After the post a few weeks ago where I showed that Post-Keynesian Stock Flow Consistent modeling has become very popular on Wall Street I got a ton of emails asking for more details on this approach. So, here’s a short description and a few good links for you to explore if you’d like.
Stock flow consistent modeling is a form of economic modeling that involves a comprehensive macro framework for understanding the integration of the stocks and flows in the economy between its various sectors. This modeling is a top down approach that can involve a comprehensive macro view including a few sectors (such as the government and non-government) or a much more intricately detailed view including as many sectors as one wants to model, but usually modeling the most important sectors such as households, non-financial businesses, financial businesses, government and rest of world.
Although the term “stock flow consistent” has become popularized by Post-Keynesian Economists, it’s really just macro integrated accounting. So, please don’t confuse “Post-Keynesian” as having a monopoly on macro accounting or flow of funds accounting frameworks. In fact, if you’ve ever cracked the Federal Reserve’s Z.1 report, probably the most important data set the US government compiles for the economy and the source of much of the St Louis Fed’s FRED database, then you’ve dabbled in “stock flow consistent” modeling which is more commonly referred to as “flow of funds” accounting by the Fed. This approach to economic modeling was introduced by Morris Copeland in the 1940s when he brought it to the Federal Reserve.¹ Although it is widely used in the Fed and on Wall Street it hasn’t made much impact on more mainstream academic economic modeling techniques for reasons I don’t fully know. Copeland was famously critical of mainstream economic models that didn’t include money and were not consistent with macro accounting principles:
