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A stock-flow consistent input–output model with applications to energy price shocks, interest
rates, and heat emissions
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New J. Phys. 17 (2015) 015011 doi:10.1088/1367-2630/17/1/015011
PAPER
A stock-flow consistent input–output model with applications to

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energy price shocks, interest rates, and heat emissions
RECEIVED
31 August 2014
Matthew Berg1, Brian Hartley2 and Oliver Richters3
ACCEPTED FOR PUBLICATION 1
5 December 2014
University of Missouri Kansas City, USA
2
The New School for Social Research, USA
PUBLISHED 3
Theoretical Physics/Complex Systems, Institute for Chemistry and Biology of the Marine Environment, Carl von Ossietzky University,
20 January 2015
Oldenburg, Germany
E-mail: [email protected]
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Keywords: ecological macroeconomics, post-Keynesian economics, input-output analysis, stock-flow consistent models, stationary
Commons Attribution 3.0 economy, energy price shocks, anthropogenic heat flux
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By synthesizing stock-flow consistent models, input–output models, and aspects of ecological macro-
DOI. economics, a method is developed to simultaneously model monetary flows through the financial
system, flows of produced goods and services through the real economy, and flows of physical materi-
als through the natural environment. This paper highlights the linkages between the physical environ-
ment and the economic system by emphasizing the role of the energy industry. A conceptual model is
developed in general form with an arbitrary number of sectors, while emphasizing connections with
the agent-based, econophysics, and complexity economics literature. First, we use the model to chal-
lenge claims that 0% interest rates are a necessary condition for a stationary economy and conduct a
stability analysis within the parameter space of interest rates and consumption parameters of an econ-
omy in stock-flow equilibrium. Second, we analyze the role of energy price shocks in contributing to
recessions, incorporating several propagation and amplification mechanisms. Third, implied heat
emissions from energy conversion and the effect of anthropogenic heat flux on climate change are
considered in light of a minimal single-layer atmosphere climate model, although the model is only
implicitly, not explicitly, linked to the economic model.
1. Introduction
One of the key issues faced by modern society is navigating the transformation towards a sustainable
economy that respects ‘planetary boundaries’ [1]. This transformation could be facilitated by a
macroeconomic theory capable of robustly dealing with issues of energy use and emissions, but much
of economic theory underemphasizes the importance of energy and natural resources [2]. In addition,
many general equilibrium models abstract from institutional details of money creation and monetary
flows which play a central role in real-world macroeconomic dynamics. This paper suggests one
alternative route to an ecological macroeconomic model with Keynesian features, in which finance plays a
central role.
One effort to explicitly represent the dynamics of debt, finance, and other monetary factors has been the
post-Keynesian stock-flow consistent (SFC) approach. At the same time, input–output (IO) models have been
widely used to investigate sectoral interdependencies within the real economy, while environmentally extended
IO models have been used to analyze the relationship between the economy and ecological subsystems.
However, the role of monetary dynamics has been left relatively unexplored in IO models [3]. This paper
proposes a synthesis of elements from both SFC and IO models with insights from ecological economics to
provide an avenue for investigating the interrelations between the monetary economy and the physical
environment.
© 2015 IOP Publishing Ltd and Deutsche Physikalische Gesellschaft

New J. Phys. 17 (2015) 015011 M Berg et al
The first section provides an introduction to the three fields and highlights common ground in section 1.4,
showing that there is no serious theoretical impediment to integrating the three approaches. This section also
underlines links to econophysics, complexity economics, and agent-based models (ABM). In section 2, we
present a conceptual model combining aspects of both SFC and IO approaches and apply it to study the impact
of energy price shocks and to contribute to the discussion of whether a stationary economy is compatible with
positive interest rates in section 3. In section 4, implied heat emissions from energy conversion are considered in
light of a minimal single-layer atmosphere climate model showing the impact of anthropogenic heat flux on
climate change. We suggest that coupling well-developed large scale macroeconomic and climate models could
enable fruitful analysis of the interlinkages between the economy and the physical environment, which would be
relevant to addressing the issue of global climate change. A brief conclusion assesses the relevance of the
contribution and potential extensions.
1.1. Stock-flow consistent (SFC) models

SFC models are a class of structural macroeconomic models grounded by a detailed and careful articulation of
accounting relationships. The basis of this methodology can be found in the work of Copeland and Stone, who
advocated for macroeconomic models developed with the use of social accounting matrices (SAMs) that
tabulate stocks and flows of funds within the national accounts [4], and is also similar to Stützel’s
‘Saldenmechanik’ (‘balance sheet mechanics’) [5]. Godley, Lavoie, and a number of other authors expanded this
approach into a family of applied macroeconomic models that respect accounting identities and are closed with
behavioral assumptions based on post-Keynesian theory [6–8]. Of course, models possessing neoclassical
features such as intertemporal optimization and rational expectations can also be closed with accounting
identities, but stock-flow consistency has been less emphasized in neoclassical models than in post-Keynesian
models.
SFC models are constructed by tabulating individual sector budget constraints implied by a modified SAM,
which is in the literature referred to as a transaction flow matrix. Each row of the matrix represents a transaction,
while each column represents a different sector. In a manner consistent with flow of funds (FF) accounts,
sources and uses of funds are represented, respectively, by positive and negative signs. All rows and columns sum
to zero for financial transactions, since every financial asset has a corresponding financial liability. Because all
flows necessarily accumulate to stocks, the flows of funds represented on the transaction flow matrix directly
imply stock and balance sheet adjustments, which creates additional constraints. This accounting verification
process is designed to ensure the model’s internal logical consistency by removing potential ‘black holes’ [9, p 7],
and by respecting a ‘fundamental law of macroeconomics analogous to the principle of conservation of energy in
physics’ [10, p 18].
Accounting identities remove degrees of freedom from potential macroeconomic outcomes, forming a
skeletal structure that can be closed by a number of competing theoretical arguments. James Tobin’s Yale
portfolio models introduced one such possible closure, directly inspiring the approach to portfolio allocation
dominant in the SFC approach. However, despite bearing some similarity with post-Keynesian SFC models,
Tobin’s models relied upon loanable funds theory and an exogenous money supply. Because post-Keynesian
SFC models are closed differently from Tobin’s models, SFC models behave differently, and abstract less from
the institutional reality of modern monetary systems [11].
Of course, causal relationships between accounting identities can also be specified via neoclassical behavioral
closures, such as rational expectations and optimizing representative agents. However, with some notable
exceptions [12], banks are typically modelled as reserve-constrained intermediaries with loans driven by savings
and deposits in a loanable funds market. This contrasts with a substantial body of work in post-Keynesian
monetary theory, along with the statements of central bankers who say that credit money is created
endogenously via loan origination [13, 14]. Banks do not lend reserves, but rather make loans by simultaneously
expanding both sides of their balance sheets, creating an asset of the bank (a loan) and a liability of the bank
(a deposit) [15]. Furthermore, reserve requirements do not limit bank lending, because the central bank must
accommodate demand for reserves by banks in order to maintain par clearing and in order to peg its target short
term interest rate [16, p 283] [17, 18].
Banks create credit ex nihilo by creating a liability with a corresponding asset, and balance sheets must
always expand or contract equally according to a symmetry principle inherent in double entry bookkeeping.
Braun depicts this process with a limited analogy to physics, in which asset units are considered as money and
liability units as ‘antimoney’ [19]. This symmetry principle, which allows the expansion and contraction of the
money stock to occur endogenously, differs from many models in econophysics, in which the quantity of money
as an exogenously given stock is conserved, and the focus is placed squarely upon the exchange of wealth [20–22].
This common approach ignores the role of production and credit creation in economic activity and disregards
standard definitions of economic concepts such as transactions and income [19, 23, 24]. Money can be modeled
2
more realistically as a non-conservative entity, and economists have begun to build SFC ABM that may be of
interest to econophysicists [25, 26].
Perhaps the single most important advantage of the SFC approach is that it enables the modeler to easily
create scalable representations of institutional structures with an explicit monetary dimension. The central
importance of attention to financial detail was illustrated by the failure of the macroeconomics profession to
anticipate the 2007–2008 Global Financial Crisis, which was predicted nearly exclusively by those who deployed
implicit or explicit macro-accounting frameworks [27–29]. Some recent dynamic stochastic general
equilibrium (DSGE) models have added financial frictions, and have been able to replicate time series data from
the 2007–2008 financial crisis and its aftermath [30]. Many of these models utilize the financial accelerator as a
mechanism through which financial shocks can be amplified and propagated to impact the real economy [31].
Though an encouraging development, the pseudo-out-of-sample ability of such recent DSGE models to match
historical data does not necessarily entail future capability of predicting novel facts. By contrast, economists who
paid close attention to accounting fundamentals have achieved a notable degree of predictive success, in
particular anticipating the macroeconomic dangers of rising household debt, predicting that the institutional
structure of the Euro was incompatible with long-term economic stability, and that quantitative easing policies
would prove ineffective [8, 32–36]. For a more comprehensive review of ‘Stock-Flow Consistent Modelling
Through the Ages’ see [37].
1.2. IO models
IO models provide a detailed treatment of production and of the flow of real goods and services through the
economy, and are commonly applied to analyze interactions and feedback effects between mutually
interdependent industrial sectors. As mentioned, SFC models focus primarily on explicating flows of financial
funds, and therefore often underemphasize real production. Indeed, most SFC models only include a single
productive sector, and nearly all multisectoral models abstract from intermediate production. Aspects of the IO
approach, which provides a detailed picture of a complex multisectoral economy, can therefore be used to
import a more refined analysis of the real economy into a SFC framework. The IO approach can be traced back
to classical authors [38]. The first modern IO model was created by Alfred Kähler [39], and developed by Wassily
Leontief [40] into the sort of large scale empirical model now routinely produced by statistical agencies in
countries across the globe.
IO tables provide a static snapshot view of the economy, assuming constant returns to scale. IO tables are
displayed in matrix notation (‘Leontief matrix’), where each column represents inputs to a specific sector, while
each row shows the output from a given sector to the rest of the economy. For an economy with n sectors, a n × n
matrix a is used, where a ij ⩾ 0 is a flow of inputs produced by sector i to sector j in order to produce one unit of
output j. To produce the gross outputs of the different sectors, which are displayed as the elements of a vector x , a
different vector ax is required as intermediate inputs. Therefore, in every time period, gross output and final
demand d (also referred to as net output or gross domestic product (GDP)) are coupled by:
x = ax + d , (1)
x = (1 − a)−1d . (2)
To obtain a unique and positive solution, (1 − a) has to be invertible and the principal minors have to be
positive, known as the Hawkins–Simon conditions [41, pp 58ff][42], in order to guarantee that each subsystem
is ‘productive’ such that it requires less input than it produces in terms of output.
Dynamic input–output (DIO) models incorporate a feedback effect of investment on future production
which is ignored by most IO models: when industries invest, the flow of investment adds to their capital stock. A
capital coefficients matrix can then be calculated, and the capital coefficients matrix can be used to adjust the
DIO models Leontief technical coefficient matrix a from the previous time period [41, pp 639–642]. In general,
environmental impacts can be deduced from a combined environmental and economic accounting [43]. To
track the flow of income and its distribution among sectors, SAMs have been attached to IO models [41, pp
499–542], and IO models which incorporate SAMs are not dissimilar in general form and purpose to the model
as presented later. Note that SAMs, which served as a basis for the development of SFC models, are a linkage
between IO and SFC models. However, effective demand is often left exogenous in DIO models and is not
determined by a logically consistent system of SFC FF equations.
While most macroeconomic models focus on net output (GDP), it is necessary to consider gross output
(including intermediate production) in order to analyze the physical and environmental consequences of
economic activity, since intermediate production produces waste, heat emissions, and greenhouse gas emissions
just as does final production. For ecological applications such as understanding the sources and causes of heat
and greenhouse gas emissions, flows of physical materials must be explicitly modeled [44]. Environmental
input–output (EIO) models have been widely used to model raw material use in the production of gross output.
3
By expanding the SAM entries within an EEIO framework, one can analyze the impact of economic activity on a
wide range of environmental variables such as energy use, land use, material use, water use, and greenhouse gas
emissions [45].
1.3. The impact of energy and ecological macroeconomics

