Stock-Flow Consistent Modeling

PK-SFC Modeling

  • Integration of Real and Financial sectors of economy.
  • Balance-sheet  accounting approach
  • Stock-flow consistent
  • Quadruple accounting

 

From  Post-Keynesian Stock-Flow Consistent Modeling: A Survey

 

PK-SFC models are a specific kind of Post-Keynesian macro model that follows distinctive accounting rules, ensuring the consistent integration of the stocks and flows of all the sectors of the economy. The models have three important methodological innovations: first, the consistency of the overall economy is maintained, since one sector’s outflows are always another sector’s inflows just as one sector’s liability is always another sector’s asset; second, the integration of the real and the financial side of the economy; third, the construction of the long run as a chain of short run periods. Nothing is lost, neither in space nor in time. These constraints are crucial in modeling modern macroeconomies which are highly complex, integrated systems.

The roots of PK-SFC models can be identified in the work of Morris A. Copeland (1949), who, with his study on “money flows,” is the father of the flow of funds approach. His intuition was to enlarge the social accounting perspective to the study of money flows. Copeland laid the foundations for an economic approach able to integrate real and financial flows of the economy. A concrete example of his legacy is represented by the quadruple-entry system: since someone’s inflow is someone else’s outflow, the standard double-entry system of accounting is doubled in a quadruple-entry system.

Copeland’s work certainly had a great influence on economics -mainly as a source of financial data- but its potential disruptive impact on the study and modeling of the interdependences between real and financial flows failed to occur. It was only in the 1980s, with the work of Nobel Laureate James Tobin, that these efforts culminated in the organizing theory advocated by Cohen. The article Tobin wrote with co-authors (Backus et al., 1980) perhaps best represents his path-breaking contribution in the foundation of PK-SFC models. Indeed, in developing an empirical model of the US economy in both its financial and non- financial sides, Backus et al combined the theoretical hypothesis on the behavior of the economy with a rigorous accounting framework based on the flow-of-funds social account developed by Copeland. The result is a stock-flow consistent model that includes some of the characteristics still peculiar in the literature, such as the matrices-based accounting approach and discrete time and other features, such as the stock- flow identity, which are fundamental in any model of this type.

 

Next to Tobin, the other scholar who played an essential role in the development of this family of models is Wynne Godley. Godley, head of the New Cambridge school in the 1980s, started developing models coherently integrating stocks and flows. His efforts culminated in the organized framework he developed in his more recent publications, with which he collected the legacy of Tobin. Godley’s contribution probably finds its peak in the seminal book he wrote together with Marc Lavoie (Godley and Lavoie, 2007), which is still the main reference for current PK-SFC practitioners. This paper focuses on the tradition descending from the work of Wynne Godley, hence the choice of talking of PK-SFC models rather than just SFC models.

 

Key Sources of Research:

 

Bezemer, Dirk J.

“The economy as a complex system: the balance sheet dimension.”

(2012)

 

http://www.economicsofcreditanddebt.org/media/research/ACS_1250047_1st_Prf.pdf

 

‘No one saw this coming’ – or did they?

Dirk Bezemer

30 September 2009

http://voxeu.org/article/no-one-saw-coming-or-did-they?quicktabs_tabbed_recent_articles_block=0

 

A complex systems approach to constructing better models for managing financial markets and the economy

J. Doyne Farmer1, M. Gallegati2, C. Hommes3, A. Kirman4, P. Ormerod5, S. Cincotti6, A. Sanchez7, and D. Helbing8

 

http://allariz.uc3m.es/~anxosanchez/ep/EconFinancialFuturITC16.pdf

 

Money Creation and Financial Instability: An Agent-Based Credit Network Approach

Matthias Lengnick, Sebastian Krug, and Hans-Werner Wohltmann

 

http://www.economics-ejournal.org/economics/journalarticles/2013-32/version_1

 

Complex agent-based macroeconomics: a research agenda for a new paradigm

Domenico Delli Gatti

Edoardo Gaffeo

Mauro Gallegati

 

http://www.lem.sssup.it/paper_seminars/budapest/delligatti_gallegati.pdf

 

 

Growing fragilities? Balance sheets in The Great Moderation

Richard Barwell and Oliver Burrows

 

http://collections-r.europarchive.org/tna/20110802141632/http://www.bankofengland.co.uk/publications/fsr/fs_paper10.pdf

 

 

