National Accounts as a Stock-Flow Consistent System, Part 1: The Real Accounts

TL;DR

This paper introduces a stock-flow consistent macroeconomic model based on National Accounts, illustrating sector interconnections and dynamics that traditional models fail to capture, with empirical calibration using Finnish data from 1975-2012.

Contribution

It presents a novel, sector-interconnected macroeconomic model grounded in National Accounts, capable of simulating realistic economic dynamics and feedbacks.

Findings

Model accurately follows historical Finnish data from 1975-2012.

Simulates 59 macroeconomic quantities over unlimited future.

Highlights sectoral linkages explaining business cycle propagation.

Abstract

The 2008 economic crisis was not forecastable by at that time existing models of macroeconomics. Thus macroeconomics needs new tools. We introduce a model based on National Accounts that shows how macroeconomic sectors are interconnected. These connections explain the spread of business cycles from one industry to another and from financial sector to the real economy. These lingages cannot be explained by General Equilibrium type of models. Our model describes the real part of National Accounts (NA) of an economy. The accounts are presented in the form of a money flow diagram between the following macro-sectors: Non-financial firms, financial firms, households, government, and rest of the world. The model contains all main items in NA and the corresponding simulation model creates time paths for 59 key macroeconomic quantities for an unlimited future. Finnish data of NA from time period 1975-2012 is used in calibrating the parameters of the model, and the model follows the historical data with sufficient accuracy. Our study serves as a basis for systems analytic macro-models that can explain the positive and negative feed-backs in the production system of an economy. These feed-backs are born from interactions between economic units and between real and financial markets. JEL E01, E10. Key words: Stock-Flow Models, National Accounts, Simulation model.