Some ecological economists have criticized approaches such as SFC models and IO models on the grounds that
they focus on the circular flow of exchange value (i.e. money), rather than on the physical throughput of natural
resources from which all goods and services are ultimately derived [46–50], disregarding the association between
the growth of wealth and the expansion of energy services over the last several centuries [51, 52]. Some pre-
classical, physiocratic, and early nineteenth century classical economists focused on the physical side of
economic activity, but it has generally been downplayed in most modern theories [2, 53, 54]: most economists
interpret energy services as enhanced labor or capital productivity [2, p 52] associated with technological
progress, which is considered as an amorphous force that increases productive power without limit [55, p 206].
Some economists have considered energy E as a factor of production, sometimes in combination with
materials M, but have underestimated the importance of those factors. The responsiveness of output to a
marginal change of one production factor in the neoclassical approach is given by its output elasticity E y, x , the
point elasticity of output y of an entity with respect to a production factor x:
x ∂y
E y, x = . (3)
y ∂x
The theory assumes that in equilibrium, this should be identical to the cost share of the production factor.
Energy costs represent about five percent of production costs; consequently, the output elasticity of energy has
been estimated to be 0.05. As this is low compared to labor with 0.7 or capital with 0.25 during recent decades in
OECD countries, energy has been left out of most economic models [55, p 207] [56], see [2, pp 180–212] for a
longer discussion. Based on a general equilibrium framework extended by incorporating energy as a production
factor, Kümmel uses nonlinear optimization with generalized shadow prices on real data to calculate time-
averaged output elasticities of 0.37 for capital, 0.11 for routine labor, and 0.52 for energy, while the remaining
0.12 is ascribed to creativity [2, pp 180, 212]. Similar values are found by Ayres et al [57, 58]. They show that cost
share and output elasticity are not equal once a third factor is added that is not independent of the other two [58,
p 16]. This is the case here, since ‘capital in the absence of energy is functionally inert’, and technical engineering
constraints limit substitution [2, p 195]. Using these elasticities, energy accounts for most of the growth
attributed to technological progress [2, p 221]. This shows that the assumption that factor costs and output
elasticities are identical is flawed, and the neglect of energy is without solid foundation.
The significance of these findings is underlined by the International Monetary Fund, which investigates the
impact of lower oil supply in its World Economic Outlook, stating that ‘if the contribution of oil to output
proved much larger than its cost share, the effects could be dramatic, suggesting a need for urgent policy action’
[59, p 109]. A declining capacity to extract energy has sometimes been an important trigger of societal collapse
[60, p 36] [61, pp 91–122]. This not only has historical implications, but could also potentially impact theoretical
accounts of modern business cycles. Hamilton [62, 63] and Murphy and Hall [64] present evidence that every
US recession since World War II was accompanied by rising energy prices. In section 3.2, we suggest that this
could have been caused by a drop in effective demand due to higher energy prices. Given the naturally
constrained supply of fossil fuels, the connection between energy and the economy must be understood in order
to avert potential challenges to the modern global industrial system, which currently depends categorically on
fossil fuels and other non-renewable energy sources [65]. In a purely physical model, Dale et al found that future
energy conversion and net energy available for industrial production is not limited by the availability of energy as
such, but rather by the capacity to extract renewable resources due to the fact that the buildup of the capital stock
requires energy input [66]. Other studies have underlined the contemporary significance of energy in terms of
the ‘energy return on investment’, which is the usable energy acquired divided by the amount of energy
expended to extract and process that energy resource [67].
In order for economic activity to be environmentally sustainable, it must be the case that the ecosystem can
absorb waste and recycle the inputs which are required for physical production [68, p 186]. Therefore, the
physical and environmental sustainability of the economy can best be analyzed by considering the economy as
an open subsystem of the larger but finite physical ecosystem. Energy usage entails heat and particle emissions
and increases entropy [2]. While energy conservation may provide a partial solution to this problem, there are
inescapable thermodynamic limits to energy conservation which may limit decoupling of resource use and
economic growth. Furthermore, rebound effects (first discovered by the economist William Stanley Jevons [69])
mean that demand for energy may not necessarily decline even if energy conservation measures render such a
decline technically feasible [2, 70].
4
For these reasons, some ecological economists argue that the necessity of adapting to planetary boundaries
and resource extraction limits may decrease energy supply, and the constraint of this main driver of economic
growth may render a stationary economy or economic degrowth unavoidable, see Pueyo [71], Jackson [72], and
Kallis et al [73] for a longer discussion.
1.4. Common ground

