ITFIN: A stock-flow consistent model for the Italian economy

Abstract

Italy is characterized by a large sectoral imbalance (government debt) that has generated a pervasive country-risk premium and affected financial markets and the real economy. In this regard, ITFIN is a quarterly econometric model for the Italian economy that adopts a stock-flow consistent framework to describe sectoral and macroeconomic dynamics. Developed at Italy’s Department of the Treasury, this model focuses on determining the sovereign risk premium in the government debt market, its impact on the financial and banking system, and its transmission to the real economy. The financial position of each institutional sector is derived through a stock-flow consistent approach. Additionally, prices and returns for financial instruments are derived by modeling their supply and demand, along with a characterization of how financial stocks impinge on agents’ decisions and the patterns of real variables. Overall, our study illustrates this model and describes its properties by simulating the economy’s response under two counterfactual scenarios on monetary policy and different shocks to fiscal policy.