Nick Edmonds — An SFC Version of the Diamond Growth Model

A number of my posts have attempted to compare and draw parallels between very different approaches in economics. It is an exercise I find very interesting and informative. In this vein, I have recently gone about constructing a Stock-Flow Consistent (SFC) version of the Diamond growth model set out in the paper National Debt in a Neoclassical Growth Model.

The first thing to make clear is that the stocks and flows in Diamond's model are perfectly consistent, so I don't mean that I am somehow correcting accounting errors. Rather, what I have attempted to do is to restructure the model into the format typically used in post-Keynesian stock-flow models. This looks like the models that appear in Godley & Lavoie's Monetary Economics. With appropriate choice of parameter values, however, it is structurally equivalent to Diamond's neoclassical model and produces the same results.

The purpose of this exercise was to focus on the behavioural assumptions of the model and see where post-Keynesian and neoclassical views might diverge. Doing so requires "padding out" the original model a bit. Most notably, Diamond's model involves only real values - there is a real wage level, but no separate price and nominal wage levels. This doesn't fit well with a post-Keynesian worldview, so a major innovation is to turn this into a monetary model with nominal values, as well as real.

As it turns out, this is quite a useful exercise.…

Reflections on Monetary Economics
An SFC Version of the Diamond Growth Model

Nick Edmonds