Our new Zezza&Zezza paper “A Prototype Regional Stock-Flow Consistent Model” has come out as a Levy Institute Working Paper

We set up a three-region SFC model with labor mobility, to explore the implications of regional imbalances. Loosely calibrating the model on Italian North-South data, the model shows that the dependency of a poorer Southern region from imports will imply labor migration, as well as transfers of ownership of Southern real and financial assets to the other region. The model shows that, absent targeted policies, there is no automatic tendency to convergence in real income across regions.
Eviews code available here: https://gennaro.zezza.it/software/eviews/2022levywp.prg

Authors:
Francesco Zezza, Sapienza Università di Roma, Italy, and Levy Economics Institute of Bard College
Gennaro Zezza, Università degli Studi di Cassino e del Lazio Meridionale, Italy, and Levy Economics Institute of Bard College

Abstract
Starting from the seminal works of Wynne Godley (1999; Godley and Lavoie 2005, 2007a, 2007b), the literature adopting stock-flow consistent (SFC) models for two or more countries has been flourishing, showing that consistently taking into account real and financial markets of two open economies will generate different results with respect to more traditional open economy models. However, few contributions, if any, have modeled two regions in the same country, and our paper aims at filling this gap. When considering a regional context, most of the adjustment mechanisms at work in open economy models—such as exchange rate movements, or changes in interest on public debt—are simply not present, as they are in control of “external” authorities. So, what are the adjustment mechanisms at work?

To answer this question, we adapt the framework suggested in Godley and Lavoie (2007a) to consider two regions that share the same monetary, fiscal, and exchange rate policies. We loosely calibrate our model to Italian data, where the South (Mezzogiorno) has both a lower level of real income per capita and a lower growth rate than the North. We also introduce a fragmented labor market, as discouraged workers in the South will move North in hopes of finding commuting jobs.

Our model replicates some key features of the Italian economy and sheds light on the interactions between financial and real markets in regional economies with “current account” imbalances.