Sfc Models In Addition To Introductory Mmt-Style Financial Analysis

The usefulness of Stock-Flow Consistent (SFC) models is that they permit us to illustrate concepts inwards economic science without relying only on verbal descriptions. In this article, I volition hash out my interpretation of some of the ideas floating around inwards Modern Monetary Theory (MMT). I volition banking firm annotation that these are my interpretations of statements made past times others, illustrated past times an extremely unproblematic model. The key is that fifty-fifty unproblematic models tin hold out used to clarify our thinking.

This article is only a partial reply to an article past times Gerard MacDonell. He is unhappy close some of the writings of Professor Bill Mitchell, i of the leading MMT economists. I am non going to combat on Mitchell's behalf, rather I only desire to offering some analysis that touches on some of the technical issues Gerard made. He noted that Federal taxation in addition to spending are roughly similar, so how does that foursquare alongside MMT pronouncements close the independence of taxation in addition to spending? This outcome is non surprising, every bit it is precisely the kind of matter that is predicted past times SFC models -- in addition to MMT mathematical analysis of the economic scheme uses SFC models.

For those if you lot who are non fully up-to-date on post-Keynesian factionalism, delight banking firm annotation that SFC models were meant to hold out a mathematical lingua franca for post-Keynesian economics. In other words, MMT economists exercise SFC models, but they are non exclusive to MMT.

Since I desire to piece of work alongside my Python modelling framework here, in addition to it currently cannot back upward total draw concern cycle analysis (extensions volition hold out added later), I cannot create consummate jurist to Functional Finance. Therefore, I involve maintain to only focus on a yoke of to a greater extent than basic ideas close financial polict:

1. there is piffling human relationship betwixt taxes in addition to spending; and
2. governments cannot command the budget deficit.

I volition address these hither inwards turn.

Taxes in addition to Spending

One basic argue to query the human relationship betwixt taxes in addition to spending is that they are non inwards the same units,

• Taxes are mainly imposed every bit a percentage of incomes (or activity, such every bit tariffs or sales taxes). There are some user fees that are fixed, but these are typically a pocket-sized constituent of total revenue for the key government.
• Spending is laid inwards dollar amounts, or dollar amounts based on rules. (For example, welfare recipients have benefits based on some fixed scale).

When nosotros beak close taxes, nosotros are talking close percentages; when nosotros beak close authorities spending, nosotros are talking close dollars (or whatever the local currency is). Very serious budget analysts volition hash out changes to taxes inwards terms of dollar amounts, but those dollar amounts are based on crippled economical models that real few other people involve maintain seriously. (For example, meet the latest debate on "dynamic scoring" inwards the United States,)

Take the simplest possible SFC model of an economic scheme alongside a authorities - model SIM. (From Chapter three of Monetary economics, my implementation is to an article past times Gerard MacDonell. He is unhappy close some of the writings of Professor Bill Mitchell, i of the leading MMT economists. I am non going to combat on Mitchell's behalf, rather I only desire to offering some analysis that touches on some of the technical issues Gerard made. He noted that Federal taxation in addition to spending are roughly similar, so how does that foursquare alongside MMT pronouncements close the independence of taxation in addition to spending? This outcome is non surprising, every bit it is precisely the kind of matter that is predicted past times SFC models -- in addition to MMT mathematical analysis of the economic scheme uses SFC models.

For those if you lot who are non fully up-to-date on post-Keynesian factionalism, delight banking firm annotation that SFC models were meant to hold out a mathematical lingua franca for post-Keynesian economics. In other words, MMT economists exercise SFC models, but they are non exclusive to MMT.

Since I desire to piece of work alongside my Python modelling framework here, in addition to it currently cannot back upward total draw concern cycle analysis (extensions volition hold out added later), I cannot create consummate jurist to described inwards this article.)

Fiscal policy is laid past times 2 parameters:

• A taxation rate, which is a apartment percent of household income.
• Spending, which is expressed every bit an annual dollar amount. (Note that in that location is no explicit modelling of prices here.)

