Stock-flow Consistent Model Research Articles

Environmental consequences of policies in construction sector: combining economic simulation with consequential LCA

Consequential Life Cycle Assessment (CLCA) can be particularly relevant for studying the changes proposed by new policies since they may result in important displacements of environmental, social and economic impacts. For example, the financial aids for encouraging the use of new technologies may increase the demand for some materials of which production is constrained and the marginal suppliers may be more impacting than the average ones. The goal of this project was to propose a method for calculating the potential environmental burdens and benefits from new policies in the construction sector. Consequential Life Cycle Inventory must include all processes that are actually affected by the studied changes, considering the market effects. The economic models can be helpful on this matter. The proposed method couples a Stock-Flow Consistent (SFC) to the CLCA methodology to obtain the flows and stocks that are affected by the new policy. The model goes further in order to obtain the second-order effects, i.e., the monetary redistribution effects resulting from an economic perturbation. The main result is a novel method that couples an SFC model to CLCA. It is tested in a case study where the evolution of carbon tax in France (economic shock) leads to an increase in thermal retrofitting works in the French existing built stock. These results may help the construction sector to anticipate important rebound effects that are not usually included in the current studies used for decision and policy-making.

Assessing the Macroeconomic Effects of COVID-19 in an Empirical SFC Model for Denmark

The COVID-19 pandemic has tossed the world into a state of uncertainty, not only from a health point of view but also from an economic perspective. Most countries have adopted a strategy of strict lockdowns, leading to a fall in production and a rise in unemployment. From an economic perspective, this lockdown has erupted in supply-and-demand shocks in the economy. In order to investigate the potential impact of these shocks, we develop a post-Keynesian empirical Stock-Flow Consistent (SFC) model for Denmark. The impact of these shocks is analyzed in three different scenarios. Overall, our simulation results indicate that temporary (1 year) shocks in the economy will lead to a fall in output but a quick recovery, whereas persistent shocks can lead to a full-blown economic crisis. We find that the impact of these shocks can be lowered by public intervention in the form of fiscal stimulus, which can reduce the impact of these shocks and also improve the speed of economic recovery. We also address the economic consequences of financing this stimulus, and whether such a policy response is feasible. Our main conclusion is that fiscal stimulus seems to be an effective and affordable policy option available to Denmark.

Contingent Convertible Bonds and Macroeconomic Stability in a Stock-Flow Consistent Agent-Based Model

In this paper, we assess the effects of contingent convertible bonds (CoCos) in terms of stability of the banking sector and the economy as a whole. The analysis builds upon a stock-flow consistent agent-based model. The paper argues that the bail-ins that result from the activation of CoCos in a crisis not only partially replace costly bailouts for the taxpayer, but also effectively prevent bank failures and contribute to higher average capital adequacy ratios. This stabilization of the banking sector is positive for the economy as a whole as long as the volume of CoCos in circulation is not too high. Above a certain volume, their activation negatively affects macroeconomic aggregates, as CoCos reinforce the effects of a crisis rather than mitigate them. It is therefore in the regulator's interest to control the expansion of the CoCo market.

Compounding COVID-19 and climate risks: The interplay of banks’ lending and government’s policy in the shock recovery

We assess the individual and compounding impacts of COVID-19 and climate physical risks in the economy and finance, using the EIRIN Stock-Flow Consistent model. We study the interplay between banks’ lending decisions and government’s policy effectiveness in the economic recovery process. We calibrate EIRIN on Mexico, being a country highly exposed to COVID-19 and hurricanes risks. By embedding financial actors and the credit market, and by endogenising investors’ expectations, EIRIN analyses the finance-economy feedbacks, providing an accurate assessment of risks and policy co-benefits. We quantify the impacts of compounding COVID-19 and hurricanes on GDP through time using a compound risk indicator. We find that procyclical lending and credit market constraints amplify the initial shocks by limiting firms’ recovery investments, thus mining the effectiveness of higher government spending. When COVID-19 and hurricanes compound, non-linear dynamics that amplify losses emerge, negatively affecting the economic recovery, banks’ financial stability and public debt sustainability.

Rethinking inequality in the 21st century – inequality and household balance sheet composition in financialized economies

This paper analyses the impact of household wealth heterogeneity on inequality and macroeconomic stability in financialized economies. Based on the case of the USA since the 1980s it argues that transformation of financial sector operations has generated inequality by influencing gains from wealth ownership and leverage levels across the income distribution. Securitization and the subprime lending expansion have led to the emergence of a new class of leveraged homeowners, experiencing large increases in wealth prior to the Great Recession, followed by substantial losses after the crisis. Simultaneously, capitalists have diversified their asset portfolios while earning the highest and fastest-growing wages in the economy when employed as financial sector executives. In this light, the paper proposes a new conceptualization of households in macroeconomic models, defined by balance sheet composition rather than income sources alone. To inform this taxonomy, inequality and leverage indicators are simulated in a stock-flow consistent model calibrated to US data with three classes of households distinguished by their wealth composition, and a securitized financial sector. The proposed framework is found to produce more empirically accurate levels of income inequality and greater macroeconomic instability than the two-class division and establishes an equalizing effect of housing for wealth distribution.

