Stock-flow Consistent Model Research Articles

What drives markups? Evolutionary pricing in an agent-based stock-flow consistent macroeconomic model

This paper studies coordination between firms in a multi-sectoral macroeconomic model with endogenous business cycles. Firms are both in competition and interdependent, and set their prices with a markup over unit costs. Markups are heterogeneous and evolve under market pressure. We observe a systematic coordination within firms in each sector, and between each sector. The resulting pattern of relative prices are consistent with the labor theory of value. Those emerging features are robust to technology shocks.

A supermultiplier Stock-Flow Consistent model: the “return” of the paradoxes of thrift and costs in the long run?

Supermultiplier models have been recently brought to the post-Keynesian debate. Yet these models still rely on quite simple economic assumptions, being mostly ow models which omit the �nancial determinants of autonomous expenditures. Since the output growth rate converges in the long run to the exogenously given growth rate of \non-capacity creating autonomous expenditure and the utilization rate moves towards the normal utilization rate, the paradoxes of thrift and costs remain valid only as level e�ects (average growth rates). This paper investigates whether the core conclusions of supermultiplier models hold in a more complex economic framework, described by means of a supermultiplier SFC model, in which private business investment is assumed to be completely induced by income while the autonomous expenditure component - in this case consumption out of wealth - becomes endogenous. The results of the numerical simulation experiments suggest that the paradox of thrift can remain valid in terms of growth e�ects and that a lower pro�t share can also be associated to a higher accumulation rate, though with a lower pro�t rate.

The effects of fiscal targets in a monetary union: a Multi-Country Agent-Based Stock Flow Consistent model

We present an Agent Based-Stock Flow Consistent Multi-Country model of a Monetary Union to analyze the impact of a change in the fiscal regime of member countries, modeled as a permanent change in the deficit-to-gross domestic product (GDP) target that governments are committed to comply. Simulations are performed under three scenarios, differentiated by the number of countries considered (2, 6, 10). The parametric configuration employed yields economically reasonable values for the dynamics and relative dimension of key variables, broadly comparable with historical data and available stylized facts. Our policy experiments show that fiscal expansions generally allow to improve the dynamics of real GDP, labor productivity, and employment, though being generally associated with higher levels of public debt. Conversely, permanent fiscal contractions always exert strong recessionary effects, exacerbate real GDP volatility, and tend to be self-defeating in the long run. In scenarios where the Monetary Union includes a greater number of countries and the common market is bigger, fiscal austerity raises—rather than decreasing—average public debt-to-GDP ratios. We show that this is mainly related to a raise of debt-to-GDP in poorer and less productive countries mirrored by a reduction of their net foreign asset position.

Inequality, emulation and debt: The occurrence of different growth regimes in the age of financialization in a stock-flow consistent model

ABSTRACTIn the era of financialization, increasing income inequality could be observed in most developed and many developing countries. Despite similar developments in inequality, the growth performance and drivers for growth differed markedly among countries, allowing clusters of different growth regimes to be identified. Among them are 2 extreme types: the debt-led private-demand boom and the export-led mercantilist economies. Whereas the former rely mainly on credit-financed household consumption in order to compensate for the potential lack of demand (associated with the depressing effect of financialisation), the latter rely on net exports as the main driver of aggregate demand. Using a stock-flow consistent model it will be demonstrated how increasing inequality, depending on a countries institutional structure and regulatory framework, affects growth differently, explaining the occurrence of both regime types.

Is the market really a good teacher?

This paper proposes to model market mechanisms as a collective learning process for firms in a complex adaptive system, namely Jamel, an agent-based, stock-flow consistent macroeconomic model. Inspired by Alchian's (1950) blanketing shotgun process idea, our learning model is an ever-adapting process that puts a significant weight on exploration vis-a-vis exploitation. We show that decentralized market selection allows firms to collectively adapt their overall debt strategies to the changes in the macroeconomic environment so that the system sustains itself, but at the cost of recurrent deep downturns. We conclude that, in complex evolving economies, market processes do not lead to the selection of optimal behaviors, as the characterization of successful behaviors itself constantly evolves as a result of the market conditions that these behaviors contribute to shape. Heterogeneity in behavior remains essential to adaptation in such an ever-changing environment. We come to an evolutionary characterization of a crisis, as the point where the evolution of the macroeconomic system becomes faster than the adaptation capabilities of the agents that populate it, and the so far selected performing behaviors suddenly cease to be, and become instead undesirable.