We assume that the taxation charge per unit of measurement is 20%, in addition to nosotros are inwards a steady province alongside spending at $15/year. We so facial expression at 2 scenarios, where nosotros ramp upward spending to:

• Scenario 1: $20/year.
• Scenario 2: $25/year.

Note that nosotros decided to ramp upward spending purely based on feeling adept (or bad) after some Stanley Cup playoff games; nosotros did non attention what the piece of cake authorities debt nags involve maintain to say. We brand no adjustments to our taxation rates whatsoever to compensate for increased spending.

Figure: gross domestic product inwards the 2 scenarios

Since this is a red-blooded Keynesian model, nosotros meet that increased authorities spending resulted inwards greater activity. The to a greater extent than nosotros spend, the to a greater extent than the economic scheme grows.

Figure: Fiscal Deficit

Oh noes, the deficits! As tin hold out seen above, nosotros involve maintain a larger deficit when nosotros ramp upward spending. But inwards both cases, nosotros terminate upward inwards balance. I volition provide to this later,

Figure: Debt-to-GDP Ratio

What close the dreaded debt-to-GDP ratio? It must hold out explosive, alongside all the increased spending in addition to no taxation hikes? Whoops. As seen above, it genuinely fell, in addition to so it reverts to the initial level. (The departure that is visible was the final result of rounding issues, which I volition facial expression into.*)

Even though nosotros adjusted spending without whatsoever reference to raising the taxation rate, nosotros even so ended upward alongside the same debt-to-GDP ratio. If i reads Monetary Economics, in that location is a long give-and-take of steady states, in addition to this outcome is precisely the kind of matter nosotros are supposed to expect. The steady province debt ratio is a constituent of the taxation charge per unit of measurement in addition to mortal sector behaviour.

The deportment of the deficit is odd when compared to existent basis behaviour: it reverts to zero. This is because this is a no-growth economic scheme that heads to a steady state. If nosotros are inwards a steady state, all stock variables when scaled past times gross domestic product are constant, which implies cypher flows. Therefore, the internet creation of authorities debt has to hold out zero. If the steady province featured a positive growth rate, nosotros would revert to a deficit that allows debt levels to grow inwards draw alongside nominal GDP, every bit seen below.

Figure: Deficit for province growing at 2%/year.

The nautical chart higher upward shows the final result of a dissimilar scenario, where the economic scheme grows at 2% per twelvemonth inwards the "steady state."  The province did non showtime out at steady state, so the deficit every bit a percent of gross domestic product starts out at a higher level, so declines towards a constant value.

Figure: Debt/GDP ratio for province growing at 2%/year

The nautical chart higher upward shows that the debt-to-GDP ratio has reached a "steady state" past times the terminate of the simulation. With the parameter values otherwise unchanged, the debt-to-GDP ratio stabilises at a grade slightly below the no-growth steady province ratio of 80%. (The higher the nominal growth rate, the lower the debt-to-GDP ratio. This accords alongside the experience of the post-war era. It is possible to alter the household sector deportment to target the same wealth-to-income ratio regardless of growth rate.)

There are a spectacular number of simplifications embedded inwards this model. Influenza A virus subtype H5N1 key number is that the mortal sector is non a origin of growth. However, the basic principles volition hold out roughly the same. The key betoken is that the deficit volition involve maintain attention of itself eventually, the only number is to avoid politically unsustainable inflation (whatever that is) inwards the meantime. (The prospects for inflation is why nosotros usually would non involve maintain a authorities ramp upward spending past times a huge amount inwards a curt catamenia of time. That said, it has been done; the latest representative beingness World War II. Note that governments implemented rationing to brand room for the increment inwards armed forces production, which is a measuring that would hold out difficult to justify inwards peace time.)

The Budget Deficit is non Controllable**

Figure: Government consumption (G) in addition to the the deficit inwards the scenario.

