Antoine Godin

Agent Based-Stock Flow Consistent Macroeconomics: Towards a Benchmark Model

The global financial crisis has forced standard macroeconomics to re-examine the plausibility of its assumptions and the adequacy of the policy prescriptions flowing from those assumptions. We believe a renewal of macroeconomic thinking and macroeconomic modeling is possible by recognizing that our economies should be analyzed as complex adaptive systems. A coherent and exhaustive representation of the inter-linkages between the real and financial sides of the economy is vital as well. We propose a macroeconomic framework based on a novel combination of the Agent Based and Stock Flow Consistent approaches. This paper presents a benchmark model for this innovative approach. Our model depicts an economy with capital and credit in which different types of agents locally interact on different markets. We provide a detailed representation of individual agents’ balance sheets, ensuring the model accounting consistency at the micro, meso, and macro levels. We analyze the properties of our simulated economy under different configurations of agent heuristics, focusing in particular on the role of credit and investment. We explain in detail the logic followed to calibrate and validate the model. Results show that our benchmark model is able to reproduce many stylized facts observed in real world, thus representing a good starting point to test -- in the next works -- different economic policies and institutional setups. Finally, the relatively simple and flexible structure of the model opens up many possibilities for development of the framework along different lines, thus providing a fertile soil for new applications.

Stock-Flow Consistent Modeling Through the Ages

The aim of the paper is to provide an overview of the current stock-flow consistent (SFC) literature. Indeed, we feel the SFC approach has recently led to a blossoming literature, requiring a new summary after the work of Dos Santos (2006) and, above all, after the publication of the main reference work on the methodology, Godley and Lavoies Stock-flow Consistent Approach (2007). The paper is developed along the following lines. First, a brief historical analysis investigates the roots of this class of models that can be traced as far back as 1949 and the work of Copeland. Second, the competing points of view regarding some of its main controversial aspects are underlined and used to classify the different methodological approaches followed in using these models. Namely, we discuss (1) how the models are solved, (2) the treatment of time and its implication, and (3) the need-or not-of microfoundations. These results are then used in the third section of the paper to develop a bifocal perspective, which allows us to divide the literature reviewed according to both its subject and the methodology. We explore various topics such as financialization, exchange rate modeling, policy implication, the need for a common framework within the post-Keynesian literature, and the empirical use of SFC models. Finally, the conclusions present some hypotheses (and wishes) over the possible lines of development of the stock-flow consistent models.

Innovation and finance: a stock flow consistent analysis of great surges of development

The present work aims at contributing to the recent stream of literature which attempts to link the Neo-Schumpeterian/Evolutionary and the Post-Keynesian theory. The paper adopts the Post-Keynesian Stock Flow Consistent modeling approach to analyze the process of development triggered by the emergence of a new-innovative productive sector into the economic system. The model depicts a multi-sectorial economy composed of consumption and capital goods industries, a banking sector and two households sectors: capitalists and wage earners. Furthermore, it provides an explicit representation of the stock market. In line with the Schumpeterian tradition, our work highlights the cyclical nature of the development process and stresses the relevance of the finance-innovation nexus, analyzing the feed-back effects between the real and financial sides of the economic system. In this way we aim at setting the basis of a comprehensive and coherent framework to study the relationship between technological change, demand and finance along the structural change process triggered by technological innovation.

A stock flow consistent analysis of a Schumpeterian innovation economy

Schumpeter argued that boom and bust cycles are inherent to the rise of innovation and constitute an unavoidable consequence of the way the capitalist system reacts to the emergence of a wave of innovations. This contribution aims to describe Schumpeterian economic development in a ‘monetary theory of production’ framework, emphasizing the crucial role played by credit creation, conceived as ‘the monetary complement’ of innovation. By adopting a stock flow consistent analytical approach, we analyze both the structural change process triggered in the real economy by the emergence of innovation, and the monetary dynamics arising during the various stages of the development process.

