A spreadsheet version of the IS/MY model (alternative to IS/LM model) — Dirk Ehnts

I hope that this model will be taken up by more colleagues as it is very clear now that the IS/LM model “does not work”. If you make it more realistic by saying that investment does not depend on the rate of interest (vertical IS curve) and that the central bank determines the interest rate (horizontal LM curve), then you will have wasted 3-4 lectures to explain the goods market (IS curve) and the money market (LM curve) only to conclude that both do not matter in practice. It is only a small step from there to conclude that teaching the IS/LM model is a waste of time. You might just say that “demand determines supply, which determines employment” and that “government spending and private investment, which both do not depend on the rate of interest, increase demand”. Your students will easily get it and you save 3-4 lectures for something else, like my IS/MY model.

Bravo! A big step in the right direction in teaching Econ 101. And it is not just Econ 101, Paul Krugman has basically stated that he uses the IS/LM as his macroeconomic lens.

econoblog 101
A spreadsheet version of the IS/MY model (alternative to IS/LM model)
Dirk Ehnts | Lecturer at Bard College Berlin, research assistant at the Technical University of Chemnitz, and spokesperson of the board of Pufendorf-Gesellschaft eV in Berlin

Dirk Ehnts — A simple macroeconomic model based on Modern Monetary Theory (and published in 2014 in a peer-reviewed journal

There is a lot of talk about how MMT would lack a “model”. Some commentators on Twitter even claim that MMT would have “no model” and that they just created one themselves. Others believe that stock-flow consistent (SFC) models are basically SFC models. All of that is not quite right!

I think that the only model that can really claim to be a “MMT model” is the one I published in a peer-reviewed journal in 2014. The article in the International Journal of Pluralism and Economics Education (IJPEE) was named “A simple macroeconomic model of a currency union with endogenous money and saving-investment imbalances” (link). With hindsight, it was not a good title, since there is nothing specific about “currency union” or (private!) “saving-investment imbalances” in the model. It is really a replacement of the IS/LM-model and nothing else. The working paper version is accessible freely and was written in 2012 (link). During that year, I was at the Hyman-Minsky summer school at the Levy Institute of Bard College, NY. I showed the model to Randy Wray and Scott Fullwiler and some other people and they all liked it. Given that my model has the sectoral balances at its core that did not surprise me.

Since the model has not gotten a lot of attention so far – I presented it at University of Cassino in Italy after being invited there to spend a week with SFC modeler Gennaro Zezza and in some other place – I would like to use this blog post to explain the model briefly. Of course, the IJPEE paper is the long version. (The working paper contains some minor flaws that had been fixed in the journal version.) For those who can’t wait to see it, you can download a spreadsheet file of the ISMY model here. It has all the equations and is solvable by toying around with it....

econoblog 101

A simple macroeconomic model based on Modern Monetary Theory (and published in 2014 in a peer-reviewed journal
Dirk Ehnts | Lecturer at Bard College Berlin

sfc models — New working paper

Modeling economic forces, power relations, and stock-flow consistency:a general constrained dynamics approach

by Oliver Richters and Erhard Gloetzl

Abstract: In monetary Stock-Flow Consistent (SFC) models, accountingidentities reduce the number of behavioral functions to avoid anoverdetermined system of equations. We relax this restriction using adifferential algebraic equation framework of constrained dynamics.Agents exert forces on the variables according to their desire, forinstance to gradually improve their utility. The parameter ‘economicpower’ corresponds to their ability to assert their interest. Inanalogy to Lagrangian mechanics, system constraints generate additionalconstraint forces that lead to unintended dynamics. We exemplify theprocedure using a simple SFC model and reveal its implicit assumptionsabout power relations and agents’ preferences.