Money, Finance and Climate: The Elusive Quest for a Truly Integrated Assessment Model

In this paper, we show how existing IAMs generally omit any representation of a financial sector. We then discuss the potential impacts of climate change policies and climate change events on the financial sector as shown in the existing literature. We underline how the structure of the financial sector itself could impact the carbon trend of the economy. We then see how these specific linkages between the financial and the climate sector can be represented in new types of IAMs, and how they have already started to be addressed, notably in the stock-flow consistent models literature. We conclude on the necessary convergence agenda between climate policies addressing the financial goals in article 2 of the Paris Agreement and financial sector reforms to dampen the intrinsic financial instability.

Debt and damages: What are the chances of staying under the 2[formula omitted]C warming threshold?

In a stock-flow consistent macrodynamic model featuring two crucial endogenous destabilizing channels, debt accumulation and climate change, we perform a sensitivity analysis on four fundamental parameters of the climate and economic systems: (i) the climate sensitivity, (ii) the inertia of the carbon cycle, (iii) the labor productivity growth, and (iv) the share of damages sustained by the capital stock. Our main findings are that there is a mere 0.5% chance of achieving the 2 °C global warming target of the Paris Agreement in a no policy scenario, while a carbon tax, and a carbon tax plus a subsidy to mitigation efforts, increase that probability to approximately 6.5% and 25.6% respectively. We also investigate the trade-off between mitigating climate change damages and staying in a sustainable debt trajectory. While implementing effective climate policies comes at the cost of increasing the debt burden, shifting some of the debt burden to the public sector significantly reduces the chance of overstepping a threshold of unsustainable debt.

Demand, credit and macroeconomic dynamics. A micro simulation model

We develop a micro simulation model for the macroeconomic business cycle. Our model is based on three main ideas. First, we want to specify how macroeconomic coordination is achieved without a dominating influence of price mechanisms. Second, we want to incorporate the stock-flow-consistent (SFC) approach that has become popular in post-Keynesian macroeconomics. Existing macroeconomic models often pay no attention to how short-run outcomes (in the form of surpluses or deficits on the account balances of individual agents, or groups of agents) accumulate into long-run debt. The SFC approach models such deficits and surpluses, and their accumulation, explicitly, and imposes a logic in which these long-run balances co-determine the macroeconomic coordination outcome. Third, we want to allow for bankruptcies as a major mechanism in the business cycle. In reality, bankruptcies are a way in which long-run balances get adjusted, but most often the SFC models do not allow bankruptcies as a way in which long-run balances adjust. In our model, bankruptcies arise because agents do not adapt their behavior quickly enough as debt, or assets, accumulate. This is parametrized, so that bankruptcies can disappear in the simulation runs, which enables us to compare the nature of business cycles with and without bankruptcies. Our results show a clear business cycle that is driven by accumulation of financial assets and the effects this has on the real economy. By changing some of the key parameters, we show how the nature of the business cycle changes as a result of changes in the assumed behavior of agents.

Fiscal policy rules in a stock-flow consistent model

<p class="normal"><span lang="EN-US">The present paper analyzes four fiscal policy rules in a Stock-Flow Consistent model. The rules are: (i) government expenditures as a fixed proportion of GDP; (ii) government deficit as a fixed proportion of GDP; (iii) government debt as a fixed proportion of GDP; and (iv) a balanced budget. Then the economic trends implied by each rule are analyzed, and they are all compared. Some of the main findings can be summarized as follows: the more expansionist (or less contractionist) rules present higher growth rates, as expected; there is an inverse relationship between government debt and private debt, with the former being higher under the first rule, and lower in the balanced budget rule, the opposite happening in the case of private debt. Finally, considering enterprises’ profitability, we conclude that the best fiscal rule for firms is the first one, and, for the banking sector, also not surprisingly, it is the balanced budget rule.</span></p>

