Monetary Circuit Model
The monetary circuit model is a powerful way to model the dynamics of the macroeconomy. The model uses ordinary differential equations and stock-flow consistent accounting principles to describe transactions between the various sectors of the economy. Focusing on debt and the unique properties of modern token money, advanced versions of the model can explain how a Great Moderation becomes a Great Recession. The use of continuous time allows us to describe dynamic phenomena, such as endogenous business cycles, that would be difficult or impossible using equilibrium techniques.
The course uses the Free and open source mathematics package Sage. Some familiarity with accounting, the Python programming language, and systems of ordinary differential equations is recommended, though the concepts used are fairly simple.
For now, basic familiarity with how to use Sage is assumed. You should look through the tutorial for an introduction.
In these lessons, we will develop a basic circuit model which seeks to explain how all sectors of the economy (bankers, capitalists and workers) can earn continuous positive incomes despite a limited stock of money borrowed into existence at interest.
- Skeleton Model: Setting up and solving a basic differential equation system in Sage. A model without monetary transactions.
- Lending and Repayment: Extending the skeleton model to support a "revolving fund" of credit.
- Wages and Consumption: Extending the model to support payment of wages by firms and consumption by households.
- Interest: Payment of interest on loans and deposits. Purchases of goods and services by banks.
- Profits: Deriving the income of capitalists from the wage share of firm revenue.