A system dynamics approach to economic policies: money, environment and local development

This work stems from the widespread perception that macroeconomic models do not help policy makers to deal with urgent problems. There are several reasons for this growing distance between economic theory and policy. It is undoubtedly related to the current social, economic and environmental crisis, and, at the same time, to the increasing difficulties that synthetic economic indicators have in describing the state of health of a country. In these thesis, we take up this threefold challenges by building three models, based on system dynamics methodology, able to analyse pressing problems, namely money and the mechanism of credit creation by private banks, environment and local development. The first chapter presents a small macroeconomic model describing the main mechanisms of the process of credit creation by the private banking system. The model is composed of a core unit - where the dynamics of income, credit, and aggregate demand are determined - and a set of sectoral accounts that ensure its stock-flow consistency. In order to grasp the role of credit and banks in the functioning of the economic system, we make an explicit distinction between planned and realized variables, thanks to which, while maintaining the ex-post accounting consistency, we are able to introduce an ex-ante wedge between current aggregate income and planned expenditure. Private banks are the only economic agents capable of filling this gap through the creation of new credit. Through the use of numerical simulation, we discuss the link between credit creation and the expansion of economic activity, also contributing to a recent academic debate on the relation between income, debt and aggregate demand. The second chapter provides a macroeconomic framework to evaluate the social and economic consequences generated by a shift of investment to low-carbon options. We introduce into a standard growth framework a modified Lotka-Volterra model for wage and employment determination to address both the long-run dynamics of the economic system in terms of carbon emission and GDP growth and the short-term macroeconomic fluctuations in terms of unemployment and inequality. We use this framework to compare the results of different combinations of three strategies for carbon emissions reductions: improvement in energy efficiency, expansion of the renewable energy sector, and the direct reduction in carbon emissions. We show that the shift to low-carbon investment required to achieve the targeted reductions increases employment and the labour share but slows down GDP growth and wages. Finally the aim of the third chapter is to frame the potential impact of SEAP at the local community level. We apply a System Dynamics model in the case of Cascina Municipality as one of the decision making tool in energy planning policies with specific considerations on CO2 emission reductions and local development. To built and calibrate this model, we used a two steps approach involving participatory planning and data analysis. The modeling approach permits to decompose a complex social or behavioral system into its constituent components and then integrate them into a holistic model - i.e labor market and a simplified representation of the local economy, transport system, housing. Thus, we present different scenarios showing the potential implication of local energy policies in term of transportation, environmental and economic indicators.