Inventory growth cycles with debt-financed investment

We propose a continuous-time stock-flow consistent model for inventory dynamics in an economy with firms, banks, and households. On the supply side, firms decide on production based on adaptive expectations for sales demand and a desired level of inventories. On the demand side, investment is determined as a function of utilization and profitability and can be financed by debt, whereas consumption is independently determined as a function of income and wealth. Prices adjust sluggishly to both changes in labour costs and inventory. Disequilibrium between expected sales and demand is absorbed by unplanned changes in inventory. This results in a five-dimensional dynamical system for wage share, employment rate, private debt ratio, expected sales, and capacity utilization. We analyze two limiting cases: the long-run dynamics provides a version of the Keen model with effective demand and varying inventories, whereas the short-run dynamics gives rise to behaviour that we interpret as Kitchin cycles.

A stock-flow consistent macroeconomic model with heterogeneous agents: the master equation approach

A stock-flow consistent macroeconomic model with heterogeneous agents: the master equation approach

Further Insights on Endogenous Money and the Liquidity Preference Theory of Interest

We present a simple stock-flow consistent (SFC) model to discuss some recent claims made by Angel Asensio in the Journal of Post Keynesian Economics regarding the relationship between endogenous money theory and the liquidity preference theory of the rate of interest. We incorporate Asensio's assumptions as far as possible and use simulation experiments to investigate his arguments regarding the presence of a crowding-out effect, the relationship between interest rates and credit demand, and the ability of the central bank to steer interest rates through varying the stock of money. We show that in a fully-specified SFC model, some of Asensio's conclusions are not generally valid (most importantly, the presence of a crowding-out effect is ambiguous), and that in any case, his use of a non-SFC framework leads him to ignore important mechanisms which can contribute to a better understanding of the behaviour of interest rates. More generally, this paper hence once more demonstrates the utility of the SFC approach in research on monetary economics.

A mean-field approximation to stock-flow consistent agent-based models with state-dependent transition rates

A mean-field approximation to stock-flow consistent agent-based models with state-dependent transition rates

Is There a Role for Central Banks in the Low-Carbon Transition? A Stock-Flow Consistent Modelling Approach

Climate change was recognized as a risk for ecosystems and the economy, and recently for the stability of the financial system. Tackling climate change requires urgent investments in the low-carbon energy transition. However, capital is not flowing at the pace and amount needed, exposing public and private investments to the risk of stranded assets. Central banks’ influence in the economy soared since 2008 but their role in the low-carbon transition has been mostly neglected so far. In this article, we display under which conditions central banks could contribute to meet the interlinked goals of sustainability and financial stability by influencing the timing and magnitude of the low-carbon transition. By further developing the EIRIN Stock-Flows Consistent, flow-of-funds behaviorual model, we simulate three scenarios, i.e. an unconditioned Quantitative Easing (QE), a green QE conditional to the purchase of green sovereign bonds, and conventional monetary policies. For each scenario, we analyze the impact on green investments and jobs, credit conditions, green/brown bonds market, and inequality across heterogeneous households and sectors, identifying main feedback loops and transmission channels. We find that, under the model’s conditions, a green QE promotes a faster development of the green bonds’ market, with positive spillovers on green investments, employment, commercial and central banks’ reserves, and on decreasing risk of stranded assets for the financial system. However, in all scenarios we find that wealth concentration in the credit sector and in the wealthiest household increases, with undesirable effects on income inequality, financial stability and aggregate demand.

An Agent-based Stock-flow Consistent Model of the Sustainable Transition in the Energy Sector

In this paper, we investigate the effects on the economy of a feed-in tariff policy mechanism aimed to foster investments in renewable energy production capacity. To this purpose, we employ an enriched version of the agent-based Eurace macroeconomic model, where we have included an energy sector with a fossil-fuel power producer as well as a renewable-energy based one. Both power producers take pricing and capacity investment decisions based on the price of imported fossil fuel and the feed-in tariff government policy. Results show that the feed-in tariff policy is effective in fostering the sustainability transition of the energy sector and that it increases the level of investments with a positive impact on the unemployment rates. Moreover, we observe that its financing costs do not impact government finances, which actually improve following the better economic conditions. For high policy intensity, however, we observe an increasing GDP share of the investment sector in the economy, due to the building-up of renewable production capacity, with a resulting crowding out of consumption, higher interest rates and prices. The final outcome on household well-being therefore depends on what extent the chosen value judgment recognizes the importance of an economically and ecologically sustainable growth path.

