EC6012 Lecture 3
Stephen Kinsella
SFC Setup
Homework & Blogs
EC6012 Lecture 4 References
A First SFC Model
Stephen Kinsella
Dept. Economics,
University of Limerick.
stephen.kinsella@ul.ie
January 18, 2008

Today EC6012 Lecture 3
Stephen Kinsella
SFC Setup
Homework & Blogs
References
SFC Setup
Homework & Blogs

Advantages of SFC EC6012 Lecture 3
Stephen Kinsella
SFC Models “intrinsically dynamic” (Turnovsky, 1977, SFC Setup
p.3); Homework & Blogs
Model financial markets & real-financial interactions References
explicitly.

Disadvantages of SFC EC6012 Lecture 3
Stephen Kinsella
Complicated Balance Sheet Interactions SFC Setup
‘Dynamics’ difficult to imagine. Homework & Blogs
References

Aggregate Supply EC6012 Lecture 3
Stephen Kinsella
AS SFC Setup
Homework & Blogs
References
pt = wt .λt .(1 + τ ) (1)
Symbols
p Price Level; W Money wage per unit; λ labour/output
ratio; τ mark up rate

Aggregate Demand EC6012 Lecture 3
Stephen Kinsella
Consumption SFC Setup
Homework & Blogs
Ct Xt Vht−1 References
= (1 − π).(1 − θ). + a. (2)
pt .Kt−1 Kt pt .Kt−1
Investment
∆Kt δK0
= + (α.π + β − θ1 .ilt ) (3)
Kt−1 K0−1

Households & Firms EC6012 Lecture 3
Stephen Kinsella
Households SFC Setup
Homework & Blogs
pet .Etd = delta.Vht (4) References
d
Dt = (1 − δ).Vht (5)
δ = −ib + ρ (6)
Firms
∆Kt
Ets = χ.Kt = χ.Kt−1 .(1 + ) (7)
Kt−1

Equilibrium EC6012 Lecture 3
Stephen Kinsella
SR Eqm SFC Setup
Homework & Blogs
(1 − δ).vht−1 + savh References
vht = (8)
1 + gt = δ
Handout
Equilibrium Properties

Equilibrium ShocksmodelInteresta Rate the rate of interest (Regime 1b)
Figure 8. Dynamic response of to variables to shock to
u vh
1.7
0.815
0.81 1.6
0.805
1.5
0.8
0.795 1.4
0.79 1.3
0.785
1.2
0.78
0.775 1.1
0.77 1
24
32
56
64
72
80
88
96
16
40
48
0
8
g b
0.058 1.2
0.057 1.1
0.056 1
0.055 0.9
0.054 0.8
0.053 0.7
0.052 0.6
0.051 0.5
14
21
28
35
42
49
56
63
70
77
84
91
98
0
7
14
21
28
35
42
49
56
63
70
77
84
91
98
0
7

EC6012 Lecture 3
Download Excel Sheet
Stephen Kinsella
Show a change in interest rate on bonds from 0.07 to
0.1. What effect does this have in u-vh space? SFC Setup
Homework & Blogs
Reset the model. Show a change in the value of α from
References
0.3 to 0.7.
Due up on the blogs next week.
Read Godley and Lavoie (2006, Chapter 3).

References EC6012 Lecture 3
Stephen Kinsella
Wynne Godley and Marc Lavoie. Monetary Economics An SFC Setup
Integrated Approach to Credit, Money, Income, Homework & Blogs
Production and Wealth. Palgrave-Macmillan, 2006. URL References
http://www.palgrave.com/products/Catalogue.
aspx?is=0230500552.