Edited by Frederic S. Lee and Bruce Cronin
Chapter 22: Modeling the economy as a whole: stock-flow models
In this chapter we introduce the stock-flow-consistent approach to macroeconomic modeling, developed from the pioneering work of Wynne Godley and others in Cambridge, and James Tobin at Yale. Empirical applications of this approach were successful in predicting the Great Recession of 2007, and the publication of Monetary Economics by Godley and Lavoie in 2007 also attracted a growing attention to this methodology, which is being developed by a growing number of scholars, mainly in the post-Keynesian tradition. Stock-flow-consistent models provide an integrated analysis of real and financial markets, which is missing in most mainstream models, although it is essential to understanding modern monetary economies. In this chapter we introduce the consistency requirements of macroeconomic models: payments from one sector must be accounted for as receipts of another sector; financial assets of one sector are liabilities for another sector, and so on; discussing the links between models and national accounting for both flows and stocks. We next discuss how feedbacks from stocks to flow need to be accounted for, providing a consistent dynamic representation of the economy over historical time. Finally, we explore the current lines of research related to this approach in the post-Keynesian literature.
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