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Stock-Flow Consistent Macroeconomic Models: Theory, Practice and Applications

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Stock-Flow Consistent Macroeconomic Models: Theory, Practice and Applications Stock-Flow Consistent Macroeconomic Models: Theory, Practice and Applications Francesco Zezza Ph.D Candidate - Economics Universities of Siena, Pisa and Firenze, Italy September 2018 To my Father, my Mentor, Guide and Inspiration Acknowledgments I am greatly indebted to my Supervisors, Ernesto Screpanti and Alessandro Vercelli, for the constant help received throughout this Journey. I also need to thank Ugo Pagano, Michelangelo Vasta and all the PhD board and Faculty staff for giving me this opportunity. I need also to thank Marc Lavoie for the continuous inspiration and advises and Michalis Nikiforos for making me feel part of the Team during my stay at the Levy Institute. I am also indebted to Dany Lang and Jan Kregel, who helped me through my months as a Visiting Researcher at the CEPN and the Levy Institute. A special mention goes to Antoine Godin, whose continuous support and comments helped me to improve much the quality of this work. Moreover, a thank goes to Eckard Hein, Eugenio Caverzasi, Anwar Shaikh, Ric- cardo de Bonis, Roberto Golinelli, Marco Veronese Passarella (among many others) and to all the participants of Workshops and International Conferences where I presented previous versions of this work, your precious comments and suggestions helped me a lot. A special thought goes to Amedeo di Maio, Al- berto Bagnai, Engelbert Stockhammer and Sergio Cesaratto which, at different times during my studies, had a huge role in shaping my ideas and perspec- tives. Finally, I also need to thank Claudia Cicconi, Alessandra Agostinelli and Stefania Cuicchio from ISTAT and Angela Gattulli from Bank of Italy for the technical support regarding the data and the useful comments and clarifications. A special place and thank goes to my fellow PhD colleagues and students I met all around the world during my years of studies. Alex Gurchanski, Han- nah Elsisi, Gleen Moore, Bruno Criscuolo, Riccardo Pariboni, Federico Bassi, Domenico Viola and many others, that inspired me with their comments and the long discussions we had, usually in front of a (dozen) beer(s). However, achieving the PhD is not just about academics. Its about Life, Growing, Maturing. And I have not done it by myself. None of this would have been possible without my Family, my Friends, Colleagues and many Special Peo- ple I met around the world. It's impossible not to thank my Mom, Giovanna, who looks after me since Day 1 (literally!) and help me grow as the Man I am. My brother Filippo, and my bros from another mother, Fil&Peppe. My col- leagues at the PhD in Siena, Andr´e,Andrea, Alessio, Damiano, Marco, Serena, Stefano and Virna (We Did It!!), with whom I survived the first year of classes and exams, struggling side by side. Andr´eand Nic, who made my life great for the year we lived together. Siena would have not be the same without You. All the wonderful people I met during my stay at Bard, I left a piece of me there. iii iv Carolina and my Second Family, the Barker's, that welcomed me in Paris and London. Without Your support, I would have never managed to reach this goal. Everybody has a role to play, and I would not be the Man I am if it wasn't for Silvia, who stayed at my side, no matter what, for a long time, and even though our roads have now diverged, you will always have a special place in my Heart and Memories. Last, but not least, none of this would have been possible without the guid- ance, assistance and constant inspiration of my dad, Gennaro. Hoping this makes You proud. Contents I Theory 3 1 A SFC-PKK Supermultiplier Model 5 1.1 Introduction . 6 1.1.1 Demand-led Heterodox growth models: Integrating neo- Kaleckian, SFC and Sraffian Supermultiplier models . 7 1.2 Structure of the Model . 10 1.3 Keynes-Marshall method . 14 1.3.1 Short-Run Equilibrium . 15 1.3.2 Medium-Run Equilibrium . 17 1.3.3 Long-Run Equilibrium . 19 1.4 Godley- Lavoie method . 22 1.4.1 Building the Steady State . 24 1.4.2 Simulations . 24 1.5 Conclusions . 26 2 SFC modelling: the Open Economy 31 2.1 Introduction . 31 2.2 The SFC Approach: History and Principles . 