Name: FSMAT (Financial Sector Mitigation and Adaptation Tool)
Type: SFC
Institution: World Bank and AFD (Agence Française de Développement)
Geographic coverage: single country (multiple)
Description: FSMAT is an empirical stock-flow-consistent (SFC) disequilibrium model developed to explore the macro-financial and environmental implications of different financing strategies and broader green financial sector interventions of the low-carbon and resilient transition at the country level. It builds on the GEMMES model and extends it by (i) incorporating a database that constructs social accounting matrices and sectoral balance sheets for over 100 countries, and (ii) enhancing the representation of low-carbon transition investments and the multiple financing strategies, instruments, and policies that can support the funding of these investments.
Questions to be answered/variables considered: FSMAT assesses different climate investment financing scenarios, defined either exogenously by users or endogenously, constrained within a series of identifiable risks. It then projects trajectories for key macroeconomic variables, including real GDP growth, inflation and interest rates, exchange rate dynamics, government budget balance and public debt, current account balance, and sectoral debt accumulation. It can also represent associated emission reductions and climate impacts related to a range of extreme events and help investigate ways to fill the climate financing gap and respective effects on financial stability and growth.
Interdependencies between five economic agents (government, firms, households, financial institutions, and the rest of the world) are captured and all financial and real-economy flows between these agents are accounted for in a coherent manner, with their balance sheets (both stocks of assets and liabilities) evolving accordingly. Dynamic behavior is driven by an agent’s continuous adjustment of their decision variables toward endogenously moving target values, which allows for path-dependent dynamics, structural shifts, and potential instabilities in response to climate policies, financial conditions, and macroeconomic shocks.
Strengths
- FSMAT can highlight a granular range of financing strategies and their effects on the real economy, as well climate, fiscal, income, monetary, and credit policies at the macroeconomic level.
- By focusing on potential financial fragilities, debt accumulation, and sectoral imbalances, it is well-suited to detecting the risk of financial and currency crises.
Limitations and challenges
- As it is an aggregated model, FSMAT is less suitable for detailed sectoral or bottom-up analyses. It can be linked with sectoral modeling frameworks such as input–output models or techno–economic models of the energy system to overcome this limitation.
- The model relies on detailed financial sector data but data availability is a primary challenge. The SFC approach requires institutional sector accounts, which many countries do not systematically compile. In absence of this detailed data, calibration of the model is more difficult or uncertain. Using domestic data can help overcome this limitation but increases the development time.
Use: FSMAT was tailored to Brazil to evaluate the impact of the Ecological Transformation Plan (ETP) on the Brazilian economy. It was used to understand the impacts of the blended finance instrument of the ETP, the green bond initiative, and the Tropical Forest Fund Facility (TFFF) via simulations through to 2030.