Stock-flow Consistent Model Research Articles

Empirical stock–flow consistent models: evolution, current state and prospects

Empirical stock–flow consistent models: evolution, current state and prospects

The Distributive Impact of Unconventional Monetary Policies: Old and New

ABSTRACT In this paper we analyze the impact of less conventional monetary policy tools on the personal and functional distribution of income. We focus on the issuance of central bank digital currency (CBDC) in a comparative perspective, using a stock-flow consistent model of the eurozone economy. We consider two kinds of policies: helicopter money policies such as Quantitative Easing and the issuance of a CBDC; and scenarios not based on balance sheet expansions, such as an interest rate policy following the Pasinetti Rule, or a sterilized issuance of CBDC. Monetary policies using CBDCs tend to increase the wage share at the expense of financial rents. The targeted issuance of CBDCs to firms might produce an increase in GDP, corporate profits, and the wage share. The Pasinetti Rule reduces personal income inequality the most, but if applied mechanically, its impact on growth is also the least desirable.

The Monetary Theory of Production and the Supermultiplier: What Determines Savings?

ABSTRACT The paper presents a closed-economy stock-flow consistent model aimed at outlining the natural synthesis between two fundamental pillars of the post-Keynesian approach: the supermultiplier (SM) model and the monetary theory of production based on the notion of endogenous money. Such integration allows the defining of the whole economic mechanism describing the financing of autonomous components and investments, as well as the determination of output and saving within a monetary economy of production. Our contribution argues that the endogenous money theory plays a non-ancillary role within the SM approach. By comparing different scenarios describing the financing of autonomous components of demand and investments (bank loans, retained profits, CB, and equity emissions), we point out that the endogenous process of money creation is the only structural mechanism through which the autonomous components can exist and be independent of current income, and Keynesian causality materializes in the long-run. In general, it is the initial finance of investments and autonomous components through endogenous money that allows them to be ex-post founded by household saving. Conversely, the initial finance through the existing stock of wealth, although it does not intact the investments-saving causality, can be considered only a temporary spin-off of the endogenous money process.

Macroeconomic Aspects of Unemployment Benefits: Evaluating the Danish Policy

ABSTRACT This article provides an assessment of the Danish public policy of lowering unemployment benefits, adopted by the Danish government in the tax reform of 2012. To do so, we employ a stock-flow consistent model in which we incorporate the central features of the Danish labour market and the unemployment insurance system. We estimate the model using quarterly data over the period 2005Q4–2020Q1. To evaluate the effects of an unemployment insurance policy, we perform counterfactual analysis by reversing public policy in relation to unemployment insurance and compare the results with the original (baseline) scenario containing the policy effects. Overall, our findings suggest that when the aggregate demand channel, amongst other relevant macroeconomic channels, is included in the assessment, the effects of unemployment benefits on economic growth, employment, and fiscal balance tend to be weaker. These findings clearly question the political decision of suppressing unemployment benefits in general and more specifically in countries with low unemployment rates such as Denmark.

Functional income distribution, effective demand and wealth in Denmark – insights from an empirical stock-flow consistent model

With the important contribution of Marglin and Bhaduri different demand and growth regimes were identified, which inspired a strand of empirical research aiming to uncover the type of growth regime. Most of these studies can be framed into two methodological approaches: (i) a structural, and (ii) an aggregative approach. In this paper, we use a third approach where we exploit the advantages of the stock-flow consistent framework. We argue that using an empirical SFC model retains the advantages of the two more widely used approaches, while adding some novel features: (i) the endogenization of income distribution, which allows for a two-way relationship between demand and income shares, (ii) the consistent incorporation of stock variables in the estimation of the equations of aggregate demand components, and (iii) the inclusion of endogenous labor market dynamics in the analysis. To introduce these features, we build an empirical stock-flow consistent model for Denmark for the period 2005q1–2020q1. Our analysis suggests that demand can neither be categorically defined as wage-led nor profit-led, as the effects of a change in income distribution on the aggregate demand components cancel each other out. Results are more conclusive for capital accumulation, which is found to be profit-led.

