurozone and elsewhere) face a number of challenges over the coming decades. Achieving full employment, meeting climate change and other key environmental targets, and reducing inequality rank amongst the highest of these. The conventional route to achieving these goals has been to pursue economic growth. But this route has created two critical problems for modern economies. The first is that higher growth leads (ceteris parabis) to higher environmental impact. The second is that fragility in financial balances has accompanied relentless demand expansion.
The prevailing global response to the first problem has been to encourage a decoupling of output from impacts by investing in green technologies (green growth). But this response runs the risk of exacerbating problems associated with the over-leveraging of households, firms and governments and places undue confidence in unproven and imagined technologies. An alternative approach is to reduce the pace of growth and to restructure economies around green services (post-growth). But the potential dangers of declining growth rates lie in increased inequality and in rising unemployment. Some more fundamental arguments have also been made against the feasibility of interest-bearing debt within a post-growth economy.
The work described in this paper was motivated by the need to address these fundamental dilemmas and to inform the debate that has emerged in recent years about the relative merits of green growth and post-growth scenarios. In pursuit of this aim we have developed a suite of macroeconomic models based on the methodology of Post-Keynesian Stock Flow Consistent (SFC) system dynamics. Taken together these models represent the first steps in constructing a new macroeconomic synthesis capable of exploring the economic and financial dimensions of an economy confronting resource or environmental constraints. Such an ecological macroeconomics includes an account of basic macroeconomic variables such as the GDP, consumption, investment, saving, public spending, employment, and productivity. It also accounts for the performance of the economy in terms of financial balances, net lending positions, money supply, distributional equity and financial stability.
This report illustrates the utility of this new approach through a number of specific analyses and scenario explorations. These include an assessment of the Piketty hypothesis (that slow growth increases inequality), an analysis of the ‘growth imperative’ hypothesis (that interest bearing debt requires economic growth for stability), and an analysis of the financial and monetary implications of green investment policies. The work also assesses the scope for fiscal policy to improve social and environmental outcomes