OPENSIMPLEST: The Smallest SFC Open Economy Model

This article introduces OPENSIMPLEST, a highly parsimonious stock-flow consistent (SFC) model of an open economy. The model is designed as a pedagogical and analytical benchmark that preserves the core mechanisms of more complex open-economy SFC frameworks while remaining complete, transparent, and empirically tractable. Unlike standard two-country models, which are often incomplete representations of the rest of the world, difficult to interpret as analytical “toy models,” and hard to validate empirically due to the lack of bilateral financial data, OPENSIMPLEST adopts a one-country structure with an explicitly modelled, aggregate rest of the world.

Despite its simplicity, the model retains the defining features of the SFC approach: coherent accounting across stocks and flows, endogenous money, portfolio allocation based on relative rates of return, current-account dynamics, and valuation effects arising from exchange-rate movements. The key modelling difference concerns the exchange-rate closure. Rather than being determined by contemporaneous asset-market equilibrium or balance-of-payments clearing, the exchange rate adjusts gradually in response to lagged current-account imbalances, shifting the focus from short-run financial arbitrage to the interaction between flow imbalances, stock positions, and valuation effects.

Simulation exercises show that, for a wide range of fiscal, monetary, and external-demand shocks, the model reproduces the same qualitative dynamics obtained in more articulated open-economy SFC models. Differences arise only in the very short run following purely financial shocks, where the exchange-rate closure affects the impact response but not the medium-run adjustment path. The results suggest that many key insights of open-economy SFC analysis can be obtained within a small, complete, and empirically implementable framework, making OPENSIMPLEST a useful tool for teaching, sensitivity analysis, and comparative empirical applications.