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.

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.

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

New working paper

Modeling economic forces, power relations, and stock-flow consistency:
a general constrained dynamics approach
by Oliver Richters and Erhard Gloetzl

Abstract: In monetary Stock-Flow Consistent (SFC) models, accounting
identities reduce the number of behavioral functions to avoid an
overdetermined system of equations. We relax this restriction using a
differentialalgebraic equation framework of constrained dynamics.
Agents exert forces on the variables according to their desire, for
instance to gradually improve their utility. The parameter ‘economic
power’ corresponds to their ability to assert their interest. In
analogy to Lagrangian mechanics, system constraints generate additional
constraint forces that lead to unintended dynamics. We exemplify the
procedure using a simple SFC model and reveal its implicit assumptions
about power relations and agents’ preferences.

Link: https://ideas.repec.org/p/old/dpaper/409.html

A model for Argentina

Modelo de Stock-Flujo Consistente para el Análisis Macroeconómico (SFARG)

Gabriel Michelena and Nahuel Guaita

Abstract
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

Modelo de Stock-Flujo Consistente para el Análisis Macroeconómico (SFARG) (PDF Download Available).

Stock-flow-consistent macroeconomic models: A survey

Levy Institute Working paper n.891, May 2017
Michalis Nikiforos and Gennaro Zezza

Abstract
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

Stock-Flow Consistent Ecological Macroeconomics

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

Money Creation under Full-reserve Banking

Patrizio Lainà, ‘Money Creation under Full-reserve Banking: A Stock-Flow Consistent Model’, Levy Institute Working Paper n.851, 2015
Abstract: This paper presents a stock-flow consistent model+ of full-reserve banking. It is found that in a steady state, full-reserve banking can accommodate a zero-growth economy and provide both full employment and zero inflation. Furthermore, a money creation experiment is conducted with the model. An increase in central bank reserves translates into a two-thirds increase in demand deposits. Money creation through government spending leads to a temporary increase in real GDP and inflation. Surprisingly, it also leads to a permanent reduction in consolidated government debt. The claims that full-reserve banking would precipitate a credit crunch or excessively volatile interest rates are found to be baseless

Eviews code