Fiscal transfers and common debt in a Monetary Union: a multi-country agent–based stock flow consistent model

Abstract Using a refined version of our multi-country AB-SFC model of a Monetary Union the paper aims at providing a tentative assessment of the economic effects of transforming the European Monetary Union into an Intergovernmental Fiscal Transfer Union (IFTU) with its own fiscal capacity. Countries contribute proportionally to their GDP, whereas funds are redistributed according to a mechanism that gives more funds to countries performing worse than the average of the Union in cyclical terms. Our simulations show that an IFTU inspired by such a redistribution principle acts as a stabilizer of international trade, allowing us to stabilize and improve the Union GDP performance without affecting the stability of public finances. When the Union is allowed to borrow on capital markets, i.e. in a Fully Fledged Fiscal Transfer Union (FFFTU), these effects are enhanced and a part of the public debt burden shifts from the national to the Union level, leaving the total burden almost stable. An interesting result to assess the political acceptability of the proposal is that “core” countries eventually benefit the most from the introduction of this mechanism, despite being more frequently net contributors. Finally, we show that an FFFTU with common debt might help to soften the impact of an exogenous demand shock, while, because of the fact that it mainly operates as a stabilizer of aggregate demand, it does not seem to provide beneficial effects when facing a supply shock to production.

On the interactive effects of climate policies: Insights from a stock-flow consistent model

Climate policies such as carbon tax and green finance policy are critical measures to promote low-carbon transition worldwide. These policies are, however, likely to interact with each other and create unintentional consequences. This paper adopts a stock-flow consistent model to theoretically explore the effects of policy interactions. Specifically, commercial banks, as the key credit creators and critical players in providing source of finance, are included. Based on the numerical simulations of the dynamic model, we find that both carbon tax and green finance policies render positive impacts on low-carbon transition. In addition, green credit incentives, if imposed simultaneously with carbon tax, can enhance the positive effects. Although low-carbon transition could generate higher net government revenues, our results show that banking sector tends to expose to higher financial risks when firms’ debt-equity ratio rises. Further analysis shows that subsidies on green loans can support green transition and bring positive consequences to debt rollover and social welfare, indicating the needs for active government intervention to improve policy effectiveness. The framework proposed in this paper provides a useful way to understand policy dilemmas in pursuing low-carbon transition and give important implications to form optimal policy mix.

Wage-led or profit-led: is it the right question to examine the relationship between income inequality and economic growth? Insights from an empirical stock-flow consistent model for Denmark

Abstract For the last two decades an increasing number of empirical studies have analysed the relationship between income inequality and economic growth by classifying economies as either wage-led or profit-led. However, some critiques have claimed that rather than being unequivocally wage-led or profit-led, the growth regime of an economy might depend on the circumstances and the nature of the processes that determine income distribution. Using an empirical stock-flow consistent (SFC) model estimated for Denmark for 2005–2020 we run eight scenarios simulating changes in policy, structural and institutional variables to see how each affects income distribution and, through it, the business cycle and economic growth. We find that the relationship between demand, growth and income distribution is highly dependent on the source of the shock affecting income shares, its impact on the other areas of the economy and the intensity of feedback effects.

Low-Carbon Transition and Macroeconomic Vulnerabilities: A Multidimensional Approach in Tracing Vulnerabilities and Its Application in the Case of Colombia

The transition to a low-carbon and climate resilient economy is a process of heavy restructuring of the productive network, during which sunset industries are in decline or even disappear, while sunrise industries emerge and flourish. This process affects all aspects of the economy: the demand and the supply side, the public and the private sector, the financial structure and the informal economy. In this article, we propose a holistic framework that assesses the macroeconomic vulnerability that emerges from a low-carbon transition, especially in developing economies. We consider vulnerability as a multidimensional phenomenon and, thus, pay attention to all fiscal, social, monetary, financial and external dimensions of the economy. We, then apply this framework to the Colombian economy. We use indicative variables of vulnerability, in all its aspects, and a stock-flow consistent growth model in order to monitor their evolution across time. We consider two scenarios related to a reduction of real fossil fuel exports of Colombia and a global rise in interest rates. Results indicate that the more delayed is the global transition, the higher the vulnerability of the Colombian economy. Similarly, global monetary tightening becomes an obstacle in the transition process, as it induces vulnerability stemming from the financial and external side of the economy.

The DSK-SFC stock-flow consistent agent-based integrated assessment model

The DSK-SFC stock-flow consistent agent-based integrated assessment model

La transition vers une prospérité durable - Un modèle macroéconomique écologique stock-flux cohérent pour le Canada

This paper presents a stock-flow consistent (SFC) macroeconomic simulation model for Canada. We use the model to generate three very different stories about the future of the Canadian economy, covering the half century from 2017 to 2067: a Base Case Scenario in which current trends and relationships are projected into the future, a Carbon Reduction Scenario in which measures are introduced specifically designed to reduce Canada's carbon emissions, and a Sustainable Prosperity Scenario which incorporates additional measures to improve environmental, social and financial conditions across society. The performance of the economy is tracked using two composite indicators constructed especially for this study: an environmental burden index (EBI) which describes the environmental performance of the model; and a composite sustainable prosperity index (SPI) which is based on a weighted average of seven economic, social and environmental performance indicators. Contrary to the widely accepted view, the results suggest that ‘green growth’ (in the Carbon Reduction Scenario) may be slower than ‘brown growth’. More importantly, we show (in the Sustainable Prosperity Scenario) that improved environmental and social outcomes are possible even as the growth rate declines to zero.

