A Model of the Economy Based on System of National Account and Stock Flow Consistent Theory and its Application
Abstract
We propose a model of a closed economy with four interactive components based upon the System of National Account (SNA) and Stock Flow Consistent theory to model the complex dynamics of the economy. The four interacting components of this economy are households, firms, banks and the government, and their interactions will be modeled with a four-by-four matrix. After analyzing the reasons for changes in asset prices that lead to business cycles, we will also propose an asset pricing model that will capture macroeconomic dynamics in asset markets. We will be analyzing the structure of the economy and its stability by running simulations under various conditions. Furthermore, we will discuss potential applications of the model in identifying crises by observing the effects of changes of variables in the model and preventing or mitigating crises using control theory, for example, when the Federal Reserve lowers interest rates. This thesis will consist of three parts: 1. the four by four model of the economy 2. the macroeconomic asset pricing model and validation and 3. stability analysis and potential applications. We find that the model we conceive displays cyclic behavior and approaches an equilibrium, and simulates the e ects of various shocks to the economy fairly realistically.