Modeling economic forces, power relations, and stock-flow consistency: a general constrained dynamics approach

Abstract

In monetary Stock-Flow Consistent (SFC) models, accounting identities reduce the number of behavioral functions to avoid an overdetermined system of equations. We relax this restriction using a differentialalgebraic equation framework of constrained dynamics. Agents exert forces on the variables according to their desire, for instance to gradually improve their utility. The parameter 'economic power' corresponds to their ability to assert their interest. In analogy to Lagrangian mechanics, system constraints generate additional constraint forces that lead to unintended dynamics. We exemplify the procedure using a simple SFC model and reveal its implicit assumptions about power relations and agents' preferences.

Modeling the out-of-equilibrium dynamics of bounded rationality and economic constraints

“…In accordance with this, the K constraints that guarantee consistency in post-Keynesian Stock-Flow Consistent models are satisfied by simply dropping K behavioral equations (Caverzasi and Godin, 2015;Godley and Lavoie, 2012). This one-sided drop closure is justified if and only if exactly K stocks or flows are unaffected by agency, but only determined by the constraints (for a critique, see Richters and Glötzl, 2020).…”

“…The parameter α r captures how strongly household sector a considers this intertemporal choice. For an alternative specification with a simple "money in the utility function" approach (Sidrauski, 1967), see Richters and Glötzl (2020).…”

“…These algebraic equations are equivalent to adding summands (θ(w 1 L a1 + w 2 L a2 ) − T a ) 2 and (θ(w 1 L b1 + w 2 L b2 ) − T b ) 2 to the utility function U g , and this desire being pursued with infinite power µ gT (see Richters and Glötzl, 2020).…”