To what extent does aggregate leverage determine financial fragility? New insights from an agent-based stock-flow consistent model

To what extent does aggregate leverage determine financial fragility? New insights from an agent-based stock-flow consistent model

Managerial overconfidence in capital structure decisions and its link to aggregate demand: An agent-based model perspective.

This study aims to connect two strands of the psychology and economics literature, i.e., behavioural finance and agent-based macroeconomics, to assess the impact of managerial overconfidence at the micro and macro levels of the economy as a whole. We build a macroeconomic stock-flow consistent agent-based model that is calibrated for the specific case of Poland to explore whether the overconfidence of top corporate managers in the context of their initial capital structure decisions is detrimental for the firms being managed in this way, the financial market dynamics, and the selected macroeconomic indicators. We model heterogeneous firms with different capital structure decision criteria depending on their degree of managerial overconfidence. Our model also includes a complete macroeconomic closure with aggregated households, capital producers, banking, and a public sector. We find that firms with overconfident managers outperform in terms of investment and size but are also more fragile, thereby making them more likely to default. Finally, we run policy shocks and show that while investors' flight to liquidity creates financial turmoil and increases the probability of default. This paper contributes to the knowledge base by linking behavioural corporate finance and agent-based macroeconomics. In general, the excess overconfidence on the micro level, either an increase in the proportion of overconfident firms or a higher degree of overconfidence among managers, has a strong destabilizing impact on the economy as a whole on the macro level.

First steps in forecasting the health workforce in Kazakhstan: A baseline scenario

Background: The purpose of this study was to consider the basic scenario for predicting the need for general practitioners in Kazakhstan until 2030. Material and methods: A basic health care human resource planning model consists of supply and demand components, analysis of the outcomes of the prediction, and planning future actions. Stock-flow consistent model was built by using current situation and projected Kazakhstan population, retirement rate, attrition rate and adding the estimated number of new graduates. Results: According to the proposed scenario, in some years of the forecast period, both an excess and a lack of a general practitioners offer are possible. The largest surplus, 226 doctors, is predicted in 2024. However, starting in 2027 their shortage is possible, with a peak of 339 general practitioners in 2030. Conclusion: Considered scenario leads to the fact that inflow does not cover the increasing needs of primary health care associated with population growth. In this case, our forecast is the basis for medical schools to adjust the number of general practitioners students in internship, seeking a balance of supply and demand.

Stock-Flow Consistent Model with Repayment of Bank Loans Used to Finance Past Investments

ABSTRACT Stock-flow consistent modelling (SFC) is currently one of the most active fields of research in post-Keynesian macroeconomics. SFC models make it possible to study the dynamics of a monetary economy of production within a consistent accounting framework. However, with some rare exceptions, SFC models do not take into account the repayment of bank loans used to finance business investments. It is assumed that these investments are financed by perpetual loans or by constant turnover. In this article, we reject this assumption and build a model based on recent studies, in which firms repay part of their past debt in each period. We then study the dynamics of this model. The results obtained indicate that the dynamics of an SFC model is significantly affected by taking these repayments into account.

The impact of higher leverage ratios on the South African economy

We employ a micro-founded, stock-flow consistent computable general equilibrium model to study the impact of increases of the leverage ratio on the South African economy. The model provides for a richer representation of institutional balance sheets than existing models and captures the important relationship identified in the literature between bank capital, lending spreads and economic activity. The financial accelerator mechanism operates through the balance sheets of all institutions in the economy. The move to a higher leverage ratio for banks is likely in the short-run to generate negative economic impacts that depend on the banks’ choice of adjustment strategy. The negative GDP effect is greatest if the financial sector reduces leverage by reducing the value of its assets rather than raising its liabilities. The shock also leads to the financial sector changing its perceptions of risk, which reduces the size of the money multiplier and increases lending spreads. The transition to a higher leverage ratio also affect the transmission of monetary policy. Executing monetary policy effectively thus requires understanding how the financial sector is likely to meet the new requirements and how its perceptions of risk are affected.

