A new paper to assess Job Guarantee proposals in a SFC framework

Giuliano Toshiro Yajima’s paper “Beyond Job Guarantee: The Employer of Last Resort Program as a Tool to Promote the Energy Transition” has been published in the Review of Political Economy

Author:
Giuliano Toshiro Yajima, Levy Economics Institute of Bard College

Abstract
We argue that a careful design of a program of direct employment and public provision by the state can have permanent effects and promote the structural and environmental transformation of the economy. Starting from this point, we develop a multisectoral stock-flow consistent model to study the long-run effects of the implementation of a job guarantee program, both in the original formulation of Minsky and in its recent version put forward as part of the ‘Green New Deal’ (GND) policy package. We also assess the impact of both ‘green’ and ‘brown’ standard fiscal expenditures, as well as a policy mix including industrial, environmental and employment measures. Results from our simulations point out that, in order to pursue the twin targets of full employment and environmental sustainability, the government should invest in gross fixed capital formation while both reducing energy consumption and acting as an employer of last resort in order to absorb the workforce expelled from the energy sector.

A Prototype Regional Stock-Flow Consistent Model

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.

The Employer of Last Resort Scheme and the Energy Transition: A Stock-Flow Consistent Analysis

Giuliano Toshiro Yajima has just published a new Levy Institute working paper: “The Employer of Last Resort Scheme and the Energy Transition: A Stock-Flow Consistent Analysis”

Abstract
The health and economic crises of 2020–21 have revived the debate on fiscal policy as a major tool for stabilization and meeting long-term goals. The massive surge in unemployment, due to the economic disruption of the lockdown measures, has increased the interest in policies that target employment directly instead of trying to achieve it via a general “demand push.” One of the proposals currently under debate is the job guarantee. Under such a policy the government would act as an “employer of last resort” by offering a job to everyone that is able and wants to work but cannot find a job in the private sector. This paper argues that a carefully designed scheme of direct employment and public provision by the state—addressing both the low- and high-skill workforce—can have permanent effects and promote the economy’s structural transformation, in particular by fostering energy transition and a lower carbon footprint. Starting from this point, a stock-flow consistent model is developed to study the long-run effect of the job guarantee’s implementation, inspired by the work of Godin (2013) and Sawyer and Passarella (2021).

A stock-flow model for Argentina

Gabriel Michelena has published a new model for Argentina (in Spanish).
Available here: http://www.bcra.gov.ar/PublicacionesEstadisticas/Resumen.asp?id=1519&prevPage=2

Resumen
El presente documento desarrolla un modelo de Stock-Flujo Consistente (SFC)
para el análisis de las variables macroeconómicas de la Argentina. La principal
utilidad de los modelos SFC está asociada a la posibilidad de realizar
ejercicios contrafactuales para evaluar diferentes modificaciones de la política
fiscal, tributaria, monetaria y comercial. Estos modelos están caracterizados
por la utilización de matrices de contabilidad social (SAM), lo que permite
realizar una desagregación de la cuenta capital y de los instrumentos financieros
de cada sector institucional. Esto le otorga consistencia contable, ya que la
SAM contiene las principales transacciones del sector real, así como los flujos
monetarios entre las distintas instituciones: hogares, empresas, bancos, gobierno,
banco central y el resto del mundo. Este modelo fue elaborado con el objetivo de
realizar proyecciones de mediano plazo sobre los principales flujos y stocks de la
economía argentina, complementando los resultados de otros modelos existentes
en la literatura.

A Post-Keynesian stock-flow consistent model of the Global Financial Crisis and the Age of Secular Stagnation

Adam Kaczynski has recently completed his PhD with a thesis on “A Post-Keynesian stock-flow consistent model of the Global Financial Crisis and the Age of Secular Stagnation”.
The PDF is available here, and the corresponding code can be downloaded from Github.

Abstract:
This thesis is an attempt to build a dynamic, long run, Stock-Flow Consistent, Post Keynesian model of the Global Financial Crisis and Secular Stagnation. While multiple New Keynesian Dynamic Stochastic General Equilibrium models of these historic phenomena already exist, these models are built on theoretical foundations which have been rejected by Post Keynesians because of their inadequacy. The Sraffian Supermultiplier has been chosen as the theoretical framework, isolating parts of the economy generating instability from the parts which may set the trend in the long run. The model uses a continuous-time framework and is expressed as a differential-algebraic system of equations. It is simulated using an Open Source package OpenModelica which is widely used in empirical and technical sciences for simulating dynamic systems. While not calibrated by regression, and more theoretical than econometric, it nevertheless reproduces multiple macroeconomic phenomena and stylised facts which have puzzled mainstream economists. This research is an attempt to advance the macroeconomic modelling methodology and contribute to understanding macroeconomic processes by demonstrating how complex phenomena can emerge when simple parts of the economy interact. The understanding is based on sound macroeconomic theories built by Marx, Keynes, Kalecki, Sraffa and contemporary Post Keynesian economists.