At least two authors, Gowdy [74] and Kronenberg [75], have explicitly argued that post-Keynesian economics
and ecological economics share substantial common ground, and are ripe for a synthesis. Similarities have been
recognized in terms of consumption, production theory, cumulative causation (path dependency), and the
irreversibility of historical time [75–77]. Both post-Keynesian and ecological economists emphasize the
significance of fundamental ‘Knightian’ uncertainty, as opposed to computable probabilistic risk [6, 78–80].
Ellsberg also discusses this as the distinction between ambiguity and risk, which has been confirmed
experimentally in decision theory [81, 82]. However, post-Keynesians have heretofore tended to neglect the
ecological dimension of the economy, which has led Mearman to conclude that ‘post-Keynesians need to
embrace the environment’ in order to underline the relevance of their work [75, 83].
Keynesian macroeconomic theory places great emphasis on the determination of a level of effective demand
commensurate with key economic policy goals, but the ecological implications of those economic policy goals
have often been neglected. Despite the need for new analytical tools to explore this relationship, relatively little
concrete work to that end has been thus far completed [84]. Notable exceptions include the work of Kemp-
Benedict [85], Kronenberg [86], the work in progress by Dafermos et al [87], and the WWWforEurope project
[88]. However, some previous attempts to integrate post-Keynesian and ecological economics are not SFC.
Though most ecological economists abstract from the influences of the monetary side of the economy, some
analysis of the monetary dimension of ecological questions has been conducted by Tokic [89], Binswanger [90]
and Wenzlaff et al [91]. But outside this work, some misunderstandings appear, such as a common claim that a
zero interest rate is a stability condition for a stationary economy [92, 93]. We will review this argument in
section 3.1. Issues such as monetary policy and interest rates can be most fruitfully discussed within a framework
of ecological macroeconomics which is cognizant of the implications of financial flows of funds for the
economy [88].
In the famous Cambridge Capital Controversies [94], post-Keynesian authors discovered logical problems
with the aggregate neoclassical production function, such as reswitching and reverse capital-deepening. Post-
Keynesians therefore rejected the neoclassical aggregate capital stock and the neoclassical production function
[95], and do not posit an identity between output elasticity and cost share [53, p 29]. The neoclassical school
largely deflected these theoretical critiques by asserting that the properties of production functions had empirical
validity, even if the aggregate production function was logically inconsistent. However, an extensive literature
demonstrates that many regressions upon deflated monetary data simply measure distributional variables in the
national accounts and do not convey meaningful information about parameter values of the production
function or technological relationships [95, 96]. This is to say that the regressions are simply estimating
accounting identities, which are true by definition but concern a different question. In contrast, post-Keynesian
authors view production as a discrete and sequential technically determined process with limited possibility for
immediate substitution, as in fixed-coefficient IO models, and as is compatible with ecological economics [75].
Accordingly, the model of production in this paper uses disaggregation to avoid running afoul of some of the
serious aggregation problems highlighted by the Cambridge Capital Controversies.
The issue of aggregation has mostly been ignored in macroeconomics, mostly by assuming representative
agents [97], but this has recently begun to change with the advent of ABM. In order to implement locality and
search costs, bounded rationality and heterogeneity among consumers, the possibility for coordination failures
[98], and defaults and network effects [99], ABMs have been proposed and especially applied in econophysics in
order to explain distributions with fat tails and volatility clustering, thus enabling the analysis of emergent
disequilibrium dynamics created by the interactions of heterogenous agents [100, 101]. Some of these properties
are directly linked to the way different time scales are incorporated in the models [102]. ABMs have also been
recently applied to explain emergent network structures in interbank markets [103]. The underlying network
structure of interaction governs economic evolution [97] in a manner similar to cooperation and defection
[104]. As was pioneered by Bergmann [105], ABMs can also integrate a SFC description of monetary stocks and
flows, recently rediscovered including endogenous credit creation [25, 26, 106–108]. Consequently, while the
model presented in this paper is not an ABM, it is clear that ABMs offer SFC models a potential method to
incorporate a greater degree of heterogeneity. Likewise, the SFC framework offers ABMs a way to implement
financial macro constraints, which may help ABMs avert the common criticism that their results are driven too
much by the choice of particular parameter values. These innovations may help to transform the SFC
5
perspective from a ‘top-down’ approach into an agent-based or ‘fully-scalable’ mode of macroeconomic

modeling [25, 26].
If IO models are also incorporated into the analysis, it would be possible (at least in theory) to trace the
implications of the behavior of heterogeneous agents in financial markets on flows of physical materials through
the economy as well as through the natural world. Agent based input–output models have recently been used to
study the effects of carbon credit trading on deforestation in the Amazon rain forest, and have also been applied
to studying interdependencies in the vulnerability of critical infrastructure to cascading failure, given
inoperability that results due to lack of the technological capacity to smoothly and instantaneously substitute
technologically specific infrastructure-capital goods [109, 110]. It should be noted that in terms of network
theory, these sorts of physical cascading failures are similar to cascading bank failure processes [103]. Until now,
ABM have tended to disregard physical resource flows and energy and therefore miss the ‘minimum complexity
of endogenous growth models,’ as claimed by Ayres [111]. Studying the flows and stocks of physical resources
and money between agents within the framework of SFC accounting buttressed by IO data could form the basis
of a fruitful research program for complexity economics [97], ecological macroeconomics [88], and ecological
econophysics [71], and could be useful in helping to manage a transition towards an environmentally
sustainable society.
In sum, by combining SFC models and IO models, financial flows of funds can be integrated with flows of
real goods and services. Lawrence Klein, who developed large scale macroeconometric models typified by the
famous FRB-MIT-Penn model, has noted the natural synergies between the National Income and Product
accounts, the IO accounts, and the FF accounts [112]. The approach of combining both SFC and IO models with
ecological macroeconomics affords one method to unite those accounts, as suggested by Klein, and to
simultaneously model monetary flows through the financial system, flows of produced goods and services
through the real economy, and flows of physical materials through the natural environment. It is hoped that
models of this type may provide additional tools to aid macroeconomists, ecological economists, and physicists
in the task of understanding the economy and the physical environment as one united and complexly
interrelated system, rather than as a colloidal agglomeration of artificially separated analytical domains. It is
precisely these modes of analysis that are required to study pressing problems such as climate change, which are
neither purely economic, nor purely environmental, nor purely physical, but rather are all of the above [84].
2. SFCIO models—methodology
This section introduces a conceptual baseline model that could serve as a point of common ground between the
SFC, IO, and ecological macroeconomics approaches. A SFC model of a closed economy is coupled with an IO
model. This approach is similar to the work in progress by the project WWWforEurope, where researchers are
also developing a large multi-sectoral model connected to an explicit articulation of financial flows [88]. The
model developed in the present paper is represented in discrete time t and includes multiple (n) industry sectors,
a household sector, and a government/banking system sector. However, the household sector and the
government and banking system sector are both consolidated. This keeps the exposition relatively simple and
tractable, and allows focus to remain squarely on the chief aim of integrating elements of an IO treatment of
production into a SFC framework and on showing how the model can be applied to ecological macroeconomics.
However, in a more complicated and more realistic version of the model, both the household sector and the
government/banking system sector (hereafter referred to as simply ‘government sector’) would be
deconsolidated, and heterogeneity in sectors other than the multiple industry sectors could be explicitly
modeled. However, creating fully scalable models which articulate that degree of heterogeneity would likely call
for an agent-based approach.
The model simultaneously tracks the values of all flows of goods and services through the economy in both
nominal terms (measured in terms of money-values) and in real terms (measured in terms of physical units of
the heterogeneous real physical output of industry i). In order to more easily identify which variables are in real
terms and which are in nominal terms, all nominal variables are written in capital letters. Note that the subscript
(t − 1), as in Mh (t − 1), indicates the value of the stock at the end of period t − 1, whereas the subscript (t ) refers to the
value of the stock at the end of period t.
The simplified model with two sectors used in section 3 is designed to facilitate an easier understanding of
the core issues raised in the process of synthesizing SFC models, IO models, and ecological macroeconomics. As
shown in the flow diagram in figure 1, a variety of financial flows and physical flows are included in even a simple
model with two sectors. All monetary payments (solid lines) flow from one sector to another and accumulate to
the corresponding stock, providing consistency between stocks and flows.
Money flows from households to the government in the form of taxes T. Money flows from both the
production sector and the energy industry to households in the form of wages Шp e and distributed profits Π p e .
6
Figure 1. Stocks of sectors and flow chart of money, energy, and materials, h: households, p: production sector, e: energy sector, g:
government/banking system sector. For each sector, a balance sheet is shown in the form of a T-account. Stocks: Mh, money stock of
households; Mh, money issued by government/banks; L p e , loans of production sector/energy sector; Lg, loans made by government/
banks; ψ p e , physical inventories of industry sectors. Money flows: C p e , consumption of households; G p e , consumption of
government; Eep, money paid by production sector for energy; Epe, money paid by energy sector for intermediate goods; III p e , wage
bill paid by production/energy sector; Π p e , distribution of profits; T, taxes; rM Mh , interest payment to households; rL L p e , interest
payments by industry sector. Energy/material flows: energy, energy extracted from the environment; heat, heat emissions; resources,
extracted from the environment; waste, emitted to the environment; not treated explicitely in the model, but implied.
In turn, households spend their money on both production goods and energy goods, which creates flows of
money C p e back to the production and energy sectors and corresponding flows of real goods and services back
to the households. The government likewise buys both production goods and energy goods, which creates
similar flows of both real goods and services and of money G p e between the government and both of the two
industries. The production industry buys energy goods as intermediate inputs, which creates flows of energy
goods from the energy industry to the production industry and a corresponding flow of money Eep from the
production industry to the energy industry. The inverse is true for purchases of production goods as
intermediate inputs by the energy industry Epe. Finally, as physical raw materials are used in production, and as
some raw materials are expended as waste, there are flows of physical materials between the human economy
and the natural environment. Likewise, energy flows into the economy from the natural world, while heat is
emitted by the economy into the natural environment. These economy-nature interactions are not explicitly
considered in the model, but rather are simply implied. If more than two industry sectors are included, one must
incorporate additional interlinkages in the diagram, but the same principles continue to apply. Differently from
figure 1, which only includes two industries, the mathematical formulation of the model is shown in general
form for an economy with n sectors.
The flow diagram in figure 1 also shows the balance sheets of each of the four sectors (the households sector,
the government sector, the production goods sector, and the energy goods sector) in the form of T-accounts.
Assets are shown on the left side of the T-account, while liabilities and net worth are shown on the right side of
the T-account. In accounting, a fundamental equation known as the balance sheet equation states that:
Assets = Liabilities + Net worth. (4)
This means that the left side of the T-account is by definition always equal to the right side of the T-account.
This is a symmetry principle, and is why balance sheets are called ‘balance’ sheets. We distinguish two types of
stocks of financial assets: money deposits and loans. Loans appear on the asset side of the government/banking
system sector’s balance sheet and on the liability side of industry i’s balance sheet. Money deposits, on the other
hand, appear on the liability side of the government/banking system sector’s balance sheet, and on the asset side
of the household sector’s balance sheet. In the balance sheet perspective, the government sector holds assets of
loans Lg on the left side of its T-Account, while it has liabilities of money deposits Mg on the right side. The
difference between its assets and liabilities determines its net worth Vg, also shown on the right side of the T-
account.
The money stock held by households is designated as Mh, which is always equal to Mg, because the consistent
accounting in the model ensures that this will be the case, without the need for an explicit equilibrium condition
equation specifying that the money ‘supplied’ by the government sector is equal to the money ‘demanded’ by the
household sector.
7
Table 1. Balance sheet matrix in nominal terms. The money deposits of households Mh are equivalent to the money issued by the govern-
ment Mg, because we assume that the industry sector does not hold money deposits. The loans Li of each sector i are equal to the unit cost of
inventories Ψi . They sum up to the total outstanding loans of the government/banking sector Lg. Since financial assets and liabilities within
the economy sum up to zero, the net worth of the system as a whole is equal to the value of inventories (the only real asset). All sums over i are
proceeded over the n industry sectors.
Households Industry i ∈ {1, … , n} Government ∑
Money deposits +Mh −M g 0

