A Dynamic Model of Financial Balances for the United Kingdom
A dynamic model of financial balances for the
THE 12TH INTERNATIONAL POST KEYNESIAN
CONFERENCE, Sept 26, 2014.
1University of Limerick, Ireland. email@example.com
Joint work with
I Oliver Burrows and Stephen Millard, Bank of England.
I Stephen Kinsella and Sean Ryan, University of Limerick.
I Views expressed are ours and not those of the Bank of England.
What we want to do
I We are building a new dynamic macroeconomic model of
financial balances for the United Kingdom using flow of funds
data from 1987 to the present.
I The model contains six sectors: households, non-financial firms,
the government, banks, insurance companies and pension
funds, and a simplified rest of the world.
I Using forecasts for key macroeconomic driving variables, we
plan to show how we can use our model to perform
medium-term scenario analyses on developments in the housing
market, the supply of credit, demographic change, and changes
in portfolio allocation between multiple financial assets.
I Need to modify and augment standard modeling approaches
post-crisis. There is no model ‘to rule them all’ anymore.
Models should be interoperable and empirically-based.
I Clearly we need coherent incorporation of financial and real
stocks and flows via the Flow of Funds into the apparatus of
modern Bank models.
I Need to understand portfolio effects, housing markets, debt
and demographic change simultaneously.
I Understanding the relationship between developments in the
real economy and in financing flows, balance sheets and asset
prices when looking for financial vulnerabilities.
I . . . which clearly syncs with forecasts from COMPASS, the
BoE’s suite of DSGE models.
Questions we’re asking (and able to ask):
I How do changes in the portfolio allocation of sector i affect
financial stability and output?
I How do credit quality and funding shocks to banks affect the
real economy and financial system, through supply of credit to
households and firms?
I How does bank credit creation (including via mortgage lending)
affect the evolution of the real economy and financial system?
I How do changes in demand in subsectors of the housing market
(i.e. changes in the share of BtL / movers / FtBs) affect
housing market dynamics and the broader evolution of the
I How do changes in import/export propensity affect the
Directed Acyclic Graph of the 6 sector model:
Real Supply of
End of Period
Figure 1: Directed Acyclic Graph
ICPF and retirment
Ann = DITRMR + pHM · SHRM − pR · SHMR
ap = Ann
(1 + iCB)i
Closing the model: The current account-capital account
I Trade Balance and Current Account of Balance of Payment
endogenously determined (except exports)
I Assuming no change in reserves and no change in exchange
rate, Capital account = current account
I First, ROW buys all remaining Government bonds then
allocates the residual between domestic bank bonds and
domestic firms’ equities, given the nominal demand from
domestic banks in foreign bonds and equities
Government Balance Sheet:
Figure 8: Assets, Liabilities, residual
Calibration and next steps
I Model takes parameter values from COMPASS and other
I Equation system c. 250 Identity, Balancing, and Behavioral
I Calibration ongoing (roughly 90% of the process done), taking
each experiment we discussed above into account.
I Comments and questions most welcome to