In this example, nosotros are looking at a province that is facing ever-increasing debt. (The origin of the occupation is draw concern sector hoarding, to an article past times Gerard MacDonell. He is unhappy close some of the writings of Professor Bill Mitchell, i of the leading MMT economists. I am non going to combat on Mitchell's behalf, rather I only desire to offering some analysis that touches on some of the technical issues Gerard made. He noted that Federal taxation in addition to spending are roughly similar, so how does that foursquare alongside MMT pronouncements close the independence of taxation in addition to spending? This outcome is non surprising, every bit it is precisely the kind of matter that is predicted past times SFC models -- in addition to MMT mathematical analysis of the economic scheme uses SFC models.

For those if you lot who are non fully up-to-date on post-Keynesian factionalism, delight banking firm annotation that SFC models were meant to hold out a mathematical lingua franca for post-Keynesian economics. In other words, MMT economists exercise SFC models, but they are non exclusive to MMT.

Since I desire to piece of work alongside my Python modelling framework here, in addition to it currently cannot back upward total draw concern cycle analysis (extensions volition hold out added later), I cannot create consummate jurist to as described inwards this article.) The authorities was running continuous deficits, in addition to some financial conservatives got elected. At fourth dimension catamenia 24, the authorities was running a deficit of (about) $2.44, in addition to the authorities decided to cutting spending past times $3 inwards fourth dimension catamenia 25, so that the budget would become dorsum to balance.

This did non work. There was a temporary improvement inwards the budget balance, but it roughshod curt of a surplus every bit a final result of multiplier effects. (Note that a larger cutting dorsum would final result inwards a pocket-sized surplus inwards fourth dimension catamenia 25, that is, a surplus is possible to achieve.) This is an representative of a failure of "static" budget analysis -- cutting spending past times $1 does non ameliorate the realised deficit past times $1, fifty-fifty if the so-called budget wonks say it will. Furthermore, the improvement was only partial; the budget deficit reverted dorsum to a similar grade of deficit inwards reply to lower output.

Examination of what was causing the deficits -- hoarding deportment inwards the draw concern sector -- tells us that whatsoever endeavor to exercise financial policy to right the budget deficit was doomed. Unless in that location was a policy to strength the draw concern sector to run downwardly its financial property holdings, the authorities budget would e'er provide to deficit.

In other words, the budget residue volition reverberate decisions made inwards the mortal sector, in addition to the authorities only has an illusion of command over the deficit. In the existent world, it only looks similar budgets are nether command during expansions because budget assumptions systematically underestimate growth, in addition to thence taxation revenues. ("The deficit is less than projected due to our vivid administration of the economy!" is a measure press release.) Furthermore, a corking bargain of cookie jounce accounting is used past times governments to arrive facial expression similar they hitting budget targets.

When nosotros facial expression at the diverse stockpiles of financial assets that are edifice upward inwards pension funds, taxation havens, in addition to on corporate residue sheets, nosotros should hold out able to extend the logic of this representative to meet why nosotros should non hold out surprise past times "high" authorities debt levels.

Once again, this representative is highly simplified. If nosotros added inwards diverse welfare province programs, the budget deficit moves farther in addition to farther from the command of government.

Concluding Remarks

Even unproblematic SFC models tin hold out used to demonstrate that nosotros cannot retrieve of authorities budgets purely inwards dollar amounts nether the command of the government.

Appendix: Code

The code that generated these examples is on the GitHub repository. Unfortunately, the file names are only temporary placeholders, currently: intro_X_XX_sim_fiscal.py, intro_X_XX_sim_multiplier.py. They volition hold out used inwards my user manual, in addition to the "X"'s volition hold out replaced alongside the chapter/section number.


Footnotes:

* This is due to involve maintain likewise large an mistake tolerance for terminating iterations. I guess I volition laid the parameter default to hold out less tolerant of errors.

** I am non using controllable inwards the technical sense used past times command engineers, inwards representative anyone is wondering.

(c) Brian Romanchuk 2017