Analytical Political Economy

4 STOCK-FLOW CONSISTENT MACROECONOMIC MODELS: A SURVEY

Michalis Nikiforos

Levy Economics Institute of Bard College

Gennaro Zezza

Universita' di Cassino e del Lazio Meridionale, and Levy Economics Institute of Bard College

1. Introduction

The stock-flow consistent (henceforth SFC) approach to macroeconomic modelling has become increasingly popular among economists of different persuasions. Despite its roots going back at least five decades, its popularity increased exponentially after the recent crisis of 2007–2009. Two factors played a significant role in that: first, the 2007 publication of Monetary Economics, by Wynne Godley and Marc Lavoie (2007a), a book that summarizes and synthesizes the basic principles and modelling methods; and second, the recognition that models and policy analyses based on the SFC framework (e.g. Godley, 1999a) were able to predict the crisis, which caught the majority of the profession by surprise. For these two reasons, the years of the Great Recession are a demarcation point in time that separates the early period of the development of the SFC approach from the more recent period.

The main characteristic and advantage of the SFC approach is that it provides a framework for treating the real and the financial sides of the economy in an integrated way. In a modern capitalist economy, the behaviour of the real side of the economy cannot be understood without reference to the financial side (money, debt and assets markets). Although this is a general ...