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The Roads Not Taken: Graph Theory and Macroeconomic Regimes in Stock-flow Consistent Modeling

Listed author(s):
  • Miguel Carrion Alvarez
  • Dirk Ehnts

Standard presentations of stock-flow consistent modeling use specific Post Keynesian closures, even though a given stock-flow accounting structure supports various different economic dynamics. In this paper we separate the dynamic closure from the accounting constraints and cast the latter in the language of graph theory. The graph formulation provides (1) a representation of an economy as a collection of cash flows on a network and (2) a collection of algebraic techniques to identify independent versus dependent cash-flow variables and solve the accounting constraints. The separation into independent and dependent variables is not unique, and we argue that each such separation can be interpreted as an institutional structure or policy regime. Questions about macroeconomic regime change can thus be addressed within this framework. We illustrate the graph tools through application of the simple stock-flow consistent model, or "SIM model," found in Godley and Lavoie (2007). In this model there are eight different possible dynamic closures of the same underlying accounting structure. We classify the possible closures and discuss three of them in detail: the "standard" Godley–Lavoie closure, where government spending is the key policy lever; an "austerity" regime, where government spending adjusts to taxes that depend on private sector decisions; and a "colonial" regime, which is driven by taxation.

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File URL: http://www.levyinstitute.org/pubs/wp_854.pdf
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Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_854.

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Date of creation: Nov 2015
Handle: RePEc:lev:wrkpap:wp_854
Contact details of provider: Web page: http://www.levyinstitute.org

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  1. Eckhard Hein, 2009. "A (Post-) Keynesian perspective on "financialisation"," IMK Studies 01-2009, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  2. Kimmo Eriksson, 2012. "The nonsense math effect," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 7(6), pages 746-749, November.
  3. Vincent Duwicquet & Jacques Mazier, 2010. "Financial integration and macroeconomic adjustments in a monetary union," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 33(2), pages 333-370, January.
  4. Eugenio Caverzasi & Antoine Godin, 2013. "Stock-flow Consistent Modeling through the Ages," Economics Working Paper Archive wp_745, Levy Economics Institute.
  5. Tobin, James, 1982. "Money and Finance in the Macroeconomic Process," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(2), pages 171-204, May.
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