Credit Money and Macroeconomic Instability in the Agent-based Model and Simulator Eurace

Silvano Cincotti, University of Genoa Marco Raberto, Reykjavik University Andrea Teglio, Universitat Jaume I

 

http://repositori.uji.es/xmlui/bitstream/handle/10234/32596/45464.pdf?sequence=1

 

 

The Financial Instability Hypothesis: a Stochastic Microfoundation Framework

C. Chiarella and C. Di Guilmi

 

https://www.researchgate.net/profile/Carl_Chiarella/publication/222654144_The_Financial_Instability_Hypothesis_A_Stochastic_Microfoundation_Framework/links/09e4150ef5365dded1000000.pdf

 

 

The dynamics of the monetary circuit

Steve Keen

 

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.360.9497&rep=rep1&type=pdf

 

 

Debunking Macroeconomics

Steve Keen

 

https://www.researchgate.net/profile/Steve_Keen/publication/227410201_Debunking_Macroeconomics/links/0c96051b9fcca21f5c000000.pdf

 

 

Causes of Financial Instability: Don’t Forget Finance

Dirk J. Bezemer

April 2011

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.194.603&rep=rep1&type=pdf

 

 

Towards a New Monetary Paradigm: A Quantily Theorem of Disaggrcgated Credit, with Evidence from Japan

By Richard A. Werner

 

http://eprints.soton.ac.uk/36569/1/KK_97_Disaggregated_Credit.pdf

 

 

Schumpeter Might Be Right Again: The Functional Differentiation of Credit

Dirk J. Bezemer

http://www.rug.nl/staff/d.j.bezemer/the_functional_differentiation_of_credit.pdf

 

 

Banks As Social Accountants: Credit and Crisis Through an Accounting Lens

Dirk J Bezemer

https://mpra.ub.uni-muenchen.de/15766/1/MPRA_paper_15766.pdf

 

Bezemer, Dirk J.

“This is Not a Credit Crisis–It is a Debt Crisis.”

Economic Affairs 29.3 (2009): 95-97.

 

Godley, Wynne, and Marc Lavoie.

Monetary economics: an integrated approach to credit, money, income, production and wealth.

Springer, 2012.

 

Stock-flow Consistent Modeling through the Ages

Eugenio Caverzasi Antoine Godin

January 2013

https://www.researchgate.net/profile/Antoine_Godin/publication/255967990_Stock-Flow_Consistent_Modeling_Through_the_Ages/links/558f0a0108ae1e1f9bace43e.pdf

 

Fiscal Policy in a Stock-Flow Consistent (SFC) Model

Wynne Godley and Marc Lavoie

April 2007

http://estes1.levy.org/pubs/wp_494.pdf

 

Copeland, Morris A.

“Social accounting for moneyflows.” 

The Accounting Review 24.3 (1949): 254-264.

 

Finance and economic breakdown: modeling Minsky’s “financial instability hypothesis”

 

Steeve Keen

http://keenomics.s3.amazonaws.com/debtdeflation_media/papers/Keen1995FinanceEconomicBreakdown_JPKE_OCRed.pdf

 

The Credit Crisis and Recession as a Paradigm Test

Dirk J. Bezemer

http://www.economicsofcreditanddebt.org/media/research/JEI_PARADIGM_PAPER.pdf

 

Keen, Steve.

“A monetary Minsky model of the Great Moderation and the Great Recession.”

Journal of Economic Behavior & Organization 86 (2013): 221-235.

http://keenomics.s3.amazonaws.com/debtdeflation_media/papers/JEBO_2672.pdf

 

 

“No One Saw This Coming”
Understanding Financial Crisis Through Accounting Models

Dirk J Bezemer

 

http://izvor-denarja.si/wp-content/uploads/2012/08/Study-Bezemer-No-one-saw-this-coming.pdf

 

 

Understanding financial crisis through accounting models

Dirk J. Bezemer

https://www.researchgate.net/profile/Dirk_Bezemer2/publication/227411453_Understanding_financial_crisis_through_accounting_models/links/00b4952ce88deab0d2000000.pdf

 

Can Disequilibrium Macroeconomic Models Be Used to Anticipate Financial Instability?

