nef macro model - isee - rio 2012

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

Thank you!

emanuele.campiglio@neweconomics.org

www.neweconomics.org