SFC + ABM

Stephen Kinsella University of Limerick

CRISIS Workshop, Lorenz CentreLeiden April 10 2013

OVERVIEW

• Funded with a series of grants from the Institute for New Economic Thinking, INET, Rannis, Statistics Iceland, and Irish Research Council.

• Overarching goal is to build a workable model comparable to models used in CBs/Govt Departments for policy evaluation/counterfactual scenario testing.

Simple Story.

Irish Department of Finance 2007:

“The economic and fiscal outlook over the period 2008 - 2010 is as follows: GDP is forecast to expand at an average rate of 3.5% per annum (GNP by just under 3.5%). The average annual increase in employment is projected to be just under 11.5%, with unemployment assumed to average about 5.5%.”

➡In that 2-year period, output as measured by real gross domestic product fell by almost 11%, unemployment rose from just under 4% to over 9%.

WAYS TO UNDERSTAND THE CRISIS

• Nothing special about our collapse

• Exiting the crisis now most likely a slow, but upward, grind.

0"

2"

4"

6"

8"

10"

12"

14"

16"

18"

0"

50"

100"

150"

200"

250"

2002" 2003" 2004" 2005" 2006" 2007" 2008" 2009" 2010" 2011"

Debt/Disposable"Income"(LHS,"%)" Gross"Saving/Disposable"Income"(RHS,"%)"

Source: Institutional accounts for Households including NPISH (S.14+S.15), CSO.ie

Household behavior (see handout)

STOCK FLOW CONSISTENT MODELS

•Morris A. Copeland (1949) is the father of the Flow of Funds accounting. (Federal Reserve Bureau Z.1 Release). •Copeland’s idea was to enlarge the social accounting perspective - up to that moment used mainly in the study of national income - to the study of money flows.• Essentially trying to find an answer to fundamental economic question:

‘when total purchases of our national product increase, where does the money come from to finance them? When purchases of our national product decline, what becomes of the money that is not spent?’ (Copeland, 1949, p. 254)

GODLEY & LAVOIE (2007)

Sectoral modelsSet up balance and transaction matricesBuild a model’s equations from the balance sheet relations (Behavioural and Identity relations)Solve for steady state (Question over this now)Shock using ‘policy experiments’ through simulation.Left open the question of estimating these models.This is my group’s central problem.

DataConsistency/

Frequency/Bubble issues/Transfer pricing

EstimationEstimating SFC

models is very hard, esp. portfolio balance

EquationsConstantly balancing

completeness off against complexity

ApplicationWant this to be

as policy-relevant as possible

SFC✴ Sectoral✴ No black holes✴ Avoids lots of neoclassical modeling problems✴ Focus on closures✴ Needs solution methods

ABM✴ Much more developed, connections to complexity/network theory/etc✴ Individual rather than sectoral✴ Portfolio estimation/simulation v. easy✴ Models agent interactions more naturally✴ Focus on empirical regularities eg power laws

KINSELLA ET AL 2012: SFC MODEL WITH INTERACTING AGENTS

• 4 Sectors, households, firms, banks, government.•Workers... • search for work. • work for a wage or get dole. • spend money on consumption. • spend money on education. • Firms... • hire workers. • pay wages. • receive revenue from selling output. •Government: collects taxes and provides dole. • Banks lend out, can go broke.•Model allows for changes in education/employment/income/wealth

NICE FEATURES

no representative agentno utility functionno rational expectationslarge number of heterogeneous agentsindividual behavior is unpredictableindividuals follow simple rules indeterminacy at the micro level (random selection from a given distribution) SFC Adding up constraints.

COOL STUFF: MEASURING MOBILITY

•Via G.S. Fields & E.A. Ok, “Measuring Movement of Income”, Economica (1999). •Mb=1/N*∑ |log m_{0}−log m_{1}|• Implies Higher savings → lower mobility.

CONCLUSION & FURTHER WORK

• Promising connections/crossovers• Benchmark model to be built, an INET group exists for this now. • Lots of unexplored areas, open questions, low hanging and high-hanging fruit. • Fun times ahead!

REFERENCES

• Kinsella & Khalil 2011 Debt Deflation Traps within Small Open Economies

• Kinsella & Khalil 2011 Bad Banks Choking Good Banks: Simulating Balance Sheet Contagion

• Kinsella & Godin 2012 Leverage, Liquidity and Crisis: A Simulation Study

REFERENCES

• O’Shea & Kinsella (2010) Solution and Simulation of Large Stock Flow Consistent Monetary Production Models Via the Gauss Seidel Algorithm

• Godin et al (2012) Method to Simultaneously Determine Stock, Flow, and Parameter Values in Large Stock Flow Consistent Models

• Work in progress w/ Rudi Von Arim (UTAH) on ‘solving’ and studying SFC matrices numerically.