Three essays on open-economy Stock-Flow Consistent Models

This thesis is focused on open-economy Stock-Flow Consistent (SFC) models, following the methodology pioneered by the American economist James Tobin (1918-2002) and the British economist Wynne Godley (1926-2010). In order to justify the choice of this approach, the first chapter presents a summary of the debate on the ‘state of macro’ as it developed after the financial crisis of 2007-2008. It also provides some arguments on why Stock-Flow Consistent models have emerged in recent years as a credible and relatively popular alternative to ‘mainstream’ Dynamic Stochastic General Equilibrium (DSGE) models. Chapters 2, 3 and 4 of the thesis cover the following topics: 1) A comparison between a benchmark ‘mainstream’ open economy model and a ‘standard’ SFC open economy model; 2) The mathematical demonstration of a new condition that should hold to have an improvement of the trade balance following a depreciation of the currency. It is argued that the classical Marshall-Lerner condition cannot be considered a ‘useful approximation’ in the context of SFC open economy models; 3) The explanation of the ‘paradox of sticky prices’ in SFC open economy models, for which the lower is sensitivity of prices to change in exchange rates, the higher is the speed of adjustment to negative shocks of external position; 4) A review of the most recent developments of the SFC literature, with particular attention to open economy SFC models; 5) The presentation of two original SFC two-country models. The first is used to test the implications of productivity equations inspired by the so-called Verdoorn-Kaldor law (Verdoorn 1949, 1980, Kaldor 1966). The second introduces a new ‘closure’ for the flexible exchange rate regime based on a pure ‘balance of payment approach’ and a double redundant equation. The new ‘closure’ is combined with a more advanced representation of the financial system and emulative behaviours inspired by the ‘relative income’ hypothesis of Duesenberry (1949). Then the model is employed to study the relationship between financialization and distributional issues within a SFC open-economy framework.