A Prototype Regional Stock Flow Consistent Model

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 controlled by "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.

This study aims to develop an ecological stock-flow consistent (SFC) model based on the Latin American-stylized facts regarding economic, financial, and environmental features. We combine the macro-financial theoretical framework by Pérez-Caldentey et al. (2021, 2023) and the ecological modeling of Carnevali et al. (2020) and Dafermos et al. (2018). We discuss two scenarios that test exogenous climate-related shocks. The first scenario presents the case in which international regulation on commodity trade becomes more stringent due to environmental concerns, thus worsening the balance-of-payment constraint of the region. The second scenario concerns the increase in frequency and intensity of adverse climate events in the region. Both scenarios show that the financial external constraint that determines the growth path of Latin American economies may be further exacerbated due to environmental-related issues.

We show how every stock flow consistent model of the macroeconomy can be represented as a directed acyclic graph. The advantages of representing the model in this way include graphical clarity, causal inference, and model specification. We provide many examples implemented with a new software package.In this paper we rigorously show that for every stock flow consistent macroeconomic model there is a corresponding directed acyclic graph which is unique. This is achieved by constructing the graphical representation of the stock flow consistent model and using graph theoretical techniques to decompose the graph into an acyclic graph. We illustrate the theory with an example, and provide details of a computational package that gives the directed acyclic graph representation of any stock flow consistent model.

Sequentially examining the full chain of events starting from the default of firms through the fire-sale of goods towards write-offs of bad loans, a new matrix of financial transactions was developed. It was shown that if firms have no equities, the cost of default of those firms is equal zero. Indeed, firms suffer from losses on fire-sales but at the same time, they have a benefit from write-offs of their loans. Whereas, banks incur only the losses on bad loans. This situation may restrain lending to the economy. The considered matrix of financial transactions was incorporated in the transactions-flows matrix of the closed economy consisting of households, firms, and banks. The obtained matrix significantly differs from Goodley's and Lavoie's matrix that the flows caused by write-offs of bad loans were taken to flows of incomes and expenses, not to the flows generated by changes in operating assets and liabilities. On the basis of the balance sheet and transactions-flows matrices, a mathematical model of the economy was developed. The used stock-flow consistent framework allows us to be sure that nothing will be lost neither in stocks nor in flows. The model allows studying how such the key parameters as the probability of default, the rate of fire-sales (new injected parameter), recovery rate, interest rates on loans and deposits affect the performance of banks and firms, observing economic dynamics in time under different macroprudential policy rules. Numerical simulation of the model was carried out. Under chosen parameters of the models, the net wealth of firms rises due to the cost of default is zero, while both the net wealth of banks and households at the beginning run high and then falls. Reasons for such behavior of the net wealth are significantly different. The net wealth of banks begins to fall due to the accumulation of credit losses. Whereas, the net wealth of households does begin to fall due to profit paradox, when workers of households have no sufficient money in order to buy out all produced goods, due to there is price markup.

Despite being arguably one of the most active areas of research in heterodox macroeconomics, the study of the dynamic properties of stock-flow consistent (SFC) growth models of financially sophisticated economies is still in its early stages. This paper attempts to offer a contribution to this line of research by presenting a simplified Post-Keynesian SFC growth model with well-defined dynamic properties, and using it to shed light on the merits and limitations of the current heterodox SFC literature.

The past few decades have witnessed the emergence of economic imbalances at the world level and within the euro zone. The failure of mainstream economics to accurately predict financial crises, or model the effects of finance-led growth, highlights the need for alternative frameworks. A key text, Global Imbalances and Financial Capitalism: Stock-Flow-Consistent Modelling demonstrates that Stock-Flow-Consistent models are well adapted to study this growth regime due to their ability to analyse the real and financial sides of the economy in an integrated way. This approach is combined with an analysis of exchange rate misalignments using the Fundamental Equilibrium Exchange Rate (FEER) methodology, which serves to give a synthetic view of international imbalances. Together, these models describe how global and regional imbalances are created, as well as suggest appropriate tools through which they may be reduced. The book also considers alternative economic policies in the euro zone (international risk sharing, fiscal federalism, eurobonds, European investments, a multispeed euro zone) alongside alternative monetary policies. In particular, it examines the possibilities of using SDR (Special Drawing Rights) as a reserve asset to be issued to fight a global recession, to support the development of low-income countries, or as an anchor to improve global monetary stability. This text will be of interest to students, scholars, and researchers of economic theory and international monetary economics. It will also appeal to professional organisations who supervise international relations.