Systemic transitionsPlanned

The price of slack: costing and financing robustness margins in a small open economy

An open model of a national economy to test whether reserve stocks, second suppliers and spare capacity widen the range of shocks it can absorb, what they cost in normal times, and how they could be financed.

Project facts

ProgrammeSystemic transitions
StatusPlanned What the status labels mean
MethodsMacroeconomic modelling (stock-flow consistent, input-output)
ScaleEconomy
GeographyA small open economy; Canada as the first case, designed to transfer to others, including European ones

The question

Do deliberate margins (reserve stocks, second suppliers, spare capacity, longer-lived equipment) widen the range of shocks an economy can absorb, and at what cost in normal times? Can they be financed by monetary routes other than public borrowing without raising inflation or weakening the currency?

What the figures leave out

In normal times a margin looks like idle capital. Its value appears only when a shock arrives, and most accounts never record the shocks it would have absorbed. The question of who pays for margins is usually left out with them.

Approach

The model will join a stock-flow consistent monetary core to a dynamic input-output production network of 20 to 30 sectors, a price and exchange-rate block, and a physical layer of energy, materials and resource stocks. Each configuration will face several hundred identical draws of shocks. Financing routes (debt; central-bank purchases of green bonds; money creation without matching debt; cancellation of fossil-linked bank assets) are compared on inflation, exchange rate, public debt and financial stability.

These financing routes are debated. Each is stated as a hypothesis, with the result that would refute it, before the model is run. None is a position of the lab.

OPEN MODEL OF A SMALL OPEN ECONOMY · PLANNEDMonetary coreSTOCK-FLOW CONSISTENTProduction network20–30 SECTORSPrices and exchange ratePhysical stocksENERGY · MATERIALS · RESOURCESMARGINSSHOCKSIDENTICAL DRAWS,SEVERAL HUNDREDPER CONFIGURATIONFINANCING ROUTES COMPAREDDebtCentral-bank green bondsMoney creation, no debtFossil-asset cancellationON INFLATION, EXCHANGERATE, PUBLIC DEBT ANDFINANCIAL STABILITYEACH STATED AS AHYPOTHESIS SHOCKS · IDENTICAL DRAWS,SEVERAL HUNDRED PER CONFIGURATIONOPEN MODEL · PLANNEDMonetary coreSTOCK-FLOW CONSISTENTProduction network20–30 SECTORSPrices, exchange ratePhysical stocksENERGY · MATERIALS · RESOURCESFINANCING ROUTES COMPAREDDebtCentral-bank green bondsMoney creation, no debtFossil-asset cancellationON INFLATION, EXCHANGE RATE, PUBLICDEBT AND FINANCIAL STABILITY
FIG. 1 · METHOD SCHEMATIC · NO VALUES · Diagram of the planned model's four blocks and the flows between them.STATUS · PLANNED

Scope

20–30sectors in the production network
Several hundredidentical shock draws per configuration (planned)

Where it stands

Planned

Planned. Hypotheses, work plan and governance are written; a design review comes next. Model building has not started. The code will be released under an open licence (GPL or AGPL).

The decision it informs

Which sectors and critical inputs most warrant margins, and how the financing routes compare.

INSTRUMENTS · Robustness roadmaps: which margins, where, at what cost, who carries them and how they are financed.

What the work required

  • Post-Keynesian and ecological macroeconomics
  • Stock-flow consistent accounting
  • Production-network modelling
  • Monetary analysis with explicit balance sheets
  • Open, reproducible modelling: one command regenerates every figure

Leads to

None yet

Working on ecological macroeconomics, critical supply chains or how margins are financed?

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