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A Stock-Flow Consistent Quarterly Model of the Italian Economy

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  • Francesco Zezza
  • Gennaro Zezza

Abstract

Macroeconomists and political officers need rigorous, albeit realistic, quantitative models to forecast the future paths and dynamics of some variables of interest while being able to evaluate the effects of alternative scenarios. At the heart of all these models lies a standard macroeconomic module which, depending on the degree of sophistication and the research questions to be answered, represents how the economy works. However, the complete absence of a realistic monetary framework, along with the abstraction of banks and more generally of real-financial interactions, not only in dynamic stochastic general equilibrium (DSGE) models but also in central banks' structural econometric models, made it impossible to detect the rising financial fragility that led to the Great Recession. In this paper, we show how to address the missing links between the real and financial sectors within a post-Keynesian framework, presenting a quarterly stock-flow consistent (SFC) structural model of the Italian economy. We set up the accounting structure of the sectoral transactions, describing our "transaction matrix" and "balance sheet matrix," starting from the appropriate sectoral data sources. We then "close" all sectoral financial accounts, describe portfolio choices, and define the buffer stocks for each class of assets and sector in the model. We describe our estimation strategy, present the main stochastic equations, and, finally, discuss the main channels of transmissions in our model.

Suggested Citation

  • Francesco Zezza & Gennaro Zezza, 2020. "A Stock-Flow Consistent Quarterly Model of the Italian Economy," Economics Working Paper Archive wp_958, Levy Economics Institute.
  • Handle: RePEc:lev:wrkpap:wp_958
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    Cited by:

    1. Dimitri B. Papadimitriou & Francesco Zezza & Gennaro Zezza, 2020. "When Will Italy Recover?," Economics Strategic Analysis Archive sa_10_20, Levy Economics Institute.
    2. Gabriel Michelena, 2021. "A Dynamic Stock-Flow Model for the Argentine Economy," BCRA Working Paper Series 202189, Central Bank of Argentina, Economic Research Department.

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    More about this item

    Keywords

    Empirical Stock-Flow Consistent Models; Monetary Policy; Italy;
    All these keywords.

    JEL classification:

    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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