An econometric SFC model of the French economy is presented. The structure of the model is analogous to that of already existing national-level SFC models with demand-led dynamics, a Kaleckian accumulation behavior and an indebtedness norm. A supply constraint results in a simple production function that determines potential output and allows for computation of an output gap.
The general price level depends on a mark-up pricing rule, function of unit labor costs, with an effect from demand pressures. Value added is split among the different agents depending on simple structural parameters. Its distribution between wages, profits and other redistribution operations is based on a wage-price-unemployment relation. Financing methods via bank credit, bond and equity issuing, as well as financial investment behavior are described for each agent. The dynamic simulations on the past over the period 1996-2019 provide acceptable results.
In a second part the effects of unconventional monetary policy are evaluated. The distribution of helicopter money in favor of the government to finance additional public investment or social transfers leads to a recovery without public debt but, as a counterpart, with a worsening of central bank wealth and own funds. This would not be a problem according to supporters of this policy. A central bank could still work with negative own funds. This could be the case if the procedure is punctual and limited, but more problematic in the context of a sustained policy. In the case of Eurozone countries such policy would contradict European treaties. The partial cancellation of the public debt held by the central bank is another proposal. It has no effect on the real economy. Public debt falls but central bank wealth falls as much. This situation gives no room of maneuver to support new public investment. Last, the solutions proposed to restore the central bank’s own funds are not convincing. Helicopter money could be used to credit the account of the government at the central bank and purchase new issued central bank equities. But this solution would not increase the central bank own funds as its wealth would be reduced by an equivalent amount.
In addition to the presentation, you can also download the system of equations and simulations.