Modelling the Great Transition             Emanuele Campiglio              Giovanni Bernardo    International Conference o...
Introduction• nef:   –   Wellbeing and measurement of progress   –   Reform of finance and banking;   –   Environmental li...
Focus on money and banking• Economic theory needed! Very poor performance of mainstream  modelling:   – No money   – No ba...
But: banks create money       • Every loan creates a deposit       • “By far the largest role in creating broad money is p...
And most importantly,they allocate money in the economy
The model• Simpler framework centred on banking, money  creation mechanisms and private investment financing.• Great atten...
The structure of the model                 Aggregate macroeconomic framework          Production            Demand        ...
The macro framework                                       Wage share (α)                                                  ...
The macro framework (t+1)            Time t                                         Time t+1Consumption +Govt expenditures...
Sectoral accounts                   Balance sheetAssets                                        LiabilitiesAsset 1         ...
Private banks balance sheet                     Balance sheet    Assets                                      Liabilities  ...
Firms balance sheet                        Balance sheet    Assets                                         Liabilities  De...
Central Bank balance sheet                    Balance sheet   Assets                                      Liabilities   Gi...
The mechanics of credit creation    Private Banks               Central Bank           1. The bank lends 100 to           ...
Private banks balance sheet                     Balance sheet    Assets                                       Liabilities ...
Desired Investments : I d   N ; where  N    DR  Z      Demand for loans : Ld  I d   N  (  1) N        Credi...
Investments : I   N  CC  [1  ( 1)] N
The model
The model
The model
The model
Default run (η=1.2; β=1; r=0.1)
Default run with higher initial stock of             private debt
Default run with even higher initial       stock of private debt
Growth rates comparison
Banks confidence shock   (β jumps to 0.4)
Banks confidence shock
“Animal spirits” shock (η jumps to 1.7)
“Animal spirits” shock
“Animal spirits” shock
Growth rates comparison
Conclusions• Much work still to do:   – Allow for households and government to accumulate debt;   – Make (some of) the cru...
Thank you!emanuele.campiglio@neweconomics.org      www.neweconomics.org
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nef macro model - ISEE - Rio 2012

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nef macro model - ISEE - Rio 2012

  1. 1. Modelling the Great Transition Emanuele Campiglio Giovanni Bernardo International Conference on Ecological Economics Rio de Janeiro 19/06/2012
  2. 2. Introduction• nef: – Wellbeing and measurement of progress – Reform of finance and banking; – Environmental limits (fisheries); – Social policy (work time); – Inequality; – “Good” jobs.• Macroeconomic model of the UK economy: How to manage the UK economy within environmental limits whilst delivering increasing wellbeing and avoiding instability?• Complex framework at first (Working paper – October 2011 – session 49, n.311)..• .. then: focus on banking and finance.
  3. 3. Focus on money and banking• Economic theory needed! Very poor performance of mainstream modelling: – No money – No banks – No debt• Or, if present, banks seen just ad intermediaries:
  4. 4. But: banks create money • Every loan creates a deposit • “By far the largest role in creating broad money is played by the banking sector.. When banks make loans they create additional deposits for those that have borrowed.” (Bank of England, 2007)Berry et al. (2007) Interpreting movements in Broad Money, Bank of England Quarterly Bulletin 2007 Q3Source: Bank of England, Interactive Database, data series LPQAUYM (M4), LPQVQKT (notes and coins), YWMB43D (Central bank reserves).
  5. 5. And most importantly,they allocate money in the economy
  6. 6. The model• Simpler framework centred on banking, money creation mechanisms and private investment financing.• Great attention to consistency (double-entry book keeping).• A consistent framework, to be modified and potentially used for a variety of research questions: – Green economy financing; – Quantitative easing; – Fiscal and monetary policies; – Debt dynamics; – Crisis/housing bubble; – General macroeconomic dynamics.
  7. 7. The structure of the model Aggregate macroeconomic framework Production Demand Employment Sectoral accounts Non CentralBanks Gilt sellers Households financial Government Bank firms
  8. 8. The macro framework Wage share (α) Consumption + Government expenditures (C+G)Productivity (A) C  (1  t )W ; G  tW Output (Y) Wages (W) Capital (K) Aggregate Demand (AD) Profits (Π) Labour (L) Investments (I) Y  AK1 L Profit share (1-α) Net change in debt (ΔD) I    D Y  D  AD Income + net change in debt = aggregate demand
  9. 9. The macro framework (t+1) Time t Time t+1Consumption +Govt expenditures (Ct+Gt) Productivity (A t+1) Wages (Wt+1) Desired Output Labor Ldt Labor (Lt+1) (Yt+1)AggregateDemand (ADt) 1  ADt   Ld    AK 1  t  Investments (It) Capital (Kt+1) Profits (Πt+1)
  10. 10. Sectoral accounts Balance sheetAssets LiabilitiesAsset 1 LiabilityAsset 2 Net worth Total assets = Total liabilities Total change in assets = Total change in liabilities
  11. 11. Private banks balance sheet Balance sheet Assets Liabilities Reserves Deposits Loans Net worth Total assets = Total liabilities
  12. 12. Firms balance sheet Balance sheet Assets Liabilities Deposits LoansCapital stock Net worth Total assets = Total liabilities
  13. 13. Central Bank balance sheet Balance sheet Assets Liabilities Gilts Reserves Total assets = Total liabilities
  14. 14. The mechanics of credit creation Private Banks Central Bank 1. The bank lends 100 to the firm +100 +100 2. The bank seeks new +10 +10 (Loans) (Deposits) (Gilts) (Reserves) reserves at the central+10 +10 bank (suppose r=10%)(Reserves) (Deposits) 3. The central bank buys the same amount of gilts from the Gilt sellers Non financial firms secondary market.. 4. .. creating new +10 +100 +100 deposits (Deposits) (Deposits) (Loans) -10 (Gilts)
  15. 15. Private banks balance sheet Balance sheet Assets Liabilities Reserves Deposits +10 +100 +10 Loans Net worth +100 Total assets = Total liabilities
  16. 16. Desired Investments : I d   N ; where  N    DR  Z Demand for loans : Ld  I d   N  (  1) N Credit creation : CC  Ld   (  1) N
  17. 17. Investments : I   N  CC  [1  ( 1)] N
  18. 18. The model
  19. 19. The model
  20. 20. The model
  21. 21. The model
  22. 22. Default run (η=1.2; β=1; r=0.1)
  23. 23. Default run with higher initial stock of private debt
  24. 24. Default run with even higher initial stock of private debt
  25. 25. Growth rates comparison
  26. 26. Banks confidence shock (β jumps to 0.4)
  27. 27. Banks confidence shock
  28. 28. “Animal spirits” shock (η jumps to 1.7)
  29. 29. “Animal spirits” shock
  30. 30. “Animal spirits” shock
  31. 31. Growth rates comparison
  32. 32. Conclusions• Much work still to do: – Allow for households and government to accumulate debt; – Make (some of) the crucial parameters endogenous: • Propensity to invest (η) function of growth rate, profit rate, interest rate..; • Banks confidence (β) function of growth rate, profit rate..; • How do central bank interest rate affect the rest of interest rates (on deposits, loans etc.)?• Future research directions: – How does allocation of new purchasing power affect the macroeconomy? • Financing the green economy; • Productive vs speculative investments; • How does QE change the picture? – What are the alternatives? • Credit controls • Public money • Full fractional reserve banking
  33. 33. Thank you!emanuele.campiglio@neweconomics.org www.neweconomics.org
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