This document contains notes from a lecture on stock-flow consistent macroeconomic modeling. It includes an introduction to SFC models, their advantages and disadvantages. It then presents the basic setup of an SFC model, including equations for aggregate supply, aggregate demand, households, firms and equilibrium. It shows the dynamic effects of shocks to the interest rate and investment parameter on the model. It concludes by assigning homework to analyze these shocks using an Excel model and references a textbook on monetary economics.

1. EC6012 Lecture 3
Stephen Kinsella
SFC Setup
Homework & Blogs
EC6012 Lecture 4 References
A First SFC Model
Stephen Kinsella
Dept. Economics,
University of Limerick.
stephen.kinsella@ul.ie
January 18, 2008

2. Today EC6012 Lecture 3
Stephen Kinsella
SFC Setup
Homework & Blogs
References
SFC Setup
Homework & Blogs

3. Advantages of SFC EC6012 Lecture 3
Stephen Kinsella
SFC Models “intrinsically dynamic” (Turnovsky, 1977, SFC Setup
p.3); Homework & Blogs
Model financial markets & real-financial interactions References
explicitly.

4. Disadvantages of SFC EC6012 Lecture 3
Stephen Kinsella
Complicated Balance Sheet Interactions SFC Setup
‘Dynamics’ difficult to imagine. Homework & Blogs
References

5. Aggregate Supply EC6012 Lecture 3
Stephen Kinsella
AS SFC Setup
Homework & Blogs
References
pt = wt .λt .(1 + τ ) (1)
Symbols
p Price Level; W Money wage per unit; λ labour/output
ratio; τ mark up rate

6. Aggregate Demand EC6012 Lecture 3
Stephen Kinsella
Consumption SFC Setup
Homework & Blogs
Ct Xt Vht−1 References
= (1 − π).(1 − θ). + a. (2)
pt .Kt−1 Kt pt .Kt−1
Investment
∆Kt δK0
= + (α.π + β − θ1 .ilt ) (3)
Kt−1 K0−1

7. Households & Firms EC6012 Lecture 3
Stephen Kinsella
Households SFC Setup
Homework & Blogs
pet .Etd = delta.Vht (4) References
d
Dt = (1 − δ).Vht (5)
δ = −ib + ρ (6)
Firms
∆Kt
Ets = χ.Kt = χ.Kt−1 .(1 + ) (7)
Kt−1

8. Equilibrium EC6012 Lecture 3
Stephen Kinsella
SR Eqm SFC Setup
Homework & Blogs
(1 − δ).vht−1 + savh References
vht = (8)
1 + gt = δ
Handout
Equilibrium Properties

9. Equilibrium ShocksmodelInteresta Rate the rate of interest (Regime 1b)
Figure 8. Dynamic response of to variables to shock to
u vh
1.7
0.815
0.81 1.6
0.805
1.5
0.8
0.795 1.4
0.79 1.3
0.785
1.2
0.78
0.775 1.1
0.77 1
24
32
56
64
72
80
88
96
16
40
48
0
8
g b
0.058 1.2
0.057 1.1
0.056 1
0.055 0.9
0.054 0.8
0.053 0.7
0.052 0.6
0.051 0.5
14
21
28
35
42
49
56
63
70
77
84
91
98
0
7
14
21
28
35
42
49
56
63
70
77
84
91
98
0
7

10. EC6012 Lecture 3
Download Excel Sheet
Stephen Kinsella
Show a change in interest rate on bonds from 0.07 to
0.1. What effect does this have in u-vh space? SFC Setup
Homework & Blogs
Reset the model. Show a change in the value of α from
References
0.3 to 0.7.
Due up on the blogs next week.
Read Godley and Lavoie (2006, Chapter 3).

11. References EC6012 Lecture 3
Stephen Kinsella
Wynne Godley and Marc Lavoie. Monetary Economics An SFC Setup
Integrated Approach to Credit, Money, Income, Homework & Blogs
Production and Wealth. Palgrave-Macmillan, 2006. URL References
http://www.palgrave.com/products/Catalogue.
aspx?is=0230500552.