Loans −L i +L g 0
Inventories +Ψi +∑i Ψi
Net worth −Vh 0 −Vg −Vh − Vg
∑ 0 0 0 0
In addition to stocks of financial assets (money deposits and loans), stocks of real assets also appear on
balance sheets. A heterogeneous vector of inventories consisting of all the unsold output of each industry i at the
end of each period constitutes the real assets of the model economy. These inventories are denoted by ψi , each
held on the balance sheet of the corresponding industry sector, and are valued at unit costs. The monetary value
of the stock of inventories at unit costs is signified by Ψi . The production goods industry holds assets of
production good inventories Ψp on the left, counterbalanced by loans Lp on the right. The energy goods industry
similarly holds assets of energy good inventories Ψe on the left, counterbalanced by loans Le on the right. It is
assumed as a simplification that industries do not hold stockpiles of cash, and instead distribute all excess cash
holdings at the end of each period to their owners in the household sector, keeping their net worth at zero. Since
real assets can change in value, maintaining the symmetry principle requires that loans adjust in response to a
change in the value of a real asset. Since for every financial asset in the economy there is a corresponding financial
liability, the net worth of the model as a whole consists only of the monetary values of real assets (inventories),
because all financial assets and financial liabilities must necessarily sum to zero.
The very existence of stocks introduces historical time and a certain path dependence into the model. Even
though the model may asymptotically converge to a steady state if all exogenous parameters are undisturbed, the
model will follow a different traverse path for every possible set of stocks. Moreover, not all conceivable sets of
stocks are in fact possible; only some sets of stocks are consistent with the model’s accounting. Thus, depending
upon the set of stocks with which the model economy has been endowed by the past, the model will follow a
different trajectory forwards into the future.
The accounting identities in table 1 for the stocks hold for all time periods t, where the sum of i is calculated
over all n industry sectors:
Vh = Mh, (5)
Vg = L g − M g , (6)
Mh = M g , (7)
Lg = ∑i L i , (8)
L i = Ψi , (9)
Vh + Vg = ∑ i Ψi . (10)
The flows shown in figure 1 are also displayed in a more general representation with n sectors in the
transaction matrix in table 2. Adherence to the accounting constraints imposed by the balance sheet in table 1
and the transaction-flow matrix in table 2 guarantees the consistency of the model, and can be verified by
checking that all the columns and rows of the matrices sum to the appropriate values, which in the case of
financial assets sum to zero [6, p 27]. All parameters are summarized in table 3. In the following, all matrices are
displayed as bold roman letters, vectors in bold italic characters. diag(x i ) indicates a diagonal matrix with xi on
the diagonal.
2.1. Banking sector

Unlike most SFC models, the role of the banking sector (which is consolidated as a simplification into the
government sector along with the central bank) is very limited here. Banks provide loans to industries whenever
requested and can increase the money stock via credit creation. Though in truth banks may ration credit to
industries, loans in this simple model are provided to the industry sectors on demand [17, 113]. There are two
8
Table 2. The transaction matrix tabulates all flows of funds within one time period. The fact that the columns sum to zero represents a
sectorʼs budget constraints, while the fact that rows sum to zero represents the fact that each financial transaction has a counterparty.
Positive values indicate inflows, while negative values indicate outflows. For example, taxes paid by households to the government are an
outflow from households and an inflow to the government, so −T appears in the household sector column and +T appears in the govern-
ment sector column. In the flow of funds accounts, outflows are referred to as uses of funds, whereas inflows are referred to as sources of
funds. Note, however, that if households increase their holdings of money (a change in a stock), this is a use of funds even though there is no
outflow. So for changes in stocks, the fact that sources of funds are denoted with a plus sign and uses of funds are denoted with a negative sign
can seem counterintuitive. To clarify this, consider that a positive increase in money balances constitutes a use of funds, not a source. For
example, if the household sector increases its money balances, it is using its funds to accumulate a stock of money, as opposed to using its
funds for another purpose such as consumption. The current account includes receipts and outlays of firms, whereas the capital account
includes capital expenditures (investment) [6].
Households Industry i Government ∑

Current account Capital account
Government spending +Gi −∑i Gi 0

Taxes −T +T 0
Consumption −∑i C i +C i 0
Wage bill +∑i Шi −Шi 0
Intermediate purchases ∑i E ij − ∑ j E ij 0
Profits +∑i Πi −Πi 0
Interest on money deposits +rM Mh (t − 1) −rM M g (t − 1) 0
Interest on loans −rL L i (t − 1) +∑i rL L i (t − 1) 0
ΔMoney deposits −ΔMh +ΔM g 0
ΔLoans +ΔL i −∑i ΔL i 0
ΔInventory value +ΔΨi −ΔΨi 0
∑ 0 0 0 0 0
Table 3. Parameters in the general model and the values used in section 3. For simplicity, ωi and λ i were merged into one single parameter.
Parameter name General model Model presented in section 3
Household consumption parameters α1, α2 α1 = 0.8, α2 = 0.2

⎡ ⎤
Input–output matrix a = ( a ij ) a = ⎣⎢ 0.48 0.60 ⎦⎥
0.02 0.15
⎡ ⎤
Price matrix P = diag(Pi ) P = ⎢⎣ 1 0 ⎥⎦
0 1
Partial adjustment accelerators β, γ β = 0.75, γ = 0.5
Government spending G Gp = 46.6, Ge=0
Consumption C0 C p0 = 0.961, Ce0 = 0.039
Individual markups ϕ ϕp = 0.3333, ϕe = 0.1364
Interest rates rM, rL rM = 0.04, rL = 0.05
Tax rate θ θ = 0.48
Inventory to expected sales ratio σ⊤ σ ⊤ = 0.5
Labor demand per output unit λ
ω p λ p = 0.25 ; ωe λ e = 0.13
Wages per labor unit ω
interest rates in the model. First, there is an interest rate on loans rL paid by each industry sector to the
government on the stock of loans from the previous period L i (t − 1). Second, there is an interest rate on money
deposits rM paid by the government to households on the stock of money deposits from the previous period
Mh (t − 1).
2.2. Household sector

