Macroeconomic imbalances in an open economy stock-flow consistent model

Authors: 
Dirk H. Ehnts
Abstract: 

The effects of macroeconomic imbalances have been widely discussed in macroeconomics. In a regime of fixed exchange rates the imbalances can arise from different growth rates in income and changes in the real exchange rate. In stock-flow consistent (SFC) models the standard way to handle a change in the real exchange rate works via export and import functions which are sensitive to nominal exchange rates and foreign levels of income.

In this contribution a different approach is selected by directly integrating imports and exports into the consumption equation. A fall in the nominal exchange rate might thus lead to a subsequent fall in imports and consumption. In the analytically solvable model this will feed through to lower incomes. On the financial side, current account imbalances lead to financial account imbalances that have to be financed. The ways this can be done are discussed, followed by an overview of strategies that are used to turn deficits into surplusses