Stock-Flow Consistent Dynamic Models: Features, Limitations and Developments

The stock-flow consistent (SFC) approach to macroeconomic dynamic modelling was developed in the 2000s by Godley and Lavoie (in Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth. Palgrave, New York, 2007a; Cambridge Journal of Economics, 31(1), 1–23, 2007b), who paved the way for the flourishing of SFC models. These models are based on four accounting principles (flow consistency, stock consistency, stock-flow consistency and quadruple book-keeping), which allow inferring a set of accounting identities. The latter are then coupled with a set of equations defining the equilibrium conditions. Finally, difference (or differential) stochastic equations are added to define the behaviour of each macro-sector (or agent) of the economy. SFC models’ coefficients can be calibrated to obtain a theoretical baseline scenario and/or estimated through standard econometric techniques. Baseline results are then compared with a variety of ‘possible worlds’ or shocks. This theoretical and analytical flexibility is the reason SFC models are used by economists with different theoretical backgrounds. While SFC models are affected by some limitations, we believe that advantages outdo weaknesses.