32 2.3 From Closed to Open Economy . 35 2.3.1 Empirical SFC models for whole countries . 35 2.4 The \Fundamental Identity"..................... 38 2.4.1 Some \special cases" of the Fundamental Identity . 40 2.5 Closures ................................ 41 2.6 Conclusions . 43 II Practice 45 3 Data and Model Accounting 47 3.1 Introduction . 47 3.1.1 Why Italy? . 47 3.2 The Data . 51 3.2.1 The level of detail . 55 3.3 The Accounting Structure . 59 3.3.1 The (reduced-form) Transaction-Flow Matrix . 59 3.3.2 The Balance Sheet Matrix . 81 v vi CONTENTS 4 Merging Stocks & Flows 99 4.1 Capital Gains and Asset pricing . 100 4.1.1 Net Capital Gains by Asset . 103 4.1.2 The Revaluation Account: Vertical Consistency . 107 4.2 The Behavioral Transaction Matrix . 108 4.2.1 Production . 108 4.2.2 Transactions in Capital Incomes . 112 4.2.3 Taxes, Benefits & Contributions . 120 4.2.4 The transactions in Capital Account . 124 4.2.5 Investments . 125 4.3 The Central Bank . 126 4.3.1 The QE Programs . 128 4.4 Introducing the labor market . 136 4.5 Conclusions . 138 III Applications 141 5 SFC QMITA 143 5.1 Related literature . 144 5.2 The Real economy . 146 5.3 Portfolio choices . 159 5.4 Estimations . 169 5.4.1 The Production block: Consumption, Investments and Trade . 170 5.4.2 Wages and Productivity . 178 5.4.3 Prices and Deflators . 183 5.4.4 Interest Rates and Rates of Return . 188 5.4.5 Asset Prices . 193 5.4.6 Asset Stocks & Flows . 197 6 Model Simulations 201 6.1 Model Validation . 201 6.2 Projections . 208 6.3 Scenario 1: Increasing ECB Base Rate . 211 6.4 Scenario 2-4: Expansionary Fiscal Policy . 218 6.4.1 Scenario 2 . 218 6.4.2 Scenario 3 . 222 6.4.3 Scenario 4 . 227 6.5 Overall Results and Model Responses . 233 7 Conclusions 241 A Data sources 247 B Matrices 249 C Econometric Appendix 261 C.1 Estimation Outputs . 264 C.2 Actual-Fitted Graphs . 274 CONTENTS vii References 287 viii CONTENTS List of Figures 1.1 Increasing Propensity to Save . 26 1.2 Increasing Wage Share in Production . 27 1.3 Increasing Autonomous Expenditures . 28 1.4 Temporary Increase in Autonomous Expenditures . 29 3.1 Real GDP and Recessions. Selected EZ Countries . 48 3.2 Italy. Real GDP . 48 3.3 Italy. Debt to GDP . 49 3.4 Italy. Public Deficit and CAB . 50 3.5 Italy. Unemployment Rate(s) . 50 3.6 Italy. Bank NPL vs. Private Domestic Sector . 51 3.7 Discrepancies in Net lending . 53 3.8 Financial Balances . 57 3.9 Private Sector Balances . 58 3.10 Debt to GDP . 58 3.11 GDP and Discrepancies . 61 3.12 GDP Components . 62 3.13 Households Income from Production . 64 3.14 Government Income from Production and Indirect Taxes Received 65 3.15 RoW Income from Production . 66 3.16 NFC. Interest paid/received . 68 3.17 FC. Interest paid/received . 68 3.18 Households and NFC. Dividends paid/received . 69 3.19 RoW. Dividends paid/received . 69 3.20 Other Current Transfers in Capital Account . 70 3.21 FC. Reinvested Earnings from FDI . 71 3.22 NFC. Reinvested Earnings from FDI . 71 3.23 Reinvested Earnings from FDI. Selected Sectors . 72 3.24 Primary Incomes. Domestic Economy . 73 3.25 Taxes paid/received. Selected Sectors . 74 3.26 Benefits & Contributions. Selected Sectors . 75 3.27 Other Current Transfers. Selected Sectors . 75 3.28 Disposable Income. Domestic Eonomy . 76 3.29 Net Transfers. Domestic Economy . 77 3.30 Savings. Domestic Economy . 78 3.31 Net Lending positions of Institutional Sectors . 80 3.32 Three Balances and Private Sector NAFA . 81 3.33 Bank of Italy. Liabilities . 84 ix x LIST OF FIGURES 3.34 Bank of Italy. Assets . 86 3.35 Deposits . 87 3.36 Bank Loans: BoI and FAIS . 88 3.37 Bank Loans: Consumer Credit . 89 3.38 Bank Loans: Mortgages . 89 3.39 Bank Loans: Loans to NFCs . 90 3.40 Bank Loans . 90 3.41 Bank Securities . 91 3.42 Bank Securities: Composition and shares in total assets . 91 3.43 Bank Shares . 91 3.44 Public Debt. BoI and FAIS . 92 3.45 Public Debt. Sector Shares . 93 3.46 Composition of Public Debt . 94 3.47 Firm's Issued Shares . 95 3.48 Holders of NFC Shares . 96 3.49 Foreign Direct Investments, Incoming and Outgoing . 96 3.50 Foreign issued Liabilities . 97 3.51 Holders of Foreign issued Liabilities . 98 4.1 Households Net Financial Assets. Current and Historical Prices . 101 4.2 Evolution of market prices of Financial Assets . 102 4.3 Implicit Price of.
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