Households are treated as an aggregated sector, which hold only one type of financial asset: money deposits. The
only behavioural decision of households in this model is consumption. We assume that in the aggregate, a
certain fraction α1 of the wage bill after taxes (1 − θ) Ш (with θ: tax rate), and a smaller fraction α2 of wealth
Mh (t − 1) is consumed, see [6, p 66] for a justification of a similar consumption function. Interest payments and
distributed profits are not used as sources of finance for consumption within the period, but rather are added to
wealth in the current period. In subsequent periods, a portion of this accumulated stock of financial wealth will
be used to finance consumption. In this manner, a smaller propensity to consume from capital income
compared to wages income is guaranteed. Total consumption C is allocated to consumption goods produced by
each individual industry sector by an exogenous vector C 0 :
9
C = α1 (1 − θ) Ш + α 2 Mh (t − 1), (11)
C i = CC i0 ⩽ C with∑ j C j0 = 1. (12)
Once prices Pi are set by the industry sectors, the real physical demand ci of the households can be calculated
as:
Ci
ci = ∀i. (13)
Pi
The money stock Mh held by households is increased by incoming flows Y consisting of the wage bill ∑i Шi
paid to households by the industry sectors, the profits ∑i Πi distributed to households by the industry sectors,
and interest on money deposits paid to households by the banking system rM Mh (t − 1). The money stock Mh is
decreased by consumption of goods and services from the industry sectors ∑i Ci and by taxes T that are levied as
a constant share θ < 1 of income Y.
Y= ∑ i Шi + ∑ i Πi + rM Mh (t −1), (14)
Mh (t ) = Mh (t − 1) + ∑ i Шi + ∑ i Πi − ∑ i C i − T + rM Mh (t −1), (15)
T = θ · Y. (16)
2.3. Government sector

We assume that nominal government spending on the output of each sector is exogenously given by Gi, with
total expenditure G = ∑i Gi . The real physical demand of the government can be calculated as:
Gi
gi = ∀i. (17)
Pi
The money stock Mg issued by the government is increased by outflows of government spending ∑i Gi , by
the increase ∑i ΔL i in the outstanding stock of loans, and by interest payments on money deposits rM M g (t − 1). It
is decreased by inflows of tax payments T and of interest payments on loans ∑i rL L i (t − 1).
M g (t ) = M g (t − 1) + ∑ i Gi + ∑ i ΔL i + rM M g (t −1) − rL ∑ i L i − T. (18)
As mentioned in section 2, the money stock Mg issued by the government is always equal to the money
stock Mh held by households. However, decisions by households about how much money to hold are made
separately from decisions by the government about how much money to issue. Note the differences between
the equation for Mg and the equation for Mh, and note that both equations can be derived from separate
columns of the transactions flow matrix in table 2. The equality of Mg and Mh is logically implied by accounting
consistency spelled out in the transactions flow matrix, and this is what closes the model.
2.4. Industry sectors

In contrast to most SFC models, in which the production sector is highly aggregated, we articulate the
interlinkages between sectors using an IO model. An economy with n sectors is described by an n × n IO
matrix of technical coefficients a = (a ij ) given in physical terms. If a ij > 0, the production of good j by
industry j requires a physical flow of inputs of good i from industry i to industry j, such that aij units of
input i are required to produce each unit of output j. The prices of the goods are contained in the
diagonal matrix P . In general, real magnitudes can be converted to nominal magnitudes by multiplying by
current prices.
a = ( a ij ), (19)
P = diag Pi ( ) ⇔ Pij = Pi δ ij (20)
with δij being the Kronecker delta that is 1 iff i = j and 0 otherwise.
The IO matrix can also be viewed in monetary terms by multiplying P by a , yielding matrix A . Note that this
illustrates our convention that upper case letters refer to nominal monetary values, while lower case letters refer
to real values.
A=P·a ⇔ A ij = a ij Pi . (21)
The total real quantity of goods sold s(t ) will consist of sales to the households c , sales of intermediate inputs
to other industries ξ , and sales to the government g . Note that because sales of intermediate inputs (which in
10
value-added terms net to zero) are included in the definition of sales, these are not net sales, but rather are gross
sales
s(t ) = c + ξ + g. (22)
However, the markets in the model economy are not price-clearing auction markets. As in the real world,
realized sales are not yet known at the time when production decisions are made, so each industry i must
estimate its expected sales s X with a partial adjustment model, adjusting expectations partially (0 < β < 1) from
each period to the next:
( )
s(Xt ) = βs(t − 1) + 1 − β s(Xt −1). (23)
As a buffer against unexpected changes in sales, firms build up stocks of inventories ψi to serve as a quantity
buffer stock to absorb unexpected fluctuations in demand, much as do retail stores in the real world [6, 114–
116]. The inventory target ψ ⊤ is considered as a fraction of expected sales s X , and is also updated with a partial
accelerator function in light of the experiences of the previous period (with 0 < γ < 1). σ ⊤ > 0 is the targeted
ratio of inventories to expected sales. This leads to a demand for inventories Δψ ⊤
ψ ⊤ = σ ⊤s(Xt ), (24)
Δψ ⊤ = γ ⎡⎣ ψ ⊤ − ψ(t − 1) ⎤⎦ . (25)
The industry sectors produce a total gross output x in physical terms, which is equal to the total amount of
expected sales plus the targeted change in inventory stocks by the industry itself. Note that expected gross sales
includes expected sales of intermediate inputs as well as expected sales for final demand
x = s(Xt ) + Δψ ⊤. (26)
This production of output requires a labor force l . We assume that in each sector, the required labor force is
proportional to gross production xi of the sector:
l i = λ i x i, (27)
where the vector λ contains the labor forces λ i required for production in a specific sector. Given the wages per
labor unit ωi , the wage bills paid per sector Шi = ωi λi x i add up to:
Ш= ∑ i Шi = ∑ i ωi λ i x i. (28)
Because intermediate goods are consumed in production, gross product always exceeds net product bound
for final delivery. Since we have already solved for gross output x , we can solve for net output d . Though we are
solving for net output using a given gross output, rather than solving for gross output using a given net output,
this does not mean that effective demand is unimportant. Indeed, expectations of net output (effective demand)
play a crucial causal role in driving the model. Given expectations of net output, or for that matter expectations
of gross output, entrepreneurs decide how much gross output to actually produce. Given this realized gross
output, one can derive the realized net output implied by this decision. So, realized net output d is simply:
d = ( 1 − a) x . (29)
Using standard IO analysis, the sales of intermediate inputs (in real terms) to other industries can be
calculated as:
ξ = a · x. (30)
The fact that industries require goods produced by other industries as inputs causes prices to be
interdependent, because prices of other goods alter production costs. We assume that the price for each sector is
set as a markup ϕi on unit costs from the previous time period. In reality, firms must use costing procedures to
estimate their costs, and firms will often set a markup over some form of estimated normal costs, but the
difficulties of cost estimation are abstracted from here. Post-Keynesian economists have often assumed constant
prime or direct costs [117, p 1305]. However, there is empirical evidence that in reality average direct costs may
increase or decrease as output increases, and that cost structures vary across different industries [118]. Costs in
this model include wages and the costs of intermediate inputs
Pi (t ) = 1 + ϕi (t ) ⎡⎣ ω i (t − 1) λ i (t − 1) +
( ) ∑ k Pk (t −1) a ki (t −1) ⎤⎦. (31)
Given the gross production vector x , the monetary flows for intermediate inputs can be calculated as a
matrix E , where Eij means a flow of money from industry j to industry i.
11
E = P a diag( x i ) ⇔ E ij = a ij Pi x j . (32)
Total realized sales are simply the sum of the purchases by households c , by other industries ξ , and by the
government g :
s(t ) = c + ξ + g. (33)
The realized inventories ψ(t ) at the end of the period then depend on these realized sales s(t ). Because there can
be a discrepancy between expected sales s(Xt ) and realized sales s(t ), the realized amount of inventories ψ(t ) may
differ from the expected. The monetary value of inventories Ψ(t ) is equal to the physical quantity of inventory
units multiplied by the unit cost of inventories, which includes wage costs and intermediate input costs.
ψ(t ) = ψ(t − 1) + x (t ) − s(t ), (34)
L i (t ) = Ψi (t ) = ψi (t ) ⎡⎣ ω i (t − 1) λ i (t − 1) + ∑ k Pk (t −1)a ki (t −1) ⎤⎦. (35)
The net profit of each industry Π has two components: the monetary profit of industry i is the sum of
households’ consumption expenditures, purchases by government, and intermediate investment Eij by the other
sectors of the economy minus intermediate purchases Eji of sector i and minus the wage bill Шi ; additionally,
interest payments rL L i (t − 1) must be subtracted from profits. The second component contributing to profits is
any change of the value of the inventories ΔΨi = Ψi(t ) − Ψi(t − 1) valued at current unit costs. Note that profits are a
residual determined by accounting constraints; the equation for profits can simply be read off of the industry i
Current Account column on the transaction flow matrix in table 2.
Πi = C i + G i − Шi + ∑ j E ij − ∑ j E ji − rL L i (t −1) + ΔΨi . (36)
We assume that the industrial sectors distribute all profits to the household sector.
2.5. Solving the model

