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

Levy Economics Institute, Working Papers Series No. 854

33 Pages Posted: 19 Dec 2015

See all articles by Miguel

Miguel

Banco Santander

Dirk Ehnts

Bard College - Bard College Berlin

Date Written: November 2015

Abstract

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.

Keywords: Stock-flow Consistent Models, Closures, Graph Theory, Macroeconomic Regimes, Methodology

JEL Classification: E16, E17

Suggested Citation

Carrión Álvarez, Miguel and Ehnts, Dirk, The Roads Not Taken: Graph Theory and Macroeconomic Regimes in Stock-Flow Consistent Modeling (November 2015). Levy Economics Institute, Working Papers Series No. 854, Available at SSRN: https://ssrn.com/abstract=2705019 or http://dx.doi.org/10.2139/ssrn.2705019

Miguel Carrión Álvarez (Contact Author)

Banco Santander ( email )

Castellana 24
Madrid, 28046
Spain

Dirk Ehnts

Bard College - Bard College Berlin ( email )

Platanenstr. 24
Berlin, 13156
Germany

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