What Are Stock-Flow Consistent (Sfc) Models?

This article is a brusk Definition of what Stock-Flow Consistent (SFC) models are. I stance this degree of models equally existence the almost promising amidst the existing types of macroeconomic models. This article is literary, I volition write others which may truly conduct keep to a greater extent than or less equations (or at to the lowest degree pretty charts of the output). References are given below.


The stock-flow consistent modeling methodology is based on modeling the economical national accounts explicitly, alongside the affect of fiscal flows correctly accounted for past times the alter of stocks of fiscal assets together with liabilities. The approach towards accounting identities is real rigourous, alongside checks made to run into that all assets are accounted for properly (someone's fiscal property is another's liability). And inwards particular, at that spot is a notion of stock-flow norms taken into delineate of piece of work concern human relationship when modeling the behavior of entities (typically sectors) inside the model. (A stock-flow norm is the supposition that entities volition adapt flows based on their existing stock of liabilities together with assets.)

For those who are unfamiliar alongside the damage stock together with flow equally used inwards economics, stock is non related to the usage of the mutual usage of the discussion equally a fiscal asset. (Stocks are to a greater extent than or less other lift for equities inwards North America, whereas gilt-edged stocks refers to authorities bonds on the other side of the Atlantic.) Influenza A virus subtype H5N1 stock is the value (in the monetary unit of measurement of account) of an property or liability on a residual at the destination of the period. For example, if yous conduct keep $1000 inwards your banking delineate of piece of work concern human relationship at the destination of the day, your stock of banking concern deposits is $1000 for that period. Influenza A virus subtype H5N1 flow is the amount of coin that changes hands across a fourth dimension period. For example, a salary of $100 paid daily is a flow variable, equally it is an amount of coin per unit of measurement of time. The almost well-known flow variable inwards economic science is Gross Domestic Product (GDP).

As a simplified example, i could conduct keep a identify sector that follows the next rules:

1. It spends 95% of income received during the menses (which implies it saves 5%). The remaining income is used to purchase fiscal assets; and
2. it sells 10% of fiscal assets owned at the showtime of the period, together with the proceeds are besides spent. (This human relationship represents a stock-flow norm.)

(These flows volition conduct keep to consistent alongside the behavior of the other sectors of the economy. Therefore, other sector(s) volition conduct keep to buy/sell fiscal assets to offset the identify sector cyberspace purchases. I am ignoring the other sectors for simplicity, simply giving an instance rules followed past times i sector.) If the identify sector income is $100, together with it has previous fiscal assets of $50, it volition conduct keep a cyberspace savings of zip (and therefore pass $100 during the period). This is because:

1. it volition salvage $5 out of income (5% of $100), and
2. spend $5 of previous savings (10% of $50).

If the sector has less than $50 of assets, the cyberspace savings volition move positive, raising time to come fiscal assets. Conversely, if it  has to a greater extent than than $50 of fiscal assets initially, the sector volition pass to a greater extent than than 100% of income, together with time to come fiscal assets volition move lower (note that involvement income is purpose of income inwards this example). If the fourth dimension history of the model is calculated, if the identify sector income is stable nigh $100, its fiscal property holdings volition converge towards $50.

I volition non endeavour to hash out the history of SFC models herein; this is covered inwards the references. But I volition authorities notation that Modern Monetary Theory (MMT), which has a real large presence on the web, tin give the sack move best viewed equally an offshoot or evolution of SFC modelling.

One work alongside the lift for this degree of models is that they imply that other classes of macroeconomic are non stock-flow consistent. Even if this is a truthful state of affairs, it in all probability generates needless controversy. Stock-flow inconsistency was a valid critique of older mainstream approaches to macro, but this is non a weakness of modern Dynamic Stochastic General Equilibrium (DSGE) models theoretically. The touchstone frameworks produce the accounting correctly when the initial optimisation problems are laid up. That said, these initial optimisation problems are by together with large non solved; instead a linearisation of the model is taken, together with the linearised organization is the actual organization that is analysed. The pace of linearisation volition pause the accounting identities amidst the model variables. Therefore, critics of DSGE models tin give the sack betoken out that the resultant models are stock-flow inconsistent, whereas the defenders of DSGE tin give the sack betoken to the initial work statement, which is stock-flow consistent. This creates a round out declaration that volition never move resolved.

See Also:

• My SFC/MMT resources page.
• Solving a elementary SFC model.

References

• Monetary Economics: An Integrated Approach to Credit, Money, Income, Production together with Wealth (affiliate link)- Wynne Godley together with Marc Lavoie  This is an fantabulous introduction to the field. Wynne Godley is largely associated alongside the evolution of the SFC modelling methodology, although he argued that he was edifice on the initial framework preferred past times Keynes together with Minsky.
• sfc-models.net - online network of academics who written report SFC modelling. (To move honest, I am non real familiar alongside this site at present.)
• A slightly longer description of SFC models from the Australian academic Bill Mitchell (the Billy Blog).
• The Reflection on Monetary Economics weblog past times Nick Edmonds. He has a SFC model of the Britain economy.
• The Fictional Reserve Barking blog.

(c) Brian Romanchuk 2013