On the design of empirical stock–flow consistent models

Abstract

While the literature on theoretical macroeconomic models adopting the stock–flow consistent (SFC) approach is flourishing, few contributions cover the methodology for building an SFC empirical model for a whole country. Most contributions simply try to feed national accounting data into a theoretical model inspired by Godley/Lavoie (2007), albeit with different degrees of complexity. In this paper we argue instead that the structure of an empirical SFC model should start from a careful analysis of the specificities of a country's sectoral balance sheets and flow-of-funds data, compared to the relevant research question to be addressed. We illustrate our arguments with examples for Greece and Italy. We also provide some suggestions on how to consistently use the financial and non-financial accounts of institutional sectors, showing the link between SFC accounting structures and national accounting rules.

An empirical Stock‐Flow Consistent regional model of Campania

“…9 The second, related this time to policy, is that econometric models following the approach have been effective in providing timely warnings of coming recessions and of increasing financial fragility and instability, 10 as well as producing more accurate macroeconomic projections relative to traditional models. 11 Referring the interested reader to Godley and Lavoie (2007) and the mentioned surveys, Zezza and Zezza (2019) summarize the requirements of Stock-Flow Consistent models:…”

“…The last release of the SVIMEZ bi-regional model (NMODS) has some financial variables which enter their estimationsfor example, net wealth in the household's consumption function. The difference with the approach proposed here lies in the absence, in NMODS, of the equations describing the accumulation of real and financial stocks and of the intrinsic dynamic given by stock-flow adjustments.17 As in most cases, these are models where expectations are model consistent, so that the choices of consumption and investment turn out to be always correct.18 SeeZezza and Zezza (2019) for a detailed account on the construction of empirical Stock-Flow Consistent models for whole countries, starting from national accounts, flow of funds and sectoral financial accounts statistics.19 The subscripts h, f, g, or, and w denote households, firms, government, other regions, and the rest of the world, respectively.20 See OECD (2017).21 As inAlbareto, Bronzini, Carmignani, and Venturini (2008), we use national data for capital stocks and project the sectoral series as fixed shares of regional GDP.22 Which is set to be twice the deposits, as in Financial Accounts.23 The most complex empirical SFC model to date is the one presented inZezza and Zezza (2020), who build a quarterly model of the Italian Economy with six sectors (households, firms, banks, government, the central bank, and the foreign sector) and 15 classes of financial assets.24 We are leaving out some twenty identities from the description. The complete list of model equations is given in Appendix III.25 In this first version of the model, we chose not to model relative prices.…”

Commodities fluctuations, cross border flows and financial innovation: A stock‐flow analysis

“…First, the SFC modeling ensure the model consistency, which Nikiforos and Zezza (2017) and Zezza and Zezza (2019) resume in four principles: (a) the flow consistency, that is, that every flow must come from somewhere and goes somewhere else—for example, in open economy model, exports of one country are the imports of another one; (b) the stock consistency, that is, that every asset owned by an agent (sector) is the liability of another one in the system: (c) the SFC, that is, that every flow implies the change in one or more stocks; (d) the quadruple entry, that is, that every transaction is recorded four times in the accounting matrix, for instance, twice as a flow of expenditure and twice as a change of asset or increase of liabilities.…”

Frontiers of Heterodox Macroeconomics

“…Barker et al, 2012;Pollin et al, 2014), a deeper look into the financial aspects and implications of green fiscal policies is in order. The incorporation of environmental aspects into the recently developed country-specific empirical SFC models (see Burgess et al, 2016;Zezza and Zezza, 2019) would be a significant step in this direction.…”