Schumpeter showed that the boom and bust cycles are intrinsically related to the functioning of the capitalist economy. These boom and bust cycles are inherent to the rise innovation. Our paper analyses innovation cycles in a stock flow consistent framework. It focuses on the essential role of internal and external finance in the emergence of a new technological paradigm. We present two models. The first one, as a tribute to Schumpeter’s work, follows strictly Schumpeter’s description of the business cycles induced by technological change, except for the financial side.

We study the interactions of banks and firms within a leverage cycle to understand how capacity utilisation and capital investment interact with funding costs, leverage by banks and firms, and liquidity. We show in a simulation study that when firms can grow and die by becoming insolvent, and when banks can grow and die as their bad debts increase to unsustainable levels, the real economy cycles around a leverage cycle.

This paper focuses on the different balance sheet management behavior of private banks and worker households, when assets are traded in the market. The authors take into consideration the securitization process, through which mortgage loans to households are converted into tradable securities which are held by investment banks in order to make profits.

The aim of the paper is to provide an overview of the current stock-flow consistent (SFC) literature. Indeed, we feel the SFC approach has recently led to a blossoming literature, requiring a new summary after the work of Dos Santos (2006) and, above all, after the publication of the main reference work on the methodology, Godley and Lavoie's Stock-flow Consistent Approach (2007). The paper is developed along the following lines. First, a brief historical analysis investigates the roots of this class of models that can be traced as far back as 1949 and the work of Copeland.