Normally, SFC models contain implicit functions and are typically solved numerically by iterative techniques
[6, 37], but in this case, we can offer an explicit solution for the time step evolution, though because of the
number of variables, the calculations will be performed numerically. All relevant parameters are put together in
figure 3.
From the last period, the stocks of money Mh (t − 1) and loans L i (t − 1) and the corresponding values for the
government, the inventories ψ(t − 1), the prices Pi (t − 1) and the expected and realized sales s(Xt −1) and s(t − 1) are
known, together with the IO matrix a . The prices will be updated using (31), the expected sales and targeted
inventory adjustments will be calculated using (23) and (25) and the total production using (26). Then, the wage
bill can be calculated using (28), and the physical demand of the households and government can be calculated
using equations (11)–(13) and (17). This being known, the realized inventories ψi(t ) are given by (34), the
monetary value of inventories at unit costs Ψi(t ) and therefore the loans to finance them by (35). Additionally, the
realized intermediate sales ξ (30) and gross sales s(t ) (33) can be determined. The payments within the sector can
be calculated using (32), the distributed profits using (36), and taxes using (16), the monetary stocks at the end of
the period using (15) for the households, (18) for the government. In this way, all new stocks can be calculated
straightforwardly, without any iterative procedure.
3. Energy in a SFC IO model
As explained in section 1.3, energy plays a crucial role in the economic process. We apply our general framework
to a model with two goods: a multi-purpose consumer/industry good and energy. The consumer/industry good
is sold by the production sector, and the energy good is sold by the energy sector. In order to produce the
consumer/industry good, the production sector uses energy as well as its own good as inputs, while in order to
provide energy, the energy sector uses the consumer/industry good and the energy good as inputs. This
specification ensures that the two sectors are mutually interdependent, and that the model incorporates physical
aspects and the dynamics of a monetary production economy. A representation of the flows of money and
energy is given in figure 1.
The ‘physical quantities’ of the IO matrix a (19) are defined such that the prices are 1 monetary unit for all
goods in the first period, but prices of these quantities may vary ofter time. The parameters are matched to the
situation of Germany around 2010. The IO parameters, the markups, the wage bill, and the consumption vectors
are estimated from [119]: for each unit sold, the consumer/industry sector requires an input of 0.48 from its own
sector and 0.02 from the energy sector and pays 0.25 units of wages. The energy sector requires 0.60 units from
12
Figure 2. Stability analysis of the model. Left plot: for different tax rates, we check whether a stable stock-flow equilibrium exists. For a
given interest rate rM, there exists a minimum consumption out of wealth α2 for which the model is stable. An increase in the tax rate
reduces this threshold. If consumption out of wealth is smaller than interest income after taxes (as indicated by the red dashed lines),
the fixed point will definitely be unstable, as inflows to households are always bigger than outflows for α1 < 1. Right plot: the impact of
the interest rate spread Δr = rL − rM and the consumption out of wages α1 is depicted, α1 = 0.8 and Δr = 0.01 serves as a benchmark;
only changes of these parameters are indicated. A higher interest rate spread shifts the stability lines down slightly. A higher
consumption out of wages α1 increases the size of the stable region.
the industry sector and 0.15 units from the energy sector itself and pays 0.13 units of wages. Therefore, the
markups on costs can be calculated as ϕp = 0.3333 and ϕe = 0.1364. The tax rate of 0.48 is taken from [120], the
interest rates, accelerators, inventory to sales ratio, and consumption parameters are set as rough estimates. All
parameters used are displayed in table 3.
3.1. Stability analysis of a stationary economy with positive interest rates

Within ecological economics, several authors propose a non-growing economy as a solution to environmental
problems [71–73, 121]. In recent publications, it has been claimed that this is incompatible with positive interest
rates [92, 93]. It is argued that positive interest rates imply that in a non-growing economy, the stock of debts will
rise, and it is argued that such an increase would be unsustainable. Using our model, we show that an
equilibrium state of a stationary economy is possible, even with positive interest rates. The economy reaches a
general stationary stock-flow equilibrium if all stocks and all flows remain constant over time, and therefore
inflows equal outflows.
Assuming constant parameters and prices, the time evolution is defined by a non-homogeneous first-order
matrix difference equation, see appendix A.2. The unique stock-flow equilibrium is a stable fixed point if the
absolute values of all eigenvalues of the mapping matrix  are smaller than 1. The stability of the stock-flow
equilibrium is graphed in the parameter space of interest rates rM L , consumption parameters α1 2 , and for
different tax rates θ. The stability frontiers are depicted in figure 2. Rising interest on deposits rM, lower
consumption parameters α1, α2, and a lower interest spread Δr = rL − rM decrease the size of the stable region
within the parameter space. If no stable fixed point exists, we see an exponential increase of private money
deposits and a corresponding growth in public debt, illustrating the accounting principle that all financial assets
have symmetrical financial liabilities. Flows of interest payments from the government accumulate and increase
the money stock Mh held by the household sector. But if consumption out of wealth α2 is high enough to
counteract the interest and profit payments, households increase their consumption as their stock of wealth
increases. The fixed point is stable which enables the economy to remain in stock-flow equilibrium, even though
interest rates are positive. It is then not the case that the interest payments drive down government net worth.
This shows that the stability of a non-growing economy is indeed a question of the interplay of interest payments
and the propensity to save, as suggested by Wenzlaff et al [91].
For α2 = 0.2, rM = 0.05, rL = 0.04 and θ = 0.48 as in table 3 and for a nominal GDP of d p Pp + d e Pe = 100,
this is realized with Mh ≈ 162.9, Vg ≈ − 86.1, L p ≈ 73.7 and Le ≈ 3.1. In this state, the industry sectors realize
positive profits (Π p ≈ 45.4, Πe ≈ 0.7 per period) which are distributed to the households, the tax income
(T ≈ 49.3) and interest income (rL L g ≈ 3.8) of the government equals the government expenditures (G ≈ 46.6 )
and interest costs (rM Mh ≈ 6.5), and the total income of the households (Y ≈ 102.7 ) equals taxes and
consumption (C p ≈ 51.3, Ce ≈ 2.1). Once equilibrium is reached, no sector accumulates any additional stocks,
and all income is consumed or distributed, which allows for a stationary economy.
Though our model shows that positive interest rates do not necessarily imply exponential growth of
government liabilities, this result crucially depends on consumption decisions by households. Additional
13
Figure 3. Impact of an increase in energy markup ϕe : we initiate the model at the fixed point calculated in section 3.1, and the vertical
line indicates the time when the markup on energy is exogenously increased. The left plot shows the decrease of consumption that
causes a reduction of demand, which drives down wages and further reduces consumption. The right plot indicates the increase in
prices caused by the higher energy markup, and the time evolution of real demand, showing a significant drop.
research should be conducted on this question. It should be pointed out as well that a stable stationary economy
in monetary terms does not imply an equilibrium state with the environment.
3.2. The macroeconomic response to energy price shocks