Link: https://ideas.repec.org/p/old/dpaper/409.html

sfc models
New working paper

See also

SFC labs at the annual Minsky Summer Seminar

sfc-models.net — SFC modeling in Python

Brian Romanchuk is developing a Python package to build SFC modelsVisit his package web page if interested.

sfc-models.net
SFC modeling in Python

John T. Harvey — Dear President Trump: Your Tax Plan Needs Bigger Deficits!

What I want to highlight here is this: the private sector needs government deficit spending if it is going to recover properly from both the heart attack of the Financial Crisis and the decades of disease brought on by income redistribution and rising debt levels. This is so because government deficits are private-sector surpluses.

The logic is really very simple. What number do you get when you add up every trade surplus and trade deficit on the planet? Zero, of course, because one nation’s trade surplus is another’s trade deficit. This is a specific application of the general rule that in any closed system, the sum of all deficits and surpluses must be zero. If you and I are the only two people in the economy and I spend more than I earn, then you earn than you spend (and by the exact same amount, of course). There aren’t many inescapable truths in life, but this is one.

Now think about the U.S. government budget deficit. If Washington is spending more than it earns, then non-Washington must be earning more than it spends. In 2016, for example, the US federal government spent $585 billion more than it collected in taxes.

That money did not disappear in a puff of smoke. It became the excess of income over spending earned by non-Washington. Non-Washington had a $585 billion surplus or, which is the same thing, $585 billion of savings.

This is an inescapable accounting truth and it implies that any tax plan that hopes to stimulate the private sector must create a budget deficit. Federal government budget surpluses drain non-Washington income. That’s hardly what we need. Pundits and policy makers need to stop worrying about Washington’s deficit and start focusing on non-Washington’s surplus.

“Wait,” you may ask, “true or not, doesn’t this just lay the foundation for bigger problems in the future?” Almost certainly not. Let me address a few of the most common worries:

Forbes — Pragmatic Economics
Dear President Trump: Your Tax Plan Needs Bigger Deficits!
John T. Harvey | Professor of Economics, Texas Christian University

Brian Romanchuk — "An Introduction to SFC Models Using Python" Published

Stock-Flow Consistent (SFC) models are a preferred way to present economic models in the post-Keynesian tradition. This book gives an overview of the sfc_models package, which implements SFC models in Python. The approach is novel, in that the user only specifies the high-level parameters of the economic model, and the framework generates and solves the implied equations. The framework is open source, and is aimed at both researchers and those with less experience with economic models. This book explains to researchers how to extend the sfc_models framework to implement advanced models. For those who are new to SFC models, the book explains some of the basic principles behind these models, and it is possible for the reader to run example code (which is packaged with the software online) to examine the model output....

The book is available in ebook and paperback editions.

Bond Economics
"An Introduction to SFC Models Using Python" Published
Brian Romanchuk

Brian Romanchuk — Kindle Version of SFC Models Book Available...

I just wanted to let everyone know that I have a Kindle edition of the SFC models textbook available. However, the ebook edition is a "textbook" version of the book -- effectively the same thing as a PDF with fixed pages. Not all Kindle readers will support this format (particularly older ones). I believe that the Kindle store will not sell you the book if your reader does not support it, but I suggest caution. I just glanced at the book on my iPad, and it looked OK (which is unsurprising, since an iPad is set up to render PDF files).

I will be out curling tonight, and so I will not be able to give the book a more careful look-over until tomorrow. Unless you insist on being an early adopter, I would suggest waiting a few days before purchasing, in case I decide to make some fixes. (I had a hard time testing what the live version of the ebook would look like on a tablet; I had to buy the book to see what the final result is.)...

Bond Economics
Kindle Version of SFC Models Book Available...
Brian Romanchuk

Brian Romanchuk — The Relationship Between sfc_models And Godley And Lavoie

The text Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth, by Wynne Godley and Marc Lavoie is cited heavily within the sfc_models framework. This text is a standard text for SFC modelling, and has already been the object of extensive modelling. The fact that the models are well known is extremely useful from the point of view of development. These existing models were used to calibrate the sfc_models code.

