Modelling the Great Transition

Transcription

1 Modelling the Great Transition Emanuele Campiglio New Economics Foundation

2 nef Great Transition Initiative Towards a new economic system: Widespread wellbeing Environmental sustainability (energy, climate) Fair distribution of wealth But:Howtogetthere? We need: 1. Policy analysis tools 2. Appropriate economic theory We need a model!

3 Starting reference Peter Victor s LOWGROW Model (2008) Macroeconomic model of the Canadian Economy System dynamics methodology Main result: using the right policies, it could be possible to have a high employment sustainable economy without growth. Main policies: 1. Carbon taxation 2. Work time reduction

4 A good low-growth scenario

5 What next? 1. Other countries application (UK, US, Italy, Austria, New Zealand..) 2. Economic theory refinement and expansion: Money Banking system Endogenous technical change Energy sector Climate change economics Rest of the world (trade, migration..) 3. Methodology refinement (systemdynamics literature)

6 SD for Economics Starting references mainly focused on economy-energy-environment interactions: World3 Thomas Fiddaman FREE John Sterman s model: The energy transition and the economy Proper economics references: David Wheat s MacroLab Kaoru Yamaguchi s Macroeconomic Dynamics Steve Keen s endogenous money models

7 Overview of the model Climate Wellbeing Inequality Economic core unit Energy Trade Finance

8 The research process so far Great Transition(GT) model v0.6 Macroeconomic core unit Wide theoretical framework PartialinsertionofUKdata Partial work on econometrics Financial and monetary sector More focused approach nef work on banking and money creation (endogenous money theory)

9 The core economic unit Demand and supply Population Employment Prices Wages Sectoral accounts Households Firms Banks Govt. Pension funds Central bank

10 The core sector Y Y = = min (Desired (aggr. demand, output, output full capacity + inventory) GDP) Y = C AK+ I 1 α + LG α

11 Population dynamics

12 Labor force F ˆ = (Work.Pop* L ˆ = (L L* * F = part.ratio L) αy/adj.time SR* / w - F)/adj.time

13 Sectoral accounts

14 Non financial corporations budget

15 Non financial corporations assets

16 Non financial corporations liabilities

17 Data and econometrics Someofthesectorsthatwepresentarealreadyfilledin withdatarelative to the UK economy (population, employment, households consumption, government revenues and expenditures). Mainsource:ONS,andthe2010BlueBookinparticular.Forthisreason,in the model all initial values are relative to The collection of data regarding the financial sectors(banks, Pension funds and Central Bank) still has to be concluded. A parallel work has to be done to estimate some crucial functions of the model. Regressions can be run either using Ordinary Least Squares (OLS) method or with systems of simultaneous equations together with 2 Stages Least Squares(2sls) method.

18 User-friendly interface

19 User-friendly interface

20 Financial and monetary sectors Focus on the monetary/finance part of the model: Prices dynamics Wages dynamics Banking behaviour and creation of credit Money supply Interest rates determination Piecemeal approach

21 1. Output equal to capital stock over accelerator (?): 2. Employed labor equal to output over labor productivity 3. Phillips curve. The rate of change in wages is related to employment rate. If employment rate is high wage change is higher, if employment rate is low, wage change is lower or negative 4. Profits are equal to output minus wages 1. Goodwin model Y = K ν Π = Y wl L = Y a λ = L N w & = ( c + dλ) 5. Investments are equal to profits 6. Capital stock dynamics as usual 7. Constant productivity growth 8. Constant population growth I = Π K& = I a& = αa N& = βn δk

22 1. Goodwin model w & = ( c + dλ)

23 1. Goodwin model

24 1. Goodwin model

25 2. Minskymodel Remove linearity assumption We want: 1. Investment rate (I/Y) to be a non linear function of profit rate (Π/Y): when profit rate is low, investments<profits; when profit rate is high, investments>profits firms borrow money to finance investments 2. Wagetobeanonlinearfunctionofemploymentrate (Phillips curve) Generalized exponential function: GenExp( x, x val, y val, s,min) = ( y val min) e y val s ( x x min val ) + min

26 Investment rate as a function of profit rate

27 Wage change as a function of employment rate

28 2. Minskymodel

29 2. Minskymodel: cycles of growth broken by..

30

31 .. an increase in debt levels

32 2. Minskymodel: profit rate drives investment rate..

33 ..which drives employment rate..

34 ..which drives wages.

35 2. Minskymodel: debt-induced breakdown

36 2. Minskymodel: the feedbacks At the start: investment < depreciation K Y (together with a ) L (together with N ) λ w (together with L ) Tot.W Profits Now upward trend: Profits π inv.rate K Y λ w Tot.W Profits In addition, when Investments > profits Debt interests Profits Now, downward trend again This goes on until another oscillation makes profits excessively negative and impossible to repay the debt, which keeps accumulating.

37 3. Monetary Minskymodel Let s add a monetary sector Five accounts: 1. Bank Vault (BC) 2. Bank transaction (only expenditures) (BPL) 3. Firm Loan (FL) 4. Firm deposit (FD) 5. Workers deposit (WD) List of transactions in double-entry table

38 Double-entry Godley table

39 3. Monetary Minskymodel: Assets

40 3. Monetary Minskymodel: Liabilities

41 3. Monetary Minskymodel: Capital and output

42 3. Monetary Minskymodel: Price dynamics P& 1 1 = P τ 1 σ P w a

43 3. Monetary Minskymodel: Wage dynamics w& = w P h & λ (λ) + ω + λ P& P

44 3. Monetary Minskymodel: Employment dynamics & λ = λ( g ( α + β ))

45 3. Monetary Minskymodel: Profit rate π R = PY R wl ( rl FL rd FD ) PK R

46 Money lending rate as a function of profit rate

47 Loan repayment rate as a function of profit rate

48 3. Monetary Minskymodel: Output

49 3. Monetary Minskymodel: Unemployment and inflation

50 3. Monetary Minskymodel: Debt to output ratio

51 3. Monetary Minskymodel: Some stocks

52 Some problemswithsd No optimization: How to consider individuals and firms choices? No individual agents: How to model inequality? System Dynamics vs Agent Based Modelling?

53 Thanks!