A Simple Stock-Flow Consistent Model with Short-Term and Long-Term Debt: A Comment on Claudio Sardoni

In a recent article of this journal, Claudio Sardoni ([2019]. ‘Investment and Saving in a Dynamic Context: The Contribution of Athanasios (Tom) Asimakopulos.’ Review of Political Economy 31 (2): 233–246) made four claims: (1) An increase in the propensity to save will lower the long-term interest rate; (2) A higher preference for bonds will lead to lower long-term interest rates; (3) A higher level of investment will lead to a higher long-term interest rate; (4) A larger (exogenous) supply of money will lead to a lower long-term interest rate. We confront these four claims with the help of a simple stock-flow consistent (SFC) model which includes firms, banks and households, with the latter holding either bank deposits or bonds issued by firms, while these firms invest in fixed capital and in inventories. We find that higher investment leads to higher interest rates on bonds in the short run, but not in the medium or long run. Similarly, a higher desired inventories-to-output ratio ends up leading to lower interest rates both in the short and the long run. We conclude that using SFC models is particularly adequate when dealing with issues that integrate real and financial variables.