Hamilton [62, 63] and Murphy and Hall [64] present evidence that every US recession since World War II was
accompanied by rising energy prices. We now use the model to examine the impact of an increase in the energy
industryʼs markup ϕe . IO models have been criticized for keeping the matrix elements fixed [122], but since
energy sources such as oil have very low price elasticities [123] and since we are considering the short term
impact of changes in the economy, changes in a matrix coefficients would be small.
We assume that the markup on energy is increased from ϕe = 0.1364 to 0.4. In order to incorporate the effect
of the low price elasticity, households react to an energy price shock by devoting a higher portion of their
consumption spending to energy services, so that in the following period, they consume the same amount of
energy. This means that C0e changes from 0.039 to 0.048 and remains there. The impact of the energy price shock
is depicted in figure 3. The increased markup leads to a higher price of energy, which will be buffered by
households via an increased energy consumption factor C0e . This immediately drives down consumption of
other goods, which reduces the wage in the next period and the expected sales sXp of the production sector,
leading to a reduction in inventory investment. Additionally, the rise in the price of energy drives up unit costs
and therefore also drives up prices in the production sector via the IO interlinkages. Together, this leads to a
serious drop in real final demand, which is calculated in prices of the 0th period. However, production goes up
again once inventories are reduced, and after the rising profits of the energy sector are distributed to households,
leads households to increase their consumption out of wealth. The new equilibrium settles at a reduction of real
demand of 2.7%. It should be pointed out that this is due to the fact that government expenditures are kept
constant in nominal terms. An increase in government expenditures due to higher prices could potentially
compensate for that decline in real demand. It should be noted that if prices rise at different rates in different
sectors, this would lead to a change in the distribution of income.
It is worth noting that the drop of real demand is not easily explained by many neoclassical models which
abstract from finance and monetary production, in which the reduction of aggregate production in equilibrium
would be caused by a reduction of utilization of the energy input, multiplied by the output elasticity (3). As
pointed out above, neoclassical authors assumed that output-elasticity should correspond to the cost share,
which is around 4% in our model. The reduction of energy consumption by 5% should therefore reduce final
demand by 0.2%, which is barely visible. In the simulations, final demand drops by 2.7%, which is one order of
magnitude bigger. Interestingly, this order of magnitude difference has also been realized in the case of historic
oil crises [2]. Within post-Keynesian economics, this impact can be explained by traditional Keynesian
multiplier effects [85]. So following this interpretation, which is consistent with our model, it was not the
reduced supply of oil (no shortage occurs in the model), but the decreased real expenditures that triggered the
recession. The drastic increase in energy prices before 2008 may have contributed to the 2007–2008 financial
crisis, as reduced growth or lower expected growth may destabilize the economy and the financial
system [89, 91].
14
Multiplier effects play a prominent role in our model and can amplify the negative impact of recessions
caused by energy price shocks. An increase in the energy price markup may have the effect of decreasing the real
wage, which decreases real consumption [85]. First of all, this decline in consumption is amplified by the simple
IO output multiplier [41, pp 245–247]: if expected final demand is decreased by one unit, total production
declines by more than one unit due to intersectoral interlinkages. This multiplier has an immediate effect in our
model within each time period. Secondly, a decrease in production leads to a lower labor demand and therefore
decreases the wage bill. Households are assumed to immediately spend a fraction of their wages on consumption
(11), and so a lower wage bill decreases consumption. Induced effects of changes in wages which alter
consumption of goods across different sectors are referred to in IO models as ‘Total Output Multipliers’ [41, pp
247–248]. In our model, recessions are also propagated via inventory cycles [124]. Decreased consumption
because of lower wages will simply lead to an increase of inventory stocks. This occurs because firms do not
decrease their production immediately, since buffering unexpected shocks is the essential role of inventories. In
the next period, firms will decrease their expected sales and attempt to reduce their inventory stocks, which will
decrease output even more. In principle, all of these propagation and amplification mechanisms can mutually
support and strengthen each other, and yield an alternative explanation for the macroeconomic response to
energy price shocks that have been observed in the past.
4. A simple climate model with anthropogenic heat emissions
Until now, the model we have considered has been solely an economic model, and although we have depicted
material and energy flows crossing the boundaries between the economic system and the ecosystem in figure 1
and discussed the implicit effects of those flows, they were not explicitly incorporated into the model. A broad
literature deals with the interconnection between the environment and the economy, in particular the impact of
material waste and natural resource scarcity. Emission of heat resulting from thermodynamic principles,
however, remains largely neglected, and we conceptualize an integration of heat emissions from economic
activities into climate models.
As energy is consumed, the economic process transforms energy into unusable heat [2, p 114]. Except for
some renewable energy sources such as wind, where heat dissipation would have happened anyway, this adds an
anthropogenic heat flux whose impact on climate has been discussed e.g. by [125–127] or in ‘The Limits to
Growth’ [128, pp 73 f]. Today, world average heat emission can be estimated by total primary energy
consumption to be around 0.025 Wm−2, which is about 1% of total radiative forcing in 2011 from
anthropogenic climate change [129, p 14]. Globally, this may be negligible today [130], but is of importance for
regional climate models [131]. If energy conversion continues to rise over the course of the century, this may
become relevant, especially if new technologies such as nuclear fusion or energy harvesting by satellites [2, pp
76–91] are eventually implemented.
A minimal model can be introduced to get a coarse idea of the impact of human heat flux. We consider a
standard model [132, 133] (see figure 4) in which the Earth is considered to act as a black body in the infrared,
while the albedo for sunlight is considered to be α = 0.3. The Earth is considered to be at uniform equilibrium
temperature Teq. The solar constant is S=1370 Wm−2, leading to a mean insolation of S 4, since the surface of a
sphere is four times its cross section. The atmosphere is considered as a single layer perfectly transparent for
sunlight and with ϵ = 0.78 being the absorptivity and emissivity of the atmosphere in the infrared spectrum. The
4
absorbed radiation is emitted evenly up and down, such that A ↑ = A ↓ = 0.5ϵσTeq . As a variation to the
standard models, we add a layer of ‘human heating’ Phum at the Earthʼs crust. The radiative balance of Earth is
given using the Stefan–Boltzman law by
4
0.25 · S (1 − α) + Phum + A ↓ = σTeq , (37)
and the equilibrium temperature Teq can be calculated as
1
⎛ 0.25 · S · 1 − α + P ⎞ 4
Teq = ⎜
( ) hum
⎟ . (38)
⎜ σ · (1 − 0.5 · ϵ ) ⎟
⎝ ⎠
Note that this equation has to be adapted only slightly for solar energy, since efficient harvesting of sunlight
Phum
requires low reflection, which would lead to an effective albedo of αeff = α(1 − 0.25 S
). This means that Phum in
the equation must be replaced by αPhum if all thermal power plants would be replaced by solar power stations.
Todayʼs energy conversion in Germany accounts for 1.26 Wm−2. If this same degree of energy conversion
were to be realized on the whole landmass of planet Earth (29.3% of total surface), the temperature increase
would already be 0.12 K.
15
Figure 4. Single layer atmosphere with human heating Phum. The albedo α indicates the fraction of incoming sunlight that will be
reflected immediately. At the Earthʼs crust, an additional layer of human heat emissions is considered, indicated by the red sphere. The
infrared emissions of the Earth are due to black body radiation, and a fraction ϵ is absorbed in the atmosphere that radiates the
absorbed energy evenly in both directions.
Figure 5. Left: energy conversion in the USA and the world, data from [136–138]. The red line indicates an exponentially growing
curve with a yearly growth rate of 2.9%. Right: equilibrium temperature of planet Earth calculated by (38), assuming continued
exponential growth of energy conversion.
In the past, global energy conversion has increased nearly exponentially with a growth rate of around 2.9%, see
the left plot in figure 5. If we project this trend into the future, the impact of anthropogenic heat flux could
become very relevant over the next several centuries, as it would contribute significantly to an increase of average
temperature on Earth, see the right plot in figure 5. The temperature rise is smaller for solar energy than for
thermal power plants. This demonstrates that the radiation balance of ‘Spaceship Earth’ [134] would be
significantly affected by a steady increase in energy conversion. A hypothetical continuation of this 2.9% growth
rate could break all reasonable limits within centuries, though such an extrapolation would exceed the modelʼs
scope. If humans were to discover a cheap, inexhaustible, and environmentally benign source of energy, one
might at first glance consider it a clear boon to humanity. However, if its discovery were to lead to increased
energy use, heat emissions could potentially have a serious environmental impact. The implementation of new
energy technologies could potentially facilitate an explosion of the global population and an increase of
consumption, possibly beyond the Earthʼs sustainable carrying capacity [135].
Although this integration of heat into a climate model is very basic, the results underline that the heat emissions
of economic activity should be taken into account in climate modeling once long-term scenarios are examined.
16
5. Summary and outlook
Using a simple baseline model, this paper examines the interactions of financial assets, real physical goods and
services, and the physical environment. The analysis suggests an additional method of simultaneously modeling
the mutually interacting subsystems of both real flows (which correspond to IO data) and financial flows (which
correspond to FF data). Though this prototypical model does not capture the rich behavior possible from either
approach, the methodology is designed to enable scaling to an arbitrary number of industries. In addition, the
extensive SFC and IO literatures hold the potential to inform the further development of more realistic applied
models.
The role of the energy sector for the economic process and growth in the past was emphasized. The model
was used to analyze a simple economy with a household sector and a consolidated government and banking
system sector, along with two industrial sectors: an energy sector and a production goods sector. Contrary to
some of the literature in ecological economics, we demonstrated that a stationary economy can in principle be
associated with positive interest rates. The stability analysis reveals that this depends on the interplay of interest
rates and consumption parameters. Next, the impact of energy price shocks on the economy was examined, in
particular how rising energy prices can depress real wages, lower demand, and therefore trigger recessions. As
the energy sector is one of the key linkages connecting the natural environment with the economy, we studied
the environmental impact of energy conversion. Specifically, implied heat emissions from energy conversion
and the effect of anthropogenic heat flux on climate change were considered in light of a minimal single-layer
atmosphere climate model. The economic model was only linked implicitly to the climate model, because the
climate model is used to estimate the equilibrium temperature of the Earth over long periods of time, whereas
the economic model is focused on much shorter-term changes to the structure and size of the economy. But
integrating well-developed larger scale macroeconomic and climate models could potentially enable fruitful
analysis of the interlinkages between the economy and the physical environment, which may be relevant to
addressing the issue of global climate change and numerous other environmental issues.
The primary virtue of this paper is that it suggests a path towards realizing the project of integrating diverse
strands of literature, while drawing linkages between the economy and the physical world. First, the paper offers
both econophysicists and post-Keynesians a possible way to more explicitly incorporate production into their
models. Second, the paper offers to econophysicists in particular a method to incorporate the symmetry between
financial assets and liabilities as an alternative to treating money as a conserved quantity. Third, the paper offers
ecological economists an avenue to study the economy and the environment as a unified macroeconomic-
ecological system.
Though the baseline model proposed here does not capture the rich behavior possible from either approach,
the methodology is designed to enable scaling to an arbitrary number of industries, and also to allow the
incorporation of more realistic elements from other already existing IO models, SFC models and ABM. Possible
extensions may include, but are by no means limited to, the implementation of ecological and capacity
constraints, a more sophisticated treatment of investment, a more fully developed financial system through
which firms and households make more complex financing decisions, and the explicit consideration of
interacting heterogeneous agents. There exist rich literatures in all areas, which constitute fertile ground for the
synthesis of disparate insights which have heretofore been developed largely in isolation, to create disaggregated
multisectoral financial macroeconomic models which are also capable of drawing explicit links between
economic activity and the physical world.
Acknowledgments
All three co-authors made indispensable contributions to this paper; names are displayed in alphabetical order.
OR thanks Ulrike Feudel for fruitful discussions. MB and BH both thank Frederic S Lee for his inspiration. The
authors would like to thank two anonymous reviewers for their valuable comments and suggestions to improve
the paper, and Christian Kimmich (WSL Zurich) for his assistance in section 3.1. Support from the Sustainable
Money Research Group is gratefully acknowledged. Of course, all errors and omissions are the sole responsibility
of the authors.
Appendix A
Equation list of model in section 2

