Modelling Transition Risk—Towards an Agent-Based, Stock-Flow Consistent Framework

Working Paper by Florian Botte, Tommaso Ciarli, Tim Foxon, Andrew Jackson, Tim Jackson and Marco Valente
Rebuilding Macroeconomics Working Paper Series | February 2021

Abstract

This working paper summarises the initial findings of a project whose aim has been to develop an agent-based (AB), stock-flow-consistent (SFC) macroeconomic framework to study the economic, financial and social implications of the transition to a net zero carbon economy. The work follows recent proposals in the literature and from policy that agent-based, stock-flow consistent macro-economic models are needed in order to answer “macroeconomic questions where complexity, heterogeneity, networks, and heuristics play an important role”.

The AB-SFC model we develop in this paper (TRansit) allows the user to study a wide range of macro dynamics that emerge from the interactions of heterogeneous actors across several sectors of the economy under conditions of imperfect information and bounded rationality.

This working paper describes the rationale for the work, outlines the modelling approach and illustrates its usefulness by using a pilot version of the model to study the economic, distributional and financial stability implications associated with a whole-scale technological transition from ‘brown’ (fossil fuel) to ‘green’ (eg renewable) energy. The model allows us to explore questions of price stability, distributional equity, asset stranding and financial transition risk within a single macroeconomic framework.

The preliminary results reported here are conceptual in nature, subject to further empirical calibration and should not be taken as definitive projections of any empirical future. Nonetheless, they illustrate the conceptual power of the approach and suggest fertile avenues for future work. Subject to further validation of the model and a complete sensitivity analysis, an updated and revised version of this paper will be shared in the coming months.