Distribution, capital intensity and public debt-to-GDP ratio: an input output—stock flow consistent model

Distribution, capital intensity and public debt-to-GDP ratio: an input output—stock flow consistent model

Labor cost, competitiveness, and imbalances within the eurozone

This paper examines the impact of the cost of labor on macroeconomic imbalances within the eurozone. For this purpose, we construct a three-country Stock-Flow Consistent (SFC) macroeconomic model in an open economy including the eurozone and the rest of the world. We show that internal devaluation is not effective as an economic policy for getting the eurozone economies to converge. Cutting labor costs cannot kick-start economic activity through a rebound in exports of those countries that do so. Instead, it involves the risk of locking their economies concerned into low-wage production activities. The fall in unemployment it entails is the consequence, then, of a downturn in labor productivity. In contradistinction, we defend the idea that the introduction of a new wage rule making monetary wages dependent on productivity gains and on the target for inflation set by the European Central Bank, together with a budgetary stimulation policy, would be conducive to initiating convergence among European economies. In particular, it would produce a convergence in living conditions by improving labor productivity but it would also bring production structures closer together.

Mapping and modelling global mobility infrastructure stocks, material flows and their embodied greenhouse gas emissions

Roads and rail-based mobility infrastructures are the basis for mobility services and underpin several Sustainable Development Goals, but also induce material use and greenhouse gas emissions. To date, no stock-flow consistent study has assessed globally accumulated stocks of mobility infrastructures, associated material flows and emissions, and their spatial patterns.We present global findings on material stocks for all roads, rail-based infrastructures, incl. tunnels and bridges, and model associated material flows and their embodied emissions for the year 2021. The stock-flow consistent model combines crowd-sourced Open Street Maps data with archetypical infrastructure designs, material compositions, assumptions on lifetimes and network growth rates, incl. uncertainty ranges. We derive spatially explicit, national-level stock estimates for 180 countries, map them at a resolution of 5 arcminutes, and derive material flows and their embodied emissions at the country-level.We find that 314 [218–403] Gt of materials (41 [28–53] tons/cap) have accumulated in global mobility infrastructure, the majority in roads as aggregates and asphalt. Stocks are unequally distributed between countries, from averages of 23 [16–30] tons/cap in low income countries, to 130 [89–164] tons/cap in high income countries. Spatial inequality of per capita stocks per area differs by orders of magnitude, from 101-104 between rural, suburban, and dense urban areas. We find that 8 [4–16] Gt/year of material flows are due to expansion and maintenance, amounting to 6 [3–10] % of global resource extraction. These translate into 0.36 [0.19–0.69] Gt CO2eq/year, or 1 [0.5–1.9] % of global GHG emissions in 2021.Approximately two-thirds of these flows result from maintenance and replacement of stocks, indicating an important lock-in of resource use due to already existing infrastructure stocks. These findings support the crucial role of improving spatial planning, limiting stock expansion and (sub-)urbanization, to achieve more sustainable resource use and mitigate climate change.

Is the time ripe for helicopter money? Growth impact and financial stability risks of outright monetary transfers

We study the effectiveness of helicopter money, once a thought experiment that is now a feasible option given new digital technologies. We consider the effects of central bank digital currencies (CBDC) from a theoretical point of view, by means of a stock-flow consistent model of a growing open economy. We compare the effectiveness of this tool with that of traditional fiscal and monetary policies. We find that issuing a CBDC by expanding the central bank's balance sheet can have a durable impact on GDP and crucially, it allows for the activation of a new transmission channel, which depends on the sensitivity of investment and of the interest rate to firms’ leverage. But it might reduce the demand for bank deposits, and even more crucially for bank loans, thus creating challenges for financial stability.