(This article is an unedited draft of a section from my upcoming book "Introduction to SFC Models with Python.")

Bond Economics
The Relationship Between sfc_models And Godley And Lavoie
Brian Romanchuk

Andrew Berkeley — A simple economy with government money

Summing up

Okay, We've built a complete but highly simplified model of an economy consisting of a private sector and a government sector. Our model was built around the concept of the fiscal multiplier, in which the government spends into the economy and this induces subsequent consumption spending, taxation and saving. We simulated this process occuring repeatedly through 100 time periods. Each time step represented a distinct accounting period in which all flows of money were accounted for and any imbalances between a respective sector's inflows and outflows were reconciled as changes in stocks held.

In each accounting period we found that the private sector had larger inflows than outflows. This is because it chose to save some of its income rather than spending it. The government had the opposite: it was spending more than it was receiving in tax during each accounting period. This happened because tax is levied as an income tax and therefore requires spending (income is the mirror-image of spending). If the private sector do not spend all of their income then some money remains untaxed. The only accounting component which is carried across time periods is the value of the money stocks held by the sectors. So since the private sector has a surplus in every accounting period, these surpluses accumulate with each successive time period and their stock of saved money grows continually through time. Likewise, the government's constant spending deficit causes their negative money balance to grow continually through time.

So we have a situation with constant government spending, stable consumption spending and stable income levels, a constant rate of saving driving a persistent government deficit, and consequently a pot of private savings which grows steadily through time and which matches a steadily growing, negative government balance.

We might be tempted to ask, "How can the government spend more than it earned? How much money did the government start with? Where did it get it from? And how much does it have left?". Well we didn't set the model up with a stock of money at all. Yet we did take some care to ensure that our stocks and flows were dilligently accounted for. So how did money appear in the model? Well, what we did when we simulated government spending was to simply account for the spending by marking it as a receipt for the private sector (the business sector, in the first case) and an outlay for the government. This accounting implies the transfer of something between parties that didn't previously exist. This something is effectively an IOU - a record of a promise from one party to another. And since it is government spending that kick-starts the cycle of private consumption spending which gives rise to the fiscal multiplier effect, we can conclude that it is government IOUs that are circulating. Indeed, the entire accounting matrix is denominated in government IOUs. So we didn't start with a stock of money but we can see money in this model as accounting records representing government issued IOUs. The government is the source of money.
So what the private sector accumulates is government IOUs, which explains exactly and quite trivially why the government has an equally sized negative balance - it is the issuer of these IOUs. The private sector and government balances are simply the opposite sides of the same thing.

But if the money in the model is an IOU of the government's, what, exactly, is it an IOU for? What is the government obliged to provide in return for it's IOUs? Well, in this model, there is only one thing that money can be used for with respect to the government and that is paying taxes. So while the private sector's positive balance can be seen as it's accumulated, saved wealth, the government's negative balance can be seen as simply the record of government issued money that has yet to be taxed but that the government must be prepared to accept in return for the extinguishing of future tax obligations. This is the sense in which it is a "liability" or a "debt" of the government.

So, in summary, our model implies the following:

• The money which circulates is government issued IOUs
• The government creates this money when it spends
• Government money is a liability of the government in the sense that it can be redeemed against future tax a obligation
• Government money is effectively cancelled on payment of taxes
• If the private sector chooses to save money out of circulation this will cause an equally sized government budget deficit
• The government "debt" is a record of the outstanding (saved, untaxed) government money that can be returned in payment of taxes

Although this is a simple model which clearly has significant limitations relative to real economies, it is worth reflecting on whether these conclusions are very different to the real world.

Aside from being an obviously simple model, there is one problem that stands out. In this model, the savings of the private sector (and by implication, the government "debt") grows rapidly, seemingly without bound. This is arguably quite unrealistic, if only for the simple reason that when folk save they often spend their savings, at least at some stage, to some extent. This small but significant consideration will be the basis of the next model/post.