A Case Study

Dirk J. Bezemer

http://www.economicsofcreditanddebt.org/media/research/Can_Macro_Models_JEvoLEcon_1.pdf

 

A dynamic monetary multi-sectoral model of production

Steve Keen, University of Western Sydney

http://keenomics.s3.amazonaws.com/debtdeflation_media/papers/Keen2011DynamicMonetaryMultisectoralModel.pdf

 

Circuit Theory Extended: The Role of Speculation in Crises

Neil Lancastle

https://www.dora.dmu.ac.uk/bitstream/handle/2086/11640/economics_2012-34.pdf?sequence=1&isAllowed=y

 

Debt cycles, instability and fiscal rules: a Godley-Minsky model

Yannis Dafermos

 

http://eprints.uwe.ac.uk/26694/1/Dafermos%20(2015)%20Debt%20cycles%20instability%20and%20fiscal%20rules.pdf

 

The post-Keynesian economics of credit and debt

Marc Lavoie

https://www.cigionline.org/sites/default/files/inet2012lavoie_post-keynesianeconomics.pdf

 

Assessing the Contribution of Hyman Minsky’s Perspective to Our Understanding of Economic Instability

Hersh Shefrin

 

http://www6.luc.edu/media/lucedu/quinlan-risk/pdfs/Shefrin%20Assessing%20Minsky%20Jan%2013%202013.pdf

 

Modeling Financial Instability

Steve Keen

 

http://www.debtdeflation.com/blogs/wp-content/uploads/2014/02/Keen2014ModelingFinancialInstability.pdf

 

 

Post-Keynesian Stock-Flow Consistent Modeling: A Survey

Eugenio Caverzasi and Antoine Godin

 

http://www.ul.ie/business/sites/default/files/research_bulletins/february_2015_-_kbs_research_bulletin_pdf.pdf

 

Godley and Graziani: Stock-Flow-Consistent Monetary Circuits

Gennaro Zezza

April 2011

 

http://www00.unibg.it/dati/corsi/11007/65034-Zezza%20-%20Godley%20and%20Graziani.%20Stock-Flow-Consistent%20Monetary%20Circuits.pdf

 

Features of a realistic banking system within a post-Keynesian stock-flow consistent model

Marc Lavoie,

Wynne Godley,

December 2003

 

https://core.ac.uk/download/files/27/1321739.pdf

 

Words to the Wise: Stock Flow Consistent Modeling of Financial Instability

Stephen Kinsella

November 2011

https://core.ac.uk/download/files/153/6228912.pdf

 

The Minskyan System, Part III:
System Dynamics Modeling of a Stock Flow–Consistent Minskyan Model

Eric Tymoigne

June 2006

http://estes.levy.org/pubs/wp_455.pdf

 

TOWARDS A RECONSTRUCTION OF MACROECONOMICS USING A STOCK FLOW CONSISTENT (SFC) MODEL

Wynne Godley

May 2004

 

https://www.repository.cam.ac.uk/bitstream/handle/1810/225167/wp16.pdf?sequence=1&isAllowed=y

 

A foxy hedgehog: Wynne Godley and macroeconomic modelling

Lance Taylor

 

http://mulestable.net/file/ramanan-20100615T083857-gsl2drg.pdf

 

 

Some Simple, Consistent Models of the Monetary Circuit

Gennaro Zezza,

May 2004

 

https://core.ac.uk/download/files/153/9314338.pdf

 

Money and Macroeconomic Dynamics : Accounting System Dynamics Approach

Edition 2.0

Kaoru Yamaguchi Ph.D.

 

http://www.muratopia.org/Yamaguchi/macrodynamics/Macro%20Dynamics.pdf

 

Money Creation under Full-reserve Banking: A Stock-flow Consistent Model

Patrizio Lainà

October 2015

http://www.levyinstitute.org/pubs/wp_851.pdf

 

Endogenous Feedback Perspective on Money in a Stock-Flow Consistent Model

Working Paper (May 5, 2016)

I. David Wheat

http://www.wheatresources.com/WP/Wheat%20Endogenous%20Feedback%20Perspective%20on%20Money%20WP.pdf

 

 

Modeling the Economy as a Whole – Stock-Flow Models
Gennaro Zezza

 

https://www.icts.res.in/media/uploads/Program/Files/memf2015-Chapter25-Gennaro.pdf

 

 

FINANCIALIZATION AND THE MONETARY CIRCUIT: A MACRO-ACCOUNTING APPROACH

MARCO PASSARELLA

 

http://eprints.whiterose.ac.uk/80854/7/MVP%20ROPE%202014.pdf

 

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