Stock-flow consistent model

Template:Unreviewed STOCK-FLOW CONSISTENT MODELS

Stock-Flow consistent models are a group of macroeconomic models based on the social accounting framework. These models coherently integrate stocks and flows in the economy. The underlying feature of the models is that there are no leakages in stocks and flows in the system. The SFC models connect the stocks and flows of the different sectors (e.g. Households, Firms, Banks, Government, and Rest of the World) in the economy. Using an accounting frame work based on the balance sheets and the flow of funds between the sectors, the SFC approach is seen as a useful tool in connecting the real and financial side of the economy.. The current SFC models mainly emerged from the literature of the Post Keynesians, Wynne Godley being the most famous contributor in this regard.

The models considerably differ from the mainstream economics, generally referred to as the neo-classical and new Keynesians, in economics. A very clear distinguishing feature of the SFC models, from the mainstream models is observed in the treatment of money and capital stock in the economy. The SFC models are typically based on the notion of endogenous money supply and stock of capital while, in contrast, the mainstream macroeconomic models treat money and the stock of capital in the system as exogenous and given.

A SIMPLE TRANSACTION FLOW MATRIX FOR A CLOSED ECONOMY

	Households	Firms	Government	Rest of the World	∑
Consumption	-C	+C			0
Govt. Expenditures		+G	-G		0
[OUTPUT]		[Y]
Wages	+W	-W			0
Taxes	-T		+T		0
Changes in Money	-ΔHh		+ΔHs		0
∑	0	0	0

The above table shows a transaction flow matrix of a very simple SFC model for a closed economy with no explicit financial sector. The more advanced SFC models consist of a financial sector and is also extended to an open economy by introducing the trade sector. The models get more and more complicated when sectors and assets are added to the system.

THE BEHAVIOURAL EQUATIONS

Once the accounting framework is fulfilled then a set of behavioural equations, based on stylized facts, is defined. The set of behavioural equations defines relationship between different variables, not determined by the accounting framework. A set of the behavioural equations for a simple closed economy is given by:

Y = C + G

T = θY

YD = Y - T

C = α₁ Y + α₂ H_t-1

ΔH_s = G - T

ΔH_h = YD - C

H = ΔH + H_t-1

Y (Income), C (Consumption), G (Government Expenditures), T (Taxes), YD (Disposable Income), ΔH (Changes in stock of money) θ,is the tax rate on the income of household. α₁,is the household consumption out of disposable income. α₁,is the household consumption out of previous wealth or savings

The SFC models are solved in different ways depending on the aspect of research but in general initial values are assigned to the stocks and then the model is calibrated or estimated.

Current researchers in the SFC approach to macroeconomic modelling are based in University of Limerick, Levy Economics Institute and University of Oxford.