Testing Piketty’s Hypothesis in Analyzing Factors Affecting Income Inequality in Iran: Stock-Flow Consistent (SFC) Approach

Reducing inequality and establishing social justice by balancing the distribution of income and wealth is one of the main concerns of economic policymakers which has been emphasized in the constitution in Iran. Explaining the relationship between inequality and its causes has been one of the most challenging areas of economic debate in the recent decades; despite extensive research in this area, there are still many ambiguous issues in this regard. In recent years, new hypotheses have been proposed by the French economist, Thomas Piketty on the main causes of the spread of inequality. In his analysis, he considers the gap between the rate of return on capital and the rate of economic growth (r-g) to be the main causes of inequality. However, despite providing logical explanations consistent with changes in inequality patterns, he has not conducted any empirical tests for its scientific-theoretical chain. Therefore, these question arise as to how empirically verifiable the Piketty hypothesis is and is it able to explain the increase in inequality of different countries? For this purpose, a Stock-Flow Consistent (SFC) model was used as a first model in the present study to investigate the relationship between inequality and growth in a macroeconomic framework of Iran. This model tests the conclusions and Piketty assumptions for the Iranian economy when changing key parameters. The results of this model showed that under certain circumstances with decreasing growth rate, income inequality increases. However, the analysis proved that there are no inevitable conditions under which a reduction in the growth rate will lead to a sharp increase in the level of inequality.

Confronting inequality in the “new normal”: Hyper‐capitalism, proto‐socialism, and post‐pandemic recovery

Post‐pandemic recovery must address the systemic inequality that has been revealed by the coronavirus crisis. The roots of this inequality predate the pandemic and even the global financial crisis. They lie rather in the uneasy relationship between labor and capital under conditions of declining economic growth, such as those who have prevailed in advanced economies for almost half a century. This paper explores the dynamics of that relationship using a simple stock‐flow consistent (SFC) macroeconomic model of a closed economy. It examines in particular the role of two key factors—the savings rate and the substitutability (elasticity of substitution) between labor and capital—on the severity of systemic inequality under conditions of declining growth. The paper goes on to test the efficacy of three redistributive measures—a graduated income tax, a tax on capital and a universal basic income—under two distinct structural scenarios for an economy with a declining growth rate. We find that none of these measures is sufficient to control structural inequality when institutions aggressively favor capital over labor (hyper‐capitalism). Taken in combination, however, under conditions more favorable to wage labor (proto‐socialism), these same measures have the potential to eliminate inequality, almost entirely, even as the growth rate declines.

A New, Simple SFC Open Economy Framework

ABSTRACT The paper presents a simple Stock-Flow Consistent open economy model with flexible exchange rates. It can reproduce the same dynamics and results of the flexible exchange rates ‘benchmark’ model by Godley and Lavoie [2007b. Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth. London, UK: Palgrave MacMillan]. The latter is considered the ‘centre of gravity’ of SFC open economy literature. Yet the new model uses only one-third of the equations of the original one and features a different mechanism of determination of the exchange rate. Its small size and its flexibility make the model suitable both for didactic purposes and for extensions with further building blocks to address a variety of research topics.

Climate sentiments, transition risk, and financial stability in a stock-flow consistent model

A successful low-carbon transition requires the introduction of policies aimed at aligning investments to the climate and sustainability targets. In this regard, a global Carbon Tax (CT) and a revision of the microprudential banking framework via a Green Supporting Factor (GSF) have been advocated but two main knowledge gaps remain. First, the understanding of the conditions under which the CT or the GSF could contribute to the scaling-up of new green investments or, in contrast, could introduce new sources of risk for macroeconomic and financial stability, is poor. Second, we don’t know how banks’ climatesentiments, i.e. their anticipation of climate policies’ impact in lending conditions, could affect the outcomes of the policies and of the low-carbon transition. To fill these knowledge gaps we develop a Stock-Flow Consistent model of a high income country that embeds an adaptive forecasting function of banks’ climate sentiments. Then, we assess the impact of the CT and GSF on the greening of the economy and on the banking sector analyzing the risk transmission channels from the credit market to the economy via loans contracts, and the reinforcing feedbacks that could give rise to cascading effects. Our results suggest that the GSF contributes to scale up green investments only in the short-run but it also introduces potential trade-offs on bank’s financial stability. To foster the low-carbon transition while preventing unintended effects on Non-Performing Loans and households’ budget, the introduction of the CT should be complemented with redistribution welfare policies. Finally, if banks revise their credit supply conditions based on the firms’ carbon profile ahead of climate policy introduction, they can contribute to align investments to the low-carbon transition and improve financial stability of the banking sector.