Balance Sheet Effects of a Currency Devaluation: A Stock-Flow Consistent Framework for Mexico

Balance Sheet Effects of a Currency Devaluation: A Stock-Flow Consistent Framework for Mexico

by Lorenzo Nalin and Giuliano Toshiro Yajima
Levy Institute Working paper n.980, December 2020

Abstract
This working paper empirically and theoretically analyzes the exchange rate’s role in Mexico’s
development for the period 2004–19. We test the hypothesis of the re(emergence) of the balance
sheet effect due to an increase in external debt in the nonfinancial corporate sector; higher foreign
debt would affect private investment after episodes of real currency depreciation, in the spirit of the
literature put forward by Gertler, Gilchrist, and Natalucci (2007) and Céspedes, Chang, and Velasco
(2004). We build a stock-flow consistent (SFC) model, following the OPENFLEX model proposed
in Godley and Lavoie (2006), to explore the balance sheet implications from a theoretical
perspective. We simulate the 2014 fall in the Mexican peso generated by the drop in oil prices to
replicate stylized facts for Mexico for the period under investigation. The scenario analysis points to
a hysteresis effect of the real exchange rate (RER) depreciation on investment flows. That is, firms’
investment ratio does not completely recover from negative shocks in the currency.

Global imbalances and financial capitalism

Book cover

Jacques Mazier (with Vincent Duwicquet, Luis Reyes, Jamel Saadaoui and Sebastian Valdecantos) has published a new book: Global imbalances and financial capitalism: Stock-Flow-Consistent Modelling.

The Table of Contents follows:

PART I
Finance- led regime and global imbalances:A first glance
1 A simple finance- led SFC model
2 Exchange rate misalignments and global imbalances
3 Global imbalances and macroeconomic adjustments: a three- country SFC model

PART II
European challenges
4 From the European Monetary System to the single currency trap
5 Alternative economic policies in the euro zone
6 Alternative exchange rate regimes for the euro zone

PART III
Enhancing regional and international monetary stability
7 Exploring monetary cooperation in East Asia
8 Enhancing the role of the SDR

Conclusion

Assessing the Marshall–Lerner condition within a stock-flow consistent model

Assessing the Marshall–Lerner condition within a stock-flow consistent model

by Emilio Carnevali, Giuseppe Fontana and Marco Veronese Passarella

Abstract
We derive the general equilibrium condition for the terms of trade in a two-country economy model. We show that the Marshall–Lerner condition is only a special case of this condition, in which a full exchange rate pass-through to import prices is assumed. In fact, the Marshall–Lerner condition is not even a ‘useful approximation’ of the general condition. For the full pass-through assumption has destabilising, rather than stabilizing, effects, when it is introduced in a stock-flow consistent dynamic model. More generally, the higher (lower) the pass-through, the slower (quicker) is the adjustment of the economy towards the equilibrium. This is tantamount to saying that the speed of adjustment is a positive function of the strategic behaviour of the exporters, who attempt to retain their market share by keeping their foreign currency-denominated prices unchanged.

published in the Cambridge Journal of Economics, 2020

Eviews code

New paper on Latin America

Lorenzo Nalin and Giuliano Toshiro Yajima (2019) Commodity Speculation and Exchange Rate Swings in Latin America: a Stock Flow Consistent (SFC) Analysis, Working Papers 13/19, Sapienza University of Rome, DISS.

Abstract
We are investigating the role of speculative agents during a commodity-boom period in a small-open, peripheral economy. Latin American countries (LAs) have a long history of speculative attacks, balance of payments crises, and currency devaluations. At the beginning of the 2000s, LAs experienced rising commodity prices and foreign investors shifted part of their portfolio composition towards their securities in search of short-term capital gains. Unlike past episodes, financialization has allowed international investors to have a wider range of financial instruments in which to invest. Apart from the traditional government bonds, new asset categories have appeared such as derivatives, exchange traded funds and structured notes. In order to replicate this macro-financial episode, this work will adopt a Stock Flow Consistent (SFC) framework. International real-financial connections are one of the main issues tackled by this methodology, as put forward in Godley (1999). The element of novelty of our contribution consists in depicting a speculative financial sector, which issues commodity-based assets (CBAs) to be sold to rentier households in the developed country. Comparative static exercises with different scenarios will be performed.

Download the paper