The Limerick SFC workshop, second of a series of three, was aiming at building a common language for Macro-Modelling. After two days of intense debates and exchanges, we can conclude that the goal is on its way to being achieved. Indeed, surfing on the outcome of the Dijon gathering, we could get to the core of what is retained as essential for macro modelling. But first thing first, let’s have a quick summary of these challenging two days.
The workshop started with a session dedicated to open economy modelling. After a quick introduction by S. Kinsella, D. Ehnts had the honour to open the debates and presented an interesting simple and clear SFC model on exchange rate fluctuations to support expansive fiscal policies. A. Botta followed and made the case, à la Godley, for what he believes to be an unsustainable process in Colombia: FDI inflows and dividends outflows in the Oil sector, leading to current account deficit and capital account surpluses. T. Tagba-Aliti demonstrated to complexity of estimating a SFC model for Ireland. The result is a fully-fledged SFC model for Ireland, showing remarkable predictive capacities. S. Ingolfsson made a surprise presentation of his Icelandic house pricing software to conclude.
While the first session was only composed of aggregated models, the second session allowed for more disaggregation up to the point of Agent Based Models (ABM). A. Godin presented a disaggregated bank sector within a SFC model, focusing on the role of securitization and active banking in the emergence of financial crisis. C. Metzig, on the other hand concentrated on the real side impact of credit money, using an ABM. The presentation of M. Napoletano narrowed further the scope of analysis and showed the impact of High Frequency Trading on the emergence of flash crashes. Finally, E. Le Heron presented (the next day) his disaggregated SFC model of optimistic and pessimistic households, allowing for the appearance of business cycles.
The last session focused on monetary policies and had D. Neilson discussing on the pertinence of forward guidance by central banks, suggesting that it might work only in normal times but not during financial crisis. J. Mazier went on to present a multi-euro model with different exchange rate regimes and their impact on trade balances within the euro zone.
The workshop concluded with a two hours round table with excellent introductory interventions by M. Napoletano, A. Caiani and G. Zezza. The energy spent during the whole workshop bore fruit: the shape of an ABM-SFC model was designed. The strengths of SFC models (good forecasting results, empirical estimation, strong accounting framework) are combined with the forces of ABM (micro-foundation, heterogeneity, distributional and intra-sectorial aspects). Obviously this hybrid model has to be applied to a topic allowing for a full utilisation of its potential, that is where the ABM side allows for the emergence of a macroeconomic shock feeding back to its micro structure, thanks to the SFC framework.
I believe all participants would agree on the utility of such stimulating workshops where economists from different background engage in productive collaboration towards a common goal: building better models allowing for a more pervasive understanding of our world.