Stock-Flow Consistent Models: Reply To Jo Michell

Jo has a thoughtful together with constructive response to my post discussing a recent Bank of England paper that presents a novel Stock-Flow Consistent (SFC) model. One of the reasons it is constructive is because it is non tribal: besides many followers of heterodox schools seem to merely wishing to rubbish mainstream macro together with propose their exceptional schoolhouse represents the novel dawn. So I thought I mightiness brand a few points on Jo’s postal service that mightiness survive helpful.

1. Influenza A virus subtype H5N1 model that includes a lot of institutional item is non a virtue inwards itself: indeed if at the terminate of the twenty-four hours these institutions exercise non affair besides much it is an unnecessary together with distracting feature. Influenza A virus subtype H5N1 useful way to retrieve most modelling approaches is inwards damage of the validity of simplifications or short-cuts. It is for this ground that my method of theoretical deconstruction outlined together with demonstrated here for large models is so important. By trying to relate large model properties to simpler models, yous notice out where additional item is of import or unnecessary. And of course, the respond to that job may survive context specific.
   
   
2. I promise I never said SFC modes were “accounting, non economics”, because that disputation makes no sense. Any behavioural model contains closed to sort of theory. What I retrieve I said was that these models frequently seemed ‘light on theory’, which way that they speak a keen bargain most the accounting together with rather lilliputian most theory.
   
   For example, to enjoin that consumers possess got a desired wealth to income ratio is lite on theory. Why exercise they possess got such a ratio? Is it because of a precautionary motive? If it is, that volition hateful that this desired ratio volition survive influenced past times the demeanour of banks. The liquidity construction of wealth volition survive important, so they may react differently to housing wealth together with fiscal assets. Now the theory behind the equations inwards the Bank’s newspaper may survive informed past times a rich theoretical tradition, but it is normal to at to the lowest degree reference that tradition when outlining the equations of the model.
   
   
3. It is truthful that stock-flow accounting is of import inwards modelling, inwards the feel that doing it stops yous making empty-headed errors. But it is non unlike to identities or marketplace position clearing weather inwards this respect. You would never telephone band a shape of models ‘National Income Identity models’. [1] If the betoken is to emphasise that stocks affair to behavioural decisions most flows, so that is making a theoretical point. As Jo says, DSGE models are stock-flow consistent, but inwards the basic model consumers possess got no desired wealth ratio: it is the latter that matters. So when Jo says this absence should band alert bells, he is making a theoretical statement.
   
   I retrieve Jo is correct that the SFC cite is unfortunate, but yous tin brand a similar instance for the cite DSGE. It solely matters when closed to people believe that stock-flow consistency is closed to sort of heterodox invention. Equally the label DSGE becomes a job when economists initiative off thinking that macroeconomists cannot exercise partial equilibrium whatever more, a betoken that Blanchard makes inwards his discussion of DSGE models.
   
   
4. When Jo tries to connect the unimportance of stocks inwards DSGE to the provide to total work I retrieve he is icon with besides wide a brush. Let’s accept a uncomplicated example. In the baseline pocket-size opened upwards economic scheme model of mainstream macro, a temporary daze that leads to a electrical current job organisation human relationship deficit volition permanently trim welfare because internet assets permanently fall. The merchandise residue has to improve, together with consumption is thence lower. Influenza A virus subtype H5N1 permanent depreciation worsens the damage of trade. In that instance what happens to stocks has a permanent effect. Indeed, if yous modify the model past times replacing the consumption component subdivision with ane based on Blanchard/Yaari consumers, at that topographic point would survive a feedback from wealth to consumption which would hateful this daze would no longer possess got a permanent effect.
   
   
5. In using the quote of mine most ‘not their field’ from a previous post he is rather unfair. As I conk on to say, mainstream macro was at fault inwards neglecting finance. Pretty good every mainstream macroeconomist volition enjoin the same. The betoken I wanted to brand was that it is non truthful that they all did this because they were certain it didn’t matter, the sector would regulate itself etc etc. What I possess got argued inwards this paper is that macroeconomists mightiness good possess got non neglected the fiscal sector if they had allowed to a greater extent than traditional aggregate (i.e. non-microfounded) models to maintain to survive a legitimate expanse of academic research. Some mightiness wishing to debate that this fail of the fiscal sector reflected that mainstream macroeconomists were inherently neoliberal together with believed fiscal markets looked afterwards themselves. Perhaps closed to were, but enough of others were not.
   
   
6. I also retrieve it is a combat unfair to propose that I was criticising the model inwards the Bank’s paper. As it represents an choice to DSGE models it should survive welcomed. (Especially so for the Bank. Many world institutions, similar the Fed, possess got maintained their aggregate models with DSGE models: the Bank of England has not.) What I was criticising was (a) the emphasis inwards the newspaper on the accounting at the expense of theoretical give-and-take (b) that the newspaper ignored the non-DSGE non-Post Keynesian modelling tradition.

[1] It may good survive that the models I quoted, similar the 1970s Treasury model, were SFC because of the influence of Godley, but they would possess got thought that this was merely expert modelling, together with non a defining aspect of what they were doing.