Fiscal and monetary policy in an SFC model of the Italian economy

Following the Great Financial Crisis of 2008–2009, there has been a shift in mainstream economic policy modelling towards ‘realism’, with DSGE models partly diverging from the representative agent framework, and large-scale New Keynesian structural models addressing real–financial interactions in greater detail. Still, the need for tractability of the former and the lack of theoretical structure of the latter prevented the complete introduction of modern – and complex – multi-sector/multi-asset financial system in policy models in use at Central Banks and Treasuries. However, empirical models adopting the stock–flow consistent (SFC) approach resolved most of these complications, with a surge in the number of country models over the past few years. The present work presents the main out-of-sample features of a quarterly SFC model of the Italian economy (MITA). Section 2 reviews the existing SEM models of the Italian economy and places SFC models along the suite of policy models in use around the world, discussing the main pros and cons of adopting the SFC approach over others. Section 3 briefly presents the model structure and main behavioural equations, as well as discuss the main differences and similarities with the other large-scale SFC model of the Italian economy. Section 4 shows the out-of-sample properties of the model, implementing different monetary and fiscal policy shocks, and assessing their effects in terms of growth, distributional dynamics and sectoral debt sustainability. Section 5 concludes.