Misunderheard
A simple economy with government money

Andrew Berkeley

Ramanan — What Is Equilibrium?

The new paper by Gennaro Zezza and Michalis Nikiforos for the Levy Institute, surveying the literature on stock-flow consistent models has a discussion on the concept of equilibrium:

In neoclassical economics the concept of equilibrium is based on Say's law, which implies that in the long run there are no market gluts since free markets adapt to changing conditions through the operation of the law of supply and demand. This means that all markets tend to clear in the long run, including not only capital and consumer goods markets, but also labor markets and financial markets.

Gluts and shortages are temporary deviations in specific markets that are removed by the law of supply and demand. Therefore, a general glut can only result from an exogenous shock, and left to itself the market as whole will tend to general equilibrium "in the long run" as efficiently as possible.

Heterodox economists can be broadly defined as those rejecting the key fundamentals of the neoclassical approach, the assumption of rational utility maximization and general equilibrium.

Gennaro Zezza and Michalis Nikiforos set forth the SFC approach, and Ramanan summarizes it.

The Case for Concerted Action

What Is Equilibrium?
V. Ramanan

Brian Romanchuk — A SFC Model Of Gold Standard Austerity Policies

This article describes the model that I discussed in an earlier video. Although a Gold Standard is not exactly a pressing topic for most of us, the simplicity of the system makes it easy to demonstrate ways in which we can use stock-flow consistent (SFC) models. In this case, I can explain why austerity was a core component of gold standard thinking....

Why should you care about the gold standard? Because Alan Greenspan said that central banks act as if the world is still on the gold standard. This demands a tighter fiscal stance and more cramped fiscal space than operating under the floating rate monetary system that exists now. The result is demand insufficient to economic potential.

Bond Economics
A SFC Model Of Gold Standard Austerity Policies
Brian Romanchuk

Dirk Ehnts — In five steps from two identities to the sectoral balances (wonky macro)

I have seen a lot of ways to arrive at the sectoral balances identity, which states that the sum of the change in net financial assets of the private, the public and the external sector sums up to zero. I prefer to show my students six equations – hence five steps – to make them understand the nature of the identity. We start with two definitions (in bold), which are those of GDP (Y) and private saving (Sp). From there, we arrive at the sectoral balances through rearranging the private saving equation, then subtracting the GDP identity from it and rearranging again:…

As I am currently building a textbook around this identity, keep on coming back to my blog to see some more stuff related to this way of theorizing macroeconomics that was pioneered by Wynne Godley and others before him.

econoblog 101
In five steps from two identities to the sectoral balances (wonky macro)
Dirk Ehnts | Lecturer at Bard College Berlin

The forthcoming textbook will be based on the already published (German and English) Modern Monetary Theory and European Macroeconomics (Routledge International Studies in Money and Banking) (2016).

Brian Romanchuk — The Determination Financial Asset Holdings In SFC Models

This article discusses how I systematically generate the systems of equations that determines financial asset holdings within the Python sfc_models framework for Stock-Flow Consistent (SFC) models. It should be noted that despite the generality of the title, I am only discussing how I attacked the problem (the results of my technique is consistent with the literature that I have studied). The existing literature relies on the derivation of system equations by hand, and so the modelling techniques used by others are less constrained than the algorithmic equation generation I use.

(This article is technical, and aimed at those with an interest in SFC models, or more generally, an interest in how to set up a mathematical macro model. It will presumably make its way into an upcoming book on SFC modelling in Python.)

Bond Economics
The Determination Financial Asset Holdings In SFC Models
Brian Romanchuk

Simon Wren-Lewis — Stock-Flow Consistent models: response to Jo Michell

Jo has a thoughtful and constructive response to my post discussing a recent Bank of England paperthat presents a new Stock-Flow Consistent (SFC) model. One of the reasons it is constructive is because it is not tribal: too many followers of heterodox schools seem to just want to rubbish mainstream macro and suggest their particular school represents the new dawn. So I thought I might make a few points on Jo’s post that might be helpful.

