Words to the Wise: Stock Flow Consistent Modeling of Financial Instability

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The crisis has exposed the failure of economic models to deal sensibly with endogenously generated crises propagating from the financial sectors to the real economy, and back again.

The goal of this paper is to review the method of stock flow consistent modeling to highlight areas in which it is deficient. I argue there is a fruitful research agenda in shoring up these deficiencies. The objective of stock flow modeling should be the ability to practically model unstable macro-economies, and in particular their interactions with the financial sector. These models should provide ‘Words to the Wise’, and until they do, they are just thought experiments.