Innovation and finance: an SFC analysis of great surges of development

Schumpeter, a century ago, argued that boom-and-bust cycles are intrinsically related to the functioning of a capitalistic economy. These cycles, inherent to the rise of innovation, are an unavoidable consequence of the way in which markets evolve and assimilate successive technological revolutions. Furthermore, Schumpeter’s analysis stressed the fundamental role played by finance in fostering innovation, in defining bank credit as the “monetary complement” of innovation. Nevertheless, we feel that the connection between innovation and firm financing has seldom been examined from a theoretical standpoint, not only by economists in general, but even within the Neo-Schumpeterian research line. Our paper aims at analyzing both the long-term structural change process triggered by innovation and the related financial dynamics inside the coherent framework provided by the stock-flow consistent (SFC) approach. The model presents a multisectoral economy composed of consumption and capital goods industries, a banking sector, and two household sectors: capitalists and wage earners. The SFC approach helps us to track the flows of funds resulting from the rise of innovators in the system. The dynamics of prices, employment, and wealth distribution among the different sectors and social groups is analyzed. Above all, the essential role of finance in fostering innovation and its interaction with the real economy is underlined.

Guaranteed Green Jobs: Sustainable Full Employment

In most economies, the potential of saving energy via insulation and more efficient uses of electricity is important. In order to reach the Kyoto Protocol objectives, it is urgent to develop policies that reduce the production of carbon dioxide in all sectors of the economy. This paper proposes an analysis of a green-jobs employer-of-last-resort (ELR) program based on a stock-flow consistent (SFC) model with three productive sectors (consumption, capital goods, and energy) and two household sectors (wage earners and capitalists). By increasing the energy efficiency of dwellings and public buildings, the green-jobs ELR sector implies a shift in consumption patterns from energy consumption toward consumption of goods. This could spur the private sector and thus increase employment. Lastly, the jobs guarantee program removes all involuntary unemployment and decreases poverty while lowering carbon dioxide emissions. The environmental policy proposed in this paper is macroeconomic and offers a structural change of the economy instead of the usual micro solutions.

Leverage, liquidity and crisis: A simulation study

We study the interactions of banks and ?rms within a leverage cycle to understand how capacity utilisation and capital investment interact with funding costs, leverage by banks and ?rms, and liquidity. We show in a simulation study that when ?rms can grow and die by becoming insolvent, and when banks can grow and die as their bad debts increase to unsustainable levels, the real economy cycles around a leverage cycle.

A dynamic model of financial balances for the United Kingdom

We construct a new scenario analysis model for the United Kingdom using ONS data from 1987 to the present. The model links decisions about real variables to credit creation in the financial sector and decisions about asset allocation among investors for a wide array of financial assets. We develop, estimate, and calibrate the model from first principles as well as describing the stock-flow coherent database we construct to validate the model. We impose several scenarios on the model to test its usefulness as a medium term scenario analysis tool, including increases in banks’ capital ratios, sudden stops, changes in investment, increases in house prices and fiscal expansions.

Green Jobs for Full Employment: A Stock Flow Consistent Analysis

Unemployment is a fact in present economies. Even without a crisis, unemployment exists and costs a lot to society. Reasons for unemployment are multiple and differ according to the theory at hand. Lack of effective demand, imperfect markets, and friction are examples of unemployment justifications. All sorts of policies based on these different theories have been implemented with varying results but none have proven effective in tackling unemployment. Full employment has never been achieved during the last 40 years. Often the problem is that these policies promote indirect jobs creation: public spending, wage subsidies, incentives, tax cuts, job training. Another issue is the change in the dimension of these policies; we now have microeconomic supply of labor policies instead of macroeconomic demand stimulation policies. Even if they meet some objectives, these policies do not provide an answer to unemployment.

The Tightening Links Between Financial Systems and the Low-Carbon Transition

This chapter investigates the implications of the policy changes triggered by the Global Financial Crisis on the transition to a low-carbon society. The immediate effects have mostly been negative: national governments have retracted from public spending and fiscal support to clean technologies; new macroprudential regulation has discouraged banks from lending to low-carbon projects; monetary policies have perpetuated the high-carbon lock-in of the economic system. However, the transformed macroeconomic and institutional setting, together with the increased awareness of the links between financial dynamics and natural resources, has also created new space of opportunity for low-carbon investment and financing. New concepts and policy proposals have emerged, including the ‘green growth’ narrative, the idea of aligning macroprudential policy to climate objectives and the suggestion to use unconventional ‘Quantitative Easing’ monetary policies to support low-carbon investment.