Mainly Macro
Stock-Flow Consistent models: response to Jo Michell
Simon Wren-Lewis | Professor of Economics, Oxford University

Jo Mitchell — Consistent Modelling And Inconsistent Terminology

Detailed comment on the points raised by Simon Wren-Lewis on SFC modeling versus DSGE modeling. Lots of history.

Critical Macro Finance

Consistent Modelling And Inconsistent Terminology

Jo Mitchell | Senior Lecturer, University of the West of England, Bristol

ht Ramanan at The Case for Concerted Action

Brian Romanchuk — SFC vs. DSGE (Again)

There was a recent set of articles discussing Stock-Flow Consistent (SFC) and Dynamic Stochastic General Equilibrium (DSGE) models; an initial article by Simon Wren-Lewis (link), which led to responses by others; I would recommend these two articles (link and link) by Ramanan.

The discussion was civil, which is partially the result that Simon Wren-Lewis agrees that the fixation on "microfoundations" makes very little sense. However, since it is still insisted upon by mainstream academics as being necessary to get published in mainstream journals, his flexibility is not particularly representative.…

Brian also explains the writing projects he is working on.

Bond Economics
SFC vs. DSGE (Again)
Brian Romanchuk

Andrew Lainton — Why SFC models are based on Better Theory – a Response to Simon Wren Lewis

Criticism is an opportunity to respond and clarify.

Decisions, Decisions, Decisions
Why SFC models are based on Better Theory – a Response to Simon Wren Lewis
Andrew Lainton

Simon Wren-Lewis — More on Stock-Flow Consistent models

From the comments there:

Nick Edmonds4 September 2016 at 07:59

"...it would be a mistake for others to believe that the properties of their model show the importance of accounting rather than the theory they have used."

True, but please don't downplay the usefulness of SFC models, simply because some people make this mistake.
The question is whether study of this type of model, which emphasises balances and the relationship between them, can provide us with useful insights and help us focus on what matters. I think you yourself answer this question best when you state in your previous post:

".. the fact that leverage was allowed to increase substantially before the crisis was not something that most macroeconomists were even aware of let alone approved of. As I have said before, if I had seen a chart showing bank leverage .. before the crisis I would have been extremely worried."
 

Mainly Macro4 September 2016 at 11:28

Absolutely. I'm very pleased that people are working on these models. I just wish they acknowledged previous aggregate modelling and put a little more theory into them.

Mainly Macro
More on Stock-Flow Consistent models
Simon Wren-Lewis | Professor of Economics, Oxford University

Ramanan — Simon Wren-Lewis On Wynne Godley’s Models

Simon Wren-Lewis has an article on his blog on stock-flow consistent/coherent models by Wynne Godley. Unlike other articles, this has a more engaging tone and isn’t dismissive.

This is a good thing but it has the tone “Oh, there’s hardly anything new” about stock-flow consistent modeling and the sectoral balances approach. To me this is highly inaccurate, to say the least. None of the models outside SFC models —with one exception—come anywhere close to the important question about what money is and how money is created. Even in the Post-Keynesian literature, while there are various non-mathematical approaches, there’s hardly anything that comes close. That important exception is the work of James Tobin as is summarized in his Nobel Prize lecture Money and Finance in the Macroeconomic Process. Except that Wynne Godley’s model greatly improve upon the deficiencies of Tobin’s approach.…

The Case for Concerted Action
Simon Wren-Lewis On Wynne Godley’s Models
V. Ramanan

Simon Wren-Lewis — Heterodox economics, mainstream macro and the financial crisis

Hyman Minsky, Wynne Godley, SFC modeling, and by implication MMT.

"We already knew that."

Mainly Macro
Heterodox economics, mainstream macro and the financial crisis
Simon Wren-Lewis | Professor of Economics, Oxford University
ht Random in the comments