page_title: Stock-Flow consistent model
section_title: Background and history
hierarchical_section_title: Stock-Flow consistent model / Background and history
caption_attribution_description: English: Net financial assets (financial assets minus liabilities), sectors of USA economy, 1945-2009
context_page_description: Stock-Flow Consistent models are a family of macroeconomic models based on a rigorous accounting framework, which guarantees a correct and comprehensive integration of all the flows and the stocks of an economy. These models were first developed in the mid-20th century but have recently become popular, particularly within the post-Keynesian school of thought.
context_section_description: The ideas for an accounting approach to macroeconomics go back to Knut Wicksell, John Maynard Keynes (1936) and Michał Kalecki. The accounting framework behind stock flow consistent macroeconomic modelling can be traced back to Morris Copeland's development of flow of funds analysis back in 1949. Copeland wanted to understand where the money to finance increases in Gross National Product came from, and what happened to unspent money if GNP declined. He developed a set of tables to show the relationship between flows of income and expenditure and changes to the stocks of outstanding debt and financial assets held in the US economy.
  James Tobin and his collaborators used features of stock flow consistent modelling including the social accounting matrix and discrete time to develop a macroeconomic model that integrated financial and non-financial variables. He outlined the following distinguishing features of his approach in his Nobel lecture 
  Modelling changes between discrete short-run time periods rather than a long run equilibrium
  Tracking changes in stocks of assets held by different groups
  Multiple assets with different rates of return,
  Modelling of monetary policy operations
  Subjecting the demand functions to "adding up constraints"
  Also Robert Clower based his Keynesian price and business cycle theories on stock-flow relations. A similar approach was developed in Germany by Wolfgang Stützel as Balances Mechanics.
  The current SFC models mainly emerged from the separate economic tradition of the Post Keynesians, Wynne Godley being the most famous contributor in this regard. Godley argued in favour of wider adoption of stock flow consistent methods, expressing the view that they would improve the transparency and logical coherence of most macro models. The Post Keynesians aimed at developing a macroeconomic theory that rejects the classical dichotomy, the neutrality of money and general equilibrium theory. Instead, they wanted to model the financial stocks and flows and their relations, the sectoral balances. From some models of "monetary circuit theory", far-reaching consequences were derived, such as the thesis of a "monetary growth imperative", which, however, could be explained by inconsistent accounting. By respecting accounting constraints, "black holes" have to be avoided, where money vanishes without an offsetting entry in the balance sheet.
  The models gained popularity at the beginning of the 21st century and especially after the beginning of the financial crisis of 2007–08, as some authors had foreseen the critical developments with accounting models. Wynne Godley, one of the pioneers of the SFC approach since the 1970s, had been warned since 2000 in publications that the US housing market would weaken and cause a recession. In DSGE models, which dominate macroeconomics, crises usually cannot arise because of behavioural assumptions such as rational expectations and intertemporal optimisation. Although they treat stock and flow variables consistently, they usually model only individual stock variables such as physical capital, while monetary variables such as credit relations and debt are neglected. Therefore, attempts are made to analyse financial crises using stock flow consistent models based on the accounting approach.
  While ecological aspects were not considered by post-Keynesian authors like Godley or Lavoie, SFC models are now widely used within Ecological Macroeconomics. In addition to cash flows, resource or energy flows and stocks or an ecosystem with renewable resources are modeled. References are made in particular to the flow-fund models of Nicholas Georgescu-Roegen. Other approaches integrate concepts of SFC models into agent-based modeling (ABM) or input–output models.
  Current researchers in the SFC approach to macroeconomic modelling are based in University of Limerick, Levy Economics Institute and University of Oxford.
caption: Net financial assets of the different sectors of the American economy. For every asset, there exists a liability.
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