Sectoral Balances And Stock-Flow Consistent Models

The European banking and sovereign debt crisis has revealed severe financial imbalances among countries and institutional sectors. In reaction, economic policy and theory has focused on the role of finance in mitigating economic imbalances and finding ways to deal with them. Policy makers launched data gap initiatives to enhance economic and financial statistics, an important pillar of these initiatives being the integrated framework of the System of National Accounts, unifying product, income, capital, and financial accounts. In this framework, there are elaborated Stock-Flow Consistent models that model any interconnections of institutional sectors, in both real and financial aspects, in a consistent way. This article aims to illustrate the principles and possibilities of Stock Flow Consistent models and their relation to the System of National Acounts. To accomplish this, we construct a simplified Stock Flow Consistent model applied to the sectoral (im)balances between the private, government, and foreign sectors, which were a notable feature of the recent European crisis.

Income distribution and current account imbalances

We develop a three-country, stock-flow consistent macroeconomic model to study the effects of changes in both personal and functional income distribution on national current account balances. Each country has a household sector and a non-household (corporate) sector. The household sector is divided into income deciles, and consumer demand is characterized by upward-looking status comparisons following the relative income hypothesis of consumption. The strength of consumption emulation depends on country-specific institutions. The model is calibrated for the United States, Germany and China. Simulations suggest that a substantial part of the increase in household debt and the decrease in the current account in the United States since the early 1980s can be explained by the interplay of rising (top-end) household income inequality and institutions. On the other hand, the weak domestic demand and increasing current account balances of Germany and China since the mid-1990s are strongly related to shifts in the functional income distribution at the expense of the household sector.

Sovereign ratings, macroeconomic dynamics, and fiscal policy. Interactions within a stock flow consistent framework

AbstractOperating in the context of deregulated financial markets, credit rating agencies do not only ‘provide an opinion’, but also affect macroeconomic dynamics. By utilizing a two‐country stock flow consistent model that provides a representation of the Eurozone, the paper connects the movements of sovereign ratings with the dynamics of the financial market and the constraints on fiscal policy. With endogenous fiscal expenditure and an endogenous credit rating mechanism the model shows how following a recessionary shock, a rating downgrade can influence the financial constraints that surround a government, pushing it toward fiscal austerity and thereby deepening the already ongoing recession.

A third era of credit theory? Endogenous money from Wolfgang Stützel's balance mechanics perspective*

We present an introduction to the translation of a part of the stock-flow consistent (SFC) framework published by the German economist Wolfgang Stützel in 1958, which follows in this issue. While not a quantitative model, Stützel's ‘balance mechanics’ has some features which still stand out today when compared with contemporary SFC literature. Among these strengths is an accounting decomposition of all economic transactions along three dimensions and a careful distinction between propositions which are true at different levels of aggregation, so as to avoid fallacies of composition. We argue that ‘balance mechanics’ provides value added, both as a didactic tool and as a complement to formal SFC modelling exercises, since it can be used to assess the validity and coherence of economic propositions. We demonstrate this claim by translating a section on the so-called ‘third stage of credit theory’ in the translation that follows this introductory paper. Therein, Stützel synthesises the two opposing positions in the controversy on the causal priority of deposits versus loans in banking.

Stock-Flow Consistent Modeling of Default Events Sequence in a Closed Economy

By sequentially examining the full chain of events starting from the default of firms through the fire-sale of goods towards the write-offs of bad loans, we develop a new matrix of financial transactions. This matrix is incorporated into the transactions-flows matrix of the closed economy consisting of households, firms, and banks. On the basis of the balance sheet and transactions-flows matrices, this study further constructs a stock-flow consistent model of the closed economy. We also provide the results of a numerical simulation and argue that our model allows studying how such key parameters as the probability of default, the rate of fire-sales (new injected parameter), the recovery rate, and interest rates on loans and deposits affect the performance of banks and firms, observing economic dynamics in time.