Modelling energy transition risk: The impact of declining energy return on investment (EROI)

A number of papers in the field of net energy analysis have argued that declines in energy return on investment (EROI) could lead to increasing energy prices and a fall in economic growth. This paper develops a model (TranSim) which can simulate the economic and financial implications of an energy technology transition involving a reduction in EROI, by combining the stock-flow consistent (SFC) approach with an input-output (IO) model.The TranSim model has the following key features. First, it includes three firm sectors, that produce energy, capital, and other (non-energy, non-capital) goods. Second, an IO model and an Almost Ideal Demand System are integrated into the SFC model. Third, capital vintages have embedded levels of labour productivity and intermediate good requirements that depend on the economic conditions in the period the vintage was produced.Simulations are characterised by an initial increase in output (due to higher investment), followed by periods of recession and below trend growth (due to price inflation and changes to the functional income distribution). The negative effects associated with the transition – recession, stagnation, stagflation, increasing inequality and asset stranding – are positively related to the capital intensity of green energy production and reductions in EROI.

Ecological finance theory: New foundations

This paper puts forth Ecological Finance Theory as a new vision for 21st century financial economics. We first motivate this project by referring to the current global bio-geophysical context. We then introduce new meta-theoretical hypotheses, which we compare with those of the previous paradigm. We then borrow concepts of resilience, diversity, self-thinning, self-regulated mitosis, and ecological transparency from biology and introduce them in the field of financial economics. Finally, we analyze the impact of an increase in ecological transparency on resilience and diversity by developing a new stock-flow consistent model with mitotic control. The present paper is hence an invitation to reorient financial theory in line with the Anthropocene context.

Why MMT can’t work

Using a stock-flow consistent ISLM open-economy model, this article shows that, unless very specific country circumstances hold, modern money theory (MMT) cannot work as an effective and sustainable macroeconomic policy program aimed to achieve and maintain full-employment output through persistent money-financed fiscal deficits in economies suffering from Keynesian unemployment or underemployment. Specific country circumstances include cases where the economy enjoys very high policy credibility in the eyes of the international financial markets or issues an international reserve currency; under such circumstances, the adverse outcomes of MMT policy can be prevented and expansionary demand shocks can be effective. Short of such features, an open and internationally highly financially integrated economy that implements MMT policy would either see its money stock grow unsustainably large or would have to set domestic interest rates to levels that would be inconsistent with the policy objective of resource full employment and that would cause instead economic and financial instability. The article explains why ISLM analysis is used to support the arguments developed in it.

Combining financial and ecological sustainability in bank capital regulations

PurposeWith the macroprudential approach, systemic risk is explained by a general equilibrium (GE) model. However, since on-balance-sheet and off-balance-sheet (OBS) risks are structurally segmented, for example annually or periodically on financial statements, the GE model might need further integration with OBS risks including ecological shocks.Design/methodology/approachThis study develops a theoretical two-period model with consumption, investment and loans, which further includes carbon emissions to distinguish between loans for “green” or “brown” firms to enhance the perspective of ecological sustainability.FindingsThe paper shows how the environmental, social and governance (ESG) factors might be of relevance in the standard bank capital regulatory structure. In dealing with ecological sustainability, a new methodological framework with the green K-index introduces penalties to be paid in the capital structure related to ESG factors. The model is enhanced for screening green or brown firms related to impact investing. The integrated view of financial stability and ecological sustainability further illuminates how a wide cross-sectoral resilience of a green K-index measure for the economy might be achievable.Research limitations/implicationsA stock-flow consistent model with balance-sheet methods raises the question whether all necessary variables and parameters can be computed in practice. Compared to the agent-based model (ABM), this model additionally lacks inputs from agents' behaviour, thus non-rational decisions, which may be relevant in practice. More generally, by adopting a balance-sheet structure, the model shows a coherent framework with relevant variables. The methodology of the GE model with OBS has not been scholarly explored and thus is presented for discussion rather than generalisation. The GE model with OBS provides a new interpretation of systemic risk and interbank relations with a consideration of ecological aspects. Its economic implication contributes to contemporary banking theory as well as to the sustainability discussions in the larger financial sector.Practical implicationsBanks and investors can more carefully measure the ecological risks in their loan portfolios and make better informed decisions leading to a better sustainability of the financial markets.Originality/valueThis study develops a theoretical GE model with off-balance-sheet risks. The model adds green regulation enhancing the capital regulation framework relevant to sustainability. This, in turn, enhances the role of banks in a coherent economic framework for loan decisions towards a much greener finance.

The legacy of Wynne Godley

Godley’s approach is macroeconomic without micro-foundations, based on national accounts with an integrated treatment of the real and financial sides of the economy, stock flow consistent (SFC). In this framework the main economic imbalances at the national and world levels have been usefully analyzed. The SFC approach is well suited to study some of the post-corona period main issues (management of the increasing public debt, specificities of the euro zone system). But the difficulties of the task must not be underestimated (efforts to develop empirical SFC models, modeling the supply side).

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

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).