Resource scarcity, circular economy and the energy rebound: A macro-evolutionary input-output model

We propose an Agent-Based Stock-Flow Consistent model combined with a simplified Input-Output (IO) structure of production. In the model, heterogeneous firms interact in the energy, material, capital and consumption markets. Materials for production of consumer goods can be manufactured using non-renewable or recycled material inputs. We examine the conditions under which the circular economy emerges through market mechanisms, as well as it can be a source of the rebound effect. An important novelty of our approach is that recycling and mining sectors employ different types of capital for production. Capital goods (machinery) are produced by capital firms, which constantly engage in innovations to improve their technological features. This way we endogenize changes in technological coefficients of the Input-Output tables. We show that sectoral interdependencies along the value chain can render the energy rebound effect due to the circular economy (CE) even if energy intensity of the recycling process is lower compared to mining. This effect depends on the impact of investment in the recycling sector on the aggregate demand and energy use along the entire value chain. We assess the role of macroeconomic policies, namely mission-oriented innovation policies (MOIPs), active fiscal policies (AFPs), and environmental taxes in fostering the CE transition, while mitigating the rebound effect. We find that the combination of MOIPs and active fiscal policy is the most effective in promoting the circular economy, preserving employment and ensuring a sustainable growth path.

Monetary Circuit Theory, Stock-Flow Consistent Modeling and Parguez’s Analysis

Stock-flow consistent (SFC) modeling goes far beyond simple formal tools. It rests on strong post-Keynesian hypotheses and proposes a new conceptual framework for formalization. This being said, if its affiliation with post-Keynesianism is obvious, SFC models are in line with many elements of the monetary circuit theory (MCT), as developed notably by Alain Parguez. Indeed, MCT has deeply studied macroeconomics and the link between money and production. More precisely, both SFC models and MCT offer an analysis in terms of national accounting, in which money is endogenized through the financing of the economy, and more precisely through the financing of production. Even if MCT has lost its vigor, its fundamental principles are still present through the SFC modeling.

A stock-flow consistent model of inventories, debt financing and investment decisions

The paper develops a Kalecki–Steindl–Minsky stock-flow consistent (SFC) model by including inventories, as well as firm’s deposits and debt financing into the investment function. The role of investment decisions in shaping aggregate fluctuations over the business cycle is assessed by considering a model populated by five types of economic actors: workers, rentiers, firms, commercial banks and the central bank. Business cycle fluctuations are investigated assuming a deterministic steady growth path in the long period, in line with recent developments in heterodox growth theory. Next, we simulate the model, calibrating it for the US economy. Our main results confirm the relevance of inventory dynamics in economic cycles, similar to Metzler’s (1941, 1947) analysis. First, inventory investment propagates shocks and affects the length of waves, deviation size and time to convergence. Second, expectations may determine whether there are oscillations or a steady convergence to the long-term trend. Third, we suggest that inventory investment accommodates rapid aggregate demand variations, although not presenting a multiplier effect.

The interactive impact of green supporting factors on bank credit creation: An agent-based stock-flow consistent approach

Low carbon transition requires prudential regulations to incentivize bank’s green financing behaviors. This paper performs a simple and original analysis on the impact of the green differentiated banking requirements on bank’s credit creation. Through a simplified bank balance sheet, this paper incorporates green supporting factors into the framework of prudential regulations, namely the risk-based capital adequacy ratio and the net stable funding ratio respectively, and theoretically quantifies the constraining effect rendered by the green differentiated requirements. By constructing an agent-based stock-flow consistent model of commercial banks, and conducting numerical experiments, we find that the green supporting factors exert interactive impacts on credit creation, which depends on bank’s balance sheet structure characterized by equity to reserve ratios. So that it is necessary to implement different combinations of green supporting factors in order to achieve the target of green credit issuance, thus serving for green economic transition. The results obtained in this paper might facilitate the understandings what financial regulators can do to promote low-carbon transition via the banking system.

Post-Keynesian Economics: New Foundations, by Marc Lavoie Chapter 6: Accumulation and Capacity

ABSTRACT This article reviews the chapter on growth and distribution of the 2022 edition of the book Post-Keynesian Economics: New Foundations by Marc Lavoie. The review goes through most of the chapter’s main topics, including the main classes of growth and distribution models along post-Keynesian lines and the criticism and extensions of these models. It stresses the macroeconomic paradoxes that result from the relation between aggregate demand and either income distribution or debt dynamics in these models. The review also addresses the new additions to the chapter, among which the recent contributions on the controversy on the convergence towards the normal capacity utilization rate and the non-capacity creating autonomous demand growth models, and Lavoie’s new section on wealth and personal income distribution. At last, the review discusses three issues raised by the chapter’s reading: the relation between realism and complexity for a model’s calibration, the consequences of abstracting the financial side of growth models, and how we address financial issues in growth and stock-flow consistent (SFC) models. The chapter reviewed is balanced and constructive; it critically informs the reader and provides a good map of the post-Keynesian literature on growth and distribution, addressing the canons while bringing novelty.