nef macro model - isee - rio 2012
TRANSCRIPT
Modelling the Great Transition
Emanuele Campiglio
Giovanni Bernardo
International Conference on Ecological EconomicsRio de Janeiro19/06/2012
Introduction
• nef:– Wellbeing and measurement of progress– Reform of finance and banking;– Environmental limits (fisheries);– Social policy (work time);– Inequality;– “Good” jobs.
• Macroeconomic model of the UK economy: How to managethe UK economy within environmental limits whilstdelivering increasing wellbeing and avoiding instability?
• Complex framework at first (Working paper – October 2011– session 49, n.311)..
• .. then: focus on banking and finance.
Focus on money and banking
• Economic theory needed! Very poor performance of mainstream modelling:– No money
– No banks
– No debt
• Or, if present, banks seen just ad intermediaries:
But: banks create money
• Every loan creates a deposit
• “By far the largest role in creating broad money is played by the banking sector.. When banks make loans they create additional deposits for those that have borrowed.” (Bank of England, 2007)
Berry et al. (2007) Interpreting movements in Broad Money, Bank of England Quarterly Bulletin 2007 Q3Source: Bank of England, Interactive Database, data series LPQAUYM (M4), LPQVQKT (notes and coins), YWMB43D (Central bank reserves).
And most importantly, they allocate money in the economy
The model
• Simpler framework centred on banking, money creation mechanisms and private investment financing.
• Great attention to consistency (double-entry book keeping).
• A consistent framework, to be modified and potentially used for a variety of research questions:– Green economy financing;– Quantitative easing;– Fiscal and monetary policies;– Debt dynamics;– Crisis/housing bubble;– General macroeconomic dynamics.
The structure of the model
Aggregate macroeconomic framework
Sectoral accounts
Demand
Government
Production Employment
BanksCentral
BankGilt sellers Households
Non financial
firms
The macro framework
Output (Y)
Productivity (A)
Capital (K)
Labour (L)
Consumption +Government expenditures (C+G)
Investments (I)
Net change in debt (ΔD)
Aggregate Demand (AD)
Wages (W)
Wage share (α)
Profits (Π)
Profit share (1-α)
LAKY 1
tWGWtC ;)1(
DI ADDY Income + net change in debt = aggregate demand
The macro framework (t+1)
Consumption +Govt expenditures (Ct+Gt)
Investments (It)
Aggregate Demand (ADt)
Output (Yt+1)
Productivity (A t+1)
Capital (Kt+1)
Labor (Lt+1)
Wages (Wt+1)
Profits (Πt+1)
DesiredLabor Ld
t
Time t Time t+1
1
1
AK
ADL td
t
Sectoral accounts
Balance sheet
Assets Liabilities
Total assets = Total liabilities
Total change in assets = Total change in liabilities
Asset 1
Asset 2
Liability
Net worth
Private banks balance sheet
Balance sheet
Assets Liabilities
Total assets = Total liabilities
Reserves
Loans
Deposits
Net worth
Firms balance sheet
Balance sheet
Assets Liabilities
Total assets = Total liabilities
Deposits
Capital stock
Loans
Net worth
Central Bank balance sheet
Balance sheet
Assets Liabilities
Total assets = Total liabilities
Gilts Reserves
The mechanics of credit creation
+100 (Deposits)
+10(Reserves)
Non financial firms
Private Banks
Gilt sellers
Central Bank
+100 (Loans)
+100 (Deposits)
+100 (Loans)
+10(Gilts)
+10(Deposits)
-10(Gilts)
+10(Reserves)
+10(Deposits)
1. The bank lends 100 to the firm
2. The bank seeks new reserves at the central bank (suppose r=10%)
3. The central bank buys the same amount of gilts from the secondary market..
4. .. creating new deposits
Private banks balance sheet
Balance sheet
Assets Liabilities
Total assets = Total liabilities
Reserves
Loans
Deposits
Net worth
+100
+100
+10
+10
ZDI RNN
d where; :sInvestment Desired
NN
dd IL )1( :loansfor Demand
N
dLCC )1( :creationCredit
Investments : I NCC [1(1)]
N
The model
The model
The model
The model
Default run (η=1.2; β=1; r=0.1)
Default run with higher initial stock of private debt
Default run with even higher initial stock of private debt
Growth rates comparison
Banks confidence shock (β jumps to 0.4)
Banks confidence shock
“Animal spirits” shock (η jumps to 1.7)
“Animal spirits” shock
“Animal spirits” shock
Growth rates comparison
Conclusions
• Much work still to do:– Allow for households and government to accumulate debt;– Make (some of) the crucial parameters endogenous:
• Propensity to invest (η) function of growth rate, profit rate, interest rate..;
• Banks confidence (β) function of growth rate, profit rate..;• How do central bank interest rate affect the rest of interest rates (on
deposits, loans etc.)?
• Future research directions:– How does allocation of new purchasing power affect the
macroeconomy?• Financing the green economy;• Productive vs speculative investments;• How does QE change the picture?
– What are the alternatives?• Credit controls• Public money• Full fractional reserve banking