All matrices are displayed as bold roman letters, vectors in bold italic characters. diag(x i ) indicates a diagonal
matrix with xi on the diagonal.
17
Vh = Mh, (A.1)
Vg = L g − M g , (A.2)
Mh = M g , (A.3)
Lg = ∑i L i , (A.4)
L i = Ψi , (A.5)
Vh + Vg = ∑ i Ψi , (A.6)
( )
C = α1 1 − θ Ш + α 2 Mh (t − 1), (A.7)
C i = CC i0 ⩽ C with∑ j C j0 = 1, (A.8)
Ci
ci = ∀i, (A.9)
Pi
Y= ∑ i Шi + ∑ i Πi + rM Mh (t −1), (A.10)
Mh (t ) = Mh (t − 1) + ∑ i Шi + ∑ i Πi − ∑ i C i − T + rM Mh (t −1), (A.11)
T = θ · Y, (A.12)
Gi
gi = ∀i, (A.13)
Pi
M g (t ) = M g (t − 1) + ∑ i Gi + ∑ i ΔL i + rM M g (t −1) − rL ∑ i L i − T, (A.14)
a = ( a ij ), (A.15)
P = diag Pi ( ) ⇔ Pij = Pi δ ij , (A.16)
A=P·a ⇔ A ij = a ij Pi , (A.17)
s(t ) = c + ξ + g, (A.18)
(
s(Xt ) = βs(t − 1) + 1 − β s(Xt −1), ) (A.19)
ψ ⊤ = σ ⊤s(Xt ), (A.20)
Δψ ⊤ = γ ⎡⎣ ψ ⊤ − ψ(t − 1) ⎤⎦ , (A.21)
x = s(Xt ) + Δψ ⊤, (A.22)
l i = λ i x i, (A.23)
Ш= ∑ i Шi = ∑ i ωi λ i x i, (A.24)
d = ( 1 − a) x , (A.25)
ξ = a · x, (A.26)
Pi (t ) = 1 + ϕi (t ) ⎡⎣ ω i (t − 1) λ i (t − 1) +
( ) ∑ k Pk (t −1)a ki (t −1) ⎤⎦, (A.27)
E = P a diag x i ( ) ⇔ E ij = a ij Pi x j , (A.28)
s(t ) = c + ξ + g, (A.29)
ψ(t ) = ψ(t − 1) + x (t ) − s(t ), (A.30)
L i (t ) = Ψi (t ) = ψi (t ) ⎡⎣ ω i (t − 1) λ i (t − 1) + ∑ k Pk (t −1)a ki (t −1) ⎤⎦, (A.31)
Πi = C i + G i − Шi + ∑ j E ij − ∑ j E ji − rL L i (t −1) + ΔΨi . (A.32)
18
Appendix B
Equation list of stability analysis in section 3.1

If prices are set to unity (Pp = Pe = 1), the time evolution can be written as a non-homogeneous first-order
matrix difference equation:
⎛ sX ⎞ ⎛ ⎞
⎜ p (t ) ⎟ ⎜ 0 ⎟
⎜ seX(t ) ⎟ ⎜ 0 ⎟
⎜ ⎟ ⎜+G p ⎟
⎜ s p (t ) ⎟ ⎜ ⎟
X(t ) = ⎜ se (t ) ⎟ =  · X(t − 1) + ⎜ +Ge ⎟ , (B.1)
⎜ψ ⎟ ⎜−G p ⎟
⎜ p (t ) ⎟ ⎜ ⎟
⎜ ψe (t ) ⎟ ⎜ −Ge ⎟
⎜M ⎟ ⎜ 0 ⎟
⎝ h (t )⎠ ⎝ ⎠
⎡ 1−β 0 β 0 0 0 0 ⎤
⎢ 0 0 0 ⎥
⎢ 0 1−β 0 β ⎥
⎢ Z pp Γ 1 − β −Z pp γ −Z pe γ α2 C p0 ⎥
⎢ ( ) (
Z pe Γ 1 − β ) Z pp Γβ Z pe Γβ
⎥
⎢ Z Γ 1−β −Z ep γ −Z ee γ α2 Ce0 ⎥
with  = ⎢ ep ( ) Z ee Γ (1 − β) Z ep Γβ Z ee Γβ
⎥
⎢ (
1 − 1 − Z pp γ ) Z pe γ −α2 C p 0
⎥
( ) ( )
⎢ 1 − Z pp Γ 1 − β (
−Z pe Γ 1 − β ) ( )
1 − Z pp Γβ −Z pe Γβ
Z ep γ 1 − (1 − Z ee ) γ −α2 Ce0
⎥
⎢ ⎥
( )
⎢ −Z ep Γ 1 − β (1 − Z ee ) Γ (1 − β) −Z ep Γβ (1 − Z ee ) Γβ
θ−1 θ−1 ⎥
⎢ rL − Z p γ rL − Z e γ 1 + rM (1 − θ) − α2 ⎥
⎢⎣ ( )
ZpΓ 1 − β Z e Γ (1 − β) Z p Γβ Z e Γβ 1 + ϕp 1 + ϕe ⎥⎦
using the following definitions:

Z ij = a ij + α1 (1 − θ) ω j λ j C i0 with i, j ∈ p , e (B.2)
(
Z p = (1 − θ) 1 − a pp − a ep − α1 ω p λ p , ) (B.3)
Z e = (1 − θ) ( 1 − a pe − a ee − α1 ωe λ e ) , (B.4)
Γ = ( 1 + γσ ⊤) . (B.5)
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21

A Stock-Flow Consistent Input-Output Model With Ap

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rates, and heat emissions

2015 New J. Phys. 17 015011

Please note that terms and conditions apply.

A stock-ﬂow consistent input–output model with applications to

© 2015 IOP Publishing Ltd and Deutsche Physikalische Gesellschaft

1.1. Stock-ﬂow consistent (SFC) models

1.3. The impact of energy and ecological macroeconomics

1.4. Common ground

perspective from a ‘top-down’ approach into an agent-based or ‘fully-scalable’ mode of macroeconomic

Assets = Liabilities + Net worth. (4)

Households Industry i ∈ {1, … , n} Government ∑

Money deposits +Mh −M g 0

2.1. Banking sector

Households Industry i Government ∑

Government spending +Gi −∑i Gi 0

Parameter name General model Model presented in section 3

Household consumption parameters α1, α2 α1 = 0.8, α2 = 0.2

2.2. Household sector

2.3. Government sector

2.4. Industry sectors

P = diag Pi ( ) ⇔ Pij = Pi δ ij (20)

L i (t ) = Ψi (t ) = ψi (t ) ⎡⎣ ω i (t − 1) λ i (t − 1) + ∑ k Pk (t −1)a ki (t −1) ⎤⎦. (35)

Πi = C i + G i − Шi + ∑ j E ij − ∑ j E ji − rL L i (t −1) + ΔΨi . (36)

2.5. Solving the model

3. Energy in a SFC IO model

3.1. Stability analysis of a stationary economy with positive interest rates

3.2. The macroeconomic response to energy price shocks

4. A simple climate model with anthropogenic heat emissions

and the equilibrium temperature Teq can be calculated as

5. Summary and outlook

Equation list of model in section 2

P = diag Pi ( ) ⇔ Pij = Pi δ ij , (A.16)

L i (t ) = Ψi (t ) = ψi (t ) ⎡⎣ ω i (t − 1) λ i (t − 1) + ∑ k Pk (t −1)a ki (t −1) ⎤⎦, (A.31)

Πi = C i + G i − Шi + ∑ j E ij − ∑ j E ji − rL L i (t −1) + ΔΨi . (A.32)

Equation list of stability analysis in section 3.1

using the following deﬁnitions:

[80] Kolstad C D 1996 J. Public Econ. 60 221–33

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