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A SFC Model of the US Economy with a Special Emphasis on Explaining Sectoral Financial Balances


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Stock Flow Consistent Modeling session at 12th International Conference

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A SFC Model of the US Economy with a Special Emphasis on Explaining Sectoral Financial Balances

  1. 1. The sector financial balances model of aggregate demand. The perfect Econ 101 model? Oliver Picek PhD student, New School for Social Research Presentation at the 12th International Post-Keynesian Conference at the University of Missouri Kansas City September 27, 2014
  2. 2. Paper outline • The SFB of AD was proposed as a good replacement of the IS-LM model for a first model economics students should learn • Review some of the criticism of the idea of using sector financial balances for aggregate demand considerations • Formulate the model in terms of equations • Assessment and suggested use for a “sector financial balances model of aggregate demand” • Wrong name!
  3. 3. Idea of a SFB model of AD • Traces back to three balances approach of Wynne Godley • Godley (1999) uses a “fiscal ratio” (G/t) and the “government deficit”, a sector financial balance, as a measure of a contribution to aggregate demand, also in Godley and Lavoie (2007, Ch. 3 & 4) • taken up by Zezza (2009), Taylor (2004), Shaikh (2011), Fulwiller (2009,2011)
  4. 4. Criticism - Meaning of financial balance and growth contributions • Lavoie (Interview), Dos Santos and Macedo e Silva (2010), Fiebiger (2013) Teixeira (2014) • Main point: GDP consists of C,I,G,E-M According to national accounts: Growth contributions to GDP only from these, but not SFB such as T-G or S-I. • SFBs as growth contributions work only for alternative definition of AD such as aggregate supply (GDP+M, AD=PS+G+E) in Taylor (2004) or excess demand in Shaikh (2011)  leaves national accounts definitions
  5. 5. The SFB model of AD in the blogosphere: Krugman’s cross (2009)
  6. 6. SFB model of AD: blogosphere • Fulwiller (2009,2011) and co-authors pick it up and build a graphical model. • Debate about the model without actually writing down the equations. Fulwiller refers to a graphical representation of the SFC approach and more complex models initially, and argues at some point that interest can be in there. • But the model is simply the IS-LM model without the LM part. No short run shock and then long-run adjustment through interest rate demand effects of government bonds as in Godley & Lavoie 2007.
  7. 7. Statements • ..the government’s deficit is currently too small to accommodate the non-government’s desired surplus alongside full employment (Cooper 2014) • ..the SFB model shows that aggregate demand is set by the government’s deficit relative to net savings [the financial balance] desires of the non-government sectors (Fulwiller 2009) • directs attention to financial balances, but it is underlying parameters in the model that determine financial balances e.g. Haavelmo Theorem leaving desired government financial balance unchanged (Teixeira 2014).
  8. 8. Conclusions for a SFB model of AD • IS model: Joint determination of both GDP and financial balances by the same underlying parameters (autonomous spending times the multiplier)  analyze parameter shifts, similar to SFC model • The only financial balance on AD effect is in the long run, the reversal from an unsustainable situation  wrong name! Rename the model? • SFC connection? No NFA, no stock-flow norm, and the authors probably did not have a consumption function with wealth effect in mind to explain the crisis and deleveraging: A G&L type “classical” long-run adjustment to a higher level of GDP through government interest payments), because then a lower propensity to consume or fall in NFA would imply a higher long-run stationary income (GL 2007)
  9. 9. Alternative: SFC and credit • Let’s make a connection to SFC and credit literature: Long-term equilibrium of a model without growth requires: Δ NFA = Δ FA = ΔL = Δ K(=I) = 0 • Then the only long run equilibrium possible is when: FBgov=FBp=0 • No interest in the model  financial balance is the primary balance • From debt dynamics we know: a certain primary balance required to stabilize debt! • Too much credit creation (credit impulse could lead us away from equilibrium, with a shift back when debt levels become too high)
  10. 10. Conclusion for a modified SFB model of AD • Connects well to dynamic models such as SFC models, Taylor et. al (2012), Mason and Javadev (2014) • SFB effect on AD only in medium run (reversal of trend), so perhaps a different name, but the framework as such is excellent •  Perfect model for Econ 101 1) everyone knows comparative static IS-model 2) brings in financial balances naturally 3) simplified, but ok crisis explanation for first few weeks of Intro course 4) potentially allows for gross stocks analysis, not only net stocks