Dealing with adaptive expectations in Stock-Flow consistent models

Sylvio Antonio Kappes and Marcelo Milan

Journal of Post Keynesian Economics, 2020, vol. 43, issue 1, 76-89

Abstract: Stock-flow consistent (SFC) models, in their simulations of the macroeconomic dynamics, have not properly dealt with how households form their expectations about future income flows. Although the majority of SFC models assume some type of adaptive expectations, the literature has not provided so far guidelines about how to best model expected variables in general, and expect flows of income in consumption decisions in particular, thus not paying enough attention to the role of expectations in affecting the path of variables and the steady-state composition of stocks. In this article, which compares different types of modeling strategies for income expectations, it is shown that minor differences in the way that expectations are modeled may have important macroeconomic consequences, mainly in terms of the traverse and the steady-state composition of wealth.

Date: 2020
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DOI: 10.1080/01603477.2019.1640067

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